Stock Market Recap, February 20, 2009

Market Drops Amidst Growing Resignation!

Another tough week on Wall Street as the broad market lost -6.9% last week and is now down a staggering -14.7% Year to Date. It is scary to think of extrapolating those losses across the rest of the year particularly since we have not yet even closed the month of February! We should probably be thankful it was a holiday shortened week, as that may have been one of the few factors limiting the weekly loss. There are just not many positives out there to counteract the continuing mantra of a deteriorating economy, housing woes, and a financial sector in shambles. We sense a growing resignation amongst investors that this recession will indeed be severe and long lasting. Investor fear has moderated, only to have been replaced with the resignation that it will be a long time before conditions improve in the economy and stock market despite the best intentions of government efforts over financial sector reform and massive spending programs.

Nationalization Fears Harvest Market Attention!

Last week started off poorly with Global economic and financial fears taking their toll on US markets on Tuesday. A manufacturing survey was also released that showed a significantly greater decline than what was expected. On the government front, Obama announced his plan for Homeowner Affordability to provide stability to at risk homeowners, assist in refinancing, and to support lower mortgage rates indirectly through Fannie Mae and Freddie Mac assurance. The government efforts are positive, but in reality the reach of this initiative is miniscule in light of the overall mortgage debt at risk. On the housing front, a dismal report was released showing housing starts at their lowest levels ever recorded. Unfortunately, a housing bottom just does not seem near. But last week, the really big news concerned the financial sector, as fears over bank nationalization grew astronomically. Overall the financial sector plunged another 15.9% from already depressed levels. Bank of America and Citigroup took the hardest hits. The administration came out late Friday to reassure Wall Street in its belief that the private sector should run the banking system, and that nationalization is not goal or preferred option. Despite their best efforts, the government was not able to reverse the downward momentum in financial stocks.

Market Beating Foresight

Next week the Treasury will again be in the limelight as Geithner is expected to discuss more details on a government assisted private sector solution to the financial crisis. The government will have to put forth a credible solution that assuages concerns over nationalization, yet has enough details to provide confidence there is a path to return normalcy to the financial sector. An effective financial sector is a prerequisite towards stopping the bleeding in the overall economy and to restore investor confidence. Geithner was not adequately prepared in his last presentation, and will be expected to step up in a big way next week. Given the resignation in the marketplace, we suspect there is more downside risk than upside potential to the government response expected next week. If a credible plan is delivered, the market will likely respond favorably. But if expectations are not met, the downside move may be much greater than the upside potential. We have made recent investments in the financial sector due to the very depressed market conditions. We still do not think nationalization is likely, and eventually would expect the financial sector to show improvement. Although investors should be prepared to weather a difficult and long lasting storm before they see improvement in financial stocks. The market will likely remain rocky over the next three months as corporate earnings continue to deteriorate and job losses reach critical mass. Consumer spending is extremely weak and we do not see consumer confidence returning any time soon. We are currently 20% invested in our stock portfolios. We will likely sit tight on that allocation until we see more optimism and strength in the market. As the market builds strength, our stock allocation will rise over time. For now, investors should remain cautious and very selective with any investments that are made.