The Nvest Market Blog, our current thoughts on the Street

Market Enters Correction Mode - Week Ended 5/21/10

posted 05.24.2010 at 09:44 a.m. by steve

Excluding Friday, selling was relentless in the most recent week as worries of a European-led global slowdown ran rampant, putting stocks into a deeply oversold condition. Mutual funds broke their 60-week stretch of inflows, instead experiencing net redemptions. Three of the five trading sessions for the week ended sharply in the red. The Dow lost -4.0% while the S&P 500 and NASDAQ experienced more severe drops of -4.2% and -5.0%, respectively. Stocks are now more than -10% off recent cycle highs on April 23, making official a correction. Corrections within a young bull market are not uncommon. In the 11 bull markets since 1941, 7 have experienced a correction of -10% or more within the first 24 months and subsequently resumed their trend higher. Still, the economic data in the latest week did nothing to help cool fears as several important indicators fell short of expectations. Chief among those was a worse than expected new jobless claims number. In recent weeks, the improvement in employment related data seems to have stalled.

It would be missing the point to suggest that anything other than global growth fears were the root of market woes last week. Europe had both sovereign credit risk and growth risk issues until two weeks ago. To date the response has largely solved the sovereign credit risk issue (in the short-term), but at the expense of amplifying the growth risk (due to austerity measures to cut spending and raise taxes). As the bond vigilantes continue to exert force, it appears the only thing to calm the situation and help alleviate the still prevailing growth risk is for Europe to ease further and become coordinated in their response. Europe easing (quantitative) paled in comparison to other countries including the United States during early 2009 leaving the region some wiggle room to relieve the situation and promote growth. But how long will they make the world wait???

Earnings season came to a close and was overwhelmingly positive from the standpoint that most companies exceeded expectations. The positive-feedback loop seems to be gaining steam. But against a renewed backdrop of worry for a double-dip global recession, cover is being provided for policy makers to keep interest rates lower longer while commodities such as gasoline and food fall in price (due to strengthening US dollar), helping support consumers. Here in the US, recent market action seems like an overreaction (especially considering our low exposure to European sales of just 2% GDP). Instead is appears to be primarily fear response (emotion) rather than fundamentals. But, if the last bear market (October 2007 March 2009) taught us anything, it is that if one member of the world gets sick enough, everyone can catch a cold. Bearing that in mind, we continue to watch for developments out of Europe that reduce its growth risk. If those developments come sooner rather than later, a massive rebound could occur given the deep oversold condition at present. Stay tuned.

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Special Market Alert: Vision is Foresight

posted 05.19.2010 at 4:43 p.m. by steve

Today we prepared a special market commentary in light of the ongoing events. We encourage you to read it through as we believe it provides some historical context for what is currently being experienced. Most importantly, we are reminded that corrections of 10% are not an uncommon occurrence in the first 24 months of a new bull market, having occurred at least once in 7 of the 11 bull markets since 1941.

Recent events have changed the tone of what many are feeling. Our base case, or vision is that the current bull market remains underway with the current hiccup largely past (market has become very oversold and due for rebound on a number of measures). However, we are vigilant in our watch of recent issues and the risk of contagion from a rolling credit event. Client portfolios are invested conservatively and quality focused.

Please do not hesitate to contact us if you have questions or concerns. We welcome the opportunity to talk with you!

Vision is Foresight

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Surprise Surprise... Stocks Finish Higher Despite Difficult Finish - Week Ended 5/14/10

posted 05.17.2010 at 11:02 a.m. by steve

To the surprise of many, stocks managed finish the week higher due to the strength of rebound experienced earlier in the week. Despite weakness on Thursday and Friday in which the markets fell roughly -3%, the S&P 500, Dow and NASDAQ all finished higher (+2.2%, +2.3% and +3.6%, respectively). Small cap names again outpaced their larger brethren by an average of +4% (as measured by the Russell 2000). Still, despite the end result being positive, the week felt much more nerve-racking. A sharp acceleration of stocks to the downside late Thursday, and continued pressure on Friday, reminded investors that the issues with Greece and Europe are still present despite the massive plan unveiled last Sunday evening from the ECB to purchase sovereign debt. Watching the Euro continue to decline against the US dollar is evidence of this. Reading between the lines, investors as a whole remain very concerned about the health and stability of the European economic situation as currency fluctuations are arguably the most macro-economic bet one can make on a broad economy versus another. Additionally, money market assets (cash-like) rose for the first time in 17 weeks in a sign that investors are once again skittish and worried about the current rally. The declines of the US market and flight to safety remind us just how inter-twined the global economy has become. Month-to-date, the S&P 500 has retreated -4.3%, and some commodities like oil are off more.

While a look only at the month-to-date stock market values might leave one believing that the economy had went in the tank, quite the opposite appears true. In reality, the preponderance of economic releases this month have beaten expectations on the positive side. Housing data has continued its sideways path despite the expiration of homebuyer tax credits, employment seems to be improving at an accelerating rate (albeit still slower than past economic recoveries) and consumer confidence numbers continue to point in a positive direction. The bottom line to take away from all of this is that the broad economy remains in a better and improving position than when Lehman Brothers failure threatened the global financial system. Nonetheless, it appears that the markets will remain worried about the various situations over in Europe until more is done to accommodate economic growth. In other words, while the markets applauded the ECB move to buy sovereign debt, vigilante investors need to see further easing take place in Europe in the form of both lower interest rates and expanding its balance sheet (as the Fed did in the US to help stabilize and stimulate our economy). To this end, markets appear to remain in a more precarious and volatile state until such accommodations are made.

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Europe Issues Send Markets Shuddering - Week Ended 5/7/10

posted 05.10.2010 at 10:19 a.m. by steve

Europe was the overwhelming focus last week, as fears of a contagion effect resulting from a speculated Greek debt default sent markets reeling in fear. While corrections of 10% (give or take) within a new bull market are not uncommon and even healthy, the severity and tone with which the markets moved last week was very intense. The S&P 500 finished the week down -6.39% with four of five days experiencing loss greater than -1%. The real damage came on Thursday when European officials made a statement on the state of the situation with Greece that proved less than satisfactory to the markets. As a result, vigilante investors took matters into their own hands by punishing stocks. At one point during the day, the Dow was down nearly 1000 points and -10%. Traders on the floor of stock exchanges in New York described the day as unlike anything they had witnessed prior. While indexes managed to finish the day down just -3.2% for the day, fear clearly gripped the markets and caused investors to ask more scary questions about how far the impact of a Greek default could spread.

Aside from euro zone issues, overshadowed was the very positive economic data released last week. Included was the announcement that 290,000 jobs were added during the month of April and the March number was revised higher as well. Also in the package was other better than expected employment-related data, better housing numbers, and a report from the manufacturing sector that looks extremely robust. One thing increasingly clear and worth noting, is that the global economy is in a definitively stronger state today (expanding) than it was at the time of the Lehman Brothers failure. That event coupled with a slowing economy froze the credit markets in late-2008 and sent markets spiraling lower through early 2009.

This week looks set to begin with investors cheering as the ECB did manage to devise a plan valued at nearly $1 trillion on Sunday. The plan, which includes an ECB pledge to buy sovereign debt (similar to how the Fed bought US treasuries) of troubled countries appears aimed at arresting speculative behavior in currency markets. That vicious speculation has driven the Euro to very depressed levels and threatens the long-term stability of the common currency. Still, there are voices today that suggest it is only a matter of time before speculators can again exert negative force. This week could prove volatile with a bounce early, only to later be again undermined as people dig deeper into the details and find areas of perceived weakness. At first glance however, this latest package appears to do what other measures have not; that is, to get out in front of the problems by adequately addressing them. Stay tuned!

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Special Market Alert: Stocks Punished on Greek Contagion

posted 05.07.2010 at 3:25 p.m. by steve

Greek contagion fears spread yesterday (May 6) as financial market vigilantes concluded it time to address the issue of Europe failing to adequately address Greek debt and the countrys austerity plans. When governments and authorities fail to address critical issues either timely or correctly, financial market vigilantes often take matters into their own hands. The result, often lasting several days or weeks, is nerve-racking volatility and drawdown of asset values. At one point yesterday, a trading system glitch exasperated fears and likely led to a more severe decline than would have been otherwise.

Portfolios experienced drawdown, but not market-level declines. A quality focus and diversification help a lot. We do expect that as a result of the European issues

*The Fed will keep fed funds rates lower longer

*Lower interest rates and energy prices should help support the US consumer and economy

*Interest in gold will mount

*AND, current events will present another buying opportunity for quality.

Please read the full Special Commentary: Yesterday, And Tomorrow: What happens when debt is too much.

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Coasting to the Finish April Ends Positive - Week Ended 4/30/10

posted 05.03.2010 at 11:28 a.m. by steve

It was a difficult week for investors as Greece/European debt worries combined with ongoing inquisition into Goldman Sachs and what influence that situation may have on shaping financial reform efforts. World indexes turned sharply lower for the week, and volatility increased in dramatic fashion. Stocks finished the week down -2.51% as measured by the broad S&P 500 (Dow -1.75%; NASDAQ -2.73%) despite posting gains on three of the five trading days. But, the losses suffered on Tuesday and Friday were more extreme than the gains. Still, despite the setback for the week, US stocks finished the month in positive territory, with the S&P up +1.48% and boosting the YTD advance to +6.42%. Outside of worries on Europe and financial reform, economic news remained mixed. Weakness in housing data was offset by a second consecutive month of improvement for consumer confidence. A higher than expected unemployment claims number was contrasted by broad-based improvement for 1Q GDP.

Recently stock market gains have ebbed in the face of mixed economic data. But, corporate earnings season continues to outshine expectations in broad fashion. The initial estimate of 1Q GDP (released Friday) confirms what companies have been showing through earnings: that economic recovery is broad based (across various sectors of the economy) and occurring in more robust fashion than anticipated. We have previously shared that a positive feedback loop is developing. Better than expected earnings are leading (slowly) to hiring; improving employment conditions lead to rising consumer confidence; confidence turns to more spending/demand/earnings. When asked about our outlook for the next year, we answer that we believe the recovery (economy and markets) can continue their current path forward. That is, until acted upon by a force strong enough to test their strength. We believe that force will ultimately be a broad-based rise in tax and interest rates. It is also our anticipation that the stock market will transition to favor companies with perceived quality and financial strength. Low-quality, highly leveraged and cyclical names have rebounded the most since last March (2009) and recently. But, we believe as the rally matures, those companies in relatively stronger financial condition will begin to outshine as they have over the long term. Stay tuned as the rally looks to be nearing a transition point.

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