Weekly Recap, January 16, 2009

Rocky Trading Week!

Last week marked the second straight down week as the market fell sharply 4.5%. It could have been worse if not for the Friday rebound. We have not gotten the start to the New Year like we hoped as the S&P is down -5.9% and the NASDAQ -3%. It was a rocky week of trading as prices fell sharply before recovering somewhat by week end. The market remains well above November lows, but recent declines are spooking already nervous investors. News has been predominately bad and in a good light has not carried the shock value we saw in 2008. Nonetheless, the news appears bad enough to pressure stocks and to keep investors on the sidelines. Market movements will likely remain rocky for some time.

Financial Sector and Earnings Woes!

The bad news continues to build. Retail sales declined for the sixth straight month, Circuit City is liquidating, and more struggling retailers are likely to fall over the next few months. Industrial production declined sharply again in the fourth quarter. Jobless claims continue to mount as more companies announce layoffs. On the earnings front, most companies are showing poor results, with many providing warnings on future earnings. But the big news was the financial sector as it lost a whopping 16% for the week. The drivers were Bank of America and Citigroup whose shares dropped over 45% and 55% from highs at one point. Citigroup announced plans to sell a controlling interest in Smith Barney, along with a subsequent announcement of a business restructure that would divide the company in two. The restructure appears to position the company for sales of additional business units. The Citigroup business model will change radically, and will likely include the breakup of its many parts. The dismantling of Citigroup is a reflection of the great turmoil in the financial sector. Bank of America also contributed to market fears based on news from the Merrill acquisition. B of A will report large losses from the Merrill acquisition, to the extent that the bank now needs additional government support. In fact, the bank has requested an additional $20 billion in TARP funds in order to complete the acquisition and to cover losses and write downs. That is a huge number that further stoked fears in the financial sector.

Market Beating Foresight

About the only good news last week were reports of lower inflation, levels that have not been seen for many years. Of course, some argue that low inflation is just another sign of how bad the economy really is. Inflation is so low that concerns are circulating that we may enter a painful period of severe deflation. Fourth quarter earnings season is in full swing, and to date, has provided only downward pressure on stocks. Investors will begin receiving year end reports on retirement accounts, which will cause more angst as investment losses will be significant. That will be just one more challenge to overcome before investors return to the market in large numbers. Obama takes office next week and no doubt will enact massive spending programs. Those initiatives may help consumer confidence, but material impacts to jobs and the economy will not happen for months. We believe the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs. Last week, oil dropped to $33 dollars, a level we view as a good long term buy. For stocks, we remain concerned over the next three months as the market will likely remain very rocky as the full weight of poor earnings, bankruptcies, and bailouts reach critical mass. Even those consumers that have jobs are fearful, hoarding cash, and restricting spending. Consumer spending will need to return before the economy can gain momentum and start growing, a prospect not likely over the very near term. We plan to stay between 30% and 50% invested in our stock portfolios and will increase our stock allocations only over time. Only cautious investments on very selective stocks make sense right now.