The Nvest Market Blog, our current thoughts on the Street

Markets Advance in News-Filled Week

posted 03.30.2009 at 10:16 a.m. by steve

It was another positive week for the markets, and it feels as if the general attitude about the economy and market has improved very significantly since the beginning of March. The S&P, Nasdaq and Dow finished the week up +6.17%, +6.03% and +6.84%, respectively, even after a modest decline on Friday. Much of the climb came on Monday last week after Treasury Secretary Geithner released specific details of how the public-private investment partnership for dealing with toxic bank loans would work. While the details released were criticized by some (on grounds that the plan may be too small to sufficiently address the amount of bad assets), the market responded overwhelmingly positive. It seems that any well-defined plan is better than no plan. Since March 9 (through Friday), the S&P is up +20.6%. Economic data (including housing and consumer confidence) has continued to be less-bad in recent weeks, giving reason for continued hope.

The 20% advance has been much needed relief for long-term investors. However, we are extremely cautious to call this the beginning of a new bull market, despite seeing some less-bad news (one of the preconditions we are looking for to suggest an end to the current bear market). Over the last couple weeks, we have fielded many questions and calls inquiring about our thoughts on the recent rally. While the recent news has been less-bad, we suspect that first quarter earnings (to start being reported in a couple weeks) will again be very bad, putting pressure on the recent advance. Secondly, there are still significant obstacles posing challenge to the bad-asset plan for banks, including the mark-to-market accounting debate. While we believe there is still room for the market to be disappointed in the near-term (resulting in a possible retest of prior lows), we do believe that significant progress has been made by government officials toward addressing the financial crisis (restoring more normal function to the credit markets) and world economy. We further believe that now is the time to be thinking about what a sustainable recovery might look like.

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Asset Purchases and AIG Take Center Stage

posted 03.23.2009 at 09:53 a.m. by steve

While the markets continued to behave themselves (for the most part) for a second consecutive week, the media had no shortage of news to report on Wall Street. On Tuesday, the Fed announced it would buy $300 billion of treasuries in the open market, $750 billion in mortgage-backed securities (MBS) and $100 billion in other securities. All three prongs of the announced purchases are aimed at driving key interest rates down to improve the availability of credit and affordability of housing. You will recall that we have said a key ingredient to economic recovery is stemming the rate of foreclosures and stabilizing home prices. Lower interest rates should help that purpose. Meanwhile, the bigger attention-getter last week was the furor that arose over AIG bonuses paid to executives. The very thought of AIG paying executives any bonus (after demonstrating utter failure in running the business) is enough to make any investor or taxpayer sick. However, the verdict remains out on whether taxing the bonuses paid to executives at companies assisted by the Government at 90% will be a smart move. What is to say that the government will not tax bonuses paid to executives at successful companies next? Or, the possibility that the Government could excessively tax investors who participate in new sponsored initiatives/incentives to buy troubled assets if they end up being very profitable?

We continue to believe that the spring rally (as we are calling it) since March 9 is not the start of a new bull market (the S&P 500 is up +13.65% over the period). More than likely, this is another head-fake rally which will be washed away if First Quarter corporate earnings are again week (as we expect they will be). However, policy response continues to be colossal in magnitude and scope, and do believe that now is the time to be thinking about recovery. In the last six months, there have been over 449 policy initiatives around the world in response to the financial crisis. Adding to that list today will be the expected announcement this afternoon from the Obama administration and Geithner detailing plans for addressing toxic assets sitting on bank balance sheets (another key ingredient necessary for a viable recovery from the economic malaise). It is likely that with all the measures being taken that recovery will occur. The probability that the economy has resumed a path of growth (albeit at a slower pace) by early 2010 seems to increase by the day.

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The Difference a Few Days Can Make

posted 03.16.2009 at 10:24 a.m. by steve

The difference just a few days makes! After weeks of relentless selling, the markets ended last week sharply higher, providing some much needed emotional relief to battered investors. As the markets tumbled to yet another new low last Monday, pessimism was abundant. It felt as if Chicken Little might actually be correct in his exclamation that the Sky is Falling! However, the recovery that followed for the remainder of the week was nothing short of amazing. All of a sudden, it seemed that news was surprisingly less-bad (some of it actually seemed good), and that better days may still remain in sight. Citigroup, joined by other major banks, announced that through the first two months of 2009, they are actually profitable. GM indicated that it will not need all of the bailout money originally requested and General Electric saw its AAA credit rating downgraded by just one notch, instead of the 2 or 3 tallies expected by the market. Meanwhile, welcome news was also flowing out of Washington, as talk suggested that the SEC will reinstitute the up-tick rule (making short selling of stocks more restricted) and raised the prospects that there may be some relief for banking companies from mark-to-market accounting.

The US stock indexes climbed over 10% from Tuesday through Friday. The 5.78% advance that occurred on the S&P 500 Tuesday, was one of the strongest days in years from a technical analysis perspective. The number of stocks advancing to those declining was 27:1 and volume was nearly 50% above recent trend, suggesting that the advance was broad and significant. The markets managed to follow through on the positive surge, posting gains on each of the remaining days of last week. While last week provided some much needed encouragement, it is worth noting that a bounce (or rally) was overdue. The markets, leading up to Tuesday, were as oversold as they have ever been, suggesting that the market had sold off too quickly and too harshly. It is important to note that the recent advance could be just another bear-market bounce (head-fake rally), rather than the start of a new bull market. After all of the good news last week, there is still a lot of opportunity for disappointment in the market. For instance, mark-to-market accounting relief is still considered a remote possibility by many, as its benefits remain debated. The root issue is that toxic assets (bad loans) sitting on bank balance sheets must be removed in order to restore health to the system, and that new foreclosures be avoided. The suspension of mark-to-market still does not specifically solve these key problems, although it may help encourage banks to dispose of questionable assets.

All told, we remain skeptical that the recent rally is the start of the next bull market. However, we are also keenly aware that trying to guess the bottom is a losing game. We continue to closely watch leading indicators, such as sustained improvement in the credit markets and less-bad news. In the meantime, the rally that began last Tuesday could be very powerful over the next several weeks, but may not be the one that keeps on going and ends the reign of the bears.

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Several Key Issues Continue to Pressure Stocks

posted 03.09.2009 at 09:55 a.m. by steve

The markets grinded lower again last week, in what has become a very challenging few weeks. It seems that several key factors continue to weigh on the markets. First, government policy remains ever changing, and the markets seem to be unanimously voting No on much of the Obama budget and policy proposals (thought of raising taxes in weak economy is unfavorable). Second, fears regarding the banking system remain high (note Citigroup is now trading around $1/share). This is because Fed policy has yet to clearly outlay a path forward to restoring health in the banks. Healthy banks will ultimately help revive the economy. Third, we suspect hedge funds are having redemption requests as large as experienced during the 4th quarter. Many hedge funds only allow investors to request money on a quarterly or semi-annual basis. This is prompting forced selling, as hedge funds cannot wait until March 31 to raise all cash needed for redemptions. Fourth, large investors, who may have illiquid private equity investments, are again receiving capital calls, or need cash and are being forced to sell what they can (relatively more liquid stocks), not what they want.

Following several consecutive weeks of selling pressure, the market is due for a short-term bounce. Technical analysis suggests that the market is again as oversold as it was in October (a bullish contrarian indicator), after the market cascaded over the waterfall. Meanwhile, the economic picture continues to look bleak. However, we remind clients that the media will be able to continue using the R-word well into a stock market recovery. This will make investing highly uncomfortable for the masses. However, stocks have historically bottomed 6 months ahead of the economy on average. With the market making new lows, the economy could still be poised for improvement in late-2009. At this very dark hour, it remains clear that the market will almost certainly move higher when few expect it.

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Talk Strategy Slides Now Available

posted 03.06.2009 at 11:13 a.m. by steve

Slides from our March 5 Talk Strategy presentation are now available for download online. The file is 5.7 MB and takes a moment to download.

CLICK HERE

Download Abstract

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Fear Running Rampant

posted 03.02.2009 at 11:18 a.m. by steve

The Dow finished last week at levels not witnessed since 1997, while the S&P failed to hold its November 20 low of 740. During the month of February, momentum gained to the downside, as bank worries and fresh economic concerns were brought to the forefront. At this juncture, there is little to offer in the way of insight (without sounding like we have lost our minds), other than that it is increasingly clear that fear again has the upper hand over fundamentals.

Despite indications from the market that the world is coming to an end, it is worth noting that the consumer appears to be stabilizing. Reports out this morning indicate that consumer spending and personal incomes rose in January, which is positive given the backdrop of the stock market and continued weakness in housing. Meanwhile, initial indications are that retailers saw continued marginal improvement during the month of February. This does provide some hope that news is becoming less-bad; a key that we maintain is necessary for the market to recover in a meaningful way.

While news remains decidedly bad, the severity of the market decline does seem to be disconnecting from reality. Investor sentiment appears to be overly pessimistic given that news is beginning to provide small signs of hope. It is as if the market has forgotten that a very dire economic picture was already discounted from prices months ago. It is worth noting that technical analysis has historically suggested when sentiment is overwhelmingly negative (as it appears now, with almost no one calling this the bottom), it is a bullish indicator for equities. It is likely that, as with nearly every bear market in the past, it will be the early innings of the new bull market that are most meaningful; we just need to be there. In the near term however, the market will likely continue to struggle, as stories about AIG, Citi, and others continue to feed the fires of fear, making it most difficult to maintain the discipline of being a long-term investor.

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