The Nvest Market Blog, our current thoughts on the Street

September Starts With Big Gains - Week Ended 9/3/10

posted 09.07.2010 at 09:18 a.m. by steve

After a month of discouraging economic news and declining stock prices, markets responded to positive data in the most recent week. After a slow start to the week, the first day of September ushered in big gains as major indexes jumped nearly 3%. Overall, US equities advanced +3.75% for the week as household employment surged, hours worked increased, home prices posted a bigger than expected gain and chain-store sales were better than expected. Still, despite the generally positive economic data in the most recent week, it has not been consistent enough to resolve many of the big debates regarding economic growth. The range of views among investors and economists remains wide including cautious optimism versus double-dip recession fears. But, the most recent data does suggest that fears of a double-dip recession may be too pessimistic compared to reality.

Moving into the second week of September, a month that is typically associated with a negative stock market experience by retail investors, some good news continues to flow. Following the Labor Day holiday, we are reading headlines that the Obama administration wants to extend and increase a tax credit for business research & development. However, following a very busy week of economic data, this week appears to be mild and quiet. Most attention will be focused on International Trade and another round of Jobless Claims numbers, both due out Thursday. At this point in the debate between slow growth and double-dip, we are reminded that any news (even bad) could be good news of sorts. In an era where the Fed is closely watching for weak data to rationalize need for further stimulus, bad news could be interpreted by investors as good because it increases the odds of Fed action (and typically Fed action has been positive for markets). Meanwhile, good news could be good news because it decreases the odds of a double-dip. Interesting times to say the least

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Stocks Slide Again But Find Support Following Comments from Central Bank Leader - Week Ended 8/27/10

posted 08.30.2010 at 10:06 a.m. by steve

August looks set to conclude with stocks sharply lower than they began. Last week continued a series of steadily declining market values for virtually all asset classes except US Government bonds. In fact, since the July jobs report was released back on August 6, the economic data cycle has turned decidedly more negative. The negative headlines have seemed relentless in their attack on investor confidence. Most notable among the negatively oriented news has been weakening jobs data (rising unemployment claims back to late-2009 levels); a housing sector that remains in decline (with the exception of refinancing activity); and manufacturing data, which had been a bright spot for the economic recovery, has taken a turn for the worse. The dog days of summer have indeed set in which has increased the scrutiny of the US central bank. It seems as though the calls on policy makers to further stimulate the sluggish economy grow by the day, but reports suggest members of the Fed are divided whether any action should be taken.

In light of the recent economic weakness, it should come as no surprise that the 2Q GDP estimate was revised lower last week. However, the revision was not as severe as economists had forecast. The massive downward revision was primarily due to a widening trade deficit (greater imports than exports), which subtracted 4.45% from final GDP! So on one hand, GDP looks incredibly weak, yet on the other hand it suggests that US consumers and businesses are spending significantly more year on year; just not much on American goods. Elsewhere, investors did gain some understanding that the Fed, which appears to have little room to stimulate further with interest rates near zero, is committed to taking whatever actions are necessary to prevent investors worst fear of all: deflation. In addition, corporate cash levels appear to be growing to a point that demands a more productive use. This has taken on the form of merger/acquisition bids in recent weeks.

While investors struggled again in the most recent week, not all the data suggests that a double-dip recession is a foregone conclusion. In fact, at most the data continues to tell of slow-growth and not another negative growth recession. This week, the economic calendar is full, which against a backdrop of low trading volume (with the upcoming Labor Day holiday) implies that volatility could be high. Most notable this week will be the August Employment report; it would not be a surprise to see this act as a weight on equities and other risk assets as recent data has been disappointing. Stay tuned as summer unofficially comes to an end this week. Over the next two months, attention on Wall Street will turn to politics as Democrats and incumbents look extremely vulnerable with approval ratings historically low. Meantime, despite weak economic data, equities continue to look like the best long-term (5+ years) opportunity when compared to other asset classes that look less than appealing based on historical valuation metrics.

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Volatile Week Ends With Markets Little Changed - Week Ended 8/20/10

posted 08.23.2010 at 10:23 a.m. by steve

It was another week where the news turned decidedly to the negative side and investors were again left wondering if the fragile economic recovery can endure, or if a double-dip is growing likely. The data certainly pointed to weakness, as investors were served several blows to their confidence. While the most discussed item of the week was the weekly new unemployment claim total climbing back to 500,000-a level not seen since November-other reports seem more problematic from our view. The Empire State Manufacturing survey showed a slowing from the prior month in August; manufacturing had been the bright spot for this economic recovery despite the sluggish housing and employment picture. Further confirming a slowdown for the sector, the Philadelphia Fed survey out later in the week also swung into negative territory representing a contraction in activity for the month of August ending a year-long string of positive numbers.

Not all news during the week was bad however. On Tuesday the Wall Street Journal reported that the willingness of banks to make new consumer loans was improving. Easier access to credit for consumers generally leads higher consumption by two quarters and the report helped drive markets higher. More importantly, the report also suggests that banks, who have heretofore in this recovery cycle been hoarding cash in lieu of making loans to business and consumers, look to be growing tired of earning low yields in treasuries (seem to be a bubble). Maybe too, this report is evidence that banks also view treasuries as a bad investment and use of cash at this juncture? Maybe, they believe it is time to get back to their core business of lending and earning interest at more normal rates.

Through the volatility, equities ended the week down just -0.71% as measured by the broad S&P 500; the Dow lost a similar -0.87% over the five trading days. This week looks set to rise initially, as takeover activity (merger/acquisitions) seems to be on the rise, also suggesting that businesses are tired of holding large, unproductive cash balances. Further, it may also be a sign that corporations view the bond market as too good to be true as many firms have been issuing new debt at ultra-low interest rates. Outside of corporate activity, investors will be watching home sales, durable goods orders and the first revision to 2Q GDP estimate (Friday morning). In light of recent economic news, do not be surprised if the GDP number is revised significantly lower on Friday: perhaps in half to just +1% annualized.

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Jobs, Jobs, Jobs - Week Ended 8/6/10

posted 08.09.2010 at 09:09 a.m. by steve

It was all about the jobs last week as there were no fewer than 5 major economic releases directly related to employment. Unfortunately, on the jobs front, the story remains mixed and volatile. Despite an optimistic beginning to the month of August, with stocks up more than 2% on Monday, markets grew increasingly cautious as the week wore on. All eyes were focused on the Employment Situation report that was released Friday before the market open; that report showed that the private sector added +71,000 jobs during the month of July but against a greater number of Government sector layoffs related to census workers (202,000). This report missed expectations, and was a negative for the markets to end the week. Still, in the face of the weight on Friday, S&P 500 finished the week up +1.82%, closely followed by the Dow which rose +1.79%.

The level of employment remains of key concern for investors and the markets in general. Without jobs, consumers do not have the resources to spend; personal consumption drives over 70% of US GDP. As such, the recent data continues to suggest that the current recovery remains sluggish and fragile. Despite the negative employment headlines late-week, there were some glimmers of hope. The average workweek ticked higher and hourly earnings also rose. Both suggest that employers are nearing closer to the point of needing to hire additional help. Outside of employment, the ISM manufacturing index came in at the high-end of expectations and continues to reflect month to month growth, albeit at a slightly moderating pace. Construction spending also advanced and applications for new home purchase managed to rise for a third consecutive week following what was a VERY slow month of June with the expiration of the housing tax credit. On the balance, it seemed like optimists had slightly more news to validate their economic thesis than the pessimists last week.

As has been the case throughout most of the summer months, economic data remains mixed and suggests that the economic recovery has hit a soft patch. Still, with much of the issues seemingly out of the way (Europe debt, healthcare and financial reform bills), the markets should have less to worry about. But, let us not forget that congress returns to session at the end of August and will be debating heavily the extension of Bush tax cuts, which if left untouched will expire when the calendar rolls to 2011. It is our belief that most tax brackets will see the current rates extended for at least another year or two, but we recognize the real possibility that all cuts will be allowed to expire. Politics remain one of the biggest risks for investors, which is a shame. Next week, the economic calendar offers looks at international trade, retail sales, inflation (consumer price index) and consumer confidence. There is also a FOMC meeting Tuesday; investors will be closely watching to see if the Fed feels need to take steps to further ease and stimulate economic growth.

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July Finishes Up Strong as Earnigns Continue to Exceed Expectation - Week Ended 7/30/10

posted 08.02.2010 at 10:43 a.m. by steve

US equities marked time in the final week of July, allowing them to finish the month in a significantly better position than they started; the S&P 500 added +6.88% over the course of the month thanks for a strong rally that began on July 7 as 2Q earnings season commenced. The Dow has managed to fight its way back into slightly positive territory for 2010 while the S&P 500 remains a touch in the red. The recent gains have been primarily due to stronger than anticipated 2Q earnings against a backdrop of still-mixed economic data. We did get news last week that GDP in the 2Q was again positive, although at a slower pace than the 1Q. In addition to reporting generally solid financial results, US corporations have provided forecasts for the remainder of 2010 and 2011 that have given investors hope for continued positive economic growth, albeit at a slow and bumpy pace. Europe and Emerging markets have also offered positive surprise with their economic data. Europe economic activity has slowed, but remains positive and better than anticipated despite worries of a double dip. Meanwhile, China has also shown signs recently that it intends to ease off the brake and policy measures that it had been employing at the end of 2009 and first half of 2010 which sought to cool the booming economy before it ballooned into an inflationary bubble; its stock market has surged higher in the past 5 weeks after being one of the worst since late 2009.

Still, with more than half of 2010 now history, confidence by investors in the recovery and in stock investing remains very low. Bonds continue to be the investment of choice for investors seeking higher yield than zero-interest money market funds while stocks (and stock mutual funds) experience net-outflows. As evidence of this, it is currently not uncommon to find dividend yields higher than the coupons on bonds. For example, pharmaceutical company Pfizer is currently paying a dividend of 4.8% while its bonds yield just 3.1%. McDonalds just issued debt at 3.5% for 10 years, while its dividend yield is almost equal. Given a market flush with similar examples, some are predicting that the decade of 2010 will be a lost decade for bonds (as stocks were in the most recent decade) while stocks are likely to exceed pessimistic expectations, despite the headwinds of budget deficits and etc facing our country. As we move through the later-half of 2010, Fall is likely to remain difficult for investors. Historically, the months of August and September have been of the more difficult variety for stocks.

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Princeton Futures Strategy Fund - PFFAX

posted 07.27.2010 at 09:36 a.m. by steve

Recently, Nvest Wealth Strategies has been researching and performing due diligence on fund strategies that can further help reduce portfolio volatility. Historically managed futures provide an uncorrelated investment solution to the traditional asset classes of equity and fixed income. This low correlation serves as an excellent diversifier during periods of market volatility. When used in conjunction with a portfolio of traditional asset classes, the fund has the potential to reduce risk and enhance return. Additionally, unlike other alternative investments (such as hedge funds, real estate, private equity, etc.), managed futures as an asset class has maintained low correlation with other asset classes even during times of market stress in which asset correlations tend to rise (assets behave increasingly like one another).

Princeton Futures Strategy Fund (ticker: PFFAX / PFFNX) seeks to provide diversified exposure to the commodities, financial and foreign exchange markets while attempting to generate attractive, risk-adjusted returns through a fund-of-funds architecture with the daily liquidity and fee structure of a mutual fund. While the Princeton Managed Futures Strategy Fund is newly available in a mutual fund format under the Investment Company Act of 1940, the sub-advisor 6800 Capital, LLC has been running this hedge fund strategy as a limited partnership (LP) for the last 14 years with very attractive performance. Read more about Princeton Futures Strategy Fund.

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Dow Regains Positive Territory for 2010 - Week Ended 7/23/10

posted 07.26.2010 at 09:41 a.m. by steve

Despite a week full of disappointing data on the housing sector and almost no other economic news domestically, US stocks enjoyed positive performance in four of the five trading sessions. The S&P 500 rose +3.55% in the week while the Dow and NASDAQ managed to get back to their break-even levels for 2010. Better than expected earnings seemed to be the primary catalyst, as several key companies not only met or exceeded forecasts, but issued more optimistic guidance for upcoming quarters as well. In particular, shipping company UPS suggested that commerce may be picking up, while Ford noted strong sales and that it expects to be debt free by the end of 2011. In addition, European economies posted figures that surprised analysts to the upside. Among those items, we learned that the UK grew at its fastest pace in four years while Germany and Italy released data indicating that confidence and sentiment regarding their economic outlook is improving.

When reflecting on last week, it seems as though there was actually more news from Europe than here domestically. Also announced were the results from the European bank stress tests. Highly anticipated, the report showed that 7 of 91 banks failed and they would need to raise additional capital. Ultimately, the results were of little to no impact on the markets. Meanwhile, there was news from US companies, suggesting that pressure is growing for idle cash to be deployed to more productive uses. GE announced a special dividend, and there was speculation over a Genzyme takeover on Friday. Investors should be encouraged as it would show that companies may be feeling that it is time to open up the corporate wallet and think about improving/expanding their businesses rather than having a mountain of cash sitting idle and being uber-conservative. Said another way, if businesses begin to spend down the huge mountains of money acquired in the last 18 months for capital improvements, starting new ventures and marginally expanding workforces, jobs may begin to return at more rapid pace and the economic recovery could gain stability.

This week the economic calendar is busy. Most watched will be consumer confidence, durable goods orders, jobless claims and more housing-related data. Perhaps the most anticipated report of the week will be the initial estimate for 2Q GDP due on Friday. Economists are looking for +2.5% and would also like to see improvement in final sales (not just inventory re-stocking).

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Declining Consumer Confidence Hits Stocks - Week Ended 7/16/10

posted 07.19.2010 at 09:43 a.m. by steve

After extending their winning streak to 7 straight days, US equities proceeded to hit a wall of resistance late in the week and ended lower than where they began. The S&P finished the week down -1.21% following a massive decline on Friday of -2.88% onset by a consumer confidence number that plunged in the last month.

Ultimately, negative economic releases late-week overshadowed what was a great start to 2Q earnings season. Notable was great earnings from Alcoa (aluminum producer), CSX (railroad) and Intel (tech) which all showed better than expected gains in earnings and revenues and their outlook comments for the second half of 2010 remains bright and optimistic despite what has felt like a soft patch for the economy over the prior couple months. As has been the case for the past 2 years, the banking sector continues to show evidence of struggle. JPMorgan, arguably the healthiest big bank, reported better than expected earnings, but reduced the amount it sets aside for bad loans; Citicorp, by contrast one of the weakest big banking institutions, reported earnings that met analyst expectations but did so by setting aside a significantly smaller amount for bad loans than in previous quarters. The accounting profits cause one to question how strong the sector is recovering, and if banks are recognizing lower loan losses in order to juice earnings to meet expectations. Meanwhile Bank of America, the largest financial institution by deposits, missed revenue estimates adding to anxiety over the sector.

Also reported last week was an improvement in new unemployment claims, which fell to their lowest reported level in two years. But, one week does not make a trend, and investors will be watching the series in this and upcoming weeks to see if better numbers can be sustained. But, while employment numbers improved, manufacturing related data that had been the brightest spot of the recovery, deteriorated. This week, earnings season continues against a backdrop of just a few new economic data points, many of which are likely to be soft given that they are generally housing-related. Following expiration of the homebuyer tax credit in April, data from the housing sector is likely to be weak for several months as demand was pulled forward.

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Markets Fully Recover From Prior Week Damage - Week Ended 7/9/10

posted 07.12.2010 at 09:51 a.m. by steve

What a difference a week makes! Friday the 2nd felt like the world (financial) was coming to an end after five consecutive days of stock market declines. Seven days and four positive trading sessions later, things felt much better. Last week, the stock market roared ahead, recapturing much of what was lost in the week prior. Some mutual funds gained more than 7%! Overall, the S&P 500 gained +5.4% making the last two weeks of down and up of virtually no consequence. It truly has been a bumpy journey since late April, with the stock market having forfeited what would have been attractive gains for a years time and sliding into negative territory for the year-to-date. Still, last week was nothing short of encouraging as the news cycle turned more favorable after weeks of disappointment.

Most notably last week, although still not signaling strength, was that the latest unemployment-related data posted marginal improvement. Additionally, there was attempt made by the Obama administration to repair recent strife with the business community, talk of middle-east peace, Google/China mending fences, better than expected numbers from financial firms, progress being made on the capping of the Gulf of Mexico oil spill, better weekly retail sales and several other items. However, while there were signs of improvement on many fronts, not all news was good. Not entirely unexpected was that consumer confidence fell and mortgage applications for home purchase also declined. In the face of so much conflicted news (one report good, another bad), it appears as though the most probable scenario for the economy, and stock market for that matter is bumpy (volatile), slow, positive growth; not a double-dip.

This week, 2Q earnings season begins. Investors are likely to be focused on results as it was early (May) in the 2Q period that the stock market began having its fits and the data/news cycle turned for the worse. Not only will the bottom and top line earnings numbers be critical, but also watched closely will be the executive outlooks for business in the back half of this year. Will their tune remain optimistic, or will the recent struggles and uncertainty send them into a more defensive demeanor?

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Stocks Continue Selloff As Fear Seemingly Trumps Reality - Week Ended 7/2/10

posted 07.06.2010 at 09:53 a.m. by steve

Stocks sank for a third consecutive week, and in sharp fashion. The S&P 500 plummeted -5.03% and is now off -8.30% in 2010 while the Dow has suffered a similar fate. The second quarter was the first negative performance quarter for investors in five and as we have noted before, it has entered official correction territory which is defined as a decline in value of more than -10% (bear markets are defined as a drop of -20% or more). With the Dow having again fallen below the psychologically significant level of 10,000, the economic soft patch seems to be intensifying as the negative tone of the stock market since April now appears to be weighing upon business and consumer behavior. This notion is supported by the notably weaker than anticipated economic data released over the last six weeks. The weakness has been especially concentrated in the housing sector and employment, and is spreading to the consumer through what appears to be deterioration in sentiment and retail sales.

Given the recent attack on investor confidence, we acknowledge that the bearish case for the economy seems increasingly legitimate; it feels very contrarian to be an optimist at this juncture. Investment markets seem to have become once again, detached from the fundamentals of the economy and corporate profits. By almost an metric, valuations on stocks look historically cheap, while bonds (treasuries in particular) are expensive. Fear and emotion once again seem to be the rule of the day. This holiday-shortened week, there appears little in the way of news that can change the bearish tone more positive, but with stocks deeply oversold, we may see an improvement in the markets. Be on the lookout for more commentary in Nvest Nsights, our quarterly newsletter due out later this week.

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Bumpy Journey Continues as News Turns Weak - Week Ended 6/25/10

posted 06.28.2010 at 10:00 a.m. by steve

Following a two week rally, equity markets again turned decidedly south against a backdrop of weak economic data and a news cycle that seems relentless in its attack on investor confidence. The S&P 500 receded roughly -4% and indexes are again negative for 2010. Initially, the week looked set to extend recent advance on news that China will begin to let its currency float in a sign that global economic rebalancing can begin to occur. A stronger Chinese Yuan would be good for US manufacturers in that American goods would be more attractive to US consumers compared to imports from Asia. Still, despite the news, stocks declined on four of the five trading days, largely giving back what has been recovered since June 7. In fact, the news over the weekend regarding China seemed to feel as if it was the ONLY tidbit of good news to be received throughout the week.

Most notably, housing continues to look staggeringly weak. Several housing-related reports indicated significant weakness following the expiration of homebuyer tax credits (April); and, home sales fell to their lowest level on an annualized basis since data was first tracked dating back to the 1960s. While it should have come as no surprise to the markets considering that the housing credit would pull demand forward and steal from future months just as the widely successful cash for clunkers program did, the headline was just too sad to ignore. Outside of housing, consumer and employment related data showed slight improvement, but still seems stuck in a channel that is softer than data investors were getting used to earlier this year. Markets also continue to battle the worries and uncertainty that loom over new financial regulations, tax extenders, Gulf oil spill difficulties and of course Europe to name the most significant. Bottom line; it remains extremely difficult for consumers and businesses alike to feel any confidence of what the future looks like. Uncertainty and a variety of outcomes remain palatable, leaving all parties feeling as though playing it safe is perhaps the best way to go.

Still, in the face of this dramatic uncertainty, we believe that the most contrarian view among investors is that equities are the greatest opportunity over the long-term. Evidenced by the fact that bond funds continue to receive inflows at a rate of 17:1 the rate of equity funds; or the fact that equity mutual fund flows are actually negative over the last 15 months; treasuries continue to trade at ridiculously low yields (high prices) suggest that investors continue to invest by their emotions, looking in the rearview mirror of the past decade (bonds outperformed stocks) assuming that it will continue indefinitely into the future. We do not share this view. And, apparently neither does a very well known, world admired bond manager, PIMCO. With over $1 trillion in fixed income assets under management (the largest of any fund company), PIMCO announced that it is opening several new equity mutual funds. Reading between the lines: why would an immensely successful bond manager start equity funds against this current backdrop??? Might they believe that bonds are expensive and overvalued? Might they believe that equities are the unloved, under-appreciated asset class best positioned for future gains?? Time will tell

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Second Week of Gains Puts Indexes Back in the Black for 2010 - Week Ended 6/18/10

posted 06.21.2010 at 09:00 a.m. by steve

Stocks behaved themselves for a second consecutive week, rising back above the level of the 200-day moving average (an important technical level). Stocks rose in 4 of the 5 trading sessions with the biggest advance occurring on Tuesday as indexes rose sharply by more than 2%. That helped the week end +2.37% for the broad S&P 500 (and returning indexes to positive territory for 2010), despite Greece being downgraded to junk status by Moodys (largely expected) and economic data that was generally worse than expected. Meanwhile, Gold managed to also make new highs in what has become a bet against fiat currencies rather than an inflation-hedge. Credit spreads (a key barometer of perceived risk between lenders and debtors) remain elevated from the favorable levels earlier this year, but stable in recent weeks. Still, without significant improvement in credit spreads (narrowing), many believe that the recent improvement in equity market behavior is only a short-term bounce from the extreme oversold condition that had developed during the month of May and early days of June. Uncertainty over the market remains however, as evidenced by the wide range of views by economists and varying forecasts present.

Economic data news was decidedly weaker in the latest week and one thing that has become readily apparent through watching of various data points is that the domestic economic recovery stands in sharp dichotomy. Manufacturing and industrial production are robust, while housing-related sectors are flat at best. Consumer sentiment as reported in the former week continues to remain resilient at favorable levels, but unemployment is stubbornly high according to weekly unemployment claim figures. In fact, unemployment claims rose in the latest week, suggesting that jobs remain a challenge to get. But, against a backdrop of weaker than hoped-for economic news, stocks did manage to behave themselves, suggesting that bears may have exhausted their selling pressure and bulls are once again taking control of daily moves. This week looks set to extend the recent market recovery, as China announced over the weekend an easing of its monetary policy which suggests a stimulative effect on its already fast growing economy. The biggest items on the economic calendar this week are existing home sales (likely to be weak), durable goods orders (expect strong) and the FOMC meeting announcement on Wednesday. Stay tuned!

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A Sigh of Relief for Investors After Weeks of Declines - Week Ended 6/11/10

posted 06.14.2010 at 10:20 a.m. by steve

Stocks had their best week since March with the majority of the gains coming from a 273 point rally on the Dow Thursday, helping the most widely reported index recapture 10,000. Stocks managed also to extend those gains into a second day Friday (an occurrence that has become extremely rare since late-April), despite a weaker than expected retail sales figure. The week was not without its fits, as stocks again opened under selling pressure and Europe worries. All told, the S&P and other major domestic indexes gained roughly +2.5% in the five days ending June 11. Perhaps the biggest news came on Thursday when China announced that its economic activity was significantly more robust than even optimistic estimates, suggesting that a weak Euro currency is having less of a negative impact on export-oriented economies (like China). The fear had been that a weakening Eurozone could pull the world economy back into a double-dip instead of remaining a more isolated event. It should go without saying that the news of the last week does not erase the worry that has been so prevalent since late April. But, it does help investors feel that markets have been too pessimistic when assessing recent events in Europe.

Economic data continues to suggest that the US economy and other developed nations are currently in the midst of an economic soft patch (but still advancing). The news last week of falling retail sales in May, and housing data which continues to deteriorate following expiration of Government sponsored incentives; and stubborn levels of new jobless claims does remain troubling. That being said, monetary policy remains extremely accommodative and the money supply has increased for 6 consecutive weeks. The recent worries are likely to provide ample reason for central banks to keep rates low longer. Additionally, corporate balance sheets are now more flush with cash than at any time in history, suggesting they are well positioned to sustain the recovery (through continued hiring and capital spending) should their confidence improve enough to loosen the grip on their wallets. The most likely economic environment we believe is slow, choppy but positive growth.

This week we will be focused on data from the manufacturing sector, import/export prices, housing sector and jobless claims. We are interested to see how stocks interact with technical levels of resistance for the technical backdrop to reassert itself in a positive fashion. Meanwhile, from a long-term fundamental perspective, we continue to believe investors with long time horizons are better served by owning more stocks than other asset classes, despite the numerous headwinds facing the economy. Cash/money market funds continues to pay zero yield; 10-year treasuries (fixed income) pay just 3.3% and rising rates at some point will push prices down; while US stocks offer a dividend yield currently at 2% and capital appreciation potential.

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Not All About Employment... But Close - Week Ended 6/4/10

posted 06.07.2010 at 10:27 a.m. by steve

Despite a holiday-shortened trading week due to the Memorial Day holiday for US markets on Monday, the week again felt long for investors as stocks finished down -2.25% on the S&P 500. Throughout the week, markets seemed to be moving past the recent turmoil and cautious optimism was present heading into the employment report Friday. Comments from President Obama Wednesday afternoon alluded to strong job growth and helped produce one of the biggest daily gains of 2010. And, Thursday continued the prior day advance, helping to cement the first two consecutive daily advances for the S&P 500 in over a month! but, the much anticipated employment report on Friday came and went falling dramatically short expectations. Outside of temporary Census hiring, the private sector added just 41,000 jobs during the month of May; that figure was well short of economist expectations for 150,000 to 250,000 new jobs ex-Census. Add to the disappointment news from the country of Hungary, who essentially said that it is likely headed for a Greek-style debt crisis, and it was not surprising to see the markets give back all of the recent gains plus some (losing nearly -3.5% on Friday).

Despite the week finishing on such a negative tone, not all news was bad. Instead, the recent data remains more consistent with a soft-patch in the economic recovery, or a bump in the road as opposed to a double-dip recession. Of key importance last week was that credit spreads and Libor rates (a gauge of counterparty trust between banks) held steady, curbing their recent trend of deterioration. While the Labor Department report on Friday was less than inspiring, other job-related data was more encouraging. Some leading indicators of employment continue to point toward additional hiring in the months ahead. Given recent events, from European debt issues to oil spills to terrorist actions, we suspect volatility will continue and the markets will struggle to find direction. Add to those events a relatively light week of economic news, and expect that investors will be reading closely any data that helps further understanding on the direction of employment, consumer sentiment and international economic activity. Key among the releases will be the international trade data due on Thursday and retail sales on Friday. Overreactions to good or bad news in the short term are likely as investor emotion and fear is back.

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Worst May on Dow Since 1940 - Week Ended 5/28/10

posted 06.01.2010 at 3:54 p.m. by steve

Sell in May and go away so the old saying goes; it is probably one which many investors wish they had followed this year. Despite the strong performance of Thursday, and a week that was overall flat, the Dow finished May with its worst percentage loss since 1940. The index lost -7.92% for the month with others down a similar degree and moves the market officially into correction mode defined as a decline of more than 10%. Since April 23, the market has generally been sliding downward, with the S&P failing to have experienced two consecutive days of positive performance since that time. Ultimately, global economic and financial worries were the root of the problems for financial markets during the month. European debt, financial regulation and diplomatic tensions combined during the month, proving to be a toxic brew for both equity and credit markets. Indeed, the credit markets have been showing some early signs of stress; we need to see this abate. Fear of contagion has likely caused the slide in stock prices to become overblown, but it does seem that the economic conditions and facts are changing.

It is worth acknowledging the economy remains in an improving trend, but a soft patch does seem to be upon us as the most current measures of consumer confidence and spending have slowed the pace of their recovery. Economic data has lost some of its exciting tone in recent weeks. Much of that is likely attributable to the stock market and its recent slide, leaving people feeling shaky. Still, we believe that stronger corporate earnings (profits) and new hiring will continue to feed upon themselves and continue the positive feedback loop that seems to be developing. One of the biggest reasons why we feel the current market has more room to run is that the stock market recovery still trails by a wide margin the recovery that has been experienced for real GDP (key measure of economic activity). In terms of economic productivity, the US economy has largely recovered most of what it lost from 4Q 2007 to early 2009; meanwhile the S&P remains almost 30% below its October 2007 peak.

Corrections like the one currently being experienced are never fun. However, history does provide context for what investors might expect. For instance, in 1932, following an +86% run there was a correction of -30% before the market resumed its upward trajectory and rose another +102%. Investors are likely to feel very skittish following one of the worst bear markets in history, but there are many reasons to try and remain optimistic. Stay tuned for our monthly commentary later this week as we will provide additional perspective.

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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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Better Earnings Continue to Fuel US Market - Week Ended 4/23/10

posted 04.26.2010 at 09:28 a.m. by steve

Despite ongoing worries about Greece, which appears to be in an ever more precarious financial situation by the day, US stocks managed to swell higher for the week. The broad S&P 500 gained +2.11%, followed by slightly less sizable gains for the Dow and NASDAQ of +1.69% and +1.97%, respectively. The S&P is now up +4.09% for the month of April; and, 7 of the last 8 weeks have now been positive. Meantime, there has been some noise in the economic data with some reports pointing to continued recovery while others inject doubt. But last week initial unemployment claims fell back to a more preferred level and applications for home purchase surged ahead of the expiration for homebuyer tax credits.

Given the more mixed package of news lately, one might question how the markets manage to continue moving in an upward trajectory. It is worth acknowledging the many headlines that threaten to derail recent gains including Greece debt, China worries, allegation against Goldman Sachs for securities fraud, and on. Additionally, financial regulation reform is gaining momentum moving through Congress.

But, to the surprise of many, company earnings for the just completed 1Q period have largely beaten even the more optimistic projections. In fact, with a fifth of the S&P 500 now having reported results, over 85% of companies have beaten estimates: that is the most in 17 years according to research firm ISI Group. In fact, some companies have been reporting such strength that many of them should start hiring new workers to keep pace with demand, which is up over 20% in just 3 quarters. If the favorable reports can continue, then it is not hard to imagine a positive feedback loop developing whereby more jobs means more spending/demand and continued positive earnings surprises. This week, earnings season continues. Meanwhile it will be worth watching how Europe and the International Monetary Fund (IMF) move to deal with Greece. With the issue 4 months old now, one would think we are nearing a final determination for action. The economic calendar looks to be busier this week, with several key reports including Consumer Confidence, the FOMC Meeting and the first estimate of 1Q GDP growth.

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The Big Bad Banks - Week Ended 4/16/10

posted 04.19.2010 at 09:37 a.m. by steve

What originally looked to be like another week of handsome gains in the midst of strong 1Q earnings was largely erased Friday as investors were reminded of the cause of the financial crisis when investment bank Goldman Sachs was charged with fraud. The SEC charged the firm for its alleged involvement in the creation of collateralized debt obligation (CDS) and failing to disclose that it would benefit if the security fell in value; the actions ultimately cost investors $1 billion in losses. The news immediately sunk broad stock indexes by almost -2% while the banking sector experienced far greater punishment. One cannot help but wonder if the latest charges are part of a bigger political push to help build the case for sweeping and strict financial regulation overhaul (now moving through Congress). Goldman, the subject in question faced the worst decline for the day with its stock falling 13% on the charges. Despite the development on Friday, stock indexes finished the week essentially where they began. The Dow did manage to close the week above 11,000 for the first week since September 2008 when Lehman Brothers failed. The S&P was unable to hold onto its gains for the week and remains shy of 1,200 after having closed above that level for several days earlier in the week.

Despite the negative news centered on Goldman Sachs on Friday, it was generally a very positive week. Investor sentiment improved in recent weeks. The Eurozone sketched out more specific details about plans for aid of Greece and its refinancing of debt obligations. Economic data continued to point to strength in sectors such as manufacturing and the overall economic recovery appears to be gaining momentum. Corporate earnings also commenced with blowout positive reports coming from technology and banking giants Intel and JPMorgan Chase; both reported results that handedly beat even optimistic expectations. In fact, Intel indicated that the recently completed 1Q was the best and busiest 1st quarter in its company history dating over 40 years! Bank of America, the largest US bank by consumer deposits helped to confirm the general recovery being experienced by the financial sector when it too beat earnings and revenue estimates by wide margins and today, Citi also helped to support the story with its earnings release. This week, the focus will be primarily on corporate earnings as the economic calendar is light until Thursday when we receive the weekly round of jobless claims, as well as the producer price index and existing home sales. Meanwhile, the other ongoing debate is whether or not equity indexes can continue to rally and build on the momentum they have had since early February. Many are suggesting that a pause is due while others suggest that momentum is one of the biggest assets of this current rally. Bottom line, it becomes increasingly likely in our minds that the rally and economic recovery continues to surprise the consensus with its ability to climb the wall of worry.

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6 Straight, But Earnings Season Starts Tonight - Week Ended 4/9/10

posted 04.12.2010 at 09:34 a.m. by steve

It was the sixth consecutive week of gains for US indexes, with the S&P advancing +1.38% for the week and the Dow closing just below 11,000, a level not seen for the index since September 26, 2008 (the S&P currently just shy of 1,200). While managing to pull off gains, the week was not without its struggles, as worries of a Greek debt default again became a focus; economic data was generally still favorable, but there were some discouraging releases on the housing and jobs front. Consumer spending appears to be accelerating despite stubbornly high unemployment rates and a significant drop in consumer credit (borrowing). And, upward creeping mortgage rates seem to be negatively impacting the pace of refinancing activity only, not stalling the pace of applications for new home purchase at least for now.

Recent weeks have been relatively light in terms of economic data, giving investors the opportunity to look at news generally given less attention. While some areas of the economy continue to sit at levels of depressed activity (housing), an area of the economy that has shown robust recovery has been the manufacturing sector. Aluminum producer Alcoa kicks off 1Q earnings season today after the market close and it will be important to see if results can confirm the purported strength of the sector. Outside of manufacturing, there are those who believe that Wall Street expectations for earnings are too optimistic following several quarters of positive surprise. On that note, this week could prove volatile for stock indexes if earnings do turn out a bit less exciting than anticipated, especially after the advance experienced in the last 6 weeks. Whether this week can extend the winning streak or takes a breather is probably not that important. Any pullbacks are likely to be relatively short lasting and shallow magnitude. What does seem to be increasingly confirmed is that the economy is experiencing a stronger recovery than most expected, without being so hot as to stoke inflation.

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Roth IRA Conversion: Is It a Worthy Idea For Me?

posted 04.05.2010 at 2:29 p.m. by steve

A big financial planning topic being discussed for 2010 is the conversion of an IRA into a Roth IRA. You may be wondering why all the buzz? In theory, it sounds great: distributions from a Roth IRA are tax free in retirement. But in practice, paying the taxes now may not make sense. This brief paper will answer when and under what conditions does it makes sense to convert an IRA into a Roth IRA. We offer some general thoughts and guidelines, and encourage you to review your situation with tax planners, investment and estate advisors.

Please click here for the full article: Roth IRA Conversion

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Recovery Appears Ever More Sustainable Amid Job Gains - Week Ended 4/2/10

posted 04.05.2010 at 09:34 a.m. by steve

US stocks managed to post gains for a fifth consecutive week and closed out the first quarter of 2010 with solid gains. It was the fourth consecutive quarter of positive performance since the bear market made its low on March 9, 2009. The quarterly gains (S&P +5.6%) were back-loaded, coming entirely from the month of March with the S&P 500 returning +5.9% (including reinvested dividends). March was the best month for stocks since August of last year. But the advance during the quarter did not come without struggle, as a decline of about -10% was experienced for the broad stock indexes between year-end 2009 and February 8. The renewed uptrend has come as economic data has improved and global worries have eased somewhat.

The most recent week was stacked full of employment and consumer related data. Most of those reports met or slightly exceeding expectations. A report on the manufacturing sector showed that activity is about as strong as it can get in any market environment and looks to be one area of the US economy that is experiencing a V-shaped recovery. Employment related data points were consistent with one message: that jobs are slowly returning. The biggest economic data point came on Good Friday with the US markets closed. The US Employment Report showed 162,000 jobs were added during the month of March. The headline number missed expectations, but digging deeper into the report revealed that Census hiring (temporary jobs) was significantly lighter than expected and that private-sector jobs (more sustainable jobs) rose much more than expected. Additionally, the average hourly workweek increased to 34 hours and was at the very high-end of expectations; that suggests that employment gains should continue in the months ahead.

As cliche as the phrase has become, the markets continued to climb a steep wall of worry during the 1Q. And, the most non- consensus call right now is that the markets would continue to drive higher as the majority of retail and institutional investors alike doubt the new bull market. In investing, history has shown time and again that the consensus is usually wrong; we continue to be of the belief that investors focused on the long-term and are unfazed by short-term volatility (emotion driven) will be successful. Further, we hope that the consensus gets positively surprised by being wrong once again. In the meantime, we remain focused on investments with a bias toward quality.

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Only Slightly Higher after Days of Churning - Week ended 3/26/10

posted 03.29.2010 at 10:11 a.m. by steve

Net-net, it was a week of churning for the major indexes. Despite the S&P gaining +0.58% (Dow +1.01%; NASDAQ +0.87% w/w) for the five trading days, stocks traded in a wide positive range on several days only to finish roughly flat. The week began with the passage of healthcare reform, an almost tireless source of uncertainty for the markets since Obama took office over one year ago. With that headache out of the way, stocks advanced, but Government attention will now turn to financial regulatory reform which could prove volatile for stocks of the financial sector in coming months. Meanwhile, it was generally another week of mildly favorable economic data. New jobless claims dropped to 442,000 which is a new low (good news) for this recovery cycle. And, while the final 4Q 2009 GDP number (old news) was revised slightly lower on Friday with weaker than previously thought consumer data, recent reports are showing continued incremental improvement in consumer confidence/spending, business equipment investment (capex) and rising export activity.

So why did the indexes fail to move significantly higher, or hold onto big intraday gains throughout the week? For one, many investors are probably feeling a sense of hesitation after 6 weeks of strongly positive market activity. Since February 8, stocks have risen by an average of about 10%. Many will argue that a pause is overdue. Secondly, and perhaps more detrimental to last week was that the US Treasury had several weak auctions of treasuries, suggesting that investor appetite for new issues of US debt is ebbing. Weak demand for US debt means that, if prolonged, interest rates will begin to rise. And, a rise in the general level of interest rates translates into home loan rates also creeping higher, potentially choking off a housing recovery; recovery for the housing sector remains very important for the US economy. Still, despite the weak treasury auctions last week, and hesitancy of many to embrace the current rally, pressure remains high for investors to redeem zero-yield money market shares in favor of riskier assets that continue to outperform expectations. Momentum remains one of the biggest assets for the recent rally. This good-Friday shortened week ends the first quarter of 2010; it looks set to be the fourth consecutive quarter of positive performance.

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Obama Signs Healthcare Reform Bill into Law - Investment Implications

posted 03.23.2010 at 10:18 a.m. by steve

After a year of polarized and heated debate, President Obama has managed to pass a bill on healthcare reform. The bill intends to expand healthcare coverage to some 30 million additional Americans who are currently without access and has been projected by the Congressional Budget Office (CBO) to reduce the federal deficit by billions over the next decade. However, expanding coverage while reducing the deficit can only mean one thing: higher and/or new taxes are needed. Indeed, the new healthcare reform bill does levy some new taxes on higher income earners in the form of an income and investment surtax.

JPMorgan has published a brief Market Bulletin to address the investment implications of this new reform. The article does a good job of removing political views and summarizes the facts as they relate to your investments. If interested, we encourage you to read the short article by clicking here: JPMORGAN HEALTHCARE BULLETIN.

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Melt-Up Continues - Week ended 3/19/10

posted 03.22.2010 at 10:00 a.m. by steve

Despite their sell-off in higher volume on Friday, US markets managed to again finish the week in positive territory as economic data continues to paint a picture of recovery. The large-cap Dow led the rise domestically with gains of +1.10% for the week, while the S&P 500 and NASDAQ moved up +0.86% and +0.29%, respectively. The market got its biggest boost for the week came on Tuesday, as the FOMC reiterated its pledge to remain accommodative to economic growth by keeping status quo the language of rates remaining low for an extended period. However, the zero-interest-rate-policy is beginning to draw some criticism and worry by those with acute inflation awareness. At first glance, one would think that the low cost of borrowing would stoke inflation (gold did rally following the Fed statement), but it is important to also look at how much slack remains in the economy. For instance, an interesting stat worth noting and one that is directly keeping inflationary pressures at bay, is that payroll employment would need to increase at 200,000 per month for 12 years for the ratio of employed-to-working to get back to its peak in 1999. Bottom-line, while the economic recovery seems increasingly sustainable (albeit at a slow pace), but it will take a long time for employment to return to more normal levels and for overheating to occur. Stable data out this past week on both producer (PPI) and consumer prices (CPI) confirms that inflation is not even close to an issue right now.

This week looks set open on weakness. Investors will again be forced to watch relations between the US and China. As we have noted recently, China appears to have an increasingly influential voice on world economic matters; China made its way through the global recession in far better shape than developed economies like the US and have little patience for being told how things (currency valuation, trade, etc) should work. In addition, US investors will also be trying to digest what new healthcare reform will mean to businesses and economic growth in the years ahead as it appears the Democrats have managed to pass a bill (it appeared dead earlier this year) through the house against all odds. Outside of those two themes, we will also get fresh data from the housing sector (which remains depressed), durable goods orders, jobless claims and the final number on 4Q GDP (Friday).

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Grinding Higher - Week Ended 3/12/10

posted 03.15.2010 at 09:59 a.m. by steve

Last week marked the one-year anniversary of the bear market low on the S&P 500 (March 9, 2009). Since then, US stocks have been on a tear having risen nearly 70% in that time. Investors managed to brush aside those bad memories in the most recent week with US stocks continuing their grind higher. The broad S&P rose +0.99% last week. Economic data both here and abroad was encouraging (exception being China). Notably, retail sales, employment, consumer net worth and other indicators have posted better than expected numbers recently; a much welcome change from the month of January. Month-to-date, stocks have advanced over 4% with smaller-companies having led the way.

As we have mentioned countless times, the current rally remains unloved and un-embraced. As evidenced by the continued lop-sided flow of money to bond funds (and non-existent flow to stock funds), it appears that investors still do not believe the rally in stocks is sustainable for a variety of reasons. The economic calendar this week looks light, but will offer data on several key sectors including manufacturing, housing, inflation and jobs. We believe that economic data can continue to surprise the market, which continues to have very low expectations. Perhaps more important this week will be the interaction of indexes with their recent resistance levels. Many market technicians (those who study price, momentum and trend) have suggested that if the S&P can close above 1,150, then the rally can continue much higher. The rationale for such a belief: with so many retail investors having yet to participate in the stock market recovery, pressure to exchange their money market funds for stocks and chase performance higher becomes ever greater.

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Despite Doubts, Rally Continues - Week Ended 3/5/10

posted 03.08.2010 at 09:51 a.m. by steve

The first week of March was strongly positive to investors as the market rose in each of the 5 trading sessions. The broad S&P 500 advanced +3.10%. Large-cap stocks trailed their smaller-cap peers, easily seen by the difference between the Dow (large-cap) which rose +2.33% in the latest week; while the NASDAQ (more all-cap and tech) rocketed +3.94%. International equities have also trailed domestic in recent weeks. Worries abroad continue to weigh on those markets closest to the root issues, but have eased somewhat. And, economic data has improved lately as well, with data last week meeting/exceeding consensus expectations.

Last week was full of employment-related data. Early-week releases surprised expectations to the upside. They were especially welcome given the bad weather across the country during February (which typically negatively impacts employment and consumer confidence). The biggest news of the week was the Employment Report which showed that payrolls declined -36,000 in February. Prior months were also revised higher showing fewer lost jobs than previously thought; the unemployment rate remained stable at 9.7%. While those numbers sound unimpressive (and Harry Reid will likely regret being put on the record saying Friday was a day Americans should celebrate), the number was dramatically better than expected and implies we are not far off from seeing payroll growth. Less significant last week, but still important was that housing sector data also rebounded after weeks of very sluggish numbers.

With the economic data again trending favorable and international worries easing, it is important to note that the recent stock market advance has occurred in the face of a still very skeptical audience. Bond funds continue to experience inflows at a breathtaking pace while stocks experience negligible amounts. It suggests that retail investors are tired of getting paid an almost-zero yield in money market accounts, but still do not view the current rally (now 12-months old) as a sustainable new bull market. That leaves open the possibility that this market continues to surprise everyone to the upside. There is lots of money that will feel pressure to chase performance as the length of the rally continues, keeping momentum alive. It will be interesting to see if the first week of March can continue its upward trajectory; with the S&P back above early-year support, we think it can.

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February Concludes in Positive Territory - Week ended 2/26/10

posted 03.01.2010 at 09:52 a.m. by steve

Despite the rocky start, US stocks managed to finish the final week of February only slightly lower with the S&P down -0.42% over the 5 trading days. But the month of February concluded in positive territory; the S&P 500 and Dow were up +2.85% and +2.56%, respectively bringing the indexes to within a hair of where they finished 2009. Since the beginning of 2010, the markets have been forced to chew on a multitude of worries including weaker economic data (housing and employment related), regulatory changes, China tightening, Eurozone sovereign debt and more. Consumer confidence dipped considerably last month. One bright spot in the latest week was the upward revision of 4Q GDP to +5.9%, but the composition of the report suggests that the robust growth is likely to come at the expense of future quarters (due to inventory restocking) unless consumer spending/confidence picks up dramatically. But there is one x-factor that could provide another temporary boost for the consumer: tax-refund season is upon us.

With that being said, we have successfully made it through another of the historically weak months of the year (February). Seasonally speaking, the March through May period is historically one of the stronger series of months of the year. Of additional importance this spring will be housing sales. The spring selling season is the most important for the sector as it accounts for more than double the selling activity of any other season of the year. To see housing data rebound in the near future would be a big boost for the economic recovery as it directly influences employment data and consumer confidence. Seasonal factors aside, corporate earnings season is quickly winding down with most index constituents having already reported for the 4Q period. The markets will have little to focus on outside of political developments and economic data, which are likely to remain troublesome. In regard to the economic data, we fully expect that data points from February as they become available this month will look extremely weak due to much of the country experiencing bad, snowy weather. As we have mentioned in recent weeks, snowy, winter weather has a chilling effect on the economy as well by distorting unemployment claims and putting a damper on consumer confidence. This week there is a lot of new data for the market to digest, especially relating to employment with 6 reports directly related to that area; as stated above, it is likely those numbers are disappointing. Stay tuned.

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Climbing the Walls of Worry - Week Ended 2/19/10

posted 02.22.2010 at 10:31 a.m. by steve

It was a week of untarnished green as US stocks finished higher in each of the 4 trading sessions (markets were closed on Monday for Presidents Day). The S&P 500 advanced +3.13% while the Dow and NASDAQ jumped +3.00% and +2.76%, respectively. More than half of the surge for the week came on Tuesday as strong corporate earnings and better than expected manufacturing data hit the wires. But the gains continued even later in the week despite the stall of positive news; markets managed to shake early losses and conclude higher. In fact, developments that had the potential to unravel the early week recovery, including a slight setback in new jobless claims from the prior week and the raising of the discount rate by the Fed, failed to derail upward momentum.

The last two weeks have been slow from a news perspective, but the biggest worry on investor minds is how (and when) governments and central banks will implement exit-strategies for stimulus (monetary and policy) actions of the past two years. The Chinese markets are currently closed for their New Year festivities, which has allowed investors to concentrate on domestic issues rather than worry about actions of foreign governments. Even the European debt issues (Greece) have seemed less problematic in recent days. Still, we are given frequent reminder that the current economic recovery is fragile, segmented and asynchronous. Parts of the world like China are experiencing robust growth following the recession while others continue to struggle (developed Europe). The same is true when looking within sectors of the economy in countries like the United States. Here, the manufacturing sector continues to post data that surpasses even optimistic expectations and looks V-shaped, while housing and consumer-related sectors appear more like an L- or U-shape, respectively. Those illustrations remind us that while a world economic recovery is underway, it remains choppy and uncertain. If that were not enough, it is likely that in coming weeks the data here in the US will take a temporary turn for the worse as the winter storms of recent weeks will show up as a negative impact on consumer spending, productivity and jobs. Storms have historically had a chilling effect on those areas of the economic data for a short time. Aside from the usual flow of weekly jobless claims and housing-related data, the focus this week will be on Consumer Confidence (tomorrow) and the second revision to 4Q GDP (Friday). Hopefully, any revisions from the January reading will be more subdued than changes seen during the 3Q 09 period.

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Stocks Close Higher Despite Ongoing Worry - Week Ended 2/12/10

posted 02.16.2010 at 09:53 a.m. by steve

After 3 consecutive weeks of trending downward (since January 19), US stocks managed to post a gain for the week ended February 12. Despite a rough start, which included the Dow dropping below 10,000 for the first time since November 6, the Dow and S&P 500 both gained +0.87% while the tech-heavy NASDAQ added +1.98%. It was a quiet week on the economic front, with little in the way of new data. Eurozone issues continued to dominate headlines (Greece debt worries taking center stage); China also took further steps to curb the pace of its brisk economic growth by increasing reserve requirements for banks (effectively reducing the money supply). Perhaps the most encouraging data point in weeks came from the unemployment report Thursday showing that new claims totaled 440,000, exceeding consensus expectations and prior readings of 467k and 480k, respectively. The data was welcome relief following weeks of worse than expected (but perhaps holiday-distorted numbers). Economists signaled that the latest update is likely a more meaningful gauge of employment changes than prior weeks.

Despite an earnings season that has been positive (companies have largely beaten both top-line sales AND bottom-line earnings guidance), economic data has been less favorable than at 2009 year-end. And, markets are worried that moves by China to cool its economy may derail the recovery in other countries that are in a more fragile economic state (including the US). Said another way, there have been several headlines in 2010 that suggest the bill (for stimulus of past years) may be coming due more quickly than hoped. Worries have included new taxes, early Chinese tightening, calls on certain countries (namely Greece) to get their budgets under control, and just this week a weaker US treasury auction (relatively lower demand for US debt). Perhaps the biggest story worth noting (and directly tied to our most current monthly commentary) is that the New Decade, New Book; Chapter 1 is indeed about China. Recent weeks highlight this concept. China seems to have ever increasing clout with the US on issues ranging from our ballooning budget deficit to foreign policy and trade. Still, while the above seems discouraging, markets have a way of climbing a wall of worry and economic recovery looks to be more likely than not. From a technical perspective (price, momentum, trend) the recent correction in stocks continues to appear a correction, rather than the end of a bull run. Key this week will be new data out on housing and a continuation from last the better employment data out last week. Meanwhile, we would not be terribly surprised if the current correction, now having run for roughly one month, has run its course and a new leg up for the markets is just around the corner.

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The Correction Continues - Week Ended 2/5/10

posted 02.08.2010 at 10:09 a.m. by steve

Now the fourth consecutive week in the current stock market correction (began January 19), investors are feeling increasingly nervous as volatility has risen dramatically. Four of the last five trading days have registered intraday swings of greater than 1%; Thursday and Friday saw swings of 3.2% and 2.2%, respectively. Despite the heightened volatility, the S&P finished the week down just -0.7% from where it started. But amid the more uncertain backdrop, the number of bulls to bears has ebbed from over 3:1 just 3 weeks ago to roughly 1:1 last week. This suggests that there is much skepticism about the current rally and confidence has been shaken. A multitude of worries has been the cause, most recently including fear that a global debt crisis could be spurred by instability of the Euro. Several EU member countries are struggling with ballooning deficits and weak credit profiles.

What began as a correction led by concerns of a slowing Chinese economy and tough talk from Washington directed at the banking industry is now being perpetuated by a package of still improving, but relatively disappointing economic data. Outside of the very positive 4Q GDP announcement two weeks ago, the economic data has generally been weaker than consensus expectations. Data relating to the unemployment situation has been the most painful as it seems that we are moving in the wrong direction. We are careful to remind ourselves that it is not uncommon to see distortion around year-end as seasonal hiring makes the numbers temporarily look better than reality. We also have said since the recovery began in 2009, that the recovery (especially with jobs) was likely to be choppy and non-linear. In other words, we do not expect that the jobs data will show a straight line trend of improvement. The real key to this will be that weaker data does not persist for an extended period of time. Despite worries have been many, a story that has went largely untold this new year is that corporate earnings results are looking great. With now more than 50% of the S&P 500 index constituents having reported 4Q earnings, roughly 70% of companies have beaten top-line (revenues) guidance and 78% have exceeded bottom-line (earnings) estimates. The story being told is that companies are starting to see a pickup in demand; improved earnings are no longer solely attributable to the massive cost cutting that took place in late-2008 and 2009. Companies have likely exhausted their ability to grow earnings through reducing costs (costs can only be reduced so far). New sales (demand) will ultimately lead to rehiring laid off workers as companies cannot keep up with growing business. This week will be relatively quiet in terms of new economic data; maybe the corporate data can get some of the attention it deserves.

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January Finishes With a Loss; Politics Continue as Focus - Week Ended 1/29/10

posted 02.01.2010 at 10:12 a.m. by steve

Politics and populist ire continued to be a heavy weight on stocks and commodities in the final week of January. US stocks, as measured by the S&P 500 finished the week down -1.65% and extending loss in January to -3.71%. Economic news and corporate earnings continued to take the back seat to political issues. Admittedly, economic data was generally on the disappointing side, but suffice to say that the markets sold off more than economic fundamentals warranted. Even the bright news that GDP rose in the 4Q period at the fastest pace since 2003 (up +5.7%) was not enough to power through the generally negative tone of politics. The GDP report should have helped send the market notably higher. It would seem that with all the hard talk from politicians (who have been attacking the financial industry on a multitude of fronts: from threatening the re-appointment of Fed Chairman Bernanke to levying special fees and taxes on banks), confidence in the current rally has been greatly challenged.

Ultimately, the markets are very concerned with the hand of government intervention and regulation, which seems to get heavier and heavier. We acknowledge that some new regulation for the financial industry is necessary to prevent excessive risk taking that threatened the US financial system just a year ago. Still, it is a disheartening start to the year following a +26% rise for the S&P; the recent two weeks have now managed to shift the bull-to-bear ratio from over 3:1 to now 1.5:1. However, one month does not a year make and we should be careful to look at the current weakness as much more than a short term correction. Actually, while the current slide has put technical analysts on heightened alert, as a group they believe the correction is probably healthy for the market and the more sober sentiment is favorable for future market gains; more so than the uber-bullish and almost complacent sentiment that had been developing weeks ago. History also has shown that the year following gains of +25%, the market has gained 6 of 7 times and by an average of +14%. Looking ahead, this week offers new data on personal income, manufacturing, home sales and employment and the continuation of corporate earnings. Earnings will likely continue to be strong; we imagine economic data will resume its more positive tone shortly but housing and employment will continue to be a prime focus in the weeks ahead.

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Washington Induced Worries - Week Ended 1/22/10

posted 01.25.2010 at 09:07 a.m. by steve

Markets generally do not like uncertainty; but last week, Washington introduced much uncertainty into the headlines, resulting in heavy selling pressure for stocks. In fact, stocks bled roughly -5% in 3 trading days (Wednesday to Friday) putting stocks in the red for 2010; it was the worst 3-day performance since last March. During the week ended January 22, a dangerous cocktail of headline news made its way into the spotlight. Most notable was the continued tough language from Obama toward the banking industry, which in recent weeks has included the announcement of new fees/taxes to be imposed on the largest banks. This week it is the proposal from Obama to hand down more strict regulation relating to the trading and risk-taking activities permitted by the largest financial institutions. If that were not enough, there was also threats from politicians indicating that they will not vote to re-nominate Fed Chairman Bernanke to a second term. There was also further development with China and its recent moves to tighten fiscal policy. Chinese officials are feeling necessary a pre-emptive measure to fight future inflationary pressures and have begun draining some of the liquidity in its financial system. As such, the focus of the markets has clearly turned toward the bill starting to come due. Tighter monetary and fiscal policy, coupled with increasing talk over taxes and regulations designed to reign in risk taking are not favorable developments for stocks. As such, generally favorable corporate earnings and other economic data (mixed) the met expectations was overshadowed by the uncertainty being created by our Government and others.

With financials leading the declines, the S&P dropped -3.90% while the NASDAQ and Dow fared similar fates. And, despite the fact that stocks reached new cycle highs on the first trading day of the week (Tuesday), the markets have now erased the gains seen since the start of the new year. This week, investors will continue to watch for more signal that the bill is starting to come due. Additionally, it would be welcome to see economic data resume a significantly improving trend. This week will be a busy one, with lots of news on housing, and other key reports to watch including consumer confidence, jobs, durable goods orders and the initial reading on 4Q GDP (Friday). Also critical will be the FOMC meeting statement on Wednesday; investors will be watching closely to see if the phrase of keeping interest rates low for an extended period remains in place; if language begins to take even a slightly more hawkish tone, the markets could again face some near-term struggle. We do remain bullish for 2010, but believe that near-term a pause is likely, especially until Washington can manage to stop being the big headline and investors can again focus on economics and fundamentals. In the end, we feel it highly likely that Bernanke will be confirmed for a second term, and any new financial regulations and taxes will be less harmful to the banking industry than investors initial fears suggest. As evidenced by Healthcare, rarely is final government policy ever as extreme as the talk that began the discussions.

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Earnings Season Starts Mixed - Week Ended 1/15/10

posted 01.19.2010 at 10:11 a.m. by steve

US stocks finished the week slightly lower than where they started with the large-cap Dow slipping just -0.08% while the S&P and NASDAQ declined -0.78% and -1.26%, respectively. The modest selloff Friday was the most noteworthy day during the week as the Dow shed over 100 points. However, despite that and the slight loss of value for the week, bulls do seem to retain the upper hand. Even as economic and/or corporate earnings news has appeared weaker than expected, selling action has been contained and stocks have typically closed well above their daily lows. In recent weeks and months, pullbacks by the market have been relatively shallow and short-lived as the market manages to continue its climb on the wall of worry and creep higher.

In the latest week, which was the start of 4Q 09 earnings season, it could be argued that news has been more mixed. Alcoa, an aluminum producer and bellwether of manufacturing activity, missed expected earnings. Others, like JPMorgan Chase managed to post better than expected earnings, but disappointed analysts on much weaker than expected revenues from its consumer segment which suggests that Main Street continues to suffer during this recovery. Additionally, investors were forced to contemplate what paying the bill (for past and current stimulus/deficit spending) might look like as President Obama announced a proposal to tax banks. The reason the announcement was significant is because we know that current deficits will have to be paid for through a combination of higher taxes and higher interest rates; what we do not know is how quickly the Government will begin trying to collect those revenues. It has been our suspicion that higher taxes and interest rates are not a 2010 story, but rather 2011 or later as politicians seek reelection in the current year and do not want to alienate voters, but the worry is increasingly real. This week the major focus will be corporate earnings, housing starts and another round of jobless claims.

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Starting the New Year and Decade in Positive Territory - Week Ended 1/8/10

posted 01.11.2010 at 09:54 a.m. by steve

The first week of the new year (and new decade) was a very positive one for stocks, led by the strong positive performance on the first day of the week when the S&P and other major indexes jumped over +1.5%. That up-move was predicated on much better than expected data from the manufacturing sector indicating strong activity including a surge in new orders. As one can imagine following such an outsized move for the markets, the subsequent days were less robust, but still accretive to performance. Perhaps what is more telling however, is that despite the weaker economic headlines that ensued during the later-half of the week (including housing), stocks managed to close at or new session highs each day, suggesting that while many people are far from bullish; they are having difficulty being too pessimistic either. All told, the indexes managed to add to their early gains with the S&P 500 finishing up +2.68% while the Dow and NASDAQ closed up +1.82% and +2.12%, respectively. It appears that the S&P has broken through its directionless volatility ceiling, creating a new floor of support at current levels.

While economic headlines were decidedly mixed last week (neither good enough to raise expectations for the economic recovery, or bad enough to warrant a more pessimistic view), diving into the details has offered a much more favorable perspective. For example, while the drop in employment for December was -85,000 (a setback following other recent data), leading indicators of the employment situation including the average hours worked and temp employment were both encouraging. Additionally, increasing new orders and manufacturing activity (mentioned above) should soon lead to employment gains as demand outstrips capacity. As we have noted in the past, employment is the epitome of lagging indicators and will improve only when the economy has been in a recovery for many months (6-12 on average). The media will be able to talk about high unemployment well into a recovery. And, some economists are predicting that 4Q real GDP could be very strong when reported later this month (as high as 5%). If the economy can muster those kind of numbers, do not be surprised if a positive feedback loop, in which consumers spend a little bit more freely (thereby raising demand, increasing corporate profits) creates the need for new jobs. This week, the markets will be watching international trade data (tomorrow); retail sales, jobless claims and inventory levels (Thursday); and inflation, consumer sentiment and industrial data (due out on Friday).

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A Good Year, But Horrible Decade for Stocks - Week Ended 12/31/09

posted 01.04.2010 at 09:28 a.m. by steve

Thursday, December 31 was the final trading day of 2009 and the decade. It capped what was a great year for stocks despite the treacherous first quarter. After being down as much as -25.1% year-to-date at March 9, the S&P 500 began its recovery and finished with an outstanding +26.4% gain for 2009. Still, even with the tremendous rebound off of the March lows (now over 60%), the decade will go down as one of the worst in recorded stock market history. Since the ball dropped in Times Square marking the start of the year 2000 (when everyone was worried about Y2K computer issues), the S&P has lost an average of -3.3% per year adjusted for inflation. One would think that the next decade has nowhere to go but up; after all, reversion to the mean is a powerful concept. However, that concept is not to suggest that we will see outsized gains in the decade ahead, but perhaps something more normal in the range of 8%-10% gains per year for stocks on average could be expected. Without a doubt, there are major hurdles for the US economy to conquer, and the early years are not likely to be robust given the slower-than-normal economic pace anticipated.

In the most recent week, the Santa Claus rally managed to hold onto its gains in the midst of a news vacuum (no major economic data was released last week). The few pieces of new economic data were favorable, including another strong improvement in new jobless claims and the Chicago PMI. Consumer confidence has also risen in recent weeks. Accordingly, 7 of the last 9 trading days have finished higher. Trading volume was unsurprisingly weak during the final week of the year, as is usual between Christmas and New Years. The S&P finished slightly lower for the week at -1.01% while the NASDAQ and Dow closed down -0.72% and -0.87%, respectively.

2009 was a good one for investors; we anticipate 2010 will also be rewarding for stocks as markets continue to advance and climb a wall of worry. Happy New Year and welcome 2010!

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Santa Claus (Rally) is Real - Week Ended 12/25/2009

posted 12.28.2009 at 09:27 a.m. by steve

The Christmas-shortened trading week was strongly positive for investors despite more of the mixed economic data that has been seen in recent weeks. The S&P 500 advanced +2.18% while the NASDAQ and Dow finished up +3.35% and +1.85%, respectively. Perhaps more interesting is that US markets have now risen for five consecutive trading days after weeks of directionless volatility. Up until the recent Santa Claus rally, stocks have been treading water, moving neither up or down on a weekly basis since late-October. As we have discussed in recent writings, we believe the markets have been encountering resistance; common following a 50% retracement rise between the market lows (set in March) and the highs of the last bull market (ended October 2007). That resistance is between 1,100 and 1,130 on the S&P; our thinking is that if major indexes can bust through what is the current levels of resistance (a ceiling), then that resistance can transition into support (a floor) for the next leg of this advance.

In recent weeks, the package of economic data has again stalled and become more mixed. Despite fewer new unemployment claims (unemployment situation appears to be steadily improving) the past week again reminded investors that the economic recovery is slow and fragile. We received the third and final reading on 3Q GDP, which indicated that the US economy grew at a +2.2% pace despite initial indications of around +3.8%. That news was largely dismissed as stale now that the 4Q is nearing an end (markets are forward looking); we will get the first reading on 4Q GDP in late January. Meanwhile, personal consumption continues to be basically flat month over month in a sign that consumers remain cautious; holiday sales this year look to be a notable improvement over last year however. The current week (also shortened by New Years Day on Friday) will again be skinny in the way of fresh economic data. We do continue to believe that despite what looks to be a marginal improvement in the health of consumers, sustained economic recovery will depend more heavily on business activity (a surge in capital expenditures, improvements, technology upgrades, and re-hiring) than in recoveries of past. In the absence of much new data due this week and still light trading volume, the Santa Claus rally can continue into a second week, putting the cap on what has been a great year for the markets. Happy Holidays!!!

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3 Weeks Into December, Still Waiting for Santa - Week Ended 12/18/09

posted 12.21.2009 at 09:56 a.m. by steve

Despite the month of December historically being very positive for the markets, it was another week of directionless volatility as economic data continues to be mixed. For roughly two months now, the market has managed to go nowhere fast; up one day and down the next with the net weekly result being a wash. The Dow and S&P both finished the week lower at -1.36% and -0.36%, respectively while the tech-heavy NASDAQ logged a gain of +0.98% on better than expected earnings from some tech industry heavyweights. Despite the marginally negative week for the S&P, the index did manage to again close above 1,100 for the third consecutive week, giving evidence that the market has found support near the level. Meanwhile, commodities and gold in particular, came under pressure this week as the dollar gained against other currencies including the Euro on fresh worries over sovereign debt from countries like Greece. The latest currency trade serves as a reminder that while it has been easy to make a bear case for the US dollar given the ever rising budget deficits and a still weak economy, it is perhaps more challenging to make a bull case for owning another currency instead given the global economic environment.

The next two weeks will likely be somewhat slow for the stock market, as many will be focused on celebrating the holidays and taking time off before year-end. Trading volume will dip as there will be little in the way of new economic data for markets to absorb. 3Q GDP will be revised for its final time tomorrow (Tuesday) and two more data points on housing will be offered in the form of existing and new home sales; also important to the markets will be personal income and another round of jobless claims. Most recently, jobless claims have ticked up on a week over week basis; but the 4-week moving average (intended to smooth the trend) has continued to improve. Leading indicators also marked another month of improvement, now the eighth consecutive and are up 9.6% on an annual pace since June. Given the continued improvement, it appears that while the market is struggling to make new highs, the next leg up for the current rally is probably around the corner. In the absence of lots of trading and new data, a Santa Claus rally could still be in the cards this week or next to put a cap on what is already a very positive 2009! Happy Holidays to you and your family; we look forward to a new decade and a new year!

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Directionless Volatility Continues - Week Ended 12/11/2009

posted 12.14.2009 at 09:33 a.m. by steve

It was another week of directionless volatility for the US markets, leaving the major indexes little changed from the prior week. The S&P and Dow both managed to finish barely higher (+0.04% and +0.80%, respectively) while the NASDAQ dipped ever so slightly (-0.18%). Still, for a second consecutive week, the S&P closed above 1,100; a level that has been crossed mid-week with on several occasions over the last two months only to fall back below going into the weekend. Meanwhile, many commodities (including gold) dropped as the US dollar strengthened somewhat unexpectedly; international equities have continued to outperform US counterparts against a backdrop of a stronger recovery story. It has been somewhat disappointing to see the US market churning in recent weeks as the month of December has historically been a great month of the year for stocks. This has been especially true in years where the market is up handsomely going into the holiday season. Now, just 17 days remaining in 2009, it is looking as if December will not be all that exciting for stock investors compared to other months we have seen this year.

Despite rather flat US equity performance in recent weeks, economic data points have been generally better than expected. In the latest weekly installment, both consumer spending data and inventory data rose. Housing has appeared more stable and the unemployment figures have continued to improve. But, early reports have suggested that consumers have fallen behind in their holiday shopping this year; but that could be setting retailers up for a pleasant surprise in these last few weeks before Christmas if shoppers pick up their pace even a little bit. This week is somewhat quiet for fresh economic data; most watched will be the Empire State Manufacturing Survey (Tuesday); the CPI and Housing Starts (Wednesday); and Jobless Claims on Thursday. Still, the markets could experience a good start to the week, following reports this morning that Abu Dhabi will provide $10 billion in aid to help neighbor Dubai work through its recent debt crisis. Additionally, Citigroup has announced plans to repay $20 billion of its TARP loans from the US government; viewed as one of less financially stable banks, the news suggests that the banking sector as a whole is becoming more financially stable.

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S&P Finishes Week Above 1100 for First Time Since Oct 2008 - Week Ended 12/4/09

posted 12.07.2009 at 5:01 p.m. by steve

For the first time since October 2008, the S&P 500 managed to finish above 1,100 for the week. The S&P rose +1.3% while global markets jumped more. The broad S&P index has been flirting with the level for nearly two months, and has eclipsed it on several occasions during the middle of the trading week; but it has failed to finish a week above the level, which is coincidentally roughly half way from the market peak in October 2007 to the low set in March 2009. There was much in the way of good economic news for investors in the most recent week but the favorable jobs report issued Friday was the brightest light. Non-farm payrolls dropped just -11,000 during the month of November. That figure seemed almost too good to be true when benchmarked against the October reading of -190,000! Even consensus expectations by economists looked for a decline of -100,000 in November. The figure was good enough to move the unemployment rate from 10.2% back to 10.0%.

The markedly better than expected jobs data is an extremely positive surprise for investors and economists alike. And, while one data point does not make a trend, it does suggest that the economic recovery is indeed underway. Widely feared in recent months has been the notion that the current economic recovery will be one in which unemployment will remain stubbornly high. Further, if the unemployment rate moves too high, there is fear that the economy may take a u-turn and head south again. Also worth noting has been the recently better housing and consumer credit data. For the last several weeks mortgage applications have again been on the rise and consumer credit has been better than expected. That is important because small business owners have relied on equity in their homes to serve as collateral for business loans, and the economy has relied on small businesses for job creation. In short, more positive readings from housing, manufacturing, productivity, retail and automobile sales indicate that the current equity market rally is probably justified; and if positive surprises continue it helps alleviate the concern that stocks have moved too far, too fast. As we indicated in our most recent monthly commentary, Directionless Volatility, the market is currently bumping its head against technical resistance around the 1,120 level. If data can help push the index above that ceiling (resistance), we believe the level can transition to become new support (floor) for the next leg of the bullish advance.

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Final Days of November in Stalling Pattern - Week Ended 11/27/09

posted 11.30.2009 at 10:14 a.m. by steve

The holiday shortened trading week was marginally negative for investors. Generally, more dismal economic data and bad headlines caught the attention of investors. GDP for the third quarter was revised significantly downward to +2.8% from its initial reading a month ago of +3.7%; and Dubai World (a large conglomerate government sponsored bank of the Middle East emirates) told creditors that it would need a six-month standstill on its debt obligations. For the week the S&P declined just -0.31% while the NASDAQ slid -1.41%; further evidencing recent emphasis on quality and solid balance sheets, the large-cap Dow Jones Industrial Average (Dow) continued to outperform broader indices dipping just -0.08%. Not all news was bad however. Better home sales data helped send stocks higher early in the week and the Labor Department reported that the number of people filing first time claims for unemployment benefits dropped 30,000 BELOW the consensus, suggesting that the employment picture is clearly improving (although there has been a lack of hiring announcements). Additionally, early reports suggest that holiday shopping (Black Friday) has started off better than last year. As is typical for the week of Thanksgiving, trading volume was well below average in the US, making daily price moves less insightful.

News continued to be mixed. Clearly, the significant downward revision to 3Q GDP was a front-and-center reminder that the current economic recovery is likely to be slow compared to those of the past. Recovery is not a V-shape, and is likely to be choppy. Additionally, the news surrounding Dubai World serves as another reminder of what problems may loom with regard to commercial real estate which is only now beginning to face the struggles of residential real estate over the past two years. Still, while there was much attention given to the issue over the weekend, it is worth noting that even the Wall Street Journal (the media is generally the first one to focus on the bad side of news) suggested that the Dubai panic is overdone and that it is a regional problem being overblown. Perhaps the better insight to be gained from the development is that while it has been very easy to be perpetually bearish on the US dollar in the face of rising deficits and a weak economy, it is increasingly difficult to make a bullish case for other currencies as well (in order to sell a currency, you must implicitly buy another). With the exception of emerging markets, it is difficult to rationalize that they are in any better shape from a fiscal standpoint. This week could start on rocky ground as investors continue to absorb the implications of Dubai and a slower than previously thought economic recovery, but there is plenty of fresh economic data due out this week that could again turn the tide higher.

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Housing Data Sours Otherwise Sweet November - Week Ended 11/20/09

posted 11.23.2009 at 2:46 p.m. by steve

It was another teeter-totter week for investment markets. Despite beginning the week solidly in positive territory, the major US indices ended the week virtually unchanged. The broad market S&P declined -0.19% while the large-cap focused Dow managed to post a slight gain of +0.46%; the tech-heavy NASDAQ experienced the most notable change at -1.01%, in part due to pressure stemming from much worse than expected earnings results from PC manufacturer, Dell. Two trends that appear much more entrenched are the ongoing ascent of Gold and the decline of the US dollar; trades based on the thesis of ever increasing and complex dilemmas for the US government fiscal health. Still, while the overall week was slightly negative for stocks as a whole, technicals told a more favorable story, particularly on the down days. Stocks managed to battle their way back each day to finish well above their daily lows; a good sign that there is not an overabundance of bears.

Meanwhile, economic data soured a bit from the first weeks of November. Notable was housing starts, which fell to their lowest level in 6 months. And, jobless claims came-in as expected: an unfortunate contrast from what has recently been positive surprises in that data. Still, while bad news seemed more prevalent in the latest week, most of it seems easily explained and almost expected. For instance, one could have guessed that housing related data would take pause from its recent recovery given the uncertainty that surrounded extension of the first-time homebuyer tax credit set to end this month (it has been extended through 2010). Secondly, we have said on several occasions that we do not expect the recovery in employment to happen immediately, or be a straight line; the situation is not likely to be remedied as quickly as past recovery experiences. What resonated more loudly with us last week was that retail sales rebounded more than expected during the month of October. And, while much of the positive surprise was due to a rebound in automobile sales, it means that consumers are spending on some very big-ticket items because they need them. Additionally, the purchases are being made without any government incentive (cash for clunkers expired over two months ago). In addition, the Leading Economic Indicators (LEI) rose +0.3%; the 7th consecutive monthly increase.

This week, expected to be very light in terms of trading volume given the Thanksgiving holiday, will offer investors insight into the housing market and consumer confidence. Black Friday, the notorious after-Thanksgiving shopping holiday, could give retailers and investors reason to be merry during the current Christmas shopping season. We would not be surprised to see preliminary sales data from the coming weekend beat consensus expectations (very subdued) as consumers rush out to take advantage of deals and take care of shopping early this year (especially after having been very frugal last year during the peak of the financial crisis and destruction in consumer net worth). This holiday shopping season will be perhaps the best gauge of consumer sentiment to-date. Have a Happy Thanksgiving!

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Junk Rally Fading; Quality Outperforming in Recent Advance - Week Ended 11/13/09

posted 11.16.2009 at 09:43 a.m. by steve

Stocks continued to recover last week, sending the S&P briefly above 1,100 and moving the Dow to its highest level this year. The S&P popped +2.26% while the NASDAQ and Dow gained +2.62% and +2.46%, respectively with most of those gains occurring on Monday. The strength in the most recent week was attributable the continuation of better than expected corporate news, merger and acquisition activity; and perhaps most important, improving economic data in the month-to-date. Still, while the data has been better than expected, it has more recently reinforced the consensus view that the economic recovery is going to be less robust than those in recent memory. In this vein, it has been interesting to see the market leadership begin to shift more toward quality. Recently, stocks of the largest, most durable and globally diversified businesses have been outperforming their smaller-cap brethren. This stands in stark contrast to the early innings of the stock market rally when the lowest quality, most high-risk businesses had outperformed the broader market. From the bottom, many have described the ascent as a junk rally; that trade appears to be concluding.

This week the market looks set to begin on higher ground despite retail sales that came in about as expected month over month, but a much weaker than expected report on the Empire State Manufacturing survey. Other potential market-moving data points this week include the producer price index and industrial production (tomorrow); housing starts and CPI (Wednesday); and another update on Jobless claims (Thursday). Still, after the recent run-up since November began, the market seems to be struggling to push on through to new highs. The S&P continues to flirt with the 1,100 level, but it seems that it will need a continuation of definitively better economic news in order to make the next jump higher. That better economic news may come in the form of positive surprises for the holiday shopping season; however recent plunges in consumer confidence measures signal that the season will be anything but predictable.

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November Begins on Higher Ground - Week Ended 11/6/09

posted 11.09.2009 at 09:28 a.m. by steve

Following the slew of difficult economic releases (and as a result, market performance) over the last two weeks of October, the first week of November offered investors some sources of renewed hope. And the markets moved higher as a result with the S&P climbing +3.19% while the Dow and NASDAQ advanced in similar fashion: up +3.20% and +3.29%, respectively. On the positive side, the manufacturing and service PMIs rose last week (indicating better productivity); consumer confidence has held steady; vehicle sales moved higher in October rising +13.5% over the level in September; retail sales (chain-store) improved; and housing appears to have stabilized. Those key items helped move the Dow back above 10,000 for the week; a level that was reached in mid-October but has since been evasive. However, not all news was of a rosy tint last week. Perhaps the news item that will receive the greatest attention from the press and government officials over the coming weeks and months is that the unemployment rate crossed into double digits. Now at 10.2%, the latest reading is a significant upward adjustment from what had been hovering around 9.5% to 9.8% for several months.

While unemployment is a lagging indicator and expectations are for the level to rise to 10.5% at its peak, it is likely that consumer confidence could take a slight hit. Unemployment is now at its highest reading in over twenty years. As we mentioned in our monthly commentary (published to the website on Thursday) we expect the economic recovery will be choppy (and slow). At times it will appear as if the economy is headed back to darker days. Still, it is important for investors to take note that with the unemployment level now above the politically important 10% level, it is less likely that the Government removes stimulus too soon. In fact, it is more likely that there will be calls for additional stimulus to help ease the rate of unemployment quickly. Additionally, retail and businesses closely tied to consumer confidence and spending have beaten expectations lately. That trend is likely to continue as the all important holiday shopping season has historically been very much tied to year-to-date stock market performance (which has been very strong). If holiday sales can beat expectations, we could very well see a positive feedback loop begin to develop.

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Final Week Correction Turns Month Red - Week Ended 10/30/09

posted 11.02.2009 at 09:39 a.m. by steve

The month of October was a bit like a roller coaster as volatility returned to the markets. The beginning of the month started off slowly ahead of a new quarterly earnings season, but rose sharply in the middle of the month as corporate earnings generally have come in better than estimates. The final two weeks of the month were less than friendly for investors as concerns re-emerged as to the sustainability of economic recovery. Despite a better than expected GDP report from the Department of Commerce last week (GDP rose +3.5% during the 3Q versus estimates of 3.2%), stocks did poorly on all but one trading day (Thursday). The tech-heavy NASDAQ skidded the most throughout the week by -5.08% while the S&P dropped -4.02%; the Dow, which consists of generally the largest US companies, slid by a more muted -2.60%. The severity of the declines last week, and in particular on Friday, was enough to put the month in the red for 2 of the 3 indexes and breaks the streak of 7 consecutive monthly increases for stocks as a whole since March. The Dow did manage to post an ever so slight gain for the month of October of +0.005% (keeping its streak -now at now 8 months- alive), while the S&P and NASDAQ slid -1.98% and -3.64%, respectively. Smaller company stocks fared worse than large during the month, despite having been the biggest winners since the rally began.

Even with generally positive corporate earnings announcements, the economic data has been decidedly more mixed recently. And, markets seem intent to focus only on the bad news. As such, the stocks have been under more pressure recently. However, as we have said in recent writings, we do believe that the path of least resistance for the markets continues to be in the upward direction as we do believe the economic recovery is sustainable, albeit at a much slower pace than in the past. That being said, we do feel that the easy money for investors has already been made. Against the backdrop of slow-to-return jobs and a more savings-oriented consumer, investors will need to be finding the higher quality companies to invest in. Those with stronger balance sheets and the ability to access rationed credit markets will be the winners going forward.

This week will continue to provide much in the way of fresh economic data for investors to digest. But, by many indications the market has become oversold in recent weeks, and it is likely that the correction for stocks has run its course. We do believe that the positive trend will resume for November and December, making for a positive 4Q experience.

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Earnings and Economic Data: Telling Two Stories - Week Ended 10/23/09

posted 10.26.2009 at 09:32 a.m. by steve

US stocks essentially moved sideways the week ended October 23 amid generally positive corporate earnings but a more mixed bag of economic data. The strongest day of the week came Monday with the S&P 500 gaining about +1%. Still, despite the strong start and marking of new 12 month highs, gains slid throughout the remainder of the week; the S&P finished the week down -0.74% while the Dow and NASDAQ surrendered just -0.24% and -0.11%, respectively.

As mentioned above, economic data and corporate earnings seem to be telling two different stories. On one hand, overwhelmingly positive 3Q earnings from companies seems to be saying that the recession has ended; meanwhile the economic data is suggesting otherwise. For those betting that the economy is in recovery (now a consensus view), weaker than expected reports related to housing starts, mortgage applications, consumer confidence and unemployment claims were enough to stall the recent climb and overpowered favorable company results. Still, while most notable economic headlines were weaker, there were several offsetting items as well. In contrast with a related housing report earlier in the week, US existing home sales rose +9.4% in September from August and the Fed Beige Book also showed a continued trend toward overall improvement. Additionally, the US LEI (Leading Economic Indicator index) rose 1% in September, the sixth straight monthly increase. This week looks to be a busy one. Not only will corporate earnings continue to be reported at a swift pace, but there are several key economic readings. Included among those will be consumer comfort and confidence (tomorrow); new home sales and durable goods orders (Wednesday); GDP, money and unemployment claims (Thursday); and the Chicago PMI, personal income and consumer spending (Friday). If a good number of those key items can surprise expectations to the upside, then we should see a more notable move past 10,000 on the Dow and a close above 1,100 on the S&P.

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Dow Clears 10,000! - Week Ended 10/16/09

posted 10.19.2009 at 11:04 a.m. by steve

Earnings season continued last week with announcements generally upbeat. Accordingly, markets continued to tread their way higher and pushing the Dow up through above the psychologically significant 10,000 mark for the first time in more than 12 months. Most notable for the continued drive up was stronger than expected earnings from JPMorgan and Intel. The results from both the banking sector and tech giant were especially encouraging from the standpoint that while earnings outperformed expectations, revenues also expanded. So far this year, earnings (bottom-line results) that have beat expectations have come primarily from cost cutting rather than expanding sales (top-line growth). News continued into Thursday as Goldman Sachs bested even the loftiest of expectations when it reported earnings; economic data also followed suit. Initial jobless claims fell to the lowest level since January for a second consecutive week, which is helping investors quickly forget the worse than expected losses reported in late-September. Ultimately though, news took a slight turn for the worse on Friday with the release of earnings from General Electric which missed earnings estimates and reported that revenues fell by more than expected. The news on Friday, coupled with a fairly significant rise earlier in the week, was enough reason for some profit-taking to occur and the Dow closed just below the 10,000 level for the week. Still, the 5-days were modestly accretive for investors with the S&P 500, Dow and NASDAQ up +1.51%, +1.33% and +0.82%, respectively.

While clearing the 10,000 level mid-week provided investors reason for continued optimism, there argument by many that the market has come too far, too fast is only further highlighted. A more-than-healthy-skepticism remains as to whether the rally, now 7 months long, is sustainable for the longer term. More important perhaps are the questions about the economy. Most economists now believe that the recession ended in the second quarter and actually resumed expansion during the recently completed third. Many people are most skeptical that the economy will be able to maintain growth throughout 2010. Those concerns certainly have merit given stubborn high unemployment and money hoarding attitudes of consumers and some businesses. Still, it would not be too hard to imagine that if markets continue to behave themselves through the holidays, that consumers might be more willing to spend. If that is the case, as it has been in the past (historically holiday shopping has been strongly positively correlated with YTD stock market performance), businesses will find themselves with recovering revenue streams and possibly enough demand to begin some re-hiring. Bottom line: a strong holiday season on top of a good third quarter could be a self-feeding improvement of consumer and business sentiment and lead to a stronger recovery than most forecast. Not to mention, less-fundamental factors for the stock market (such as technicals like trend, momentum, breadth, leadership, etc) remain supportive for asset appreciation.

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3Q Earnings Season Begins on Positive Note - Week Ended 10/9/09

posted 10.12.2009 at 2:20 p.m. by steve

In a stark reversal from the prior week, US stocks advanced handsomely for the week ended Friday, October 9. The Dow closed at a new 2009 high. After climbing in each trading session during the week, the broad market S&P 500 index popped +4.51%, while the NASDAQ and Dow gained in similar fashion +4.45% and +3.98%, respectively. Somewhat surprisingly, stocks welcomed in the start of 3Q earnings season, rising by roughly +2% on Monday and +1.5% on Tuesday. When Alcoa released its earnings following the closing bell on Wednesday, results did not disappoint. In fact, Alcoa announced its earnings significantly topped consensus expectations (which were calling for a slight loss). But, it was not just strong earnings that revived the now 7-month long rally since March 9; it was also better economic data. Better than expected (although still not good) news came from the ISM non-manufacturing survey showing a jump in new orders and output; and, it gave evidence that some companies are considering re-hiring. Additionally, initial unemployment claims fell -33,000 this week and chain-store sales posted a 1.1% year-over-year gain; a figure that shattered the consensus expectation for a slight decline.

It goes without saying that the shift back to more positive-oriented economic data was welcome. In the final week of September and first week of October, investor concern was reheating as to whether the stock market had run too far, too fast given the still weak economy. The reports this past week allowed many investors to re-affirm that an economic recovery, albeit sluggish, is likely in progress. As we discussed in our most recent quarterly newsletter (issued and posted to this site last week), we discussed how the events of the past year have made some investors hesitant to participate in the current rally. And, it has given pause to others looking to put still idle-cash back to work. While we acknowledge that the current rally has been nothing short of astonishing (especially given our outlook for a slower speed limit of growth for the US economy going forward) we still believe the greater risk to investors is missing further upside potential. We do believe that the US stock market can continue to climb a wall of worry as investors still holding too much low-yielding cash feel increasing pressure to get reinvested. Today looks like the recent winning streak will continue. As we continue marching closer to the end of 2009 and look forward to 2010 and beyond, the biggest question remains the health of consumers. Most pivotal will be corporate and economic releases that provide insight in that vein; not only indicating that earnings are up, but that sales are improving and/or that additional employees may need to be (re)hired.

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Oppenheimer Developing Markets Fund - ODMAX

posted 10.09.2009 at 1:15 p.m. by steve

Late this spring, we began discussing with clients the concept of a New Normal. Our newsletters, commentary and recent meetings have attempted to articulate that vision. As a refresher, economic growth in the US is not likely to occur at the pace that it has in past recoveries under the New Normal. We strongly believe that life has been changed, perhaps semi-permanently as credit will be more rationed for years to come. Consumers have begun to save more and reduce debt; they are likely in the early innings of their de-leveraging process. That behavioral change, combined with higher anticipated taxes to pay for large government deficits and increasing regulatory oversight will set a slower speed limit for growth in the United States and other developed economies. We believe that developing country economies, also known as emerging markets, will grow at a more swift pace. Countries like Brazil, India, China and the like will continue to experience fast economic gains, especially as compared to their developed country counterparts. The most notable difference between countries like the US and emerging economies is the consumer. While the US consumer is de-leveraging, consumers in other parts of the world are actually increasing their level of spending as they marginally increase their standard of living.

We are currently increasing client exposure to foreign equities beyond what we have ever before. We are targeting foreign equity exposure to represent roughly one-third of total client equity exposure. For example, if a client investment objective was 90% stock and 10% bonds, that client portfolio would target 30% foreign equity exposure. In addition, we feel that emerging markets in particular will be an area of especially strong opportunity for investors. With that in mind, we sought to identify an emerging/developing markets mutual fund with a well-defined process, articulated buy and sell discipline and strong track record to best capture this opportunity. The result of our process yielded the Oppenheimer Developing Markets fund (ODMAX).

In recent months you have likely noticed it being bought in your investment portfolios that we manage. It has performed well, and we anticipate that it will significantly outperform domestic-oriented funds going forward in this New Normal. For more information and in-depth analysis on the fund, click the link (ODMAX). Please contact us if you would like to receive additional information on this fund, and our current investment thesis.

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Is It Earnings Anxiety? - Week Ended 10/2/2009

posted 10.05.2009 at 09:20 a.m. by steve

The final days of September and first two of October were nothing short of discouraging for investors holding a more bullish view. Despite opening the week (Monday) on strong gains, US stocks declined in each of the remaining four trading sessions and the S&P 500 finished the week down 1.84%. While a decline of that magnitude is not terrible news for a week, perhaps more troubling is that the S&P has now declined in 6 of the last 7 trading days. There has been a noticeable shift in the package of economic news recently released to a less favorable tone. And, increasing is the worry that the market has come too far, too fast. Most influencing on the general tone of news has been the data related to employment, consumer confidence and overall consumption. Continued improvement in unemployment has been weaker than expected. Consumer confidence has stalled in its ascent, and consumption appears to be in a state of hangover following the sugar high of activity that was attributed to the cash for clunkers program.

To put the most recent week in perspective, ISI Group (NY economic research firm) may have said it best with a comment to the effect that the US economy has hit a pothole. The question is, will the economy stay on the road or will it veer off into the ditch?

While news has been of a more mixed variant lately, the pattern seems reminiscent of the week(s) leading up to each calendar quarter-end this year. In each case, the markets have experienced a higher level of stress around the weeks and days immediately preceding corporate earnings season (think back to late December, March, June and now September). Investors have seemed determined to extrapolate only the more negative headlines during these times. Again it seems that markets have anxiety over what story will be told through the collective announcement of earnings, which begins this Wednesday afternoon with industrial component, Alcoa. If the past 2 quarters are any guide, the story told will assuage the worst of fears and once again help the markets melt up. Still, while earnings will be a key focus this coming week, there is still much in the way of new economic data being reported. Included among the data will be the national non-manufacturing PMI, unemployment claims, trade data and monthly retail sales. Today, US markets appear ready for a bounce. Will the commencement of earnings this week again be the catalyst needed to restore optimism and resume the rally? Stay tuned!

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Worry Re-Emerges over Shape of Recovery - Week Ended 9/25/09

posted 09.28.2009 at 10:30 a.m. by steve

In the week ended September 25, US stocks came under pressure reminding us that despite strong performance month-to-date, worry lingers that markets have recovered too far, too fast given the still very real possibility that the economy could double-dip. Beginning last Wednesday, after the S&P attained fresh new highs for the year, stocks began a 3-consecutive day decline to end the week. Still, the week began with positive economic news as the LEI (leading economic indicators index) rose +0.6% in August, on top of a revised upward gain of +0.9% in July making it the fifth consecutive monthly gain; an occurrence that has never happened with the economy still in recession (suggesting the recession is over). Despite making new highs for 2009 on Tuesday, stocks finished the week below where they started. If one event could be identified as the turning point for the week, it was the release of the Federal Reserve statement following the conclusion of their meeting Wednesday. Despite announcing that the Fed intends to keep interest rates low for an extended period (a stimulative policy), and providing further commentary that the economy is in recovery, markets sold off in sharp fashion late in the day and continued that path through the close on Friday. In sum, the S&P dropped -2.24% for the week while the NASDAQ and Dow gave back -1.97% and -1.58%, respectively.

The path of stock markets last week was disappointing considering that economic news continues to be of a more positive tone. Among that data we continue to see improving numbers coming from the housing sector (excluding the most recent headline reading released Thursday) and an easing of key consumer metrics like slowing unemployment claims. In the latest week, unemployment claims made a downside breakout, suggesting that the number of people losing their jobs is slowing. An interesting tidbit worth noting is that historically, unemployment claims of around -475,000 has historically been consistent with the start of net job creation. Still, all things considered and in light of the ongoing theme of less-bad news, we are probably approaching the point where investors begin to change their tune. The debate on stocks is shifting from recovery vs. no recovery over to sustainability vs. double-dip. This week marks the end of the third quarter for 2009. Most notable before Wednesdays close will be the release of consumer comfort and confidence numbers (due Tuesday), followed by GDP, refinance activity and another employment report (Wednesday). Looking further out, it is worth noting that from a seasonal perspective, the fourth quarter is typically the most beneficial to investors of any season. Looking back at history, this has been even more pronounced in years where stock market performance has already been strong. We hope this trend continues as we move through the final innings of the year, but that will remain largely dependent on how the recovery continues to take shape.

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Economic Data Sends Markets Higher - Week Ended 9/18/09

posted 09.21.2009 at 09:32 a.m. by steve

US stocks advanced for a second consecutive week, adding to their positive performance for the month of September. The three major US indexes gained in similar fashion, with the NASDAQ popping +2.50% while the S&P 500 and Dow edged up +2.45% and +2.24%, respectively for the week. If September can hold onto its month-to-date gains, it would be a seventh consecutive month of positive performance!

Overall, economic news was of the more favorable variant in the most recent week, and stocks posted gains in each trading session except for Thursday. Perhaps most interesting was the ability of the stock market to advance on Monday despite unfavorable news of protectionist trade measures levied between the US and China regarding Chinese-made tires and US chickens. Protectionism, or actions inhibiting free trade between economies, is viewed as a major threat to worldwide economic recovery. Aside from that initial setback, there was much for investors to be positive about. Most notable among the data were releases that showed retail sales strong for the month of August; better than expected industrial production figures indicating strong gains for the manufacturing sector in recent weeks; and continued declines in initial jobless claims (good development) and housing data that continues to suggest a stabilization in home prices.

All told, US stocks continue on their march higher and market technicals (price momentum, breadth, leadership, volume, etc.) continue to show signs of ongoing strength. Most significant this week will be the release of the leading indicators index (today), consumer comfort and sentiment surveys (tomorrow and Friday), existing home sales and unemployment claims (Thursday). If the pattern continues, those releases should continue to show a stabilization and/or improvement in the overall economy. Still, as we draw nearer to the end of the third quarter and approach another earnings season, we would not be surprised to see markets stall out and pause as investors grow anxious and uncertain over what corporate earnings may look like when released next month. While we believe that cost cutting will continue to be the biggest source of earnings improvement, we would not be surprised if top-line gains (revenue growth) begin to make a more significant contribution as well. Consumers as a whole did spend more during the third quarter (with help from Government incentives like Cash for Clunkers and seasonal factors like back-to-school) and sentiment has improved somewhat. So far to date, corporate earnings have surprised consensus expectations to the upside; we believe that it is not unlikely for that to occur with this upcoming next round as well.

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Stocks Move to 2009 Highs Despite Light News - Week Ended 9/11/09

posted 09.14.2009 at 09:51 a.m. by steve

Despite the slow start to September, markets advanced in the latest week pulling the month back into positive territory and helping major US indexes set new highs for the year-to-date. The week did close on a less positive note as Friday snapped a 5-day winning streak for US stocks with its ever so miniscule (-0.14%) decline. All told for the week, the broad market S&P 500 advanced +2.59% while the NASDAQ and Dow gained +3.08% and +1.74%, respectively. It was a good week to be invested.

From a news standpoint, with almost nothing new in the way of economic reports or corporate earnings released, it was a quiet week. Perhaps the most significant stat of the week was the notable rise in the consumer confidence index, which jumped to 70.2; a big improvement from the reading of roughly 66 in August. Economists had been expecting a less notable increase. This week however, looks to be filled with much more in the way of significant economic news. Additionally, we are reminded that today marks the 1-year anniversary of Lehman Bros. failure: the catalyst event for what was the credit crisis. Key among the data this week will be retail sales and consumer comfort (out Tuesday); industrial production (Wednesday); housing starts and unemployment claims (Thursday). But, as we have seen in the most recent months, it seems that economic data continues to positively surprise consensus expectations. That being said, if the third quarter mimics the pattern so far in 2009, stocks could face pressure as we near the end of another calendar quarter and approach yet another new earnings season in several more weeks. But, if the pattern holds, investors will again be positively surprised by earnings that exceed expectations when reported for the third quarter, helping keep the market rally alive heading toward year-end.

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September Begins Under Pressure - Week Ended 9/4/09

posted 09.08.2009 at 09:44 a.m. by steve

In what has historically been the weakest month of the year for US stocks, the first week of September remained true to its reputation. On Tuesday, the first day of the new month, stocks dropped about -2% despite a backdrop of somewhat favorable economic data early in the day. Recent data is suggesting that the recession, which had gripped the economy so tightly through the second quarter of 2009, has ended. Among the reports was much stronger than expected data from the manufacturing sector and the housing market. Despite that selloff, stocks slipped for a fourth consecutive trading session on Wednesday, but losses were small compared to the prior day and trading volume was exceptionally light (even compared to the low volume that is often characteristic ahead of 3-day weekends). But, to the surprise of some, stocks managed to recapture some of the losses sustained early in the week on Thursday and Friday. Friday was the most notable component of the rebound as stocks rallied to end the day up +1.3%. Again the economic backdrop was favorable following continued improvement on the employment front with a favorable jobs-related report. All told, the major indexes still concluded the first week of September in the red: the S&P 500 and Dow gave back in similar fashion -1.22% and -1.08%, respectively while the tech-heavy NASDAQ shed just -0.49%.

While recent reports continue to suggest that the recession has most likely ended, investors remain concerned for several reasons. Chief among those remains the employment picture. While job-related reports have been more favorable (generally speaking) recently and remain well below their crisis peak levels, unemployment does continue to rise (ever closer to the psychologically important 10% figure). However, while it is clear that consumers as a whole have become more frugal in the most recent 12 months, there is evidence that they are willing to spend when given the right incentives (ie: the price is right). This notion/concept fits in with our belief that the US economy will have a New Normal going forward (please take a moment to read our Monthly Commentaries, including the most recent found here: Archive). Still, this is not to say that the new normal economy will not afford investors opportunity for asset value recovery. We are frequently reminded that while current worries (there are many) remain in focus, markets have managed to climb even the steepest walls of worry in the past. As such, given the period which we have just been through, we believe, for a number of reasons (including good technicals, lots of money still to be invested, improving fundamentals, etc), that it is most risky to be short (or out of) the market as we believe a continued advance is more likely than a retest of prior lows. In other words, we feel that any pullback in stocks is likely to be short in terms of duration and shallow in terms of magnitude. In the short term, the seasonal forces of September can continue to put pressure on stock prices; but early indications seem to point confirmation of the recovery-is-underway thesis.

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Markets Coasting toward Labor Day - Week Ended 8/28/09

posted 08.31.2009 at 09:42 a.m. by steve

In the week ended August 28, the US stock market managed to keep its head above water and add to the advance for the month. However, despite the Dow rising in the last 8 of 9 trading days (streak was snapped Friday), recent gains have been almost un-noticeable. The Dow gained a paltry +0.40% last week, while the NASDAQ and S&P 500 advanced +0.39% and +0.27%, respectively. Trading volume in the most recent two weeks has been extremely light, typical in the weeks leading up to Labor Day. Amid the light volume and mild-tone week, stocks often see-sawed throughout the day, hovering around the break-even level each day (of the total volume traded, over one-third was heavily concentrated in 5 low-quality financial stock names, suggesting overall trading volume is even weaker than the raw numbers suggest). Even the news of the reappointment of Fed Chairman Ben Bernanke, which removed a piece of uncertainty for the markets, failed to have much effect on the markets. Economic and corporate news also has appeared to be of a more mixed tone recently; a notable departure from the more bullish tone that was evident at the end of July and early weeks of August. One comment last week that struck us as particularly true is that it appears investors are becoming tired of having to extrapolate the positive slant from company earnings and economic data points; they now want corporate executives to be issuing more detailed and favorable guidance on their view of the future path of recovery (they still remain cautious to provide optimistic guidance).

Despite the tired tone of the markets recently, upward remains the trend. With one more trading day left in August (today), and the month being solidly in positive territory, it seems safe to say that the S&P has now risen for six consecutive months. And, while the news of late has been decidedly more mixed, some key indicators are showing persistent improvements. For instance, housing appears to have found a bottom. The Case-Shiller home price index showed prices up in June, as did government FHFA data; home sales increased and mortgage applications have been on the rise. Consumer confidence also rebounded during the latest month, but did not make a new cycle high. And, while jobless claims continue to be high and unemployment will likely peak above 10%, claims have remained below their peak for 21 weeks, suggesting that the worst is behind us. This week, volume will likely remain low through the holiday, meaning that market moves this week will have little to offer in terms of providing a story for the future direction. The real test to the recent market rally will likely come next week as trading volume picks up in what has traditionally been a difficult month for stocks (September). The biggest news item to be watched will be same-store sales from retailers as they report how the back-to-school shopping season went. Investors will try and garner insight for how the Christmas retailing environment might look compared with last year.

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Rally and Recovery Continues - Week Ended 8/21/09

posted 08.24.2009 at 09:41 a.m. by steve

Despite another mixed week of economic statistics, US markets worked their way higher in light trading volume. After beginning the week with a major setback (US stocks gapped down over -2% on Monday following weak trading in overseas markets) losses were largely erased by the close on Wednesday. Most impressive was the nearly +2% advance Friday which came with the release of a much better than expected existing home sales report. Housing remains of key concern for investors as it directly affects the health of consumers. With the move Friday, market technicians now believe that momentum has been restored for the current rally, which could help send the market higher. And, as we continue to distance ourselves from the lows in early March, reduced is the possibility that this is just a bear market bounce. All told, the S&P 500 popped +2.20% for the week ended August 21 while the Dow and NASDAQ gained +1.98% and +1.78%, respectively. With the advance last week, we have witnessed the most rapid 50% recovery in the S&P 500 since its inception!

Gains last week were impressive, and we continue to believe that the markets are finding broad support from the massive amount of cash on the sidelines that is being reinvested on weakness. As such, it appears the markets are paying more attention to news and economic data confirming the thesis that an economic recovery is well underway and ignoring signals that might suggest otherwise. For instance, stocks managed to post gains on Thursday, even as unemployment claims rose for a second consecutive week; but the market interpreted the data as an indication that the economy has taken a turn for the better since claims have remained below their peak for 20 straight weeks. With the data for unemployment continuing to be one of the most stubborn points to turn, it becomes increasingly likely that the economic recovery will need to come more from business spending and capital investment rather than consumers (making for a slower growth recovery). As we have said in recent weeks, the focus of markets in the short term will remain the health of consumers. Directly tied to that, there are numerous housing sector data points due out this week. Markets will also be watching back-to-school sales and a survey of personal income for signs of improvement.

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A Mild Pause Amid Weaker News - Week Ended 8/14/09

posted 08.17.2009 at 09:56 a.m. by steve

After four consecutive weeks of stock market gains, the major US indexes took a breather with the S&P 500 sliding -0.85% while the NASDAQ and Dow slipped -0.74% and -0.51%, respectively. Despite 3 of the 5 trading days looking weak, the marginal loss experienced for the week looks like a moral victory. For instance, selling pressure on Tuesday and Friday abated late in the trading session both days for the markets to end well above their lows. Still, ongoing remains the concern that the market has run up too far too fast amid a backdrop of increasing unemployment and uncertainty regarding the health of the consumer. In other words, despite the economic indicators becoming less-bad and sentiment clearly improving worldwide (the recession was declared over in Germany and France) investors worry that the next leg up for stocks will be more difficult to come by. For several weeks now, the pace of gains has slowed and trading volume has declined as an increasing number of people believe that some sort of pause is due. As such, the absence of good news was enough to stall the rally last week; however the decidedly weaker-than-expected news released on Thursday was virtually ignored as the markets rose higher. Most surprising among the data was that retail sales fell -0.1% in July; that number is especially disappointing considering that the hugely successful cash for clunkers program began during the month and was expected to help lift the figure to +0.7%.

While last week represented a minor setback for the markets, increasing is the likelihood that the lows of March 9 will mark the start of a new bull market. Additionally, it is important to remember that no market (bull or bear) moves in a straight line. There will be pauses and corrections along the way. The data last week, with an absence of less-bad or good news, was enough to stall the advance. This week looks as if it will commence with stocks under significant selling pressure as worries about the health of the US consumer continue to weigh on the spirits of investors. Indeed, the health of the consumer is near the top of our list of threats to this advance. Fueling those concerns today are earnings results from home improvement retailer, Lowes which said that sales fell 19% during the second quarter as consumers remain cautious. The fact remains that consumer spending has traditionally accounted for up to two-thirds of GDP in this country and without the consumer, economic recovery will be a long, drawn-out process. As the markets try to quell these worries, investors will be keenly focused on all news this week relating to consumer confidence. Still, we are inclined to believe that any correction will be relatively mild for the reasons that there remains lots of money needing to get reinvested (providing buying support on weakness); and because after 18 months of a bear market, investor expectations that had become so weak are now ripe for lots of positive surprise.

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Unemployment Surprise - Week ended 8/7/09

posted 08.10.2009 at 11:32 a.m. by steve

Most important for the week ended August 7 was the unemployment figure from the Labor Department released Friday, which was a positive surprise for the markets. Key was the fact that payrolls fell by only 247,000 compared to economist expectations for a greater loss of 275,000 non-farm jobs during the month of July. Cash for clunkers (CARS program) also continues to stimulate consumer demand and spawn excitement over 3Q growth. Combined, that news was enough to send the markets notably higher, closing the week at their highest level (on the S&P 500) in over 10 months! The favorable employment news Friday came in contrast to the ADP employment report out earlier in the week, which disappointed the market indicating that more jobs were lost in July than expected. All told, the week that was bookended by strong advances on Monday and Friday (over 1% each), saw the S&P and Dow up +2.33% and +2.16%, respectively while the NASDAQ advanced a more muted +1.10%.

Bottom line: the market has advanced over +15% in just under a month on a news cycle that has markedly become more optimistic. Clearly news is still mixed as evidenced from the various unemployment related reports out last week. Still, the markets seem to increasingly be more focused on heeding the news bytes with an optimistic slant and ignoring those that do not support the economic recovery thesis. That notion is likely best explained by the fact that as we continue to distance ourselves from the lows in early March, investors increasingly feel the need to get the truck loads of low-yielding cash (money market funds), that has been sitting on the sidelines, reinvested. This load of reinvested money is providing great support to the market on days where the news is weak as investors generally try to buy in on days where prices decline (buy low, sell high). We too, have been looking for a market pullback to get clients with the most cash incrementally closer to their long-term investment objectives (asset allocations). Despite having held above-normal cash over the last 18 months in client accounts in order to protect, we still believe that time in the market (rather than timing) the market is the biggest contributor to long-term investment success. Clients just need to be in the market for a long time with a well-defined, disciplined process to be winners. But, as we have written at length about in recent monthly commentaries, we do also believe that we have begun a new normal investment environment. That environment is one in which growth will be harder to come by (for developed economies in particular) and sustain as consumers continue to de-leverage their balance sheets, and corporate credit remains rationed. As previously stated, the next big item to watch in coming weeks will be back-to-school sales; they will act as a barometer for the current health and mindset of the consumer.

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July Ends with 4th Consecutive Week of Gains - Week Ended 7/31/09

posted 08.03.2009 at 12:29 p.m. by steve

US stocks managed to continue their streak higher for a fourth consecutive week. One of the most notable days for equities came Wednesday as US markets managed a moral victory by virtually ignoring the fact that Asian markets dropped significantly earlier that day on concerns that the world stock market has rallied too much too quick considering the still weak economic backdrop. Despite struggling to find direction early in the week, US equity markets shot higher on Thursday on what seemed to be no significant news. Still, while US stock indexes finished higher by about 1%, market technicians expressed some concern over the fact that the momentum in early trading deteriorated as the day wore on (a signal conflicting strength). This late-day fizzle of enthusiasm suggests that the move higher was not as strong as bulls would have liked. For the week, the Dow, S&P and NASDAQ posted small similar-sized gains of +0.86%, +0.84% and +0.64%, respectively.

US markets have jumped over +12% since the beginning of July. As such, it is somewhat surprising to see the markets continue to move ahead (especially as demand for the massive amount of newly issued US government debt looks increasingly weak). Economic news generally remains mixed, but the market seems to be giving more weight to data that supports the economic-recovery-is-underway thesis. For instance, US GDP continued its year-over-year decline in the 2Q09 period, falling -1.0% compared to the period last year while the Chicago PMI made incremental improvement in July; but the conference board measure of consumer confidence fell in July (confirming the recent weakness observed by University of Michigan, ABC and Rasmussen surveys). Perhaps the one area that does seem to be showing more clear signs of stabilization/improvement is the housing sector. In recent weeks, housing related data has continued to look less-bad, which probably explains the strong relative performance of the financial sector stocks. Considering that falling home prices and bad loans are what many blame for the current economic recession, any improvement here is sure to help stoke more optimistic animal spirits. The bottom line is, investors are continuing to shift to a more optimistic beat and bulls are gaining the upper hand over bears. Moving further into the quarter, less-bad news will likely continue to be viewed as good news and could keep the rally running. The key item to watch in coming weeks could be back-to-school sales, which could give the best indication yet of how the consumer is currently holding up. In the interim, the most important item to watch this week will be the Jobs Report this Friday.

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Another Week of Impressive Gains - Week Ended 7/24/09

posted 07.27.2009 at 09:55 a.m. by steve

For a third consecutive week, stocks rallied higher as corporate earnings reports continued overall to top analyst estimates with economic indicators following suit (the Chicago Fed National Activity Index, a composite of 85 different economic indicators, improved in June). Most noteworthy was the action on the Dow, which made its way above 9,000 for the first time since early January (2009). A chunk of the gains came on Thursday as an unexpected jump in home sales helped catapult the major indexes over +2% on the day. The favorable news for housing was particularly well-received by investors given that deteriorating fundamentals for housing are what most blame for financial meltdown (and remain troublesome for the banking sector). All told, the tech-heavy NASDAQ led gains for the week with a surge of +4.21% while the S&P 500 and Dow jumped +4.13% and +3.99%, respectively.

The recent rally certainly feels good for investors, especially seeing the Dow recover to values not seen since the beginning of 2009 (as the holiday rally, which ran from 11/20/08 to1/6/09, was coming to an end). And, for those who have been sitting on the sidelines, the pressure continues to mount as feelings of missing the new bull market continue to escalate. Indeed, a growing majority of economists now believe that the worst of the economic pain is behind us. However, following a third successive week of gains with almost no days of pause, the advance has some feeling it has been too far, too fast; some pullback or pause may be necessary. Worthy of mention is the fact that most bottom-line gains have come from aggressive cost cutting rather than increasing revenues. Additionally, most seasoned Wall Street analysts would suspect that while earnings season has started exceptionally better than expected, it is usually the less favorable earnings that get reported as the season matures. That being said, the current spring rally, now nearly 5 months running, has continued to surprise to the upside. It is not uncommon for investors to fail in their ability to recalibrate expectations after significant market events, opening the door for more surprise in days and weeks ahead.

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Stocks Uneasy Ahead of Corporate Earnings

posted 07.13.2009 at 08:34 a.m. by steve

Equity markets came under pressure in the first full week of the third quarter as investors grew increasingly uneasy about corporate earnings season and the recently weaker economic news. For most of the week, it appeared as though stocks were on the defensive, with volume picking up modestly but still below average. It would seem now that the equity market has no conviction of an economic recovery. The most harmful day of the week for investors came Tuesday as the S&P surrendered -2.0%. All told, the S&P and Dow slid -1.93% and -1.62%, respectively while the tech-heavy NASDAQ fell -2.25% as some industry heavyweights indicated that business spending on technology has been weaker than anticipated. In addition to setbacks in the equity markets, commodities moved down in tandem (oil finished the week below $60 per barrel, down from a recent peak of about $74 just two weeks ago) as worries over the economy continued to sink in and talk of more strict regulation in derivatives markets increased.

It is not unusual for the markets to exhibit some anxiety before earnings season begins each quarter, especially after a prolonged period of weakness. However, fear is increasing that the current recession, which was showing early signs of improvement just weeks ago, might still have a bit longer to run. In fact, some believe that we might see a double-dip recession, wherein the economy could again slip backward after the sugar-high from tax refunds (now past) and various stimulus measures fade. Still, businesses should have some easy year-over-year earnings comparisons, and could just as easily renew the optimism that was gaining momentum in late-May and early June. Nonetheless, as we explained in our current quarterly newsletter, it is our feeling that investors now want to see signs of real improvement, not just a continuation of news that is less-bad than expected in order to send the market on its next leg higher. Not only do investors want to see profits (rather than less severe losses), but they could really use some positive surprises from economic data. In addition to being keenly focused on corporate earnings this week (in particular several key banks and industrial bellwether names), the markets will turn their attention toward economic-related releases due out on retail sales, housing starts and others that could help provide clarity on the mindset and health of the consumer.

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Weak Data Fuels Sell-Off Ahead of Holiday Weekend

posted 07.06.2009 at 11:13 a.m. by steve

In what was another see-saw week for the markets, the S&P, NASDAQ and Dow finished down -2.45%, -2.27% and -1.87%, respectively. Despite beginning the week with a healthy gain on Monday, the markets came under significant pressure as the July 4 holiday-shortened trading week (markets were closed on Friday) wore on. On Tuesday, indications from the Conference Board suggested that the economic recovery is going to be slow after reporting a disappointing drop in consumer confidence. High unemployment and a lack of credit are still hurting consumers. The real carnage for stocks was suffered on Thursday, ahead of the long weekend, after it was announced that June saw significantly more job losses than in May (467,000 compared to 322,000), further hampering expectations for economic growth in the second half of 2009. Perhaps one positive outshoot of the weak economic data being reported is that oil prices have begun a meaningful correction, down today almost $10 from their recent highs above $70 per barrel. Keeping oil prices low should help ease the pain on consumers (although oil prices will continue to find support as investors increasingly fear inflation problems in the coming years, using the commodity as a hedge).

In recent weeks, the markets have traded inside a fairly wide range. However, the recently heightened volatility has come on extremely light trading volume as the summer vacation season appears to be in full swing. With light volume, it is difficult to take much conclusion from daily or weekly price moves. Still, the recent economic readings are surprisingly weaker than expected, again giving investors much uncertainty about the path of recovery. In the near term, that uncertainty could continue to play out in the form of heightened volatility, especially as investors look toward corporate earnings in hope of gaining a flavor for what companies are actually experiencing. In order to support the next move higher for the stock market, we do believe that economic data will have to start turning decidedly good, rather than just continuing the streak of less-bad.

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Markets Manage a Moral Victory

posted 06.29.2009 at 09:29 a.m. by steve

The US stock market managed to finish the week almost where it began, despite a rattling start. On the heels of the first down week since early May, the S&P 500 lost -3.38% last Monday and closed below 900 for the first time in over a month after the World Bank estimated that the global economy will fare worse than expected declines in 2009. The release dealt a major setback for those previously trying to believe the green shoots story, and increasingly suggests that the spring rally began in early March will now need good economic news, not just less-bad news, to push forward.

While the decline Monday renewed the debate about where the economy is truly headed, the move came in extremely light volume suggesting that a lack of buyers, rather than a wave of sellers, provoked the meltdown. Tuesday and Wednesday the markets managed to tread water (posting very negligible gains) despite the US treasury auctioning off record amounts of new debt to finance Government spending plans. The next notable day for the stock markets came on Thursday, as the major indexes managed to chug their way higher, up +2.14% on the S&P, largely erasing the Monday setback. That advance was driven by as handful of better-than-expected earnings announcements from homebuilders, retailers and other consumer discretionary stocks. The net result for the week ended Friday was a slight loss on both the S&P and the Dow (-0.26% and -1.19%, respectively) while the NASDAQ managed to post a modest gain (+0.59%).

US stock markets posted a moral victory last week despite ongoing and increasingly pervasive worries of huge Government deficits and weak consumer spending (and a lengthy deleveraging process). Markets remain extremely cautious about the recovery moving forward as the state of the consumer continues to be a big question mark. Friday, the Commerce Department indicated that consumer spending edged up by +0.3% during the month of May. However, the real change for the consumer is told by the rapid rise in his savings rate, which rose to +6.9%; that figure is the highest reading since 1993. In an economy where the consumer accounts for over two-thirds of total economic activity (the United States), small changes in consumer behavior have huge impacts on the pace of productivity and growth. As such, the markets may struggle to find convincing direction in the coming weeks as the 2Q comes to an end and investors prepare for another round of corporate earnings. Stay tuned; without much anticipated volume in either direction this week (holiday-shortened), it will be difficult to get a true sense for what daily price swings mean for the longer-term outlook.

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Rally Under Pressure

posted 06.22.2009 at 10:21 a.m. by steve

Stocks finished the week lower for the first time since early May, noted by a decline in the Dow of -2.95% while the S&P and NASDAQ forfeited -2.64% and -1.66%, respectively. On the down days last week (4 of 5), volume was generally elevated (although still low due to seasonal factors) suggesting distribution days and profit taking. The bulk of the damage was borne on Monday as the US stock market opened down more than 1%. Selling pressure intensified throughout the day with economic data being released that continues to suggest the world economy has significant hurdles to overcome. Also pressuring the markets may have been uncertainty stemming from the evolving proposals of the Obama administration about how financial market regulation will look going forward. Further, recent data suggests that the market may have become too optimistic about green shoots and will need to begin seeing good news (instead of just less-bad news) to continue justifying the 3-month long rally and more importantly, the next advance higher.

While last week was the most decisive correction since the current rally began in early March, there are a number of data points to suggest that the recession might indeed be over (although any real economic growth would surely be at a very anemic pace). For instance, the 4-week average unemployment claims number has declined by -43,000; a figure that in the past has marked the end of recessions. Additionally, manufacturer inventories continue to be drawn lower, suggesting that at some point in the not too distant future, industrial production will have to increase in order to replenish inventories and also continue making products that businesses and consumers buy. Of interest are other miscellaneous indications that the economic situation is no longer deteriorating. Among them are US pending house sales up +12.3%; furniture buying has increased +9.3%; vehicle sales have risen by +8.8%; and golf membership rates are on the rise. Still, in the near term, interest rates (rising) continue to pressure the recovery as the US government is set to issue a record amount of debt this week to continue financing its ambitious spending plans for the current year. As such, bond vigilantes are increasingly worried about larger deficits and problematic inflation in the intermediate- to long-term.

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Shift to More Bullish Tone Continues

posted 06.15.2009 at 09:49 a.m. by steve

The US stock market managed to nudge its way higher last week as the S&P 500 rose +0.65% while the NASDAQ and Dow gained +0.51% and +0.41%, respectively. Trading volume remained light throughout the week; a not uncommon characteristic for the month of June. However, in recent weeks, the rally that had been so powerful (beginning back on March 10) now seems to have lost its momentum in recent weeks. The markets have felt like they are treading water, rather than making any significant progress. Indeed, the real story of the last several weeks has been in the bond market as the US treasury continues to issue a seemingly bottomless supply of new debt to finance government spending plans. Yields on the benchmark 10-year treasury briefly topped 4% last week (prices fell); a level not witnessed in over 8 months. It seems that the bond vigilantes are once again making known their concerns about huge government deficits (now and into the future) by pushing up the cost of financing for the treasury department through higher yields.

As we have discussed in recent writings, interest rate hic-ups or spikes are common during economic recoveries. However, interest rate hic-ups may have an enhanced ability to have negative effects on the recovery as the current financial crisis has been so closely tied to the interest-rate sensitive housing market and short-term financing markets. Rising interest rates for the US government surely mean rising interest rates for home mortgages and business loans, as their levels are directly tied to treasury-issued debt. In addition, the US dollar has weakened significantly against world currencies and oil, being used as a hedge, has shot higher. While a weakening dollar makes US labor more competitive in the global marketplace, higher oil prices are coming at a time when the consumer remains extremely weak. Still, the number of investors shifting over into the bullish camp (from the bearish one) has been impressive. According to Investors Intelligence surveys, the number of bulls now outnumbers bears for the first time since late-2007. This is remarkable considering how dire the environment has been over the past year. The tone is clearly shifting as the end of the second quarter approaches. And, institutional investors find themselves struggling to put cash to work after the strong push by the market higher. All of the money remaining on the sidelines is one very valid reason to believe that the stock market has a lot of support for current prices.

One perspective that remains, and that poses challenge for the market moving forward, is that for the market to continue its thrust higher, there needs to be a more prominent catalyst than just waning investor pessimism. Good news will need to start appearing; not just more less-bad news.

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Rally, Almost 3 Months Old, Continues Advance

posted 06.08.2009 at 09:54 a.m. by steve

The spring rally that began on March 10 will turn 3 months old this Wednesday, having added almost +40% on the S&P 500 from the March 9 low to the rally peak (hit last Tuesday). Despite that impressive up-move, it is the first time since early January when the S&P 500 has finished in positive territory for the year-to-date period. Our client portfolios of all objectives continue to be beat the broad stock index for the year-to-date period while holding above-normal cash positions. All told for the week, the NASDAQ popped +4.23% while the Dow gained +3.09% and the S&P rose +2.28%. Still, the up-move fails to tell the story for the week, which began with longtime American industrial icon General Motors filing for bankruptcy (widely expected) and treasury prices plummeting (yields spiking) in the face of massive federal debt issuance. Despite those two bleak headlines, there was good news including that from large US banks successfully issuing new equity (raising capital to restore health and stability to their balance sheets) and some new data suggesting that home sales are improving.

As strong as the percentage gains last week look on paper, the move higher was less impressive from a technical standpoint. Trading volume fell significantly throughout the week, suggesting that enthusiasm is beginning to wane. Further, it suggests that there is little conviction as to what the direction of the market should be moving forward from these elevated levels (relative to just a couple months ago). This week, the market is set to open lower and could face pressure as investors increasingly worry about rising interest rates (yields). There seem to be an ever increasing number of stories out of China, our (United States) biggest creditor, suggesting that it is is becoming more concerned about the levels of debt our government is willing to take on. A spike in interest rates (yields) could threaten the economic recovery as it makes the task of obtaining financing (for the US government as well as consumers and businesses) more costly. This phenomenon is also known as an interest rate hic-up.

Interest rate hic-ups, while troubling, are not uncommon during strong stock market recoveries. We do believe that the worst days for the stock market are behind us (although a retreat may be due). The lows have likely been set for this cycle. The trick for the economy now will be continuing to recover in the face of oil prices that continue to rise (hurting an already weak consumer) and keeping borrowing costs low (helping housing find a recovery point). For more on the path forward, please take a moment to read through our latest monthly commentary, A New Normal Future (click here).

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Third Consecutive Month of Gains

posted 06.01.2009 at 11:21 a.m. by steve

The month of May again concluded in the black, making it the third consecutive month of gains for the stock market. The holiday shortened trading week managed to finish higher on 3 of the 4 days with the S&P advancing +3.62%, the NASDAQ adding +3.09% and Dow rising +2.69% despite unsettling news on several different fronts. For instance, markets were able to virtually ignore drama coming out of geopolitical antagonist North Korea early in the week and instead focus on significantly better-than-expected surveys coming from the Dallas and Richmond Fed indexes on the economy Tuesday. Wednesday, the only down-day of the week for the US stock market, stocks and bonds came under steep pressure as huge US government treasury auctions caused concern over a deteriorating long-term fiscal situation for the country. The remainder of the week, markets managed to work their way higher, despite ever increasing certainty as the week wore on that General Motors ultimate fate would be filing for bankruptcy today, June 1.

While the current rally remains a welcome change from declines over the past year and a half, we remain surprised at the ability of this market to continue its march higher. At the present, we are looking for an opportunity to increase client equity exposure on market weakness; we believe stocks should give back some (not all) of the recent gains as there remain some significant threats. Among them include higher oil prices (which are translating to gasoline prices that have risen by over 40% since January), increasing unemployment, and rising interest rates that threaten to choke off recovery before it really ever gets started. Diving deeper into the interest rate issue; the bond market vigilantes voiced their concern over a US government that continues to take on ever increasing amounts of debt to finance spending plans. As a result, treasury yields spiked on Wednesday (prices fell), sending mortgage rates notably higher than their recent lows, and the stock market reeled on the development.

As we begin the first week of June (a tough month for stocks historically as volume languishes) the markets are beginning with a step forward, even in spite of GM announcing bankruptcy. At the moment, the stock market appears determined to continue its advance; the biggest threat to that progress remains the interest rate environment, which is likely to experience more pressure considering the boat load of new debt still yet to be auctioned in the markets.

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Markets Tread Water on Light Volume

posted 05.26.2009 at 09:28 a.m. by steve

Despite a sizable boost last Monday, the major US stock indexes finished roughly flat for the week ended May 22 on light trading volume. The NASDAQ managed to claim the biggest advance at +0.71%, while the S&P 500 gained an even more muted +0.46% and the Dow floated +0.10% higher. While the rally that began in early March has lost its steam in recent weeks, 880 on the S&P continues to be defended by the bulls and remains a key level of market support. Meanwhile, institutional investor surveys suggest that the smart money, despite remaining somewhat skeptical of the spring rally possibly being the start of a new bull market, is being forced to get incrementally more invested and participate on this advance. All this cash on the sidelines suggests that key support levels will have more staying power. Despite having enjoyed a nice recovery of value in the recent months, we too feel great pressure (self imposed) to work client portfolios back toward their objective stock allocation.

Still, we see some near-term risks that threaten to put pressure on the recent rally. Notable is the weaker than expected retail sales (consumer spending accounts for over two-thirds of GDP in the US) and the ever-problematic jobs market and teetering unemployment situation (fallout from the automakers current ails could have a negative ripple effect on employment and housing). And, commodity prices have risen sharply in recent weeks (think gasoline prices over the weekend) despite the fact that there has been no data suggesting a pickup in demand has even started to occur yet. Still, while much of that sounds bad, we are approaching some months and quarters which should offer some very easy comparisons when looking at the economy compared to a year ago. Compared against the extremely weak readings of year ago, the economy will look like it is again growing. Albeit, this growth will be at a much reduced pace as we believe the process of deleveraging for the consumer is still in the very early innings of the game. Consumers are not as likely to spend like they have in the past decade.

This holiday-shortened week could be an interesting one to watch. Already, it is shaping up to be a bumpy ride as world markets attempt stave off the fear and uncertainty that always seems to come with rising international tension (North Korea test-fired two missiles a day after a nuclear test). Against the backdrop of still-weak economic news, this may be the concrete reason investors reference to go ahead and take profits after a strong advance.

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Spring Rally Faces Pressure as Green Shoots Fade

posted 05.18.2009 at 09:37 a.m. by steve

The major US stock indexes finished last week lower; the first such week in which all 3 major US indexes have retreated in the last 11 weeks. The S&P sank -4.99% while the NASDAQ and Dow dropped -3.38% and -3.57%, respectively as the green shoots story faced pressure. Recently, the market has shot higher on less-bad news, otherwise referred to as green shoots, have become ever more prominent. However, last week there were several noteworthy items which, in the words of influential economist and professor Nouriel Roubini, looked more like yellow weeds. Retail sales came in weaker than expected, and sent the market notably lower mid-week. Further pressuring the rosy tint of the news lately was the announcements by Chrysler and General Motors that they will begin cutting ties with some 25% of their US dealerships; a move that would surely provoke higher unemployment figures.

All said, the recent stock market rally since March 9 is increasingly showing signs that it may be stalling out. Near-term headwinds have picked up, including an uptick in gasoline prices (although still cheap compared to prices last year), a slowdown in home refinancing activity, and a tax refund season that is now behind us. It is possible that the recent increase in favorable news, especially as it was related to the health of the consumer, may have been distorted by consumer spending that was stimulated by big tax refunds (tax refunds were up roughly 17% this year over last). Still, while the market took its first stumble in over two months, we are looking to make incremental moves back into the market with idle cash. There are many economic indicators that are hinting that the end of the recession may be near (for instance product inventory levels are reaching very low levels, suggesting that businesses will need to begin producing again, and trucking surveys are showing that there has been an improvement in freight movement). One leading indicator, which has a nearly perfect record at predicting both the start and end of expansionary economic periods is the yield curve (when the yield curve is positive sloping it is a bullish indicator); it is now at a historically steep positive slope.

Bottom line, we believe that the current market is due for further correction after the significant spring rally. However, we will be looking to get incrementally more invested in client accounts on market weakness, as we believe that a recovery is probably not that far away, and that the bigger risk for investors remains missing the upside rather than further downside.

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Good Times Roll

posted 05.11.2009 at 6:12 p.m. by steve

The market made good on investor hopes for another positive week. The S&P 500 jumped +5.9% while the NASDAQ rose +2.2% and the Dow inched higher +1.2%. The relative outperformance by the S&P stemmed from its larger number of financial sector stocks, which rocketed higher by +23.0% on the week! It seems that the results from the government stress tests of the 19 largest US banks, indicating was viewed by investors as manageable (the government concluded that 9 of the banks did not need any new capital). In addition to the news of the banks, the markets also successfully shrugged off news that the unemployment rate in the US has now risen to 8.9% (although new job losses were announced at a slowing rate). It has now been 10 weeks and over +35% in gains on the S&P 500 since the current spring rally began on March 9, making it longer than an average bear market rally (typically 1-2 months in length and +19% in magnitude).

All that being said, it is clear that the general sentiment has become more favorable in the last two months. The market is rallying not on good news, but instead on news that is less-bad than the Armageddon scenarios that were previously priced in and feared. Still, while it seems that the worst is behind us, a majority of institutional investors do not believe this is the start of a new bull market. At the very least, it does appear that the market has rallied too far, too fast given that the economy still faces significant challenges (think how GM looks ever more likely to enter bankruptcy which could spawn an uptick in unemployment and again pressure housing prices and loans). A stock market pullback seems likely. From a technical perspective there are also signs that the current rally is losing steam. New bull markets are typically characterized by a change in sector leadership; not so in the current rally. The financial sector was the leader during the last five-year bull market. It is not likely that it would be the leader during the next bull, yet it has been the overwhelming leader since the March 9 low. Still, while there are plenty of reasons to remain skeptical that a new bull market might not be that far away, we are reminded the there is still oodles of cash sitting in money market funds earning almost nothing. Lots of money waiting to be invested is a good indication that the market should have some pretty meaningful support as investors seek to reacquire risk and begin recovering what has been lost over the last 18 months. We continue to watch this market closely, and are looking for opportunities to be reinvesting client monies on market pullbacks in the near future. We still believe that it is the amount of time in the market that makes an investor most successful.

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Stressful Tests - Results Due This Week

posted 05.04.2009 at 1:18 p.m. by steve

The market concluded the month of April as one of the best months in history, and marks the second consecutive month of gains. Such strings have been rare since the bear market began over 18 months ago in October 2007. The Dow, Nasdaq and S&P 500 melted higher by +1.7%, +1.5% and +1.3%, respectively last week; helping extend the April charge to +12.3% for the Nasdaq, +9.4% on the S&P 500, and +7.3% for the Dow. Since the cycle lows nearly two months ago on March 9, the Dow is over +25% higher, while the broader S&P has fared even better at +29.7%. It has been an impressive advance, indeed!

While the gains of the last 7 weeks have been a welcome relief for investors, the debate lingers on in the minds of nearly all as to whether this is the start of a new bull market, or just a head-fake rally within a bear market. Whatever the case may be, it does appear that the economy is beginning to turn the corner, at least from the perspective that its pace of deterioration appears to be slowing. Green shoots, as many are now calling them (the bits and bites of less-bad news and improving sentiment), seem to be appearing in more places. Further, the credit markets have shown notable improvement in the last several weeks as evidenced by lower credit spreads (indicative of more normal credit market function) and higher new corporate debt issuance. Still, with the encouraging improvement, worry remains concerning the bank stress test results. The findings were originally slated for public release today, but have been delayed to later this week. The delay raises some question as to why the delay (bad news, perhaps), and may further challenge the credibility of the results in the minds of some critics when the results do finally become available to the public.

That being said, we do continue to be encouraged by the green shoots becoming more evident in the news cycle. In the meantime, the market will be focused closely on the results of the bank stress tests later this week. So far today, the markets are starting the week notably higher; will it be another week of gains following results? Stay tuned.

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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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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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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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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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Happy New Year!

posted 12.29.2008 at 12:27 p.m. by steve

There is little to be said of the markets during a holiday shortened week where trading volume was just a fraction of what is considered normal. With much of the country on vacation, new economic data and/or company announcements were also scarce. As such, there is little that can be taken from the decline of -0.7%, -1.7% and -2.2% on the Dow, S&P and Nasdaq, respectively.

Still, as we move through the remaining 3 trading days of 2008, there is A LOT that can be said of a year in which weeks seemed like months, and some months felt like entire years. Just think about the price of oil, which rose to around $150 per barrel in July and crashed to under $40 per barrel in just four months. Over the summer, we were spending $4-plus per gallon on gasoline! While that price change has been welcomed by consumers, confidence has not improved.

Year-to-date, the S&P 500 is down nearly -41% (that terrible number is what remains even after a rally of over +15% since late November)! That kind of value destruction is well outside the realm of a typical down-year and the risk tolerance of all investors was tested. Aggressive and conservative investors alike doubted their strategy and focus. News came at investors so quickly that it was like information overload. It is curious to ponder how much of the panic was created by the media. How would the declines experienced by investors in 2008 have been muted if not for the 24-hour news cycle and ever increasing availability of information via sources such as the internet? Think how much slower information traveled just 10 years ago. Arguably, panic was created around events such as the implosion of Lehman Bros. That event alone nearly caused a modern-day run on the banks as investors questioned even the safest of investments (including money market funds). As investors questioned those instruments, credit markets all but dried up, forcing aggressive deleveraging. Businesses were unable to rollover existing debt or access new and even existing lines of credit. Hedge funds were called to return borrowed funds, which forced massive selling pressure. As the liquidity of less favorable and/or more exotic investments deteriorated, funds were forced to sell what they could (often the best assets), rather than what they wanted to. That activity caused most stocks to be punished uniformly, and the benefits of diversification were became reduced.

About the only good thing that to say about 2008 is that it is almost over; and that client accounts fared the storm better than the broad market. Looking ahead, we believe that the damage done to the economy from frozen credit will take time to repair. The current bear market ranks up there among the worst declines ever in terms of magnitude, but is still short in terms of duration. The first half of 2009 may remain extremely trying for investors amid ongoing volatility. Yet, we do believe that the government continues to be proactive in pulling out all stops when dealing with the current predicament. As such, the economy may recover in quicker fashion than many expect. 2009 is a fresh start and we commend those that have made it through the past year maintaining a long-term focus. We wish you all the best in 2009! Happy New Year!

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Week Full of News Leaves Stocks Little Changed

posted 12.22.2008 at 11:03 a.m. by steve

Stocks finished last week slightly higher than they began. The Dow, S&P and Nasdaq advanced +0.3%, +0.9% and +1.5%, respectively. However, it was an eventful week in terms of news. At the beginning of the week, investors were still attempting to absorb news of the $50 billion Madoff Investment Securities ponzi scheme. Tuesday the US Federal Reserve announced that it would target a discount rate of 0.0%-0.25%, down from its recent level of 1.0%. The 75-100 basis point cut takes the target rate to its lowest level in the US ever! Accompanying the rate cut, the Fed released the statement that it intends to keep rates low for a long time. The bold nature of the rate cut suggests that the Fed is committed to fighting deflation with everything it has (inflation will be a big concern in the long-term). It was enough to send the markets higher on Tuesday by over 5% on the S&P and Nasdaq. We truly are living in unprecedented times.

In the final days of the week, the markets pared gains (to be expected after the type of euphoria that was experienced on Tuesday) on fresh news of weakening jobs and economic data. The markets did end on a slightly positive note Friday as GM and Chrysler were given a $17.4 billion lifeline after weeks of drama in Washington (Ford opted to forego government money as it is in better financial shape than the other two and is not on the brink of failure). While controversial in terms of whether the automakers deserve taxpayer assistance, or that the financial assistance will do anything other than delay an inevitable failure is currently being ignored in favor of keeping unemployment numbers from spiking if the Detroit companies were forced to bankruptcy. Higher unemployment would have negative effects on overall consumer confidence and the economy.

In the past few weeks, markets have generally behaved themselves as witnessed by a strong advance since November 20. That upswing has led many investors to question whether they should be in a rush to get back into the markets. While markets may sustain their gains through the end of the year and even continue to move higher, we still believe that investors need not be in a hurry to get cash reinvested. With the final two weeks of the year meaning lots of vacation time for investors and companies, there will not likely be much economic or corporate news to hurt the markets. Yet, we remain of the notion that when companies begin to report fourth quarter results at the start of 2009, those earnings will be very week and cause the markets to possibly retest lows established in November. Corporate earnings and economic data are likely to remain week for a while longer. Many respected economists believe that we will not see any meaningful economic recovery until 2010, meaning that a sustainable stock market recovery is still several months off. In any event, the markets continue to create areas of opportunity, and we look forward to the day when a new bull market begins!

Thanks for your continued support in 2008. We look forward to continuing our relationship with you in 2009! If we dont otherwise speak before then, have a Merry Christmas and a Happy New Year!!!

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Thoughts on Madoff Investment Securities, LLC

posted 12.18.2008 at 2:40 p.m. by steve

Trust. It is the foundation for which the entire world and capital markets function. It is the core of the investment management business that takes years to build. Without trust, the capital markets would cease to function. Yet, every few years we hear of a new and unique situation of fraud or deceit where the foundation of trust is shaken.

In response to the recent news surrounding Madoff Investment Securities, we have taken a moment to write a piece responding to questions circulating in client and investor minds. That entire piece can be found by clicking here: Thoughts on Madoff Investment Securities, LLC.

*Nvest Wealth Strategies has never used investments (funds or other investment vehicles) managed or associated with Madoff Investment Securities, LLC.

*Client accounts are held by a third-party custodian, Charles Schwab & Co.

*Due dilligence, initial and ongoing, is thorough for your peace of mind.

We value the trust you have placed in us, and continue working to earn that trust each and every day. Thank you for your continued support!

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Weekly Market Summary

posted 12.15.2008 at 11:16 a.m. by steve

Markets ended last week roughly where they began, despite continued bad economic news and no apparent agreement between the US automakers and government over a bailout. Drama over the automaker bailout dominated the headlines, while other weak data continued to surface including a continued drop in real GDP and a weakening trade picture. In a somewhat alarming development, T-bills were issued by the treasury at negative rates for the first time ever (treasuries did trade earlier this year in negative rate territory, but in the secondary market), signaling that the credit markets are still not functioning in normal fashion. On that note, there were also reports that the Fed is considering issuing its own debt for the first time ever. Such a move would signal that the powers of the Fed are expanding beyond what has ever been seen before and that the gloves are off in terms of fighting this crisis.

In recent months, we have seen markets decline in magnitude not often paralleled at other times in history. The result has been largely due to a quick deleveraging cycle which has occurred. Hedge funds which have been forced to unwind uses of leverage quickly have severely and negatively impacted the markets. A question of high importance is, what inning of hedge fund deleveraging are we currently in? By some estimates, this activity is getting close to being over as the hedge fund industry has seen its assets under management cut by more than half, and most funds require investors to have submitted redemption requests by now.

With that being said, there is still some selling pressure that may remain through the end of the year as many investors seek to offset capital gains (likely small) by tax-loss harvesting. As we have said before, we do not yet believe it is necessary to rush back into the market. We do believe that the market will retest the new low established in late-November, perhaps several more times. As we head for the conclusion to 2008, the markets will remain focused on developments with the auto sector, and be looking to the Fed meeting mid-week for another cut to the Fed funds rate. Additionally, OPEC is likely to cut oil production output in an attempt to stabilize oil prices. Investors are also sure to remain focused on the US consumer as we enter the final days before Christmas. Reports are starting to surface that holiday shopping may not be as weak as most analysts are expecting, which would be a good piece of encouragement.

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A Bumpy Start - Weekly Market Summary

posted 12.08.2008 at 12:36 p.m. by steve

The first week of December ended much better than it began. On Monday of last week, the Dow dropped 680 points (about 7.7%) while the S&P and Nasdaq fell slightly more. A correction could have been expected from a technical standpoint, as the stock market had the biggest week over week rebound during the week of Thanksgiving. However, the magnitude of the losses last Monday was surprising, as it seemed to me that the holiday shopping season was beginning better than most investors had expected. All told, the week managed to regain some of what it lost early, with strong advances coming on Tuesday, Wednesday and Friday. The S&P, Dow and Nasdaq concluded the week down just -2.3%, -2.2% and -1.7%, respectively.

While drops like the one which occurred at the beginning of last week are extremely disheartening, we have been encouraged that the market seems to be reacting less negatively to bad news reports. For example, the market actually finished extremely strong on Friday, despite news earlier in the day that employers had slashed over a half-million jobs during the month of November; those are the worst unemployment numbers in 34 years, and were far worse than what the market was expecting! It appears that the reason behind large market drops is shifting from being news-based to technicals-based. In other words, the markets seem to be trading in a range right now, and when the market believes that stocks have climbed too far too fast (such as during the week of Thanksgiving), traders are taking the opportunity to realize profit.

As we begin this second week of December, stocks are continuing to advance on optimism that some sort of rescue will be reached for the US auto industry, as well as fresh news that the Obama administration has big plans for government spending works (to come in the form of infrastructure improvements like building roads, sewers, communications, etc). Those two items should help mitigate the unemployment situation which, is quickly becoming the largest threat to a modestly quick economic recovery. Still, it is difficult to read into any move that the market makes given the light trading volume observed over the past two weeks. While news remains bad, it does feel like things may be sorting themselves out, or at least calming down. Liquidity is improving (as measured by major interest rates, including mortgages, coming down), and the chatter of fresh bank failures seems to be more muted for the time being. At this time of year, I think it could be beneficial for a lot more people to begin looking at the glass as half full; what a difference that could make!

Happy Holidays!

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A Week of Thanksgiving

posted 12.01.2008 at 10:44 a.m. by steve

The markets soared higher last week, giving investors some much needed relief going into the Thanksgiving holiday. In the 5 most recent trading days (markets were closed Thanksgiving day), the S&P, Dow and Nasdaq shot higher +19.1%, +16.9%, and +16.7%, respectively. The advances on Wednesday and Friday came with extremely light trading volume due to many traders and investors taking the opportunity to enjoy a long holiday weekend. Unfortunately, the strong advances of last week only helped to pare losses experienced in a difficult November, which left the S&P down another -7.5%. That decline is frustrating after considering the exasperating months of September and October.

While the markets have rallied in the past week, economic news has continued to be generally weaker than already negative expectations. It is likely that economic data through the close of the year will follow suit. However, it does appear that the US consumer may make this holiday shopping season a bit more interesting than the most bearish of expectations. Preliminary data from retailers for the historically profitable weekend suggests that spending was on par with previous years. If you were one of the brave souls venturing our into the madness on Friday morning, we imagine that you were greeted with long lines and robust activity in malls and other retailers. Most economists and retailers had been predicting a significant drop on the notion that consumers are going to cut back this year given the weak consumer confidence readings. In other words, do not write off the US consumer and his penchant to spend just yet. Retailers may fare better than expected this year.

While the Thanksgiving holiday gives some room for optimism, we remain somewhat more cautious on our outlook for the final month of 2008. While markets enter the month on a strong note, and consumers appear to be more willing to open up the wallet than previously expected, there will probably still be news that gives investors the spooks. Additionally, there are still too many investors that want out, and will take profits anytime the markets have a nice rally like last week. We do believe that the market will turn higher well in advance of a turn in the economy, but think there are too many headwinds for the markets (including tax-loss harvesting and hedge fund redemptions) in the remaining weeks of the 2008.

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Week of Worry - Weekly Market Summary

posted 11.24.2008 at 09:39 a.m. by steve

Horrible. Frustrating. Exasperating.

Those words are the first three that come to my mind when reflecting back on the markets last week. Worries and bad news were pervasive as investors remained keenly focused on stalled bailout talks for the auto manufacturers; declining confidence in banking giant, Citigroup; and increasingly weak economic data on housing and the economy. Each of the major US stock market indexes undercut October lows, with the Dow closing on Thursday well below 8000 and the S&P touching 750. Those are values that havent been seen since the bear market lows in 2002. The markets did find some relief Friday, as the indexes surged higher roughly 6.5% on news that President elect Obama has selected current New York Fed Chairman, Timothy Geithner as the next Treasury Secretary (the post is currently held by Henry Paulson). It appears that investors were able to find some comfort in removing a critical piece of uncertainty about the upcoming Obama administration.

As we head into the holiday-shortened trading week, markets look to extend the Friday advance. It was announced earlier today that the government does have a plan for aiding Citigroup. It will inject $20 billion of capital into the banking giant and guarantee as much as $306 billion of toxic assets including residential mortgages, leveraged loans and collateralized debt obligations. It was also made clear that if needed, the arrangement will be extended to other financial institutions that pose a risk to the stability of the financial system.

While it is encouraging that the government is continuing to be proactive and sending markets the message that it will intervene, there is still much for investors to worry about. It is important however, to remember that the markets have already priced in a TON of yet to be revealed bad news. It has been said that the markets often overshoot fundamentals both up and down; it is extremely likely that at this point we have overshot even the potential bad news to the downside. Emotions, in particular panic, have irrationally punished all market sectors. While there is nothing to say that the market cannot continue to melt lower in the short term on continued panic selling, we believe that current prices present great opportunity for long-term investors. We do remain cautious however, as irrational behavior often persists longer than expected (which is how bubbles like housing or oil form). Further, we strongly believe that when the panic sellers and de-leveraging hedge funds are all but completely washed out, this market could catapult higher at such a rate that matches or surpasses the most robust times in market history.

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Weekly Market Summary

posted 11.17.2008 at 09:34 a.m. by steve

It was another frustrating week on Wall Street, as investors watched stocks flop around amid more bad news. Among the items worrying the markets was consumer-related news coming from retailers like Circuit City (declared bankruptcy) and Best Buy which gave unsettling forecasts about the holiday shopping season; the realization that the US auto industry may see a bankruptcy before year-end; a major change in the governments $700 billion Troubled Asset Relief Program (TARP); and an uncertain lame-duck session for our lawmakers in Washington as they debate support for the auto industry. The Dow finished the week down roughly 5%, while the S&P and Nasdaq gave up just over 6% and 7.5%, respectively.

About the only positive thing that could be said about the markets in the past week is that we may have seen another successful retest of the October lows. Thursday, investors watched the Dow surge 863 points off of its intraday low to conclude up almost 7% on strong volume. Regardless, we imagine that investors are still feeling extremely troubled by the heightened volatility occurring each week, and there appears to be no good news in sight. We, too, struggle to fight our emotions at this time.

Further, it seems as though investors are increasingly anxious about evolving details of the $700 billion TARP program. Treasury Secretary Henry Paulson indicated last week that the money would now not be used to purchase bad mortgage assets from banks and instead focus on improving liquidity for consumers. The rationale appears to be that while short term lending markets have improved some (as noted by continued decline in the London Inter-Bank Offered Rate, LIBOR), banks are still not lending to each other, businesses or consumers like we need them to. Consumer spending in the US represents over two-thirds of our economy; without that component, our economy will be extremely slow to recover. Paulson believes that directing the money in other ways, can more accurately target improvement for the consumer, and thus help the economy. Still, the rules of the game probably need to stop changing before a sustainable rally can take place.

It appears that our hypothesis of a U-shaped recovery (rather than a V or a W) continues to be most probable. In fact, some guess that we will continue to just bounce around near the October lows until the lame-duck session of Government has passed when President-elect Obama takes office due to the removal of uncertainty associated with the current administration. If that is in fact the case, it will continue to be a difficult time period for investors. However, recoveries coming out of a long U-shaped bottom have historically been very powerful. Remember, while the current period is extremely difficult to maintain a long-term focus, it is more critical than ever to try and keep your emotions at bay and make rational sound decisions. Please call us if you find yourself struggling through this trying time.

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Another Bumpy Ride - Weekly Market Summary

posted 11.10.2008 at 11:27 a.m. by steve

It was another eventful week for the markets, with volatility remaining at extremes. Ahead of the presidential election on Tuesday, the markets had their biggest election day rally ever, up over 4%. That jubilation was reversed following the election when investors resumed their focus on the weak economy, despite more stimulus and policy response across the globe. Wednesday and Thursday the stock market fell about 10% in the combined trading sessions. Friday, the market bounced back, paring the two big down days, with little regard for the unemployment report showing a worse than expected 6.5% rate. The major indices concluded the week down -4.21%, -3.89% and -4.27% on the Dow, S&P 500 and Nasdaq, respectively from where they began. The gyrations of the week are a perfect illustration of what has become the norm since the beginning of September. Since September 1, the Dow has moved up or down more than 300 points 22 times; that works out to almost one of every two trading days.

While none of the above sounds very encouraging, it is important to note that the two bad days last week came with very low trading volume. Low volume suggests that there was little conviction behind the down move. It does suggest that many investors are sitting on the sidelines, which is typical in the latter innings of bear markets. Additionally, the advance Friday occured amid very bad economic news. As we sit here today, the market is again up with predominately bad news. Goldman Sachs is predicting the biggest contraction in the fourth quarter since 1982, and an unemployment rate of 8.5% by the end of next year. What all of this increasingly suggests is that the market is in the process of forming a base. Unfortunately, volatility is probably going to be around a bit longer because from our lens, it is indeed going to be a difficult holiday season and the news coming from retailers and consumer confidence figures will be very weak. Lots of negative news will cause investors to have much difficulty forecasting, and that uncertainty translates to volatility.

Comments on Presidential Election: One question that we have been asked in recent conversation is what effect will the new President elect have on the markets? While President of the United States is arguably the most powerful position on earth, we generally hold the view that the clout of any president is greatest on day one of taking office, and that power only declines through the remainder of his term. This President, more so than others in recent memory will probably soon realize that much of the promises which were made during the campaign need to be significantly delayed or scrapped altogether given the current state of our economy. It would be a mistake to raise taxes on businesses, or anyone for that matter, during this difficult time. Without much ability to increase tax revenue, programs like universal healthcare, or increases in entitlement spending which require more spending are probably inappropriate given the already ballooning deficit being created by the recent government stimuli. Instead, what the markets will likely be reacting to is whom Obama selects for key posts like Treasury Secretary, rather than speculating at length which sectors are the winners and losers under his Presidency.

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October: Trick, or a Treat?

posted 11.03.2008 at 12:08 p.m. by steve

October 2008 will go down in the history books as one of the most chaotic investment climates ever. The final week of the month was encouraging, especially after the markets threatened to undercut the October 10 lows early in the week. Many of the stock mutual funds we hold in client accounts advanced over 12% last week, coming predominately from a strong last-hour rally on Tuesday. The month had two trading days in which the US stock indexes jumped double-digits!

Despite those two, large, one-day gains, and a positive concluding week to the month, October was terrible for investors. The Dow finished the month down about 10%. News was burdening as consumer confidence hit a 41-year low, unemployment projections are expected to go to the 8% level and home prices are off nearly 17% year over year. Without a doubt, we have slipped into an economic recession. It is also clear that the credit market seizure which occurred in late-September and early-October did hurt businesses and consumers alike. What is important to note is that we are still a far cry from a depression, which would be characterized by unemployment reaching levels near 25%! The economic data paints a very pessimistic view of the current environment and can lead one to think the worst about the markets going forward.

Currently, the market has priced in a LOT of bad news. Right now, the S&P 500 price-earnings (P/E) multiple is estimated to be around 9.5x assuming Wall Street analysts base-case earnings estimates, and just 12x using worst-case earnings estimates. In more simplistic terms, even under very pessimistic corporate earnings scenarios, the market is significantly undervalued from a historical perspective where the average P/E multiple has been between 15x and 18x.

In talking with clients and friends alike, we are constantly reminded how difficult it is for people to separate bad economic news from investment market valuation. The investment markets are a leading indicator. While we are of the belief that an immediate stock market recovery is probably not in the cards, the worst may be behind us (despite an economy which probably gets a bit weaker from here). The problems plaguing the markets and investor confidence post-Lehman Bros bankruptcy have improved significantly in recent weeks. The government continues to be responsive, further cutting rates last week from 1.5% to 1.0%. The policy response is working, as evidenced by the continued decline in the London Inter-Bank Offered Rate (LIBOR) to 2.86% from over 4.42% two weeks ago; it has declined 17 straight days. Short-term lending and credit availability is improving, which should help consumers and businesses greatly with time.

In sum, hang in there. The current market environment is challenging, but it does appear that brighter days for the markets may not be too far off.

P.S. Be on the watch for our Monthly Commentary to arrive in your inbox in the next day or so!

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Weekly Market Summary

posted 10.27.2008 at 10:37 a.m. by steve

The stock market concluded the week down near the lows established on October 10. We are not necessarily surprised about the ongoing test of those lows, but do remain concerned and frustrated as it seems the markets continue to be in the grips of fear. Despite some improvement and thawing of credit, most easily noted by the decline in short term lending rates such as LIBOR (has improved from 4.42% to 3.52% in the most recent week), stocks continue to be punished on worries about the global economy. While the economy is weak (and global picture likely to get much weaker), the improvement in metrics such as LIBOR suggests that the enormous government policy response to date is starting to have positive effects.

We are in the thick of earnings season, and companies have not been reporting much good news. To us, it is not surprising that earnings are weak. What is somewhat surprising is that the markets continue to be so badly punished, at least in the US where policy response has been so huge and our government has been proactive in addressing the situation. The US has been ahead of the curve when compared to foreign central banks and governments in addressing the problems. The markets are supposed to be a forward looking discount mechanism; to the extent that the market successfully predicts earnings (the rational reason behind the stock market decline over the last 12 months), prices should already reflect bad earnings to come. If investors are expecting weak corporate earnings announcements as we are, why are the huge drops continuing? What are some possible explanations?

We suspect that complex structures such as hedge funds and other highly leveraged institutional investors are being forced to liquidate holdings to meet shareholder redemptions, margin calls and capital requirements. There have also been rumors that a major hedge fund imploded in the recent week, which would have surely put unusual pressure on markets. Additionally, as more average investors succumb to their fears, they too sell their investments such as mutual funds, which then requires the funds to liquidate more holdings and satisfy redemptions.

With that, we would like to offer some food for thought and perhaps encouragement. Despite all of the selling that has occurred since September, there is an opportunistic, bold investor on the other side of the transaction. We suspect those investors realize nearly all assets are on sale, and that even if prices move lower in the short term (weeks or months), they will be a winner when prices recover. They, like Warren Buffett, believe that upside potential at these prices probably outweighs the risk to the downside.

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First Positive Week Since Lehman Collapse - Weekly Market Summary

posted 10.20.2008 at 11:49 a.m. by steve

The Dow had its best week in more than five years, ending up 4.75% (despite closing down 1.4% on Friday). The ride was indeed a wild one, but it was much welcomed after the week ending October 10 (the worst ever for the Dow). Last Monday started with the biggest one day point gain (936 points) for the Dow, a slight loss Tuesday followed by a shocking 733 point loss on Wednesday; another encouraging gain of nearly 5% came on Thursday.

Two weeks ago, in the thick of the selloff, it was clear that panic was ruling the markets. Investors were selling everything they could as pessimism was abundant, and virtually no one was optimistic. The markets had reached a point of irrational exasperation (opposite of Alan Greenspan term irrational exuberance). While we are clearly still in a bear market, perhaps the worst for the markets is behind us. As we discussed in our Talk Strategy meeting last Tuesday evening with clients, we do not believe that the stock market recovery will look like a V (an immediate bounce type recovery). The robust rally last Monday following the terrible decline on October 10 did not hold and was all but erased by midweek, perhaps confirming that a V recovery is not in the cards. Instead, we believe that the recovery will look more like a U in which the market establishes a low (the low on Friday, October 10 perhaps) and retests that low for a period of weeks, or even months at which time it will begin to meaningfully recover. It does seem like that is the pattern beginning to take shape.

Last week, the worry appeared to shift from fear of a market crash to the economy. While the global economy has almost certainly entered a recession, investors are now seeking signs to determine how severe the slowdown will be. While an economic slowdown is not much fun, it is almost encouraging to see the focus starting to shift back to fundamentals rather than irrational emotions. With volatility at extreme highs, it is evident that emotion and fear is still a huge factor for many investors. However, it does seem that some investors are encouraged and thinking opportunistically. In an editorial letter to the NY Times last week, Warren Buffett was quoted saying, Buy stocks, cash is trash! Be fearful when others are greedy, and be greedy when others are fearful. Admittedly, Mr. Buffett has the means to be very aggressive, but his logic echoes our own. Stocks are on sale! Even much of the corporate bond market is selling at a very steep discount. The opportunity for making money in the markets has not been this attractive in many years.

Given that none of us have the assets like Warren Buffet, we remain more cautious with client money. Were not quite ready to dive headfirst into this confusing market by deploying all our excess money market assets (cash) just yet. However, we are thinking strategically about the portfolios, and will probably begin nibbling in a new fund or two. Additionally, we will probably be shifting the chairs on the deck (rebalancing and adjusting existing allocations) in anticipation of the market recovery. We do believe that the economy will be weak for some time, but the market will move well ahead of an economic recovery. Additionally, we believe that the government policy response is beginning to work (short term borrowing rates, such as LIBOR, are beginning to fall which encourages banks to lend). As banks resume lending, the market should begin to price in better times ahead.

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Talk Strategy Slides Available

posted 10.15.2008 at 3:42 p.m. by steve

Slides from out October 14th Talk Strategy (town-hall) presentation are now available for download online. The file is 7.5 MB and takes a moment to download.

CLICK HERE

Download Abstract

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Seismic Swings - Weekly Market Summary

posted 10.13.2008 at 12:29 p.m. by steve

Last week was one of seismic swings, and if you feel like you just cant bear any more pain you are not alone. While some technical analysts suggest that we still havent seen a day of capitulation (a day where a solid low is created), we would be inclined to argue that after 8 straight sessions ending convincingly in the red, that the broad market indices should be getting close to finding a bottom. At the very least, the market is extremely oversold within a downtrend. We did get some feeling of hope going into the close on Friday, as the Dow rebounded by as much as 1000 points off of the lows. Despite the strong close (indexes finishing down only a little over a percentage point), last week goes down in history as THE WORST week for the NYSE (New York Stock Exchange) in 114 years! It was the worst weekly drop for the Dow since 1914 according to Bloomberg. The Dow, Nasdaq and S&P 500 finished the week down -18.2%, -15.3% and -18.2%, respectively.

The tone among clients has certainly changed in little over a week. When we chatted with most all clients at the end of September, the general sentiment from clients was Stay the course. We have to be getting close to the bottom, right? It almost made us proud of our clients apparent focus on the long-term. At the end of last week however, the comments had shifted to a state of disbelief and alarm. The media reports and affection for misery (helps their ratings) was getting overwhelming. Common remarks were, I just cant afford to lose anymore. I mean, this thing shows no signs of slowing down or turning the other way. Everything for the economy looks so bad. Our response has been, and continues to be, that investors will NOT be able to successfully time a bottom. The market will turn when things feel absolutely horrible.

History has proven time and again that the markets will turn when things feel the worst. We must admit that the past 2 weeks have been extremely difficult for us as well. We have found ourselves thinking at times that putting clients to cash may be best option; fear has crept into our minds as well. Days have felt like weeks, and weeks like months. But, we manage our emotions, knowing the history of the markets. We also know that the most opportunistic investors are looking to buy. There is a better chance to make money in the stock market today than a year ago. We also are cognizant that fear has the effect of shortening even the longest of time horizons for a worried investor.

Today, Columbus Day, the markets have started off much higher. We are optimistic that investors are realizing there are many great companies for sale out there, at bargain basement prices. Confidence is also perhaps being inspired by the notion that the various Government policy responses are going to help solve the financial crisis. Indeed, much has been done to help our financial system continue functioning, and early indications are that the measures will be successful in accomplishing their goal: to get banks the capital and liquidity they need to resume lending to each other and businesses again. Our economy does not function very efficiently without the ability for businesses and consumers to borrow money short-term. Early indications are that the measures will accomplish the goal, but government response has historically worked with a lag.

Keep in mind that for each person selling, there is a gutsy buyer on the other side of the transaction, licking his chops at the potential for future returns. Someone is buying at GREAT prices and discounts from even a month ago, despite sentiment being at negative extremes. Please call us if you have questions.

P.S. We are hosting a town hall style meeting tomorrow night, October 14 at 7:00pm at Wedgewood Golf & CC to share our outlook. Please feel free to attend.

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Crisis of Confidence - Weekly Market Summary

posted 10.06.2008 at 11:26 a.m. by steve

The rate of news coming from the markets has sped to the point of making the newspapers almost entirely irrelevant. News is changing faster than it can be printed. It has become clear that panic is currently governing the markets.

Last week we attempted to contact all clients by phone to see how they are holding up amid this market turmoil. Monday marked the largest single day percentage decline weve seen in years, and the largest absolute point drop for the Dow ever. The decline came as Congress failed to pass the $700 billion recovery plan (media has termed it the bailout plan, which it is not). Tuesday roared back with a strong advance, but the remainder of the week could not continue the positive trek. Friday, Congress managed to pass the recovery plan, but markets declined anyway. It seems as though the crisis is spreading overseas and that coordinated foreign government action will be necessary to make positive progress on this situation.

With the third quarter, and the horrid month of September now behind us, the remainder of the year appears highly uncertain. For the year through Friday, the S&P 500 is off just over 25%. On one hand, we have seen good and bad companies punished similarly throughout this crisis. That leads us to believe that there are some tremendous values out there which create much opportunity for the future. There are still quality companies out there. On the other hand, this financial crisis does appear to be different than those in recent past. The problems which created this mess are much more complex, and core to our economy. Housing has turned out to be a much more integral part of our country and the economy than even the most suspicious investors originally thought. In turn, it has caused banks to not only be cautious in their lending to potential homeowners, but suspicious of businesses and counterparties as well.

Given the above, it is clear that we are currently dealing with a crisis of confidence. We will admit that it is difficult to be confident about much of anything in this challenging environment. We understand where you are at: we have our personal savings invested in exactly the same funds and strategies as our clients and are feeling the pain of the past year with them. The only thing we can say with confidence right now is that time will heal this damage, and we remain focused on the long term.

If you find yourself with questions and worry, or know of others who feel alone during this time, please do not hesitate to reach out to us.

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Congress Must Act - Weekly Market Summary

posted 09.29.2008 at 11:15 a.m. by steve

Last week was a lousy one for the equity markets. When speaking of the bailout plan being debated in Congress, it seems as though we have a ticking time bomb with which each passing moment the equity markets are discounting a higher probability that a plan (first announced a week ago) will not be passed. Instead, what is occurring is more jockeying in Congress as we draw nearer to the election - no member of Congress wants to be held responsible for voting in favor of a plan that is not viewed favorably by his/her constituents. Everyone wants to get re-elected, making this a difficult and divisive issue in which to reach consensus. In the end, it is clear that this will have to be a bipartisan agreement as it is too big for one party to take most of the responsibility. It is our belief that some sort of bailout/buyout package will be agreed upon and look similar to what was first announced. Apparently, others agree. Last week, Warren Buffett agreed to make a $5 billion investment in Goldman Sachs. Heretofore, Buffett has avoided the financial sector, but in his statement this week regarding the decision, he indicated that the cash infusion was a vote of confidence in Goldman and a vote of confidence in Congress. The Buffett investment may signal a turning point.

One thing that investors agree upon, is that a bailout deal needs to be made fast to avoid significant damage to our economy. As we sit today, the credit markets are essentially frozen due to mounting uncertainty. The credit markets are essential for businesses who must fund daily operations with short-term borrowing. With the spigot of capital turned all but off, some businesses are idle in need of funding.

Today, the markets are again punishing equities on news that a bill has still not been signed. Early reports today suggest that the details of a plan are mostly agreed upon, and that the bill stands to make it to a vote early in the week. In our minds, the markets want something passed yesterday, but we are certainly on board with wanting Congress to get this thing right. As indicated in our market alert distributed on Friday, we do not view the proposed $700 billion plan to purchase illiquid assets from banks as being a bailout. Instead, we believe it could be very profitable to the Treasury and ultimately a zero-cost to taxpayers down the road. Care must also be taken so as not to reward executives of banking and financial firms who did not manage risk there should be no golden parachutes. Regardless, the plan feels more like a buyout, or asset purchase than a bailout. When a plan is agreed upon and the details are disclosed, the overall market should experience a rebound. However, it is likely that the initial rebound will fade as the economy has clearly weakened since we started the year and it will take some time to recover.

Tomorrow ends the third quarter, and we will begin our work to generate quarterly reports. The third quarter has not been an encouraging one to investors. Despite a slightly positive month in August on falling oil prices, the financial crisis seemingly came to a climax in September and sent markets into a state of panic. While headlines of bank failures may not be done, we are hopeful that with a government plan finalized, that the worst will be behind us for the banks and this crisis. We are additionally encouraged by the notion that the most recent government intervention appears to be more directly aimed at solving the problem: getting bad loans off the books of the banks.

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Hurricane Ike, A Blessing in Disguise - Weekly Market Summary

posted 09.22.2008 at 09:37 a.m. by steve

If you were without power, cable, phone and all forms of communication, or your attention was simply diverted to cleaning up last week following the wind storm from Hurricane Ike, you might think it that it was an uneventful week on Wall Street. The S&P 500, Nasdaq and Dow closed about the same as they started at +0.27%, +0.56% and -0.29%, respectively.

No communication would have been a blessing in disguise, allowing you to avoid worry over the financial markets. However, a quick look at the week will not do the journey justice - it was a roller coaster ride like we have not seen years. The markets dropped almost 5% on Monday, gained shy of 2% on Tuesday, fell another 4.5% on Wednesday, gained 4% on Thursday and soared nearly 4% again on Friday. To further illustrate the gyrations, at mid-day Thursday, the Dow was down 900 points from where it started the week, or 8%, before staging a massive upswing to conclude at almost break-even. Following the severe drop on Wednesday, a feeling of panic was ingrained in investors. Talk of money market funds breaking the buck (when the net asset value of $1 per share is violated) was common place, creating the threat of a run on money funds - a situation like the one which ultimately caused the Great Depression in 1929. Sellers ruled the day, driving prices of the financial sector (banking stocks) lower by double digits. During that time, we received many questions from clients about the financial health of Schwab, and their account security. This was a pretty easy question to answer; we had already talked with Schwab regarding their stability earlier in the week. Our conversations confirmed what we have known for years - that Schwab is different from the firms like Merrill Lynch, Morgan Stanley and Lehman Brothers. Schwab is conservative and has not been (and will not be) part of the financial wizardry (our term to describe the financial engineers of other firms who created new exotic securities and write derivatives in an attempt to repackage risk). Schwab is one of the few firms in the banking sector that has improved earnings over the last year amid the problems, and has been virtually unscathed by mortgage-related write-downs. Schwab money market funds are stable - your money is secure.

Indeed, it was a yo-yo week, where chatter about bank failures, a collapse of the US financial system and utter chaos ran rampant. It was capped off on feelings of hope, stoked by massive intervention from the government which included the guarantee and insurance of money market funds; a ban of naked short selling for some 799 financial companies; and a promise for creation of an entity like the Resolution Trust Company that will absorb toxic assets from banks books (such an entity would allow the write downs to cease and plug the ever growing black hole on bank balance sheets) and provide the banks with capital in exchange. The details of the government package have yet to be fully revealed, but it is stated by Treasury secretary Henry Paulson to be a bold intervention. The intervention will not come without a cost, currently estimated to be near $1 trillion! One thing that is certain - the rules and regulations for the American financial system will be rewritten. A host of new regulations will be devised and implemented with the intent of better managing risk and eliminating the type of risky loan and securities creation that defined the earlier part of this decade.

We hope that last week was one where you were able to keep a distance from the markets; it would have saved you much worry. We are certain that the bad news is not yet over (hopefully the worst news is now behind us). Last week certainly felt climactic, and it appears that good news might be around the corner. We understand that even the most recent bailout does not eliminate the possibility of a bank failure (like Lehman or Indi Mac). It should alleviate the problems that could have led to a systematic crash of the financial system. If you find yourself worried or exasperated, please give us a call. Nearly all experts agree that this is a financial crisis unlike any we have seen in decades; it is difficult navigating the waters. We would love to hear from you, and provide you with as much information as possible, and hopefully deliver peace of mind.

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Finally, All She Wrote!!!

posted 09.16.2008 at 11:49 a.m. by steve

The US Treasury is saying it has had enough of risk taking brokerage firms who didnt care, except for their own wallets. And, they are not going to bail out these Wall Street cats; they can figure out how to get out of their problems without tax-payer assistance. It does appear the financial crisis, which has been in slow motion, may now have seen hurricane Ike.

This is not to say the Treasury or Fed wants the financial system to fail, or that they want housing woes to wipe out hard-working, taxpaying citizens. But talks with Lehman Brothers over the weekend provided no assistance, and the end result was Lehman filing for Chapter 11 bankruptcy protection. And, Merrill Lynch will now be part of Bank of America. All of this comes one week after the Treasury placed Freddie Mac and Fannie Mae into conservatorship. Thus, not all financial institutions are too big to fail.

This will have meaningful consequences and implications for the future of the financial services marketplace. Of key importance to clients is that Schwab has never been like the Merrill Lynchs, Goldman Sachs, Lehman Brothers or others that developed securities and created all types of securities transactions to fill the appetite of investors of all sorts. Schwab does not have financial ties to Legman like some others; it is independent. Watching Schwab stock should provide witness to the fact that the markets do not see worrisome connections. You should not be wary of your accounts’ safety at Schwab.

Next, it is most difficult for us to make predictions about what the markets will be like tomorrow, the next few days or weeks. We should expect further turmoil in the financial markets and emotional selling can take prices of some securities to obscene levels. When the markets stabilize, which they will, and cooler heads prevail, investors (not speculators) will advance stock prices. The financial dominoes are bigger and closer together now. In the short term, confidence is lacking (by investors and between financial institutions as they avoid making loans of all kinds), but confidence will return.

We are holding cash, since late last year (and wish percentages were even greater); in addition most client portfolios also own bonds. Thus, stock market exposure is lighter than when we are fully invested. We expect to stay conservative for a while longer. We dont like to time the markets, rather we like to be long-term investors. But like you, we have not witnessed this type of financial institution turmoil before. We need to keep in mind the Fed, Treasury and government has instituted enormous policy response. Policy response works with a lag. And we expect more policy responses are likely.

If you harbor undue worries, please let us hear from you via phone call or email. We want to know how you are doing.

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Financial Crisis in Slow Motion Continues - Weekly Market Summary

posted 09.15.2008 at 8:52 p.m. by steve

The markets finished last week in slightly positive territory somewhat encouraging after the start of the week when it was announced that Fannie Mae and Freddie Mac (the two government sponsored entities backing over half of all US mortgages) were placed into a conservatorship (both now being run by the government). Several days last week, the market opened in one direction (up or down), only to reverse course and end the day in the opposite direction.

Several times this year we have entered the start of a new workweek with very bad financial news (lots of bad things happening on weekends). In March it was the collapse of Bear Stearns; then we had Fannie and Freddie; and now today we come to work learning that the face of Wall Streets investment banking landscape is changing quickly before our eyes. Today we learned that Lehman Bros. declared bankruptcy, Merrill Lynch has been purchased by Bank of America, and AIG is precariously teetering on the brink of failure amid mounting losses.

Throughout history we have seen various financial crisis serve as a springboard for the market. Time after time, a major bank failure, or financial crisis has preceded a positive turn in the market. The question remains, what financial crisis event will be that positive catalyst? What financial event will be the big one that ushers in brighter days, or indicates that the worst is now behind us. What event will signal to investors that the worst is now behind us? One thing is certain: the market will move higher well before news has turned good. With each new financial development, we are reminded that this financial crisis does in fact seem different. The difference is that this is a financial crisis in slow motion; it is really all the individual events, happening over a spread-out time line, that sum up the larger problem.

While today was a miserable day for the markets, it will be interesting to see if a policy response is on the way. While the Feds minutes most recently indicated that a Fed Funds rate hike was the next move, we are likely moving closer to another cut. The market has gone from expecting a hike, to now thinking a cut is the more probable next card. Perhaps this next move will be a dramatic one (perhaps another 0.50% cut). It is becoming more and more clear that the Fed needs to get banks lending again. Lending is how banks make money (banks borrow short term, and lend long-term). Until the yield curve becomes steeper (short rates are relatively low, while long rates are relatively higher), it is not profitable for banks to lend; a cut to the fed funds rate should help improve the slope of the yield curve and encourage banks to lend.

Until recently, the Fed has been reluctant to cut rates further due to inflation. The good news is that commodity prices, such as oil, have dropped substantially in the past 8 weeks. That should remove some of the inflation pressures, and assist the Fed in their decision. We continue to watch the markets closely, bearing all of the above in mind. If you find yourself worried, we need to hear from you. Hang in there (to steal a line from the new Batman movie, but which is definitely applicable here) the night is always darkest before the dawn.

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Alternative Investments

posted 09.12.2008 at 10:00 a.m. by steve

From time to time, we are asked about owning, or our thoughts about using investment alternatives in portfolios. We offer a few thoughts on that subject. Some of these thoughts were gathered from research we receive from Advisor Intelligence, who permits publishing their thoughts (in whole or part), but align with our own. Link: Alternative Investments

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GSE Bailout - Weekly Market Summary

posted 09.08.2008 at 11:21 a.m. by steve

The holiday-shortened week was a miserable one for stocks as traders returned from vacation and increased daily volume. It would seem as though the markets modest improvement in the final week of August was a false signal. During the first week of September, the S&P, Nasdaq and Dow slide -3.16%, -4.72% and -2.79%, respectively. The sharp movement lower appears to have been led by worries that the economy is weaker than recently believed. Those worries came to a head when the payroll and unemployment reports were released late in the week, and were worse than expected. A sharp selloff on Thursday led many to talk, including world-famous PIMCO bond manager Bill Gross indicating that his investment company no longer sees compelling value in the bond issues of Fannie and Freddie, and further commenting that it would be up to the treasury to become the lender of last resort for the government sponsored mortgage giants.

Apparently someone was listening, because yesterday the Federal Housing Finance Agency took over operation of the two GSEs (Government Sponsored Entities, Fannie Mae and Freddie Mac). The implications of this action are huge and will likely be looked at favorably by the stock market. Indeed, as we sit this morning, the market has surged over 1% on the news. Along with the encouragement, that the Government will not let the housing giants fail, it may also have other positive ramifications. The move should help to effectively lower mortgage rates. Additionally, government backing should improve banks willingness to lend to homebuyers. If banks become more willing to lend, we may very well see the housing market begin to stabilize, which has been and remains the focal point of this financial crisis.

In sum, we have seen the price of oil drop precipitously in the recent 6 weeks, from levels around $150 down to almost $100. Consumer confidence has shown signs of improving on lower fuel prices. Additionally, inflation, which has been higher than what the Fed deems comfortable, may subside if oil remains at lower levels. Now, we have seen a very important development in rectifying the financial sector with the bailout of the mortgage giants Fannie Mae and Freddie Mac. Should the development prove to be what the doctor ordered, brighter days for the market are not far off. Hang in there; do not hesitate to give us a call with questions!

Please take a moment to read our monthly commentary, Playing Hurt, added to the site today.

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Nvest News

posted 09.02.2008 at 12:50 p.m. by steve

Nvest Wealth Strategies is happy to announce two exciting developments in recent weeks.

Bill was selected to be a member of the Investment Advisory Committee for the Dave Thomas Foundation for Adoption. Created by Wendy’s founder, Dave Thomas, who was adopted as a child, the foundation seeks to increase the adoptions of children in North America’s foster care system.

Meanwhile, I (Steve) received notification of successfully passing the third and final level of the Chartered Financial Analyst (CFA) designation. The CFA Institute and charter program seeks to lead the investment profession globally by setting the highest standards of ethics, education, and professional excellence.

Both developments are consistent with our ongoing pursuit to provide value and serve others, as well as enhance our investment experience and background. Please let us know if you would like more information on either of these items. Thank you for your continued support!

Dave Thomas Foundation for Adoption

CFA Institute

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Weekly Market Summary

posted 09.02.2008 at 12:32 p.m. by steve

Despite last week being a slightly negative performance experience for the stock market (S&P 500 down 0.73%), the markets closed the month of August higher than they started. The month was characterized by lower oil prices, renewed fears of financial institution instability (note Fannie Mae and Freddie Mac), and a deteriorating global economic outlook. Real GDP was revised upward for the second quarter to +3.3% year over year, bolstered by increased export activity. However, toward the end of the month, it seemed as though all news was negative.

While the markets did hold up, trading volume was extremely light (typical around the Labor Day holiday as many traders take vacation), giving investors little ability to discern whether or not the markets advance is meaningful. Whether it can it be sustained as we enter a new month in which trading volume picks up after the slower days of summer, or if traders take this as an opportunity to sell out of the market at prices generally better than a month ago, remains to be seen?

As we enter the final month of the third quarter, we are hopeful that oil prices will revisit levels not seen since the beginning of 2008 ($100 or less per barrel). Additionally, we would like to see progress in the financial sectors task of rebuilding balance sheets and resume lending activity. What should also be interesting in the months ahead is the election. While generally an uncertain time in terms of who will be our next president, both candidates are making a lot of promises to voters that build optimism, and could provide a stock market boost.

In the coming week, be on the lookout for our monthly commentary to arrive in your email. While sounding like a broken record at times, there is much evidence that a disciplined, long-term strategy to investing is rewarded with the passage of time. Give us a call if you would like to schedule a time to review your accounts!

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Economic Data Weakens - Weekly Market Summary

posted 08.25.2008 at 10:09 a.m. by steve

Markets moved generally lower last week amid an abundance of negative headlines relating to the US and global economy (S&P 500 -0.5%; Dow -0.3%; Nasdaq -1.5%). Judging from an increasing number of stories, it is becoming more clear that the global economy, not just the US, is slowing significantly. In fact, the global economy appears to be slowing more than ours in the US. Among the items making the news were the Producer Price Index rising 9.8% and 3.5% year over year for headline and core inflation, respectively; those kind of numbers, especially headline inflation, are well outside the Feds comfort range of around 2.5% - 3% annually. While the inflation data is likely old news and a hangover from oil prices that were reaching as high as $147 in July before dropping as much as $35 per barrel in August, oils move slightly higher last week was not friendly for the markets.

On top of the general economic news, there is the rising notion that Fannie Mae and Freddie Mac are going to need additional government assistance, which would come at the expense of those respective equity stockholders. As a result, the stock of Fannie and Freddie were again slammed last week, while the broader financial sector was more stable. The two Government Sponsored Entities (GSEs) are involved in over two thirds of the entire mortgage market and they are too big to let fail, but it is becoming clearer that any bailout of the firms using taxpayer money will NOT benefit shareholders. Politicians want to help homeowners and stabilize the housing market without getting a black eye for bailing out risky Wall Street investors.

All told, the economy is very weak and oil still needs to fall further. The financial sector still must do more to repair their bleeding balance sheets by raising capital (in the process diluting existing shareholder equity); that notion is leading some to believe that while beaten up badly over the past year, the stocks of banks are probably still overvalued. Housing must begin to stabilize in order to help the banks. It is an interesting environment right now for the markets, and one which is leading us to do much thinking about client portfolio strategy. The US economy, while at the center of the housing bubble bust, is believed to likely hold up better than foreign economies, both developed and developing. Additionally, a case can be made for a stronger dollar presuming that Europes economy continues its slide and inflation cools. If those conditions continue, the European Central Bank is much more likely to lower interest rates, which is supportive of the US dollar. All items have investment implications which we are considering.

Remember, while current environment feels uncomfortable, we have now been dealing with a messy stock market for almost an entire year. Generally, bear markets generally last about a year. While history is no guarantee of the future, it can be a useful guide and suggests that it is not the time to be thinking short term. Stocks are becoming great values for when the economy does look to improve. Hang in there, and be reminded that with a long-term, disciplined investment approach, you will come out ahead. Call us if you would like to meet or discuss your portfolios.

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Weekly Market Summary

posted 08.18.2008 at 11:12 a.m. by steve

The markets finished mixed last week as oil prices continued to stay low. This came as headline inflation numbers soared higher than expected. On the news of higher inflation, the markets sold off but then recovered on the likely realization that the inflation numbers are old news. While the numbers were disturbing, oil prices have dropped significantly in recent weeks, which is likely to ease inflation pressures in the coming months assuming they remain around the same lower levels.

Meanwhile, the dollar has continued to strengthen in recent weeks amid heightened news that many foreign economies are slowing more than the US. Related headlines seemed to be the dominating theme last week. While consumption within the US has declined, the weakened dollar has led to a significant pickup in US exports, helping our economy be more resilient. It seems as though the US economy continues to be the engine that drives the world economy. Many economists believe that if the US does enter a recession (officially marked by two consecutive quarters of negative GDP growth), it will be less severe than those faced by Europe, China and others.

While the markets advance over the past several weeks has been nice, we are reminded daily during our review of fund performance and index component analysis that this is probably not the start of a new bull market. For one, daily trading volume has been light as many people in the US are away on vacation (new bull markets generally exhibit a surge in volume) making it harder to interpret daily price changes. Secondly, while the market is moving higher, it seems like it is just a few stocks that are doing all the work (while others remain stable or continue falling). A new bull market would generally lift the prices of a majority of stocks and sectors, and in a swift fashion. More than likely, the price rise may be attributable to hedge funds and speculators have been bitten by increasing regulatory oversight in the most recent month; an unwinding of speculative activity. We have seen stocks of the banking sector stabilize as the SEC imposed more strict limitations on short-selling to curb negative speculation. We read headlines of commodities like cotton - which had surged significantly - collapse last week on speculative activity, leading the CFTC (Commodities Futures Trading Commission) to indicate that speculation in commodities markets (including oil) is a bigger problem than they originally believed.

Aside from the non-normal speculative activity, we are busy reviewing our mutual fund managers. Given our continual following of the investment markets, there are several key themes that we are looking for recently to determine if any changes are warranted. First, we believe that quality has become more important. Managers who seek quality companies, those with strong balance sheets, growing business lines, and light leverage will outperform companies who have higher debt loads regardless of market capitalization. Secondly, we believe that growth funds should outperform during an economic slowdown as investors are willing to pay a premium for companies growing faster than the broader economy. Third, we are evaluating what a global economic slowdown means for international investing and investing in domestic companies with significant foreign revenue.

The market landscape is currently a challenging place and confusing place. While much of the economic news has not been much fun, we have seen some encouraging news in recent weeks with the onset of falling oil prices and other commodities. Additionally, we have seen motions being enacted to reduce speculative activity, which should help the markets function more efficiently. Those few things alone are encouraging to us. In the meantime, if you have questions, please do not hesitate to give us a call.

PS We hope that you have been enjoying the wonderful weather and the action of the Beijing summer Olympics!

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Weekly Update

posted 08.13.2008 at 11:28 a.m. by steve

We hope that the first two weeks of August are going well. So far, oil prices have continued to fall (is the oil price bubble finally popping?) and the markets have moved higher in response. This week, we have seen the stock market become worried again by the financial sector, which as we have said many times, is going to take a while to repair itself.

We hope that you havent missed the updates too much during my honeymoon absence following the August 2, wedding. For those who have been asking, please feel free to click the link for a few pictures from the big day. Suzanne and I had a great time sharing the special day with close friends and family. Thank you to all for the kind wishes!

The weekly market summary will be back next Monday!

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Weekly Market Summary

posted 07.28.2008 at 3:21 p.m. by steve

Last week was an interesting one for the markets. Tuesday index prices shot higher with financials leading the way, only to be battered back down on Thursday. Consumers were greeted with some relief at the pump, finding that the national average price for gasoline has fallen below $4. Oil has now been at levels below $130 for the better part of a week. While oil has dropped nicely in recent weeks, the drop in natural gas has been even more pronounced a welcome move as we draw nearer to the winter heating season. So what spurred the reversal of trend?

For one, the SEC has initiated a ban on naked short selling for 30 days on financial sector securities. That move led many speculative short sellers to cover their positions (buy the stocks they had shorted), which created price support for the stocks of financial institutions. Secondly, many banking firms have been reporting second quarter earnings. While still turning in HUGE losses, many of those are coming in better than expected. It has been a perfect instance of the market rallying on seemingly bad news, and is our case in point for saying that it will not take all good news for this market to move higher. Lately, news has been undeniably bad. Over the weekend two more banks in Arizona were shut down, and are the latest in what some experts say will be more to come. As has been the case for over 10 months (since the bull market died last October), the economy is in the process of deleveraging its balance sheet. Throughout this process, quality companies will prevail, and lead the market higher. Companies with excessive debt and leverage may find themselves facing very difficult times.

Meanwhile, the demand for energy should be easing as the worldwide economy slows; statistical data being released recently has shown that to be occurring. As is increasingly being said of this market, it is the tale of two: oil, and everything else. While oils recent decent, and the banking sectors recovery may only be temporary, much is being done to repair the balance sheets of companies and the consumer.

For example; while Japanese stocks were battered in the 80s on banking problems and bad loans (resulting in a miserable experience for Japanese stocks for 10+ years), the US financial system is purging the toxic loans by writing their values down and taking losses NOW. While painful for corporate earnings, it is better to recognize the problem loans, and rebuild capital rather than postpone or ignore the issues. On the consumer side of things, the US senate and congress passed through a housing relief bill over the weekend. The bill is probably a step in the right direction to encourage home-ownership and first-time homebuyers. This should help improve the housing market, perhaps giving it some footing upon which to recover.

All told, much continues to be done by our government and those around the world to improve the global economic situation. In recent meetings, Bill has been using the word-picture that the economy is like a battleship it will not just turn on a dime, but it will turn. In the meantime, we continue to look for the pieces of the puzzle that suggest the ship is almost righted.

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Banks Rally; Oil Falls - Weekly Market Summary

posted 07.21.2008 at 10:17 a.m. by steve

What started off as another dreadful week for the stock market quickly turned overwhelmingly positive mid-way through on Wednesday. The S&P, Nasdaq and Dow all rose higher by 1.71%, 1.95%, and 3.57%, respectively. Those figures are fresh off of the failure of IndyMac bank in California. Fear climbed of other regional bank failure, but relief came when Wells Fargo announced it was increasing its dividend. The move was a surprise to the markets because companies usually dont increase dividends when times are tough and it was interpreted as a sign of strength; financial sector stocks rallied. Of additional support for the banking sector was news that the SEC is going to place restrictions on short selling for 30 days in an attempt to curb the speculation and harmful effects of too much short interest in some 18 stocks. This probably led to short-covering (the process of buying the stock which was sold short to close out the position). All told, the financial sector, as measured by the S&P financials index, finished the week up 31% from last Tuesdays close.

Of additional encouragement was the selloff in oil and other key commodities. Oil finished the week below $130, or $17 per barrel below its price a week earlier. It would be nice to say that the bubble in oil prices has popped, but it is probably too early to begin making claims like that. In fact, what has been a welcomed decline over the past week is likely to reverse somewhat higher this week as we hear fresh news of a tropical storm developing off the gulf coast. It is likely that the fear-based model of supply strains will take hold on any news remotely suggesting supply disruptions are possible.

In sum, the steps taken to discourage aggressive short selling, better-than-expected earnings from the banking sector and falling oil prices led to a nice bump for the markets. We hope that encouraging news can continue; however, we remain grounded in thinking that there are still many troubles out there, especially for the banking sector. The sector has a long process ahead to repair their balance sheets. In the meantime, be reminded that the market can march higher at any point, despite prevailing bad sentiment. As we mention in our second quarter newsletter, good news doesnt start new bull markets, it only ends them in other words, dont wait for all good news before entering the market as youll surely have already missed the bounce.

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Financial Crisis Continues - Weekly Market Summary

posted 07.14.2008 at 2:18 p.m. by steve

This past weeks downward market action is best attributed to the insolvency fears of Fannie Mae and Freddie Mac. With the latest news of financial crisis spreading to the government sponsored entities (GSEs), it is clear that the mortgage and credit crisis is anything but over. At one point Friday, Fannie and Freddie were down 64% and 73%, respectively week over week.

Further complicating the landscape was oils record-high breaking rise above $147 per barrel; this came immediately after a drop in oils price below $135 just two days earlier, but may be attributed to increasing tension in Iran. The oil market is increasingly volatile, lending more credence to the notion that prices are not following economic fundamentals.

Given the latest happenings, and the belief that higher prices will stall consumer and business spending have led analysts to notably reduce their earnings expectations for the second quarter. Particularly affected are industries such as aerospace, airline, automotive, retail, shipping and travel industries. Despite news today that the Fed will allow the GSEs to borrow from the discount window, financial stocks are again being pummeled this morning (Monday). It comes something as a surprise given that it is becoming clearer that the Federal Government will not allow our countrys financial system to fail.

Perhaps whats most frustrating to investors is that it seems all stocks are being punished. Excluding the earnings of financial firms (which are still announcing mortgage related write-downs) and the en vogue energy sector, S&P 500 earnings are expected to rise 3.2%. One piece of good news in all the KAOS is that Price/Earnings multiples are at 18 year lows. This means that we havent seen values this good on stocks in nearly two decades!

During times like these, it is important to maintain your long-term focus. Hang in there and call us if youre feeling blue.

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Weekly Market Summary

posted 07.08.2008 at 09:21 a.m. by steve

June concluded as one of the worst months in recent memory, noted by the erasure of all gains (by stock market indexes) that had been made during the March 17 to May 30 rally. When looking at the technical aspects of the decline, there are a number of extremes that have developed. For one, investor sentiment is very low and stocks making new lows outpaced new highs by 10 to 1 on the NYSE (20 to 1 among Nasdaq stocks last week), suggesting that the market has become oversold. Without a doubt, there are some big problems out there right now: namely the financial sector and stubborn oil prices that seem to advance substantially higher on unfavorable news, but never seem to retract when the news is good. After all, miles driven data continues, month after month to be on the decline in North America. Abroad, emerging economies and Europe are also feeling notably higher oil prices: higher prices will reduce demand with time.

Whats also interesting to note is that the European Central Bank took a big step last week in fighting inflation: it raised its key interest rate, despite its struggling economies. Perhaps whats more significant is that the US dollar actually strengthened a bit on the ECBs tightening (typically currencies depreciate against those that have rising interest rates). The point here is that inflation has become a global problem, not just a US problem. In most developing countries, inflation is running at double digits, substantially higher than that we are facing, even after considering energy.

In the current environment, it seems there are two stories: oil, and everything else. In the upcoming Nvest Nsights newsletter (due to show up in your email inboxes with your quarterly reports in the next several days) Bill reminds us that in a bear market (we have officially entered bear market territory), there are no asset classes or areas of the market that go unscathed. So far we have seen stocks, bonds, financial sector stocks, emerging markets like China, and many commodities get punished, but there is still one area of the market that ignores the others: oil. It too will correct; and when it does a new bull market may be upon us.

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Weekly Market Summary

posted 07.01.2008 at 10:44 a.m. by steve

Last week is most easily remembered for the dramatic drop that occurred on Thursday when the Dow fell to levels not seen since September 2006. Despite the Fed taking a more hawkish stance on inflation following its meeting a day before (in which the market advanced moderately and oil declined), oil climbed to another new record and closed the week above $140 per barrel. Several times throughout the week we found ourselves frustrated with quotes taken from prominent persons who cant seem to keep their mouths shut when it comes to issues such as oil and the market. It seemed as though the perfect of poison was created on Thursday causing each of the major indices to post declines of about -3% for the day as financial stocks were again hammered and General Motors was pushed further down to prices not seen since 1955!

As a result, June was a very unpleasant month. Its tough to find good things to say when the past several weeks have been anything but good overall for the markets. However, we still are optimistic that progress is being made. For one, such a quick decline as was experienced throughout the month may be indicative that we are near a capitulation point. Second, there is actually much discussion occurring in Washington about the role of speculation in the commodity markets and how to reduce or eliminate it all together. Several headlines this week suggest that if speculators can be removed from the commodity futures markets, oils price may abruptly recede down to levels below $100 per barrel. Such a correction would bet a HUGE positive for non-energy sector equities.

While economic data suggests that we have not seen a recession yet this year (defined as two consecutive quarters of negative GDP growth), forecasts and surveys are indicating that if oil continues to stay stubbornly high for another month or two, that a recession highly probable. With the financial crisis continuing to remain problematic, we believe that pressure in Washington will be high to do something to make perceived progress in the fight against energy prices and inflation. Whats important to also realize however, is that inflation is not a U.S.- and Europe-only problem. Inflation in some emerging economies (China, Japan, India, etc) is well above double-digits. As a result, emerging economies are creating much of the instability. As Fed Vice-Chairman Donald Kohn suggested last week, it is the central banks in developing economies that must begin to more aggressively tighten their fiscal policies and slow their economies. We continue to hope that all the action being taken, both here and abroad, will begin to break the back of oil, and set up a strong stock market recovery.

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Financials Pummeled - Weekly Market Summary

posted 06.23.2008 at 3:12 p.m. by steve

Stocks struggled again last week (click here for details), making the month of June a frustrating experience following the 2 month rally that began with the collapse of Bear Stearns on March 17. The week’s downward price action was most noted in the financial stocks, as banks of all sizes saw their stock prices slashed amid more mortgage-related write-downs and analyst revisions. As we have been saying for many months now, the banks have a large task ahead of them to improve their balance sheets. Further exacerbating the market’s woes was the downgrade suffered by bond insurers MBIA and Ambac from AAA to AA.

Meanwhile, oil continues to waver back and forth at elevated levels. Extreme single-day price swings in the commodity are further building a case that speculation is a serious problem. Further, inflation is showing up in more and more places. One bit of good news is that company surveys are showing salary and wage increases, the biggest component of inflation (wages and labor cost), are not expected to meaningfully accelerate in response to higher prices. While marginal wage increases will pinch the consumer, this should help contain inflation pressures.

As we look ahead to the upcoming Fed statement this week, we are likely to see the FOMC hold the Fed Funds rate constant and suggest in its statement that the primary risk concerns are now more balanced between promoting economic growth and inflation. Such comments would suggest that the Fed has entered more hawkish stance, and is shifting its focus to fighting inflation. Inflation is, in our view, the largest barrier to a sustainable stock market advance, and economic recovery.

With the second quarter quickly approaching an end, we are hopeful that the Fed can successfully communicate to investors and markets worldwide that it knows what it is doing and that it will fight inflation. That would likely assist in strengthening the dollar and weakening oil’s advance. If those things can happen, the market may preserve some of the recovery that has occurred since mid-March.

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Global Inflation - Weekly Market Summary

posted 06.16.2008 at 3:17 p.m. by steve

Despite economic data that looked marginally improving, the markets depreciated on continued inflation concerns. Retail sales in May came in stronger than expected including revisions, rising 0.8% month/month (ex-gasoline), and 2Q GDP is currently trekking in positive territory. Inflation is increasingly appearing to be a worldwide problem, not one for the U.S. alone as the dollar appreciated 2.4% on the week against other major currencies; it is leading many to believe that we are in a stagflation environment with slow economic growth. With inflation popping up in more places, it is clear that central banks are becoming more focused on containing it. We have now heard comments from the ECB, Canada and even our own Fed chairman Bernanke indicate they will be more aggressive at fighting inflation. This probably means that interest rates, which have been cut aggressively to promote growth, are not likely to stay low for very long. With the key players making these comments, it is almost certain that a global slowdown is still in the process of unfolding, and the equity markets continue to discount this data (click here for last week’s market details).

All of the above suggests that our estimate of a muddling along experience for the equity markets is most likely correct. If the government begins raising rates, housing prices are likely to continue their decline because the cost of borrowing will be on the rise. That probably translates to a prolonged lack of consumer confidence and no quick recovery for the economy. However, the one thing that could fix most of these problems by our count, is a drop in energy prices. That item alone could alleviate much of the inflation that is being observed in food and other products.

While oil looks more bubbly all the time, asset bubbles have a way of going on longer than one would expect. The Fed is undeniably between a rock and a hard place. They can raise rates in hopes of strengthening the dollar and containing inflation at the expense of economic growth; or rates can go unchanged and risk ongoing inflation to preserve the feeble growth still going. It will certainly be interesting to read the statement following the Fed’s next meeting!

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Bad Start to the Weekend - Weekly Market Summary

posted 06.09.2008 at 3:20 p.m. by steve

The market was setting itself up to end almost flat for the week - and then came Friday (click here for a summary of last week). Oil, which had been moving down for most of the week advanced sharply on Friday, up almost $11 per barrel on talk from the European Central Bank that it may raise rates, prompting the dollar to decline in value against the Euro. Further exacerbating the sharp run-up was the threat from a Deputy Prime Minister, Shaul Mofaz that he may be forced to attack Iran. Its almost a shame that we sent out our newsletter to clients so early in the day Friday, as it almost sounded funny if you didnt have a chance to read it until the weekend.

In this market, it seems as though the primary driver of valuation is going to continue being indications of inflation. There is probably no commodity more closely tied to unexpected inflation than energy, and when energy goes up, it will push the stock market down. While we are admittedly not oil experts, it doesnt take a genius to conclude that speculation in the commodities futures markets such as NYMEX Crude is an issue. One day prices moves like what was experienced Friday are not typical of supply and demand fundamentals those didnt really change as a result of anything that came out Friday. This oil market has all the telltale traits of a bubble, including the pundits that suggest its different this time. In every bubble environment, there are always those vocal people suggesting that the rules of economics dont apply. It happened with tech in the late 90s, as everyone was saying that the growth of the internet was unstoppable, and that people would no longer shop in stores. Reality check: the rules did apply to internet companies, and the correction was severe. For the sake of the consumer, we hope that the reality check comes very soon!

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Weekly Market Summary

posted 06.02.2008 at 10:40 a.m. by steve

The holiday shortened work week was a positive one for the stock market, closing marginally up each day of trading. The S&P 500 gained +1.8% for the four days ending the month of May. While encouraging, the week was not without its troubling headlines. It seems that while housing prices continue to fall, inflation is still a major concern. For instance, Dow Chemical and Kodak announced that they will be raising prices by 20%. We continue to hope that given the slowed state of the economy, that these are just lagging effects and that slowing demand will temper further inflation.

Meanwhile, with May behind us and the summer vacation season about to begin, trading volume has been on the decline. It is likely that in the next few months, the equity markets will trade within a range as there is no real volume to move the market significantly one way or the other. We have talked some in recent weeks to the point that trading volume since March 17 has been light, and that new investment is index-hugging. These are two tell-tale signs that there is not much confidence by investors, and that they are just attempting to stay in the game. That trend will likely continue for at least a few more months while the state of the world economy continues to reveal itself.

Be on the lookout in the coming days for our Monthly Commentary to arrive in your email. We hope that you find it insightful. As always, please feel free to share it with friends and colleagues!

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Bubble Forming - Weekly Market Summary

posted 05.27.2008 at 2:13 p.m. by steve

Last week concluded another chapter than can best be summarized by still higher oil prices, and a stock market that was mildly punished as a result. The S&P 500, Nasdaq and DJIA fell -3.5%, -3.3% and -3.9%, respectively (click here for details). At the sake of sounding like a broken record, it is energy prices that are primarily holding this market down. Until that situation is resolved, the financial markets are likely to remain in a state of unease. Since the market turned upward in mid-March, we have seen very light volume and index-hugging, signaling that those who have money to invest, arent sure where they want to put it. Theres not much conviction in the markets right now!

From the beginning of the year, we have seen frozen credit conditions thaw and markets beginning to look past the economic slowdown. Those two items have helped portfolios recover a majority of the decline experienced between November and mid-March. It is also interesting to note that while energy prices continue increasing, many other commodity prices have rolled over and fallen precipitously. Take note of nickel (down 28%) lead (down 50%) and others. The price curve of oil prices indeed are looking more parabolic with the passing of each day. This rocket ship lift-off price curve has been the trademark sign of a bubble. In every bubble case, prices have popped (this dates all the way back to the bubble that formed with Holland Tulips in 1637; the first recorded asset bubble). While the weakening dollar was blamed for oils ascent initially, is no longer a valid argument for why prices are at current levels - rampant speculation and greed are. Oil prices have advanced far above the level that would be required to offset the dollars decline. Consumers across the world are assuredly feeling higher oil prices; not just U.S. consumers paying with weak dollars (now, if China and other countries would just stop subsidizing oil and gasoline costs to remove the pain for their consumers, demand would really decline). As consumers here and abroad feel pain at the pump, global demand will fall. When it does, it is likely that we will see an unwinding of oil prices.

Aside from oil, we do see signs of economic conditions slowing down globally. That will assist in the containment of inflation. Bubbles have a way of going on longer than most people expect, but when they do pop, rest assured that price multiples will expand. At that time, it is important that investors already be in the game and ready to benefit from a quick upward valuation.

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Weekly Market Summary

posted 05.19.2008 at 11:14 a.m. by steve

Last week the markets managed to move higher once again, despite ongoing concerns (click here for details). So where are we now? According to economic indicators, we still have slightly positive economic growth, and unemployment claims are coming in lower than many economists have been expecting. Even inflation numbers have eased on a broad level. That last point is most intriguing because there isn’t an item in my budget that is getting any cheaper. Gasoline prices continue to rise in tandem with oil, and it is likely costing you about 40% more per fill up this year compared to last according to AAA. The housing climate continues to be marked by declining prices and high inventories. It seems logical to conclude that markets will continue to be soft, or that the recent rally is not sustainable.

What is interesting is that the recent up-market movement has been most notably led by small- and mid-cap companies. This type of action is notable because historically, small- and mid-sized company stocks have led the start of new cycles. That gives us at least some optimism that the advance started in mid-March is not just a head fake by the market, but is perhaps stronger performance is possible for a sustainable period of time. Again however, in order for that story to continue playing out, it is a common belief that energy prices must retreat, or at the very least stabilize. We inch ever closer to that psychological $4 per gallon price at the pump wherein most consumers will be seriously considering how they can reduce their consumption (if they have not already). As such, volume on the major markets remains low, indicating that investors are not convinced that we are at the beginning of a period of sustainable positive performance.

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Ongoing Oil Ascent - Weekly Market Update

posted 05.12.2008 at 2:06 p.m. by steve

Markets took back some of the gains in previous weeks as oil moved ever higher; the S&P 500, Nasdaq and Dow receded -1.8%, -1.3% and -2.4%, respectively. It seems as though news about the health of the consumer ebbs and flows almost daily. One day, we’re seeing the market move modestly higher due to slight increases in retail sales while just at the same time the closing price of oil eclipses previous highs despite a dollar that shows signs of strengthening.

Since late 2007, we have continually heard how the oil prices have been moving higher predominately due to a weaker dollar, yet when the dollar shows signs of strengthening, oil rarely recedes. It actually seems that what we have is a market that just doesn’t want to re-align itself with fundamentals. Supply is plenty, while demand continues to fall. Is economics 101 still being taught in our universities?

Whatever the case, the media continues on with their usual panic-based reporting; that is they report the bad, but ignore anything good. Additionally, speculative traders continue to flood the commodities futures markets with more and more cash (more money chasing the same barrels of oil), which does nothing to help ease the price. Year-to-date, the dollar value of daily traded contracts is approaching $140 billion; that figure compares to $86 billion last year, or $9.5 billion just 5 years ago! All that increase in the trading of oil has undoubtedly raised the price of oil substantially. Speculation is driving oil prices – not supply and demand. Like the game Jenga, the biggest and most frightful question in most people’s minds at this point is, how much higher can prices it go before something breaks? We continue to hope that this bubble pops soon.

Click here for details of last week’s markets

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Thoughts on Fed Decision - Weekly Market Summary

posted 04.28.2008 at 5:00 p.m. by steve

The week ended April 25 was another marginally positive one for stocks as the yield on the 2-year treasury surpassed the Fed Funds rate (click here for details). Barring some crazy final days to the month of April, equity markets will see their first positive performance calendar month since October. We are certain that there are still many worries on investor minds, and many may be unaware that the market has done so well since the collapse of Bear Stearns around March 17. It definitely always seems that the media hones in on the negative news, and gives better news so little attention.

Moving into Wednesday, the Federal Reserve is largely expected by the market to ease an additional 25 basis points. There have been some murmurs of a no-cut decision following the meeting. Such a result is difficult to predict as it relates to how the stock market would react. At the moment, in the face of a weak dollar and oil’s seemingly endless price ascent, we are inclined to slightly favor no-cut. Such an action, while possibly surprising to the markets, may actually be a rally point in the ensuing days. No cut to the fed funds rate would likely mean that the dollar strengthens notably against other currencies such as the euro, and might be the catalyst that could put a ceiling on oil’s climb, and actually sends it and many other dollar-denominated commodities into a tailspin. A stronger dollar should mean cheaper oil and food for Americans! Additionally it would help ease inflation, and even help the European central bank build the case that it should begin easing (further assisting the dollar and easing inflation globally). That would indeed be welcome by consumers, especially as the Government stimulus checks have begun to flow into individual’s bank accounts. Surely such activity will enhance the economy and stoke some consumer confidence and spending, even if the checks do nothing but go to help the average person’s financial balance sheet by paying off some credit card debt.

It is often said that government economic stimulus is like pushing on a string; it takes a while for the effects to be seen. We hope that whatever the result of tomorrow’s fed meeting might be, that the accompanying statement is foretelling of a stabilizing dollar and commodity prices. That would really help stocks in a number of ways.

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Fear or Opportunity

posted 01.22.2008 at 2:52 p.m. by steve

What a start to the week…

In light of the market since the beginning of the year, and with the Federal Reserve’s unprecedented 75bp inter-meeting Fed funds rate cut this morning in response, Bill took some time today to organize some thoughts in the form of a slideshow (attached). If you find yourself being spooked, this piece (CLICK HERE) may provide some help.

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Long Term is a Green Banana

posted 11.27.2007 at 3:04 p.m. by steve

Lately we have been pondering much amidst the market turmoil in the month of November. It is clear that emotions are running high for investors everywhere, and we would be lying if I said we are not concerned as well. The financial engineers of Wall Street and their creative financing structures are denting earnings, credit availability and investor sentiment.

What does it mean to be a long term investor???

What typically happens following a bad month in the stock market???

Why not just take a step back and sit this market out for a while???

Those are the types of questions that come to mind when investors become emotional. However, knowledge from the studies of behavioral finance has proven time and again that if you can eliminate emotion from investing, you will succeed.

Attached you will find our thoughts on these questions in a piece titled, “ Long-Term is a Green Banana." Please don’t hesitate to give us a call if you have any questions, or would like to schedule a time to review your portfolios.

“Troubles never seem bigger than the present, even though those of yesterday were just as big.”

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Columbia Technology

posted 10.15.2007 at 1:34 p.m. by steve

As we’re certain you are aware, much prudence, thought and analysis goes into each investment decision we make on your behalf. We continuously track client portfolios and the performance of each investment in them. Along with performance tracking, we closely monitor each fund’s allocation to the various business sectors (financials, industrials, technology, healthcare, services, etc…) to ensure that our funds are not collectively overexposing your portfolio to any one sector.

Recently, we have been paying close attention to research and models that suggest Technology stocks, largely out of favor since 1999, may be in good position to outperform the broad market under the current macro-economic landscape. As such, we have done much analysis in recent months to identify a tech-specific fund for use in our more aggressive client portfolios, believing that a slight increase in technology expposure may provide a nice boost to client portfolios.

Through the process and screening of hundreds of funds, we selected the Columbia Technology Fund (CMTFX) for several reasons including its strong long-term track record and disciplined but opportunistic investment approach. Within recent weeks, you may have noted the addition of Columbia Technology to your portfolio. CMTFX looks for companies that are most likely to benefit from a technological trend, and then identifies those that have the ability to grow revenue and earnings; have a strong balance sheet and trends in accruals; sustainable valuations; and have the possibility for a 20% positive upside to their price target over 12 months. The fund has consistently ranked among the top in its peer group.

For additional information on this fund or to gain further insight about its addition as it relates to your portfolio, please give us a call.

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