The Nvest Market Blog, our current thoughts on the Street

Weekly Market Summary

posted 07.28.2008 at 3:21 p.m. by steve

Last week was an interesting one for the markets. Tuesday index prices shot higher with financials leading the way, only to be battered back down on Thursday. Consumers were greeted with some relief at the pump, finding that the national average price for gasoline has fallen below $4. Oil has now been at levels below $130 for the better part of a week. While oil has dropped nicely in recent weeks, the drop in natural gas has been even more pronounced a welcome move as we draw nearer to the winter heating season. So what spurred the reversal of trend?

For one, the SEC has initiated a ban on naked short selling for 30 days on financial sector securities. That move led many speculative short sellers to cover their positions (buy the stocks they had shorted), which created price support for the stocks of financial institutions. Secondly, many banking firms have been reporting second quarter earnings. While still turning in HUGE losses, many of those are coming in better than expected. It has been a perfect instance of the market rallying on seemingly bad news, and is our case in point for saying that it will not take all good news for this market to move higher. Lately, news has been undeniably bad. Over the weekend two more banks in Arizona were shut down, and are the latest in what some experts say will be more to come. As has been the case for over 10 months (since the bull market died last October), the economy is in the process of deleveraging its balance sheet. Throughout this process, quality companies will prevail, and lead the market higher. Companies with excessive debt and leverage may find themselves facing very difficult times.

Meanwhile, the demand for energy should be easing as the worldwide economy slows; statistical data being released recently has shown that to be occurring. As is increasingly being said of this market, it is the tale of two: oil, and everything else. While oils recent decent, and the banking sectors recovery may only be temporary, much is being done to repair the balance sheets of companies and the consumer.

For example; while Japanese stocks were battered in the 80s on banking problems and bad loans (resulting in a miserable experience for Japanese stocks for 10+ years), the US financial system is purging the toxic loans by writing their values down and taking losses NOW. While painful for corporate earnings, it is better to recognize the problem loans, and rebuild capital rather than postpone or ignore the issues. On the consumer side of things, the US senate and congress passed through a housing relief bill over the weekend. The bill is probably a step in the right direction to encourage home-ownership and first-time homebuyers. This should help improve the housing market, perhaps giving it some footing upon which to recover.

All told, much continues to be done by our government and those around the world to improve the global economic situation. In recent meetings, Bill has been using the word-picture that the economy is like a battleship it will not just turn on a dime, but it will turn. In the meantime, we continue to look for the pieces of the puzzle that suggest the ship is almost righted.

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Banks Rally; Oil Falls - Weekly Market Summary

posted 07.21.2008 at 10:17 a.m. by steve

What started off as another dreadful week for the stock market quickly turned overwhelmingly positive mid-way through on Wednesday. The S&P, Nasdaq and Dow all rose higher by 1.71%, 1.95%, and 3.57%, respectively. Those figures are fresh off of the failure of IndyMac bank in California. Fear climbed of other regional bank failure, but relief came when Wells Fargo announced it was increasing its dividend. The move was a surprise to the markets because companies usually dont increase dividends when times are tough and it was interpreted as a sign of strength; financial sector stocks rallied. Of additional support for the banking sector was news that the SEC is going to place restrictions on short selling for 30 days in an attempt to curb the speculation and harmful effects of too much short interest in some 18 stocks. This probably led to short-covering (the process of buying the stock which was sold short to close out the position). All told, the financial sector, as measured by the S&P financials index, finished the week up 31% from last Tuesdays close.

Of additional encouragement was the selloff in oil and other key commodities. Oil finished the week below $130, or $17 per barrel below its price a week earlier. It would be nice to say that the bubble in oil prices has popped, but it is probably too early to begin making claims like that. In fact, what has been a welcomed decline over the past week is likely to reverse somewhat higher this week as we hear fresh news of a tropical storm developing off the gulf coast. It is likely that the fear-based model of supply strains will take hold on any news remotely suggesting supply disruptions are possible.

In sum, the steps taken to discourage aggressive short selling, better-than-expected earnings from the banking sector and falling oil prices led to a nice bump for the markets. We hope that encouraging news can continue; however, we remain grounded in thinking that there are still many troubles out there, especially for the banking sector. The sector has a long process ahead to repair their balance sheets. In the meantime, be reminded that the market can march higher at any point, despite prevailing bad sentiment. As we mention in our second quarter newsletter, good news doesnt start new bull markets, it only ends them in other words, dont wait for all good news before entering the market as youll surely have already missed the bounce.

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Financial Crisis Continues - Weekly Market Summary

posted 07.14.2008 at 2:18 p.m. by steve

This past weeks downward market action is best attributed to the insolvency fears of Fannie Mae and Freddie Mac. With the latest news of financial crisis spreading to the government sponsored entities (GSEs), it is clear that the mortgage and credit crisis is anything but over. At one point Friday, Fannie and Freddie were down 64% and 73%, respectively week over week.

Further complicating the landscape was oils record-high breaking rise above $147 per barrel; this came immediately after a drop in oils price below $135 just two days earlier, but may be attributed to increasing tension in Iran. The oil market is increasingly volatile, lending more credence to the notion that prices are not following economic fundamentals.

Given the latest happenings, and the belief that higher prices will stall consumer and business spending have led analysts to notably reduce their earnings expectations for the second quarter. Particularly affected are industries such as aerospace, airline, automotive, retail, shipping and travel industries. Despite news today that the Fed will allow the GSEs to borrow from the discount window, financial stocks are again being pummeled this morning (Monday). It comes something as a surprise given that it is becoming clearer that the Federal Government will not allow our countrys financial system to fail.

Perhaps whats most frustrating to investors is that it seems all stocks are being punished. Excluding the earnings of financial firms (which are still announcing mortgage related write-downs) and the en vogue energy sector, S&P 500 earnings are expected to rise 3.2%. One piece of good news in all the KAOS is that Price/Earnings multiples are at 18 year lows. This means that we havent seen values this good on stocks in nearly two decades!

During times like these, it is important to maintain your long-term focus. Hang in there and call us if youre feeling blue.

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Weekly Market Summary

posted 07.08.2008 at 09:21 a.m. by steve

June concluded as one of the worst months in recent memory, noted by the erasure of all gains (by stock market indexes) that had been made during the March 17 to May 30 rally. When looking at the technical aspects of the decline, there are a number of extremes that have developed. For one, investor sentiment is very low and stocks making new lows outpaced new highs by 10 to 1 on the NYSE (20 to 1 among Nasdaq stocks last week), suggesting that the market has become oversold. Without a doubt, there are some big problems out there right now: namely the financial sector and stubborn oil prices that seem to advance substantially higher on unfavorable news, but never seem to retract when the news is good. After all, miles driven data continues, month after month to be on the decline in North America. Abroad, emerging economies and Europe are also feeling notably higher oil prices: higher prices will reduce demand with time.

Whats also interesting to note is that the European Central Bank took a big step last week in fighting inflation: it raised its key interest rate, despite its struggling economies. Perhaps whats more significant is that the US dollar actually strengthened a bit on the ECBs tightening (typically currencies depreciate against those that have rising interest rates). The point here is that inflation has become a global problem, not just a US problem. In most developing countries, inflation is running at double digits, substantially higher than that we are facing, even after considering energy.

In the current environment, it seems there are two stories: oil, and everything else. In the upcoming Nvest Nsights newsletter (due to show up in your email inboxes with your quarterly reports in the next several days) Bill reminds us that in a bear market (we have officially entered bear market territory), there are no asset classes or areas of the market that go unscathed. So far we have seen stocks, bonds, financial sector stocks, emerging markets like China, and many commodities get punished, but there is still one area of the market that ignores the others: oil. It too will correct; and when it does a new bull market may be upon us.

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Weekly Market Summary

posted 07.01.2008 at 10:44 a.m. by steve

Last week is most easily remembered for the dramatic drop that occurred on Thursday when the Dow fell to levels not seen since September 2006. Despite the Fed taking a more hawkish stance on inflation following its meeting a day before (in which the market advanced moderately and oil declined), oil climbed to another new record and closed the week above $140 per barrel. Several times throughout the week we found ourselves frustrated with quotes taken from prominent persons who cant seem to keep their mouths shut when it comes to issues such as oil and the market. It seemed as though the perfect of poison was created on Thursday causing each of the major indices to post declines of about -3% for the day as financial stocks were again hammered and General Motors was pushed further down to prices not seen since 1955!

As a result, June was a very unpleasant month. Its tough to find good things to say when the past several weeks have been anything but good overall for the markets. However, we still are optimistic that progress is being made. For one, such a quick decline as was experienced throughout the month may be indicative that we are near a capitulation point. Second, there is actually much discussion occurring in Washington about the role of speculation in the commodity markets and how to reduce or eliminate it all together. Several headlines this week suggest that if speculators can be removed from the commodity futures markets, oils price may abruptly recede down to levels below $100 per barrel. Such a correction would bet a HUGE positive for non-energy sector equities.

While economic data suggests that we have not seen a recession yet this year (defined as two consecutive quarters of negative GDP growth), forecasts and surveys are indicating that if oil continues to stay stubbornly high for another month or two, that a recession highly probable. With the financial crisis continuing to remain problematic, we believe that pressure in Washington will be high to do something to make perceived progress in the fight against energy prices and inflation. Whats important to also realize however, is that inflation is not a U.S.- and Europe-only problem. Inflation in some emerging economies (China, Japan, India, etc) is well above double-digits. As a result, emerging economies are creating much of the instability. As Fed Vice-Chairman Donald Kohn suggested last week, it is the central banks in developing economies that must begin to more aggressively tighten their fiscal policies and slow their economies. We continue to hope that all the action being taken, both here and abroad, will begin to break the back of oil, and set up a strong stock market recovery.

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