Weekly Recap - 1/09/2009

First Full Trading Week

Last week marked the first full trading week of the New Year. Unfortunately the week marked the worst market decline (-4.4%) since November 2008. The NASDAQ was also down 3.7% for the week. Does this foretell doom for the rest of the New Year? Obviously, one trading week does not have any predictive power for the entire year. For perspective, the market has advanced more than 20% since November so a pullback is not surprising particularly in light of the constant bad news released every day. Furthermore, despite the losses last week, the market continues to show signs of moderating with lower volatility. Higher trading volume also returned last week, which often provides more reliable signals on both the direction and conviction of price moves.

2009, Job Losses Mount!

Most of the news last week was not good. Increasing unemployment numbers are grabbing most of the headlines. The unemployment rate rose to 7.2%, the highest figure in many years. In addition, the line of companies announcing cutbacks continues to grow as job losses continue to mount. Major retailers reported dismal December sales, no real surprise although Wal-Mart had been expected to do better than reported. Automakers also reported December sales declines of more than 30%. Oil prices were volatile, first rising early in the week on tensions in the Middle East, before falling sharply due to demand concerns from the worsening global economy. The fourth quarter earnings season has begun which is also causing investor anxiety. The quarterly reports that have trickled in to date highlight the toll the weak economy is causing. In addition, companies are adjusting future outlooks downward with greater regularity.

Market Beating Foresight

Fourth quarter earnings and future outlooks have the potential to really move the market. If earnings results and future outlooks are worse than expected, the market could plunge to much lower levels. Most observers expect results to be very weak. But at issue will be how bad results relative to expectations are. Obama is gearing up to take office January 20 and we are confident that his administration will push massive spending programs to stimulate the economy. That will help boost confidence in the economy and market, but will certainly take months before having any material impact on jobs and economic growth. We continue to believe that the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs. Oil continues to trade in wide price swings, so short term traders can make significant profits from moves in both directions. Long-term, oil may be a good buy if investors can buy between $32 and $36. No doubt oil prices will rise over time once the economy gets through this difficult patch. When bubbles burst, there is often an overcorrection, and Oil in the low $30 range may be one example. For stocks, we are sticking with our current investment allocation and plan to gradually increase our investments only over time. If the market can get through quarterly earnings season relatively unscathed, we will significantly increase our stock allocation. Short term, the best approach is patience and cautious investment.