The Nvest Market Blog, our current thoughts on the Street

Economic Data Weakens - Weekly Market Summary

posted 08.25.2008 at 10:09 a.m. by steve

Markets moved generally lower last week amid an abundance of negative headlines relating to the US and global economy (S&P 500 -0.5%; Dow -0.3%; Nasdaq -1.5%). Judging from an increasing number of stories, it is becoming more clear that the global economy, not just the US, is slowing significantly. In fact, the global economy appears to be slowing more than ours in the US. Among the items making the news were the Producer Price Index rising 9.8% and 3.5% year over year for headline and core inflation, respectively; those kind of numbers, especially headline inflation, are well outside the Feds comfort range of around 2.5% - 3% annually. While the inflation data is likely old news and a hangover from oil prices that were reaching as high as $147 in July before dropping as much as $35 per barrel in August, oils move slightly higher last week was not friendly for the markets.

On top of the general economic news, there is the rising notion that Fannie Mae and Freddie Mac are going to need additional government assistance, which would come at the expense of those respective equity stockholders. As a result, the stock of Fannie and Freddie were again slammed last week, while the broader financial sector was more stable. The two Government Sponsored Entities (GSEs) are involved in over two thirds of the entire mortgage market and they are too big to let fail, but it is becoming clearer that any bailout of the firms using taxpayer money will NOT benefit shareholders. Politicians want to help homeowners and stabilize the housing market without getting a black eye for bailing out risky Wall Street investors.

All told, the economy is very weak and oil still needs to fall further. The financial sector still must do more to repair their bleeding balance sheets by raising capital (in the process diluting existing shareholder equity); that notion is leading some to believe that while beaten up badly over the past year, the stocks of banks are probably still overvalued. Housing must begin to stabilize in order to help the banks. It is an interesting environment right now for the markets, and one which is leading us to do much thinking about client portfolio strategy. The US economy, while at the center of the housing bubble bust, is believed to likely hold up better than foreign economies, both developed and developing. Additionally, a case can be made for a stronger dollar presuming that Europes economy continues its slide and inflation cools. If those conditions continue, the European Central Bank is much more likely to lower interest rates, which is supportive of the US dollar. All items have investment implications which we are considering.

Remember, while current environment feels uncomfortable, we have now been dealing with a messy stock market for almost an entire year. Generally, bear markets generally last about a year. While history is no guarantee of the future, it can be a useful guide and suggests that it is not the time to be thinking short term. Stocks are becoming great values for when the economy does look to improve. Hang in there, and be reminded that with a long-term, disciplined investment approach, you will come out ahead. Call us if you would like to meet or discuss your portfolios.

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Weekly Market Summary

posted 08.18.2008 at 11:12 a.m. by steve

The markets finished mixed last week as oil prices continued to stay low. This came as headline inflation numbers soared higher than expected. On the news of higher inflation, the markets sold off but then recovered on the likely realization that the inflation numbers are old news. While the numbers were disturbing, oil prices have dropped significantly in recent weeks, which is likely to ease inflation pressures in the coming months assuming they remain around the same lower levels.

Meanwhile, the dollar has continued to strengthen in recent weeks amid heightened news that many foreign economies are slowing more than the US. Related headlines seemed to be the dominating theme last week. While consumption within the US has declined, the weakened dollar has led to a significant pickup in US exports, helping our economy be more resilient. It seems as though the US economy continues to be the engine that drives the world economy. Many economists believe that if the US does enter a recession (officially marked by two consecutive quarters of negative GDP growth), it will be less severe than those faced by Europe, China and others.

While the markets advance over the past several weeks has been nice, we are reminded daily during our review of fund performance and index component analysis that this is probably not the start of a new bull market. For one, daily trading volume has been light as many people in the US are away on vacation (new bull markets generally exhibit a surge in volume) making it harder to interpret daily price changes. Secondly, while the market is moving higher, it seems like it is just a few stocks that are doing all the work (while others remain stable or continue falling). A new bull market would generally lift the prices of a majority of stocks and sectors, and in a swift fashion. More than likely, the price rise may be attributable to hedge funds and speculators have been bitten by increasing regulatory oversight in the most recent month; an unwinding of speculative activity. We have seen stocks of the banking sector stabilize as the SEC imposed more strict limitations on short-selling to curb negative speculation. We read headlines of commodities like cotton - which had surged significantly - collapse last week on speculative activity, leading the CFTC (Commodities Futures Trading Commission) to indicate that speculation in commodities markets (including oil) is a bigger problem than they originally believed.

Aside from the non-normal speculative activity, we are busy reviewing our mutual fund managers. Given our continual following of the investment markets, there are several key themes that we are looking for recently to determine if any changes are warranted. First, we believe that quality has become more important. Managers who seek quality companies, those with strong balance sheets, growing business lines, and light leverage will outperform companies who have higher debt loads regardless of market capitalization. Secondly, we believe that growth funds should outperform during an economic slowdown as investors are willing to pay a premium for companies growing faster than the broader economy. Third, we are evaluating what a global economic slowdown means for international investing and investing in domestic companies with significant foreign revenue.

The market landscape is currently a challenging place and confusing place. While much of the economic news has not been much fun, we have seen some encouraging news in recent weeks with the onset of falling oil prices and other commodities. Additionally, we have seen motions being enacted to reduce speculative activity, which should help the markets function more efficiently. Those few things alone are encouraging to us. In the meantime, if you have questions, please do not hesitate to give us a call.

PS We hope that you have been enjoying the wonderful weather and the action of the Beijing summer Olympics!

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Weekly Update

posted 08.13.2008 at 11:28 a.m. by steve

We hope that the first two weeks of August are going well. So far, oil prices have continued to fall (is the oil price bubble finally popping?) and the markets have moved higher in response. This week, we have seen the stock market become worried again by the financial sector, which as we have said many times, is going to take a while to repair itself.

We hope that you havent missed the updates too much during my honeymoon absence following the August 2, wedding. For those who have been asking, please feel free to click the link for a few pictures from the big day. Suzanne and I had a great time sharing the special day with close friends and family. Thank you to all for the kind wishes!

The weekly market summary will be back next Monday!

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