Weekly Stocks Recap, March 20 2009

Market Holds Gains From Prior Week!

The broad market advanced 1.6% last week, a good showing in that it held the extraordinary gains achieved over the prior two weeks. The market declined on Thursday and Friday as investors took profits, although there was enough resistance to still end the week with a weekly gain. We view the market strength shown last week in a very positive light as investors did not run following the recent strong advance. Our sense is that investors may begin to return to the market. As cash flows in, the demand for stocks will rise, driving stock prices upward. It is still too early to say the worst is over, although we are encouraged with the recent resistance the market has shown. Our view is that the S&P will remain rocky, swinging back and forth within a trading range of 150 points. We expect the economic struggles to continue over this year, and that will temper the stock market advance. The stock market is usually a leading indicator for economic recovery, so the stock market should begin to recover well before the economic conditions improve. Overall, we want to see the market display strength and resistance over several months before feeling comfortable that the bottom has been reached. Another strong indicator will be first quarter earnings, for which reports will begin April and May.

FED Purchases Expand!

Last week the economic news was somewhat mixed. Industrial production declined slightly more than expected, although at a slower rate than the prior month. Inflation figures also rose more than expected, but remain at very modest levels. On a positive note, housing starts and building permits both showed unexpected increases in February. Housing starts in particular showed a very large percentage increase. Both signs are encouraging, but we want to see an uptrend with several months of advances before calling a housing bottom. The biggest news for the week came from the Federal Reserve after announcing they would purchase up to an additional $750 billion of mortgage-backed securities. In addition, the Federal Open Market Committee decided to purchase up to $300 billion in longer-term Treasury securities and $200 billion in other agency debt. Bonds rose sharply following these announcements and stocks too followed that lead. To date, the FED has been aggressive with monetary policy by dropping interest rates to near zero levels. The commitment to expand purchases of troubled assets has propelled their program to a new level. We do think these measures will help both the economy and financial markets find and regain their footing over the near term. However, we do have long term concerns over the amount of this funding and the resultant burden placed on taxpayers in future years. Over the long term, we certainly would expect interest rates and inflation to rise sharply in response to all of the government spending and outstanding debt. We do not expect interest rates to rise this year in light of a sour economy, but at some point in the future, consumers and taxpayers will bear the burden of the actions taken today.

Market Beating Foresight

Both existing and new home sales are due out next week. Other economic reports will include a final reading on fourth-quarter GDP and weekly jobless claims. These reports will likely provide further evidence of economic weakness. Unemployment rates continue to run high, and that directly impacts consumer confidence and their willingness to spend. The economy will continue to struggle until confidence returns and consumers start opening their wallets. We still consider the market very shaky despite the strong performance over the past few weeks. A primary market mover next week will likely be the Geithner plan for addressing troubled bank assets. The market is looking for a clear and credible plan for addressing toxic assets in the financial sector. The market expects Geithner to put forth more details on that plan next week. That announcement could drive the market significantly higher or lower depending on the reception it receives. Geithner fell short on the details in his last plan discussion and the market punished stocks. Hopefully, Geithner will not fall short on the details once again! Volatility, as measured by the VIX, has been trading in a more narrow range since January of this year. Volatility is still well above long term trends, but appears to be stabilizing which eventually will lead to lower levels over time. Lower volatility will help encourage more investors to return to the stock market. We are currently 20% invested in our stock portfolios. We may increase those allocations slightly over the near term given the market strength shown over the past few weeks. However, we plan to wait until after the next set of quarterly reports in April-May before raising our allocations significantly. Investors should remain cautious and very selective with any investments that are made. However, now may be a good time to begin gradually reducing cash levels with additional stock purchases over the next few months.

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