Today’s Stocks & Topics: (MTRX) Matrix Service Co, Where to Invest?, Dogs of The Dow, Charting.
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Today’s Stocks & Topics: (DE) Deere & Company, Gaps, Oil ETFs, (USO) United States Oil Fund Lp, (KF) Korea Fund, Infrastructure Stocks.
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After a strong first day of trading on Friday the market started off on a weak note this morning. There is a well known statistic that reads as follows: as goes the first day of the year, as goes the first week and as goes the first month so goes the year for the stock market. The first day was up strongly; we will see if the week will hold up. Last year the first day, week and month were down and we all know how the rest of the year went.
The big economic report this week will be released Friday where we will have December’s employment data. There is an expectation of a loss of 500,000 jobs and the unemployment rate rising to 7%. Before this weak economic cycle is over expect the unemployment rate to rise to at least 8% and maybe as high as 10%. It will depend on the success or failure of Obama’s economic plan.
Meanwhile, although construction spending for November was estimated to be falling by 1.3% or so, this morning it is reported that it actually fell only .6%. Is that good news or bad? With expectations all negative any less bad news is good news for the market.
The market builds into the prices of stocks all the expectations it sees and of course that has meant a severe bear market. Now investors need to ask: ”has there been enough price depreciation to anticipate the bad news in the economy we are going to have over the next few months?”
Stock markets rally long before economies recover because of this phenomenon.
Good Trading
Steve Peasley
Terry Tamminen - Special Advisor to Governor Schwarzenegger and former head of the California EPA: “Lives per Gallon”. Mark Murphy: “Generation Y and the New Rules of Management”, Ephren Taylor: GoFerretGo.com.
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This was another holiday shortened week as the last days of 2008 wound down. Everyone is happy to see 2008 go. It was one of the worst stock market years since the Great Depression and no one anticipated the disaster in the financial industry that spread world wide. Looking back, the commodity sector rallied strongly for the first part of the year before absolutely collapsing in the second half. The rise and fall in oil and gasoline prices clearly demonstrated the horrific volatility in 2008. There was no sector in the stock market or for that matter any asset class almost anywhere in the world that rose in 2008. All fell sharply and the only safe place was cash. However, cash at this point is earning nothing as the treasury yields have fallen with the Federal Reserve lowering the Fed Funds rate to zero percent interest.
That was 2008. However, as investors we must look forward. Will 2009 repeat 2008’s performance? Most experts don’t see that and frankly it would be almost unheard of if it did. Even in the Great Depression there was a rally after the first year’s severe fall in stock prices. As stated last week, mortgage applications are spiking up, and two weeks ago I quoted Bob Brinker’s research in stock prices rising following a year when they were down 50% from a peak. Of course that does not have to happen this time but it is a compelling argument for a higher market in 2009.
For the economy, if there is going to be a recovery in the new year, it will start with housing and then get a boost by the very large infrastructure spending the Obama Presidency is preparing. The Federal Reserve will start buying troubled mortgages in January and have set up a goal of $500 billion by mid 2009. Just the announcement of this effort in December lead to a cut in mortgage rates by 1%. When they actually start buying these mortgages from banks that will set a floor in the price of these troubled assets for the banks and provide them cash. That relief may well give banks reasons to start loaning again. Banks are getting free money to lend out to the public at whatever rate they can charge. I wish I had that deal.
Fear is still high but is starting to fade. You can see it in the various interest rates banks are willing to accept and a reduction in the volatility in stocks. For homeowners there is going to be a once in a lifetime opportunity to reduce mortgage payments by refinancing, and for new buyers who can qualify for extremely low 30 year fixed mortgages. It is possible to see 4% sometime in 2009. Add that to very low home prices that will stay weak in 2009 and you have an extreme buyer’s market.
These fundamentals for our economy should result in a recovery in late 2009. The stock market historically starts to rally six months in advance of any recovery in the economy; at least it has always done so in the past. We may be seeing the first signs of that already, but it is going to be a bumpy ride.
There are dangers for 2009. The Middle East is the fist thing that comes to mind. Iran trying to obtain a nuclear bomb is destabilizing and of course that will affect oil prices. But since the world is already fearful, any conflict in that part of the world will be felt more acutely by the markets. We have seen that in the Hamas/Israeli conflict, which is fairly contained. It caused oil prices to rise a little so what would further trouble in that part of the world cause?
Of course any collapse in a large bank would cause trouble. However, I doubt any government around the world would let that happen. Unrest in emerging economies might be a problem. With world economies slowing, job creation has also slowed, and in places like China that can be a big issue resulting in citizen unrest. Then of course there is the unforeseen and unforeseeable event that could happen.
Therefore anything ‘can’ happen but rational people must look at probabilities not possibilities. What are the probable outcomes for 2009? I think it is a stronger stock market with a recovering economy late in the year. Inflation is likely to return when the economy starts to recover. These are the highly probable events. This is certain- the economy is weak and will stay that way for a while and it is going to be an eventful year.
Happy New Year. Let’s hope for a profitable one as well. Chances are good that it will be.
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We’re excited to announce that we’ll be talking to you in the new year on a new radio station! Join us at AM 860, a 50,000 watt station that is heard in a much wider area of the Bay Area and beyond, including Carmel and Sacramento.
Today’s Stocks & Topics: The Most Often Asked Questions On Investtalk
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Today’s Stocks & Topics: 401(k), The Stock Market, Penny Stocks, (AJG) Arthur J. Gallagher & Co., Taxes, The U.S. Economy.
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The Fed announced a couple days ago that they have set a self imposed goal of buying $500 Billion of mortgage backed securities by mid 2009. I think the announcement was an effort to push mortgage rates down. The actual purchase will likely do the same thing. They are going to start buying these assets in January and $500 Billion seems very aggressive.
Overall, I think this is a good thing. It will provide a couple benefits. One, it will give banks the ability to put cash back in their coffers which gives them incentive to make new loans. Banks can only make money by lending it. Also, it gives them a market for these assets with transparency as to the value of these assets. Without a market there is no telling what these assets are worth and this unknown is a problem for the banks.
The other benefit is for you and me. This effort has already driven mortgage rates down and with the Fed Funds rate (the rate at which banks can borrow money from the government) near zero, all the interest they charge us is profit. This means that with competition, and less fear in the banking industry, mortgage rates should continue to fall. They are very likely to go under 5% and could go to 4%. That will help the consumer put money in his pocket on a monthly basis.
Good Trading
Steve Peasley
Today’s Stocks & Topics: PE Ratio, After Tax Contributions, Year End Tax Planning, The Wash Rule, Shorting.
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There has been very little sign of a Christmas rally and now we are looking for the New Year rally. Traditionally, these rallies come in the last couple weeks of December and the first couple weeks in January. However, this has been a year of non traditional moves for the market.
It has been the worst year for the S&P 500 and Nasdaq indexes including the great depression. For the DOW it has been the second worst, but just barely. Even though prices of stocks are at historic lows, when compared to price to sales, price to book and other financial relationships it does not mean the market ‘has’ to rally at year end.
Sometime in the new year we are going to see a very strong rally, but that may be several months away. No one can predict the timing of a rally or a fall in the market. However, there are huge amounts of cash sitting on the sidelines, but even if it just sits there for a while you have consumers who are finally getting a break at the gas pump with very low prices for gasoline, historic low mortgage rates, and the Obama stimulus package.
All these factors should give us a strong rally. The biggest fear is that there is some unknown or unknowable event that could panic investors. A little hint of that kind of thing are Israeli air strikes this weekend with oil prices spiking as a result. The rally is assured but it is the ‘when’ that is always impossible to gauge.
Good Trading
Steve Peasley
