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Buy when there are sellers…carefully

September 5, 2008 – 1:32 pm

The big news this week on the economic front was this morning’s jobs report but on Monday we had construction spending which was a fall of .6% for July, after being up .3% in June, and an ISM report of 49.9% down from 50% for the manufacturing sector and another ISM report for nonmanufacturing with a reading of 50.3% when expectations were for 49.3%. Neither number told us much. On Wednesday factory orders for July were ‘OK’, and yesterday revised productively for the second quarter rose sharply, much more than expected. However, the jobs report this morning was the big story of the week showing us a weak job market. It wasn’t a surprise with a loss of a little over 80,000 jobs when the expectation was for a loss of 75,000 but there was a revision for the previous two months of more jobs lost, and this pushed up the unemployment rate to 6.1%. This data is telling us that we are in a weak economy but not a shrinking one. The economy is actually growing, just not with any gusto.

The dollar continued to strengthen slightly and oil collapsed after Gustov missed the production zone in the Gulf. Oil prices continued to fall all week sitting at about $105 per barrel this morning. Oil no longer controls the action of the stock market, that link has dissolved.

The assumption the traders are making is that the world economy is slowing but they are not sure if that is going to translate into a recession. I don’t think so. The World Bank is projecting a 4% plus growth rate for the world which is less growth than a year ago but still strong growth. Inflation has been conquered, at least in the current cycle, as oil and all commodities have fallen. But just as importantly, productivity has dramatically picked up meaning more downward pressure on inflation. Obviously, employers are not hiring yet; they are getting more work done with existing workers. How are they doing that? Much of it is technology upgrades and new technology that makes work more efficient.

As we said September is a tough month and this week has already proved that observation. That does not mean it will be negative. In election years September has been mixed, but in most years it is a down month. So cash held on the sidelines is prudent. However, it is also the month to start teasing into the market, just be very careful. Buy after any large down stroke in the market.

The stock market has always rallied strongly from the depths of negativism. The question is, are we at that point? Almost, universally the news on our economy is bent in a fashion to be negative. The consumer ‘feels’ poor with big hits to the value of his home and a painful reduction in the value of his 401K or other stock market assets. No wonder the consumer is down. At the same time it’s harder to find a job. It certainly feels like the news is all bad.

However, it is not all bad. Exports are still strong, finally the consumer is getting a break at the gas pump and we will see food prices start to come down. Salaries year over year are up 3%. Outside of financials and housing the economy is growing.

In our portfolios we are holding a huge amount of cash and we are shorting the market in certain areas. We also have tight stops in to take us out, producing more cash if need be. We will start to feel better about investing closer to the Presidential election when one uncertainty will be removed. The stock market hates uncertainty and in two months, with the elections over, I think we are going to look back and say things are starting to improve. Inflation’s fall will be showing up in the statistics by then. The financial crisis will be clearer and housing will be further into its weakness. Slight improvement is already happening but it is being ignored at this time. That’s normal.

One final point, the stock market has ‘always’ started to rally before you see any economic recovery. So, it is our job to anticipate that recovery. In this cycle we may not have seen the bottom but we are getting close.

The market is very likely to be higher by year end than it is today. The ride may be rough over the next six weeks leading up to the election but there is so much pessimism that chances are good the stock market is at or near its bottom, but the economy is not.

I see the stock market being much higher in 2009 and over the next few years returning not only double digit returns but high double digit returns. It is the journey getting there that is tough. It is never truer than in today’s market that you buy when there are sellers and sell when there are buyers. We have sellers; it’s time to buy, slowly.

  1. One Response to “Buy when there are sellers…carefully”

  2. Great comment Steve — you have to know when to hold ’em and know when to fold ’em, love the podcast.

    By Henry on Sep 6, 2008

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