The Nvest Market Blog, our current thoughts on the Street

Bank Fears Lead Market Lower in Difficult Week

posted 02.23.2009 at 10:16 a.m. by steve

Banking sector issues again wreaked havoc on the markets, leading each of the major market indices decidedly lower last week. As chatter increased regarding nationalization, markets were punished to the point of violating the previous November 20 low on the Dow, and pushed the S&P and Nasdaq closer to prior levels of support. The stocks of some major banks, as well as large regional banks (down 40% year-to-date on average), are trading as if nationalization is the likely endgame, despite comments out of the White House that suggest otherwise. While the Dow did conclude the week below its late-November levels, the S&P 500 and Nasdaq still remain 4.1% and 9.5% higher than on November 20, respectively.

News and rumors were relentless, and at this point it seems like a very dire picture is being painted for recovery. Whereas most were expecting economic recovery in the back half of 2009, it seems that those projections are now being considered too optimistic. Further, it appears that while key measures of credit availability have improved since the 4th quarter of 2008, that recovery has too, puttered. Investors seem to be most uneasy about how a new Obama administration is handling the financial crisis and the economy. Programs that appeared to be working (like government purchases of home mortgages to drive borrowing costs down, and expanding the Fed balance sheet), have apparently been put on hold. Other programs, intended to grease the credit transmission mechanism, such as the TALF (Term Asset-Backed-Securities Lending Facility), have yet to be started, leaving their effectiveness untested and unknown. Bottom line, there is still tremendous uncertainty relating to how government response will work toward solving the problems.

To continue on a point made from last week, we still believe that the Government will figure out a solution that aids a recovery. Additionally, we remind that a VERY bad outlook (such as depression) may already be reflected in prices. If indications begin to suggest that the most dire outlook is overly pessimistic, a sustainable rally may be around the corner. As a reminder, we are hosting a Talk Strategy meeting on March 5. We encourage you to attend as we share additional perspective on this confusing and difficult time.

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Is the Sky Falling?

posted 02.17.2009 at 10:00 a.m. by steve

Last week proved to be another disappointment for investors. Anxious to hear what the Obama administration has been cooking up since the inauguration, investors were left disappointed by the lack of detail provided by Treasury Secretary Timothy Geithner. Everyone wanted to know what would be done to cure the credit markets. Investors are ready for the rules to stop changing. Instead, we received more abstract, and arguably no better indication of the rules going forward. Following the Geithner speech, the markets remained under pressure as the week wore on. It seems that the next stop may be a retest of the November 20 lows.

In talking with clients over the past few weeks, it is increasingly clear that pessimism and worry is again rising. It is extremely easy to extrapolate current bad news and project it indefinitely into the future, as it seems there no reason at the present to believe things are going to materially improve. Everyone is cautious right now, including us. If you find yourself feeling worried, we believe it is important to ask yourself the following question: What do you believe will happen?

If you believe, like Chicken Little, that the sky is falling and the world as we know it is coming to an end, then you should sell everything. However, if you believe that a recovery is ultimately in the cards, then selling now is not appropriate. Our belief is that the latter scenario will occur; meanwhile, portfolios are constructed with buckets of time to weather the storm.

While economic statistics continue to show decline, a number of recent readings suggest that the pace of decline is moderating. Key metrics, including improving retail sales, lower global interest rates, improving housing affordability, lower energy costs and an increasing money supply are a few leading indicators suggesting that economic recovery may not be that far off.

As always, we urge you to contact us with questions, or inquire of a time to get together and meet to go over your investments.

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Market Hopeful as it Looks to Details from Washington

posted 02.09.2009 at 11:11 a.m. by steve

The first week of February proved to be a relief for investors compared to the month of January, as the markets generally behaved themselves, despite bad ongoing economic and corporate earnings reports. The Nasdaq, S&P 500 and Dow moved notably higher, up +7.8%, +5.2% and +3.5%, respectively. The bulk of the positive swing came late in the week, as news out of Washington indicated that final details were emerging on a two-pronged solution to the financial crisis, including a massive government stimulus package (infrastructure spending, housing programs, tax cuts, etc) and a plan for dealing with the banks. Positive momentum carried markets into the close, as the Obama team announced that they intended to reveal details of the package today (Monday). Unfortunately, it appears that investors will now have to wait until tomorrow to better understand what has been decided upon.

It is a bit disappointing that the White House continues to delay, but we do believe that more specific details of the plan will emerge this week. Intense debate continues among policy makers and the public alike as to what should be done and how, especially when it comes to the price tag of new initiatives. While it is probably never a good idea to just throw money at a problem, the biggest danger of being slow to act is that the debate and controversy only intensifies further, continuing to erode confidence that the problem is even solvable. If the Obama team can successfully convey a path forward in a way that significantly addresses the issues of toxic home loans, stemming foreclosures and improving credit conditions, then the market could rally. On the other hand, if the plan does little to address the root of the issue, which presently is a lack of transparency in the US banking system (and thus a lack of investor and business confidence), then the market is in for another tumble.

Amid all the attention being focused on Washington, it seems that the market has again started behaving better in the face of bad news. Instead, we would offer an important distinction; that the news is still decidedly bad, but maybe it is less-bad than what the market was expecting. Indeed, we know that the market will move higher when news begins to be less severe than the market had been forecasting. Still, we believe caution is warranted. This is the exact same type of sentiment that began to surface in mid-December when we cautioned that corporate earnings would be lousy in January. It is likely that the first month of 2009 has already significantly damaged corporate earnings potential for the first quarter, and poor results may lie ahead when 1Q 09 earnings season kicks off in mid-April. Recent economic reports suggest that the rate of the decline in the economy is moderating somewhat, and that alone may be reason to believe that the greater risk to investors at this point is missing the early innings of market recovery, rather than significant further downside to prices.

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Final Week Fails to Improve Worst January in S&P History

posted 02.02.2009 at 3:49 p.m. by steve

Stocks finished the week little changed from where they began, with the Dow dropping -0.96%, the S&P 500 down -0.72% and the Nasdaq flat. The week did however cap off what was the worst January for the S&P 500 in history, finishing the month down -8.6% from where it began, causing many investors to perhaps wonder if 2009 will be another terrible year after what has been a very difficult 15 months.

It is becoming increasingly clear that the market is predominately focused on (and unsettled about) what will be policy response to the financial crisis going forward. Earlier last week, markets rallied nicely on rumors that the Obama administration was making significant progress on its economic stimulus plan, and a plan for how to deal with toxic assets held by banks (more important in our opinion). The early-week rally was occurring despite no relief from negative corporate earnings reports and layoff announcements. However, as the week progressed, it became clear that details of a plan for dealing with the banks were still highly uncertain. On that realization, markets worked to erase the early, positive progress in the markets, and sending bank shares back to lows. It seems that the market, and even banking community is getting sick of the government spinning its wheels on a plan for the financial system. Action is seemingly required yesterday, not days or weeks from now. Growing frustration was evident when JPMorgan CEO James Dimon appealed to Congress and the Obama administration to just get on with it in finalizing a workable program to address the financial crisis and dealing with toxic assets.

Employment, housing and consumer confidence reports continue to come in week. One report, the first estimate of 4Q 2008 GDP, came in at -3.8%; better than the widely expected -5.5% drop. However, that relatively tame news caused many to believe that the decline in the economy is being elongated, and that 1Q will now be worse than previously expected. That suggests that economists who were thinking a recovery in the economy was most likely to occur in the at the front part of the third quarter, may now be too optimistic in their timetable.

Despite the above recap appearing as though nothing is well in the world, there was some room for encouragement. According to various economists, the rate of decline in the economy appears to be easing. Secondly, credit markets have managed to continue their thaw; LIBOR spreads are finally back under 100 basis points, a first since the Lehman bankruptcy which disrupted the entire financial system last September. Following the Lehman event, LIBOR spreads were above 350 basis point. Such a contraction in rate spreads suggests that the significant perception of risk in short-term lending markets has eased a bit.

Please read our January market commentary, to be posted to the website later today.

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