I was out last Friday, so I didn't have the opportunity to comment on the best week we've had in a while. The market was off on Monday (the 9th), but on Tuesday we posted a dramatic recovery, followed by three more up days. 676 points gained on the Dow in four days! That's over 10%!
What sparked the rally? Well, on Tuesday Citigroup announced that they had their best quarter since 2007. As the market took off on this news, I began to get phone calls and e-mails laced with incredulity. That's it? That's all it took? We've been living through all this, and one company, one that's been struggling to stay afloat, that's fallen from over $27 to under a buck in the last year, says that they're having a not-so-bad quarter, and the market takes off? Moreover, it required an influx of BILLIONS of dollars of Federal money and outside investor capital to do it, and the market thinks that's great?!?
Not quite. The market was way oversold. Like, oversold to epic proportions. All we needed was a spark to start the fire, and the one little piece of good (or maybe just not-so-bad) news was the spark. After a slight breather early this week, the market climbed as high as 7,571. That's over 1,000 points in 7 trading days. Granted, once we hit that high of 7,571, the market has trended back down for the past two days. And we haven't been living without intraday volatility either. Regardless, we ended up for the week for the second week in a row. I don't know how long it's been since I could say that.
We're not out of the woods though. The economy is still struggling, and likely to be weak for some time. It will likely look darker still in a few months. Which begs the question: "If we think the economy is going to remain weak, and will probably look even weaker in the near future, is now the time to sell?" In a word: No. Now is the time to posture a portfolio for the coming recovery. Stocks may get cheaper in the short run, but figuring out where that bottom is will only be done in hindsight. In the long run, this is probably one of the best opportunities to buy stocks that any of us will ever see. I'm not saying to push all your chips to the middle of the table and go all in, but that there are opportunities everywhere to buy great companies while they're on sale. This is the stock up sale, and it's not the generic canned beans on aisle 5. It's the good stuff. The stuff we wouldn't ordinarily buy because it's always too expensive.
It may be scary to be investing when the conventional wisdom says that the stock market is a losing proposition, but I've found that conventional wisdom is rarely wise. Most investors underperform the market because they are only comfortable buying in when it's at its high, and don't want anything to do with it when it's at the lows.
Friday, March 20, 2009
Friday, March 6, 2009
Another week, another 7%, BUT...
As awful as last fall was in the market, I truly am more frustrated by the current environment. The market continues to drift downward, dragging everything with it. I can understand the financials being hit (Citigroup is now a penny stock!). I can understand the autos being hit (GM is at 75 year lows). I can understand economically sensitive sectors being hit (homebuilders, luxury goods, etc). But solid companies that continue to earn money are falling right along side of them. Why? It's not because they are bad companies, or that people are panicking and selling out. It's simply because there are no buyers.
The economy continues to languish, with no end in sight. Our representatives in Washington keep coming up with more ways to spend our money. So what do people do in times of uncertainty? They hoard cash. Never mind that the best return they can hope for is barely above zero (at least it's positive!). The cash hoarding will continue until there is a catalyst that entices investment. What might that be?
Positive news of any kind would be a GREAT catalyst, but I don't see anything on the horizon. Lately any news that has been less bad than expected has had at least momentary positive effect. I would suspect that simple exhaustion might give us some upside, or at least a relief rally. By this I mean that investors simply get frustrated earning 0.20% on their cash and begin thinking that stocks selling for less than the value of their assets look awfully attractive.
At present, (many) stocks look as cheap as they ever have. There is tremendous value in a lot of these companies, and it is being ignored out of fear and frustration.
And now for a little good news: despite being down about 7% for the week, both the Dow and the S&P 500 closed up today, with the Dow climbing roughly 150 points in the last half hour of the day. That may be pretty significant, as most traders do not like to be exposed going into a weekend.
The economy continues to languish, with no end in sight. Our representatives in Washington keep coming up with more ways to spend our money. So what do people do in times of uncertainty? They hoard cash. Never mind that the best return they can hope for is barely above zero (at least it's positive!). The cash hoarding will continue until there is a catalyst that entices investment. What might that be?
Positive news of any kind would be a GREAT catalyst, but I don't see anything on the horizon. Lately any news that has been less bad than expected has had at least momentary positive effect. I would suspect that simple exhaustion might give us some upside, or at least a relief rally. By this I mean that investors simply get frustrated earning 0.20% on their cash and begin thinking that stocks selling for less than the value of their assets look awfully attractive.
At present, (many) stocks look as cheap as they ever have. There is tremendous value in a lot of these companies, and it is being ignored out of fear and frustration.
And now for a little good news: despite being down about 7% for the week, both the Dow and the S&P 500 closed up today, with the Dow climbing roughly 150 points in the last half hour of the day. That may be pretty significant, as most traders do not like to be exposed going into a weekend.
Friday, February 27, 2009
Washington makes me worry.
Last week Obama unveiled his spending plan, which turned out to be (surprise!) full of pork. This week he made it worse, rolling out a budget that increases taxes significantly, and reduces the value of deductions for mortgage interest and charitable contributions (which effectively raises taxes even more). There has yet to be a pronouncement from his administration that has had a positive impact on the markets.
The market continues to search for something to spark a turnaround, but Washington is not providing it. This morning it was announced that the government investment in Citigroup would be converted into common stock. Citigroup stock is down 37% on that news. That's 37% for the day. Other financial services companies were also battered by the news, with Bank of America falling about 25% today, and AIG, which within the last 12 months traded as high as $52, selling for about 43 cents a share. GE slashed its dividend to 10 cents a share from 34 cents. This was somewhat expected, and market reaction to the news has been relatively uneventful (the stock was already trading down prior to the announcement).
The biggest drag on the market today was the revision of the GDP numbers for the fourth quarter of 2008. While a downward revision was expected, the number came in much worse than predicted. The decline in GDP was the worst since the beginning of 1982.
Given all the above, why on earth would anyone want to buy stocks? The reality is that because of all the above, now is one of the best times I've ever seen to buy stocks. Stocks are cheap. Might they get cheaper? Sure. But that does not negate the fact that they are cheap now. Granted, not every company is worth owning. I wouldn't want to buy any financial services company right now. Is there money to be made in financial services stocks? I'm sure there is, but the risk in those stocks is incredibly high. The payoff may be astronomical, but I'd much rather invest in something with significantly less risk and a more predictable outcome.
Companies are still making money. People are still buying burgers, putting gas in their cars, drinking soda, taking prescriptions, using personal care products (toothpaste, soap, deodorant, etc.), and unless you raise your own vegetables, mill your own flour, and butcher your own meat, you're probably still going to the grocery store. There is a level of economic activity that is required just to meet the needs of daily life. That level of economic activity results in additional economic activity. All of that economic activity has a value, and I believe its value is higher than that being assigned by current stock market valuations.
The market continues to search for something to spark a turnaround, but Washington is not providing it. This morning it was announced that the government investment in Citigroup would be converted into common stock. Citigroup stock is down 37% on that news. That's 37% for the day. Other financial services companies were also battered by the news, with Bank of America falling about 25% today, and AIG, which within the last 12 months traded as high as $52, selling for about 43 cents a share. GE slashed its dividend to 10 cents a share from 34 cents. This was somewhat expected, and market reaction to the news has been relatively uneventful (the stock was already trading down prior to the announcement).
The biggest drag on the market today was the revision of the GDP numbers for the fourth quarter of 2008. While a downward revision was expected, the number came in much worse than predicted. The decline in GDP was the worst since the beginning of 1982.
Given all the above, why on earth would anyone want to buy stocks? The reality is that because of all the above, now is one of the best times I've ever seen to buy stocks. Stocks are cheap. Might they get cheaper? Sure. But that does not negate the fact that they are cheap now. Granted, not every company is worth owning. I wouldn't want to buy any financial services company right now. Is there money to be made in financial services stocks? I'm sure there is, but the risk in those stocks is incredibly high. The payoff may be astronomical, but I'd much rather invest in something with significantly less risk and a more predictable outcome.
Companies are still making money. People are still buying burgers, putting gas in their cars, drinking soda, taking prescriptions, using personal care products (toothpaste, soap, deodorant, etc.), and unless you raise your own vegetables, mill your own flour, and butcher your own meat, you're probably still going to the grocery store. There is a level of economic activity that is required just to meet the needs of daily life. That level of economic activity results in additional economic activity. All of that economic activity has a value, and I believe its value is higher than that being assigned by current stock market valuations.
Friday, February 20, 2009
No Confidence.
The market delivered a resounding vote of "no confidence" this week. Obama signed the spending bill on Tuesday, and the market did not respond with any enthusiasm. As I write this, the Dow Jones Industrial Average is down 5.8% for the week. For the past fifteen minutes, however, it has been struggling to end the day on a positive note.
The spending bill (note that I'm not calling it the "stimulus") is just that: government spending. As we reviewed a synopsis of the provisions, we could not help shaking our heads in dismay. It really is just a laundry list of items on which some segments in the government have wanted to spend money for years. They just needed an excuse to push things through, and what better than "economic stimulus"? Adding billions, perhaps trillions of dollars to the expenditure side of the government budget in the name of "stimulus" is not prudent management of our money. There is a very real cost to this plan.
This week's market decline is not solely attributable to the spending bill. There is a cloud of fear hanging over the market that the government is going to nationalize one or more of the big banks. If that occurs, expect a very distraught stock market. Nationalization is essentially the government taking ownership out of the hands of individuals - equity will be wiped out, the value owned by shareholders will become zero.
The market continues to sort out the realities of the current economic environment. The activity in the market this week did not look to me like a panic sell off, but rather just a lack of interest on the part of buyers. Remember, for every person selling a stock, someone else has to take the position of the buyer. When buyers are hesitant, prices come down, and continue to fall until they are low enough to spark interest. We started getting more interested earlier in the week, and began a little bit of targeted buying. As we see opportunities, we will continue to increase equity exposure in a calculated manner. Stocks look cheap, but volatility will be with us for a while.
The spending bill (note that I'm not calling it the "stimulus") is just that: government spending. As we reviewed a synopsis of the provisions, we could not help shaking our heads in dismay. It really is just a laundry list of items on which some segments in the government have wanted to spend money for years. They just needed an excuse to push things through, and what better than "economic stimulus"? Adding billions, perhaps trillions of dollars to the expenditure side of the government budget in the name of "stimulus" is not prudent management of our money. There is a very real cost to this plan.
This week's market decline is not solely attributable to the spending bill. There is a cloud of fear hanging over the market that the government is going to nationalize one or more of the big banks. If that occurs, expect a very distraught stock market. Nationalization is essentially the government taking ownership out of the hands of individuals - equity will be wiped out, the value owned by shareholders will become zero.
The market continues to sort out the realities of the current economic environment. The activity in the market this week did not look to me like a panic sell off, but rather just a lack of interest on the part of buyers. Remember, for every person selling a stock, someone else has to take the position of the buyer. When buyers are hesitant, prices come down, and continue to fall until they are low enough to spark interest. We started getting more interested earlier in the week, and began a little bit of targeted buying. As we see opportunities, we will continue to increase equity exposure in a calculated manner. Stocks look cheap, but volatility will be with us for a while.
Friday, February 13, 2009
The market really dislikes uncertainty.
Tell me what you're going to do, and I can plan for it. If it's something that is going to have a negative effect, I won't necessarily like it, but at least I know that I can plan for it. If you tell me that you're going to do "something", but won't elaborate, then you make me nervous.
And that's what occurred this week. On Tuesday Timothy Geithner, the new Treasury Secretary, gave a rather lengthy speech in which he essentially said.... nothing. The outcome of his speech was a roughly 4% drop in the market. I believe it would have been better if he hadn't given a speech at all.
We've also got this stimulus package that got voted on today that cannot help but be laden with pork. The last report I heard stated that it was over 1,000 pages long, spends close to $800 billion, and was not delivered to those voting on it until midnight last night. It will be "interesting" to see what all is in it. It's a shame that no one had time to read the thing before voting on it!
We need a stimulus package, but I don't have high hopes for the one they voted on today. I fully expect that the economy will recover, don't get me wrong. But I fear the spending that is likely built into this bill (I obviously haven't read it yet!). This spending must be paid for somehow, and it will end up getting paid for by you, me, our kids, grandkids, and possibly even their grandkids (a bit of hyperbole here, but you get the point).
The economy showed some signs of life, with an unexpected pickup in retail sales last month. I wouldn't get too excited about that though - one month's numbers do not a trend foretell. I expect that unemployment (currently at 7.6%) will continue to rise for a while. Things may well feel worse than they do now, and the general mood may become even more pessimistic. That should be expected as we head toward an eventual recovery.
Once the mood has begun to change, it will likely be too late to begin buying stocks. The market generally turns in advance of the economic recovery, and as such we believe that investors should be increasing exposure to equities. It may not be comfortable doing so, as we expect that the volatility will continue for some time, but this may prove to be the best opportunity to invest in decades.
And that's what occurred this week. On Tuesday Timothy Geithner, the new Treasury Secretary, gave a rather lengthy speech in which he essentially said.... nothing. The outcome of his speech was a roughly 4% drop in the market. I believe it would have been better if he hadn't given a speech at all.
We've also got this stimulus package that got voted on today that cannot help but be laden with pork. The last report I heard stated that it was over 1,000 pages long, spends close to $800 billion, and was not delivered to those voting on it until midnight last night. It will be "interesting" to see what all is in it. It's a shame that no one had time to read the thing before voting on it!
We need a stimulus package, but I don't have high hopes for the one they voted on today. I fully expect that the economy will recover, don't get me wrong. But I fear the spending that is likely built into this bill (I obviously haven't read it yet!). This spending must be paid for somehow, and it will end up getting paid for by you, me, our kids, grandkids, and possibly even their grandkids (a bit of hyperbole here, but you get the point).
The economy showed some signs of life, with an unexpected pickup in retail sales last month. I wouldn't get too excited about that though - one month's numbers do not a trend foretell. I expect that unemployment (currently at 7.6%) will continue to rise for a while. Things may well feel worse than they do now, and the general mood may become even more pessimistic. That should be expected as we head toward an eventual recovery.
Once the mood has begun to change, it will likely be too late to begin buying stocks. The market generally turns in advance of the economic recovery, and as such we believe that investors should be increasing exposure to equities. It may not be comfortable doing so, as we expect that the volatility will continue for some time, but this may prove to be the best opportunity to invest in decades.
Friday, January 23, 2009
The Inauguration is Behind Us
On Tuesday, the world paused for a few hours to celebrate the inauguration of Barack Obama. Regardless of one's political leanings, it was a momentous event and an unrivaled spectacle.
For weeks, some had been saying "the market will take off during the inauguration". I was one who suspected that the hype surrounding the event might be self-fulfilling, driving the market up (at least temporarily), but even the historic event did not help the market this week. The reality of the economy and its effects on company earnings weighed on stock prices all week long.
The market was closed in observation of Martin Luther King, Jr.'s birthday on Monday, and trading was pretty slow during the hours leading up to the inauguration. We speculated that many had put trading on the back burner in order to watch the events in Washington, at least on TV (or internet feed, as the case may be). But almost as soon as Obama's speech was finished, the market came unglued, with the Dow falling over 4% for the day by the time the market closed.
I can only imagine what's been running through his head as he completes his first week as President. He inherited an economic mess, and one that took many years, several political administrations, and a lot of fiscal mismanagement at all levels from government to individual to get to the state it's in. Can he fix it? No. No one man can fix what's wrong with the system. The only thing he can do is put forth good ideas for Congress to deliberate, and wield the veto pen against bad ideas that Congress sends to his desk.
So how do we fix it? I believe the first step is to recognize the excesses of the recent (and not so recent) past. Spending at all levels of government is out of hand. But the blame cannot be pinned on the government alone, nor can the government alone be responsible for the recovery. In general, Americans spend far more than they earn at a personal level. That is not sustainable, and the results of exhuberant consumerism have come home to roost. We need to learn to live within our means. As we do this, we have to recognize that we all helped get the system into the mess it's in, and we're all going to have to play a part in getting it back out.
For weeks, some had been saying "the market will take off during the inauguration". I was one who suspected that the hype surrounding the event might be self-fulfilling, driving the market up (at least temporarily), but even the historic event did not help the market this week. The reality of the economy and its effects on company earnings weighed on stock prices all week long.
The market was closed in observation of Martin Luther King, Jr.'s birthday on Monday, and trading was pretty slow during the hours leading up to the inauguration. We speculated that many had put trading on the back burner in order to watch the events in Washington, at least on TV (or internet feed, as the case may be). But almost as soon as Obama's speech was finished, the market came unglued, with the Dow falling over 4% for the day by the time the market closed.
I can only imagine what's been running through his head as he completes his first week as President. He inherited an economic mess, and one that took many years, several political administrations, and a lot of fiscal mismanagement at all levels from government to individual to get to the state it's in. Can he fix it? No. No one man can fix what's wrong with the system. The only thing he can do is put forth good ideas for Congress to deliberate, and wield the veto pen against bad ideas that Congress sends to his desk.
So how do we fix it? I believe the first step is to recognize the excesses of the recent (and not so recent) past. Spending at all levels of government is out of hand. But the blame cannot be pinned on the government alone, nor can the government alone be responsible for the recovery. In general, Americans spend far more than they earn at a personal level. That is not sustainable, and the results of exhuberant consumerism have come home to roost. We need to learn to live within our means. As we do this, we have to recognize that we all helped get the system into the mess it's in, and we're all going to have to play a part in getting it back out.
Friday, January 16, 2009
Calm, cool, and collected...
That's how Chesley "Sulley" Sullenberger, the pilot that landed US Airways Flight 1549 was described in one report today. Sulley's plane was crippled after it flew into a flock of geese while en route from New York to Charlotte. The cool-headed pilot averted a complete disaster, landing the plane in the Hudson River, avoiding a deadly crash in a populated area, and assisted in the successful evacuation of all 153 passengers and crew safely from the plane. Reports state that he was the last to leave the sinking airliner, after twice searching every row of the cabin to assure that no one was left on board.
The above obviously has nothing to do with the financial markets, but I believe that Sulley's story is appropriate for this week's blog entry. It's a reminder of what can be done when those in charge take their responsibilities to heart without regard for their personal outcome. Unavoidable disasters can be survived, and the actions taken can serve as reminders for "the way it should be".
The financial markets have been in their own version of a crippled flight for the past several months. Our pilot and co-pilot, Hank Paulson and Ben Bernanke, are trying to safely land the plane and get everyone to safety. But it seems that instead of helping us into the lifeboats, Congress has been intent on putting hurdles in the way, pointing fingers at the pilots, and trying to snatch a couple extra packets of peanuts for themselves on their way out of the plane. However, it seems that in the past few weeks they've finally come to the conclusion that they are going down with the plane if they don't start helping out.
I am pleased that the finger-pointing is decreasing, and the attempts to get things fixed are seemingly more constructive, rather than mere political ploys. That said, I am concerned about the eventual outcome. As I stated in the last entry, all this will have to be paid for somehow, and it isn't going to be comfortable when that happens.
The markets spent this week paying attention to earnings. Alcoa is the traditional lead-off man in earnings season, and often sets a psychological tone for the markets as earning season begins. And the tone set was not pretty. As companies have begun announcing their fourth quarter and full year 2008 earnings, the results have been pretty bleak. The estimates for the coming year are being reined in (predictably), and in some cases company management is choosing not to divulge their expectations for the coming year. In the latter cases, my presumption is that they just cannot foresee just how things are going to play out in an economy as weak as this one may become.
That said, we are seeing more value out there now than we have in years. We are slowly re-entering the market, and will be adding to equity positions over the coming weeks and months. We do not expect a rapid recovery in the broad market, but rather somewhat range-bound trading for the foreseeable future.
The above obviously has nothing to do with the financial markets, but I believe that Sulley's story is appropriate for this week's blog entry. It's a reminder of what can be done when those in charge take their responsibilities to heart without regard for their personal outcome. Unavoidable disasters can be survived, and the actions taken can serve as reminders for "the way it should be".
The financial markets have been in their own version of a crippled flight for the past several months. Our pilot and co-pilot, Hank Paulson and Ben Bernanke, are trying to safely land the plane and get everyone to safety. But it seems that instead of helping us into the lifeboats, Congress has been intent on putting hurdles in the way, pointing fingers at the pilots, and trying to snatch a couple extra packets of peanuts for themselves on their way out of the plane. However, it seems that in the past few weeks they've finally come to the conclusion that they are going down with the plane if they don't start helping out.
I am pleased that the finger-pointing is decreasing, and the attempts to get things fixed are seemingly more constructive, rather than mere political ploys. That said, I am concerned about the eventual outcome. As I stated in the last entry, all this will have to be paid for somehow, and it isn't going to be comfortable when that happens.
The markets spent this week paying attention to earnings. Alcoa is the traditional lead-off man in earnings season, and often sets a psychological tone for the markets as earning season begins. And the tone set was not pretty. As companies have begun announcing their fourth quarter and full year 2008 earnings, the results have been pretty bleak. The estimates for the coming year are being reined in (predictably), and in some cases company management is choosing not to divulge their expectations for the coming year. In the latter cases, my presumption is that they just cannot foresee just how things are going to play out in an economy as weak as this one may become.
That said, we are seeing more value out there now than we have in years. We are slowly re-entering the market, and will be adding to equity positions over the coming weeks and months. We do not expect a rapid recovery in the broad market, but rather somewhat range-bound trading for the foreseeable future.
Subscribe to:
Posts (Atom)