Weekly Recap - December 26, 2008

Trading Volume Low Over Holiday

Last week the market lost 1.7% on the S&P and 2.2% on the NASDAQ in light trading from the holiday shortened week. Economic news again was poor, although not a surprise from what most of us were expecting. Frankly, it is more difficult to assess directional trends in the overall market when there are low trading volumes. Trading volumes will likely remain low again this week with the holiday shortened new year. We remain encouraged that volatility, while still high, continues to moderate, which we view as critical relative to bringing investor confidence back to the market.

Rates Lower, Refinancing Rises!

On the economic front, last week was much of the same as reports showed declines in existing home sales, along with new home sales that hit lows not seen in 17 years. Personal income and spending also reported drops in November. Jobless claims last week hit new highs again. Consumers have clearly cut back on spending in the face of job and housing concerns. Holiday retail sales will likely show declines from last year. Overall, the market is taking most of the bad news in stride, as volatility continues to moderate. Oil prices remain low, although prices began to move up by the end of the week. Although most of the news was bad, there were positive developments last week including GMAC which received government approval to become a bank holding company. That should help GMAC stave off bankruptcy at least for the short term and provide more credit to the GM customers to buy cars for which GM desperately needs. Also, another hopeful sign was applications for new mortgage loans hit their highest level in five years, as lower interest rates begin to have an effect as an incentive to refinance. The Federal Reserve program to buy mortgage securities from Fannie, Freddie, and Ginnie Mae is bringing mortgage rates down which lowers borrowing costs to consumers and encourages more refinancing for those that can. According to Freddie Mac, 30 year fixed rate mortgage loans have dropped to 5.14%, a 37 year low. As borrowers refinance, consumers will then have additional cash to either spend or to save, which will help improve consumer confidence.

Market Beating Foresight

The market continues to show resistance at current pricing levels, along with a lower downward trend in volatility. Both trends are encouraging despite a very difficult economy. Next week will bring reports on manufacturing and services, along with consumer confidence and jobless claims. Trading volumes will likely remain low in another holiday shortened week. The other story unfolding next week is the Santa Claus effect which began last week and will run through January 3. Quantitative research suggests that the Santa Claus effect has been responsible for an average market increase of 1.5% from the last five trading days of the year through the first two trading days of the new-year. A net gain for the Santa Claus period is considered by many as positive for the new-year, while a loss is viewed as a negative. We remain hopeful that the market is starting to show signs of stabilizing, although it could remain very bumpy or even rocky over the next few months.

As we have said before, a bumpy market will provide short-term investors with many profitable opportunities on both short and long positions as the market swings back and forth, within a 100 point trading range. Our stock tips for investors has not changed from last week, and would include sticking to defensive industries such as utilities, healthcare, food, and consumer staples. Focus on value stocks 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, we think there is a bubble right now in US Treasury Bonds as investors have driven yields down to incredible levels not seen in many years. Yields are unbelievably low and at a minimum, rates will rise over time as they begin to normalize. But the bigger story is likely to be inflation, which over the long term horizon will likely heat up in a major way due to all of the government spending underway to revive the economy. When inflation hits in a few years, yields will rise significantly forcing the prices of bonds to fall severely. Exchange Traded funds are an easy way to play this bubble where investors can buy one of the Short or Ultrashort Treasury Bond funds where performance moves inversely to the Treasury Bond price index. We do not see the government raising interest rates any time soon and the flight to safety will likely continue over the near term until investors are more confident that the worst is over. With that in mind, buying now may mean carrying losses short term, but that may still be better than missing the reversal which tends to happen quickly with bubbles. Investors will eventually begin to move money out of treasuries and back into stocks, and when that begins, investors should be ready to move as bond prices will fall.

Remember, our complete list of stocks to buy is Available Online At: http://www.marketbeatingstocks.com