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.
Friday, February 27, 2009
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.
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