The Nvest Market Blog, our current thoughts on the Street

Emotionally Exhausting Week

posted 01.26.2009 at 11:12 a.m. by steve

While shortened by the Martin Luther King holiday, last week felt like an eternity for the markets. There was no shortage of news for the market to ponder, as we witnessed the inauguration of the 44th President of the United States. In addition, earnings season is in full swing. While optimism was running high on main street in anticipation of change, the Dow fell 332 points (the most ever recorded on an inauguration day) as investor anxiety ran high. Much of the down move was erased on Wednesday, as President Obama began work in the Oval Office for the first day. The remainder of the week remained difficult, as the market continued to experience heightened volatility amid rising trading volume. On the balance, the Dow, S&P and Nasdaq slid -2.46%, -2.7% and -3.4% for the week, respectively. But, after the week investors had, it is worth noting that the Dow and S&P closed Friday above psychologically important levels of 8,000 and 800, respectively.

There is growing evidence that the current bear market is maturing, and that a bottoming process may be taking place. It is not uncommon, as we state in our newsletter, that bear bottoms often have numerous head fakes wherein the market will shoot higher an average of 15%-20% over a period of 60 days, only to fall apart and plummet back to prior lows. The market action from November 20 has in fact mirrored what are common traits during a bear market bounce. Another common characteristic of bottoming is that the market will trade in a sideways pattern during a flood of bad news among heightened volatility. It is not uncommon for this to occur over a period of several months. Also, during past bear markets, equal-weighted indices (such as the S&P) have historically outperformed market-cap weighted indices (like the Dow) as the bear market matures. This is because an equal weighted index gives the same weight to smaller company stocks, which often outperform when the market improves, as it does to bigger company stocks. Indeed, in recent weeks the S&P 500 has outperformed the Dow by some 600 basis points; the mid-cap S&P 400 has beat the S&P 500 by 900 basis points!

While optimism was oozing as we entered 2009, most of January has felt horrible. As the lows established on November 20 were approached, worry that the market could fall even further has become prevalent. However, the market did manage to keep its head above the November low during the week, despite lots of negative news. In our quarterly newsletter sent to clients earlier this month, we did note our view that markets would face challenges as 1Q corporate earnings were announced. We believed at that time, that earnings would be extremely weak as the rate of decline in the economy accelerated during the 4th quarter. We warned investors not to get too comfortable with the December rally, as it was likely just a head fake. While not that surprising, we too found ourselves feeling sick to our stomachs, and can appreciate clients having similar feelings. Yet, we are reminded that this is exactly what a tough bear market feels like when it is maturing, and that new bull markets often begin when most of the herd is too fearful to participate.

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Weak Earnings Punish Stocks and Sentiment

posted 01.19.2009 at 10:04 a.m. by steve

Earnings season for the fourth-quarter began with tidal waves of bad news from several bellweather companies, including Alcoa, Boeing, Chevron, Intel, Time Warner, Citigroup and Bank of America. According to Citigroup research, the average S&P 500 stock is expected to announce a -1.1% drop in earnings, down substantially from previous expectations of a 14.9% increase just a few weeks ago. Clearly, sentiment has swung toward pessimism again, just a few weeks into the new year. Among weak earnings figures, it is becoming more apparent that layoffs, plant closures and asset write-downs are not yet slowing. As such, the S&P 500, Dow and Nasdaq declined -4.5%, -3.7% and -2.7%, respectively. Perhaps what is most disconcerting about last week was the fact that most stocks in the financial sector (banks) broke through previous lows, and it seems as though the crisis of confidence in our financial industry is resurfacing.

Corporate announcements last week were discouraging, and it appears that the financial sector (banks) is once again in a dire state. Important to remember, however, is that most analysts believe the fourth quarter should be the worst in the recession (which is now 14 months old). We remain of the opinion that the stock market will still have many fits and starts before a new bull market begins. Additionally, we believe it is important that investors continue to gain clarity into the state of the financial sector, and are increasingly of the opinion that policy response going forward should seek to address removing or isolating the toxic assets that continue to muddy bank balance sheets. Investors and bankers alike need clarity of the true financial situation of the banking sector so that investors feel confident reinvesting in banks (allowing banks to recapitalize) and so that banks feel more confident taking on risk in the form of loans to consumers and businesses. It seems increasingly likely that the next round of (Troubled Asset Relief Program) TARP money, which is set to be released in the coming days, will seek to addressing those very concerns.

With the US markets closed today in observance of Martin Luther King, and the hope that will come with the inauguration of a new President tomorrow, we may see markets move higher short-term. Still, we believe that there is more weaker-than-expected news to come from companies in the weeks and months ahead. While a lot of very bad news has already been priced into the markets, the economy will need to show some signs of stabilizing before anyone can talk seriously about a sustainable stock market advance. In the meantime, we believe that being cautious in reacquiring risk will serve investors well. It is in this vein, that clients may see some idle money being put back to work in corporate debt (it is senior to equity in the corporate financing structure). Hang in there; we do believe that all the action being taken by global policy makers will ultimately get the upper-hand, and lead to a sustainable recovery.

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Weekly Market Summary

posted 01.12.2009 at 11:18 a.m. by steve

Markets concluded last week modestly lower than where they began, including moves of -2.1%, -3.7% and -4.4% on the Dow, Nasdaq and S&P 500, respectively. Volume continued to creep higher, back toward more normal levels following the holidays, but was still somewhat light. It appears as though many investors, while cautiously optimistic that the worst for the stock market is behind us, are still somewhat hesitant to dive back into stocks. That caution appears well warranted, as economic data and company statements issued last week continued to surprise to the downside. Among those items was a worse-than-expected payroll report, which showed that the unemployment rate has now risen to 7.2%, a 15-year high, and is expected to continue clibing through the first half of 2009.

Corporate earnings season kicks off this afternoon, with aluminum produced Alcoa reporting its 4th quarter earnings after the market close. It is likely that earnings from Alcoa will be horrible, as the Company already issued a warning last week when it announced that it will sell assets and cut 13% of its workforce. As earnings from much of the S&P 500 get reported, it is likely that there will be significant surprise both to the up and downside. Investor ability to accurately forecast in this enviornment of limited visability is greatly impaired.

Despite continued bad news since November 20, the market is notably higher. Sentiment has improved, as the stock market has behaved itself in the face of bad news. The month of December offered investors the only positive month during the fourth quarter. Additionally, while volatility remains high from a long-term perspective, it has moderated somewhat. Perhaps investors are managing to find some comfort in the promise that lies with a new administration. Obama has been busy making statements suggesting that ongoing government stimulus needs to be implemented quickly and exceed public expectations in size. Additionally, he has provided comments to indicate that regulatory reform and heightened accountability will help avoid repeating the mistakes that created this crisis in the future.

Meanwhile, current actions by the Treasury are having some positive effects in providing liquidity to consumers. Mortgage rates have dropped significantly in the recent week as the Fed began its first purchases of mortgage backed securities while auto loan interest rates have also improved. It is likely that as the government continues to provide support in the credit markets, that consumer-based interest rates will improve further. While the lower rates should help consumers, many economists suggest that were are entering a period where it will become trendy to save money, rather than spend it. If the US consumer does indeed wise up and resume a positive savings rate (the savings rate in the US had been negative, meaning consumers were spending more than they make), this economic recession could be longer those in recent years past.

For more perspective this week, please take a moment to read Nvest Nsights, our 4th quarter newsletter. CLICK HERE

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Strong Finish to a Bad Year

posted 01.06.2009 at 09:43 a.m. by steve

The major indexes finished the final week to the miserable 2008 year on a positive note, and carried gains through into the first trading day of 2009. On the week, the S&P, Nasdaq and Dow gained +6.8%, +6.7% and +6.1%, respectively. Still, low trading volume makes the up-move less significant. All told, the month of December offered investors some relief, being the only up-month for the markets during the horrendous fourth quarter. Still, 2008 goes down as one of the worst declines in a year ever, ranking with the 1930s. Assets of all kinds were hammered, and just 1 mutual fund of the more than 1,700 finished the year with a gain (its gain was a meager +0.4%). Over the last 82 years, only six times has the S&P declined more than -20% in a single year (the S&P declined -37% in 2008).

While the month of December was a bright spot in a dark year, some investors may be feeling a bit more optimistic going into 2009. We do believe that the worst of the stock market may be behind us, but think it is likely that the market will still have some struggles, and may perhaps not end 2009 much higher than it has begun. We do know that a new bull market will commence when few expect it to, and thus will be looking to get client cash reinvested at more opportunistic values.

The most difficult thing about forecasting in this environment is that unprecedented policy response and government intervention remain the x-factor from the standpoint that no one knows how long it will take before stimulus measures make meaningful impact. When they do, a recovery could be quite robust. Entering 2009, we are optimistic that the worst days for the stock market are likely behind us.

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