Weekly Recap - December 12, 2008

Market Resilient Despite Auto Woes!

The market gained .4% on the S&P and 2.1% on the NASDAQ last week despite more bad economic news and the ongoing saga involving the nearly bankrupt auto industry. The market was up strong most of the week, but took a significant swing down on Friday to essentially end the week where it started. The market continues to show resilience to all of the bad economic news including the pressure from the auto industry. Could the sentiment finally be changing? Volatility decreased last week and the market continues to show strength despite a difficult economy that will struggle well into 2009. The oversold conditions and the market resistance shown at current levels provide support for the belief the market is in that bottoming process.

Recession in Full Force!

We got official acknowledgement the prior week, so now we can use the word recession, which has been in full force. The economic data released last week clearly adds further evidence of the recession severity. November retail sales declined again, with retail sales now reported down 4.7% over the past three months. That is a significant decline that shows consumers are restricting spending wherever possible. In addition, the procession of companies announcing layoffs continues, as jobless claims hit 26 year highs. It is also worth noting the breadth of the layoffs as almost all industries are being affected by the downturn. But the biggest news for the week was the auto industry and the failure of the senate to approve the $14 billion bailout package. Some reports suggest that the auto industry employs as many as 350,000 people directly and indirectly. The impact of an auto bankruptcy could be very significant to the overall economy, not to mention payrolls. Speculation remains strong that the auto industry will get help in some fashion, but the uncertainty over direction clearly weighed on the market Friday. On a positive note, Obama provided a spark by suggesting his administration is putting together plans to provide substantial support and new funding early next year. No doubt that will help, but we need to see improvement in housing and employment before the economy can make headway and start growing again.

Market Beating Foresight

The market finished the week flat, after having been up strong until Friday when the auto bailout failed to pass. Volatility has recently started to trend downward although it still remains at historically high levels. Investor sentiment appears to be improving, as bad news announcements seem to have less shock value. The fact that the market has declined over 50% since October 2007 highs lends support for an oversold market that might be ready for a trend reversal. As we have said before, there is no doubt that the economy is bad and that only time and government intervention can turn the tide. Next week will bring additional reports on industrial production, consumer price index, housing starts, and another round of jobless claims. The FED is also meeting next week and is widely expected to lower the FED funds rate to .5%. To date, the FED has been an active participant in helping to stabilize the financial markets. However, after the next cut, interest rates cannot go much lower so future FED plans will be of great interest as the FED has to find another way to help with economic recovery. The looming bankruptcy of General Motors and the auto industry bailout will also surely be a hot topic next week. Our speculation is that relief will come from either an agreement over the bailout proposal or perhaps administration approval to use TARP funds. We continue to believe that the economy has a long way to go and could be as long as year-end 2009 before improving. However, we also believe the market has reached a trading range bottom. Volatility is starting to trend down and the market has been resilient in resisting sharp drops over the past two weeks despite bad economic news. We think the market is starting to show signs of stabilizing, although it could remain very bumpy or even rocky over the next few months until volatility returns to normal at much lower levels.

For short-term investors, a bumpy market will provide many profitable opportunities on both the short and long positions as the market swings back and forth, within a 100 point trading range. For now, long investors should stick to the defensive industries such as utilities, healthcare, and consumer staples. Stick to those companies that have strong balance sheets, are well capitalized, and have high cash levels, as those are the companies that will survive and even prosper in difficult economic times. For speculative investors, maybe now is the time to consider a play in oil, as prices have hit multiyear lows. No doubt oil demand will be pressured in the coming year with the global slowdown, but perhaps prices have moved down too far too fast. Some speculators suggest oil could fall as low as $30 over the short term, however this was also the same investment house that suggested it would hit $200 before the end of this year. No one can predict short term prices, but we believe oil price levels are currently on the low end of their long term trend, and a reversion back to that mean assumes a price rise is probably more likely. Also, we mentioned the prior week the bubble in Treasuries, as the flight to safety, along with the FED buying initiative, has pushed 30 year treasury yields to their lowest levels ever! In fact, last week we saw briefly negative yields on short term T-Bills, meaning investors are willing to pay the government to hold their money. Clearly, the pressure and downward trend on yields will change as this bubble will eventually burst as they always do. The FED will likely cut short term rates again next week, which will further pressure yields on government securities. Overall, equities remain at very compelling price levels despite an economy that has a long way to go before it gets better. We are planning to invest some of our cash into stocks over the next few weeks as we find good opportunities and would suggest that investors sitting on cash do the same. Patience will reward the long term investor as positive momentum and confidence will eventually return. Investors buying stocks at these levels will be rewarded in 2-3 years even if they are early in calling the market bottom. Despite a difficult year, all of our portfolios still show positive returns since their inception, which is truly exceptional given that corresponding market returns all show significant losses.

Sign Up Today for complete access to all of our stock picks and portfolios through http://www.marketbeatingstocks.com! To keep subscribers informed, we send email alerts immediately after every trade we make, and provide a weekly newsletter summarizing the week's activities and our portfolio performance.