Weekly Recap, January 23, 2009

Pessimism, Volatility Rise!

Another depressing week as our 44th President of the United States takes office. The market fell -2.1% and is now down -7.9% for the year. The NASDAQ lost even more during the week with declines of -3.4%. The pessimism in the marketplace continues to boil, with volatility/fear again on the rise. The financial sector is driving the most fear, but corporate earnings for all sectors continue to deteriorate. The market remains above November lows, but nervousness and confidence is shaky as volatility and fear escalate. Fear is what investors have to watch, as that can cause quick and violent downward moves in stock prices. Current news on the whole is primarily bad, and that is not likely to change anytime soon, which will surely keep many investors on the sidelines. We expect market movements to remain rocky for some time.

Financial Sector and Earnings Woes!

The drama in the financial sector continues as the sector dropped another -7.1%. That decline just adds to the financial sector losses of 16% from the prior week. Financial stocks are very volatile right now and B of A is one of the leading causes. Problems with the Merrill acquisition are causing heartache with B of A investors, and some are calling for Ken Lewis to resign. The stock has been volatile in trading with daily moves up and down of 30%! No doubt the financial sector is leading the way in stoking investor fears regarding a long lasting and painful recession. But it is not just the financial sector. One report from Thomson Reuters, estimates that corporate profits will drop 28% this earnings season, with seven of the 10 S&P sectors expected to see double digit declines. Companies, like Microsoft that reported last week, brought mostly unfavorable announcements on revenue and earnings. Microsoft then made matters worse by also reporting that market volatility left it unable to provide quantitative revenue and EPS guidance for the remainder of the year. No doubt there is considerable uncertainty over what this year will bring in terms of economic activity, and that is just adding to investor fear. Of course, the economic data reported continues to be dismal, as jobless claims again hit extreme levels, and home sales/starts remain very weak. Each week, companies from nearly all industries announce more and more layoffs. This recession is severe, and will not begin to turn any time soon despite the best efforts of Obama.

Market Beating Foresight

Fourth quarter earnings season is in full swing. Next week, 137 companies in the S&P 500 will report earnings. There is little doubt those earnings reports will confirm what we already know. The economy is in dire straits as this will surely be another quarter of significant decline. 4th quarter GDP will also be released and is expected to show a contraction of more than 5%, a much larger decline than the previous quarter of .5%. There will also be reports next week on consumer confidence, home sales/prices, jobless claims, and manufacturing volume. The news next week is not likely to renew optimism in the market. 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. We are also seeing increases in the volatility index and that could be a sign of more dramatic stock swings to come. Oil prices are one of the few assets that have risen significantly, now trading around $46. We suggested buying last week when levels were closer to $33, and investors that jumped in would have earned significant gains in just one week. Oil prices rose on evidence of production cuts by oil producing countries. However, oil demand will continued to be pressured given the weak economy, even after accounting for production cuts. We would not buy oil at these levels, but would consider buying if there is a significant pullback to a range under $34. As for stocks, we remain concerned over the next three months as the market will remain rocky as the full weight of poor earnings, bankruptcies, and bailouts reach critical mass. Consumer spending is extremely weak and we do not see consumer confidence returning any time soon. We plan to stay between 30% and 50% invested in stock portfolios and will increase our stock allocation only over time. Investors should remain cautious and very selective with any investments that are made right now.

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