The Nvest Market Blog, our current thoughts on the Street

A Moral Victory

posted 04.27.2009 at 10:08 a.m. by steve

The equity markets managed to end the week virtually unchanged, with the S&P and Dow down slightly at -0.4% and -0.7%; meanwhile the Nasdaq finished up +1.3%, helped by its heavier weighting of technology companies. The fact that the major indexes ended the week virtually unharmed was a major accomplishment after the beating suffered Monday when declines were roughly -4%. Stocks would have to fight to climb their way back out of the hole that was dug largely by double-digit declines in the stocks of the financial sector, as fears of shareholder dilution again escalated ahead of the Government stress test results (due to be released to the public on May 4).

Following the shaky beginning, the market recovered over 2% on Tuesday with help from news stories (perhaps overly rosy) that interpreted comments from Treasury Secretary Geithner that a majority of banks appear well capitalized under scenarios posed by the stress testing. Some respected analysts believe that the rally may have been misguided however, as Geithner was referring to capital based on accounting rules, suggesting that existing equity shareholders of the banks may not be out of the woods with respect to the possibility for further dilution in the event that capital might need to be raised (or provided by TARP). Still, the markets managed to hang on to the optimism, and finish in positive territory on each day for the remainder of the week.

While last week can be viewed as a moral victory, there remain some significant threats to the advance. However, barring some very horrible event, is seems increasingly likely that the low of March 9 may be the market low for this cycle (the economy and employment will continue to deteriorate further, albeit at a slowing pace). The worst for the markets may be behind us. Also, it is worth noting that even after the advance over the last six-plus weeks, cash on the sidelines remains significant at 54% of the total market cap of the S&P 500 (slightly down from 66% a few weeks ago), providing further encouragement to those wondering just how big a sustainable recovery could be when it does start.

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Drifting Higher

posted 04.20.2009 at 09:54 a.m. by steve

The US stock market continued to drift higher for a sixth consecutive week. The S&P 500, Nasdaq and Dow rose +1.52%, +1.24% and +0.59%, respectively. Since March 9, the S&P 500 has rallied an impressive +28.54%, and what initially began as correction from an extremely oversold condition, has continued to move forward with the aid of less-bad economic and corporate earnings news. A number of large banks, which have served as a bellwether for the industry throughout the financial crisis, reported stronger than expected Q1 earnings (however the jury remains hung on how much of the strong earnings is a result of more questionable accounting due to recent changes in asset valuation standards). Indeed, it does seem that against a better market backdrop, the news on the economy has been viewed in a more positive light. Investors once again seem to be attempting to find the silver lining in news bits, rather than focusing solely on the negatives (as had been the case in January and February).

As we meet with clients, an increasing question seems to center around whether or not this is the start of a new bull market. Given that we have held above-normal levels of cash in client accounts since late-07 (serving our clients well during that time), we must admit that our greatest worry on a day to day basis is that this might be the start of a sustainable advance. There has been a colossal global policy response and stimulus effort, which may be starting to trickle through to the economy. However, while news has been arguably much-less-bad than expectations, we continue to believe that the current rally is consistent with another bear market bounce, or head-fake. Technical students of the markets believe that this bounce could run to 900 on the S&P before meeting much resistance (at which point mediocre corporate news might be again viewed more critically). Still, what is most encouraging despite having a view that the spring rally might be only a bounce, is that the pace of economic decline does appear to be moderating. The most dire scenario, depression, seems increasingly remote. Already in the 2Q, there are indications that job layoffs are slowing, which is highly correlated with unemployment. An improving employment picture would go a long way towards materially improving confidence.

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Spring Rally Continues on Economic Green Shoots

posted 04.13.2009 at 10:15 a.m. by steve

The markets concluded the 4-day trading week in the black, making it the 5th consecutive week of gains in a row. After beginning the week deeply in the red (significant declines on Monday and Tuesday), the markets managed to work their way higher on positive earnings announcements from Wal-Mart and Wells Fargo late in the week. The gain Thursday lifted the major indexes over +3.0%. In total, the S&P, Nasdaq and Dow concluded the week ahead +1.7%, +1.1% and +0.8%, respectively.

All told, the markets have managed to continue their Spring Rally (as we are calling the rally that began on March 10 from an extremely oversold condition) predicated on lots of less-bad news. In our quarterly newsletter, Nvest Nsights issued last week, we talked of Green Shoots appearing in recent economic data, which akin to spring, are showing signs of life and hope for growth after a cold winter. Indeed, we are hearing reports that housing and consumer confidence data may offering signs of life. It appears that perhaps the colossal global stimulus and policy initiatives are beginning to show positive effects toward stabilizing the global economic decline.

While Green Shoots of less-bad news have been easier to find lately, the markets will remain closely tuned to company earnings throughout the coming month. Perhaps more important than the raw earnings numbers (most people already believe 1Q 2009 earnings will be lousy) will be the forecasts for future business that are provided by companies. What is perhaps most concerning to us about the recent spring stock market rally is that the advance has come in the face of widening corporate credit spreads. Widening interest rate spreads for investment grade companies suggest that the credit markets remain distressed and perceive the risk of lending to companies as increasing, not subsiding. Clients will recall that we believe both less-bad news and improving credit conditions are necessary for a sustainable rally. As such, we continue to closely follow the credit markets for reversion to more favorable conditions, and corporate forecasts that might suggest that businesses are gaining some visibility of the future.

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Fourth Consecutive Week of Gains

posted 04.06.2009 at 09:56 a.m. by steve

It was the fourth consecutive week of gains on the major US stock indexes. The Nasdaq, S&P 500 and Dow rose +4.91%, +3.31% and +3.09%, respectively. As we have noted in recent weeks, investors continue to receive encouragement in the form of less-bad news (including a change in mark-to-market accounting, the G-20 meeting in London and unemployment data). And, policy response continues to be colossal in scope and size. Further, there have been some improving trends taking place in the credit markets since the beginning of March.

Amid the recent up-move for the markets, an increasing question seems to be cropping up as to whether or not the rally that began on March 9 is the start of a new bull market. Having just concluded the first quarter, we believe that earnings to be reported in the coming weeks from corporations will be awful, and ultimately put pressure on recent stock market gains. In fact it is earnings, or the prospect for future earnings, that is the basis for which stocks trade. Still, with all the recent improvement from the perspective of less-bad news, we do believe that companies are beginning to again find some transparency (or at least hope) for the future (whereas a few months ago pessimism was rampant). There are increasing signals that stabilization may be occurring in housing, consumer spending, manufacturing and possibly banking. The employment picture will continue to deteriorate for some time however, as it is a lagging indicator.

Given that a stabilization seems to be either starting to happen or around the corner via less-bad news and marginally improving credit conditions, clients will note that we have been taking some steps in portfolios to ready for recovery. While we are not deploying funds currently held as cash just yet, we have been taking steps to position client portfolios to better participate in the up-market (swapping some key positions). We encourage clients to talk to us if they have other accounts or friends with portfolios that might benefit from readying for the future.

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