Industrial Production for April fell .5%. That is six straight months of weakening numbers. Capacity fell to a record low of 69.1% from 69.4%. That was bad news but it was better than expected with the experts expecting a .6% fall. That certainly is not much better than expected. Consumer Goods were flat for the month and the only gain was in utilities. Auto Production increased for the third month in a row, and finally business equipment fell .6%, much better than the 2.75% average drop for the first quarter of this year.

Those numbers are all backward looking but after studying them you can’t help but notice that while still showing shrinkage the free fall of U.S. output over the last 6 months is stopping. Before a turn happens you have to stop falling and it appears that is what is happening.

It is still bad news, just not as bad as everyone has feared. By the time we see good news the stock market will have rallied another 25% or more. That good news will be a flat economy and maybe by the end of the year or next we will see small growth. That will be a welcome change.

Good Trading
Steve Peasley

Add to:

As we enter Christmas week and then New Years, traders will be looking for the traditional end of the year rally. Both selling and buying that takes place during this time. Tax loss selling may be pronounced as there have been plenty of losses and traders may want to lock in those losses to apply to future gains. Buying may come in to try and take advantage of very inexpensive stock prices in an effort to benefit from a recovery to normal values of those stocks going into the new year.  

What might drive the market this week is the new and existing housing report for November which will be out Tuesday. Will inventory stabilize or sales increase? Everyone expects foreclosures to increase and prices to be weak but with the recent reduction of interest rates, which won’t help the November report, investors are paying closer attention to the home sector of our economy.  

At some point in 2009 cash, earning next to nothing in money market and short term treasuries, will not be desirable. That cash will find other places to go and some of the trillions of dollars that are avoiding the stock market will return. When that happens we will have a sustained rally. Until then the market is going to be choppy.

Good Trading
Steve Peasley 

Add to:

Another big Monday rally of 400 points for the DOW did not set a tone for the week. Stocks were up and down with a sharp sell off this morning following a collapse of markets around the world. By mid morning the market is trying to recover but we won’t know what direction it will take until the last hour of trading. It has a lot of work to do to turn positive and I doubt that it will.

There was little in the way of economic data out this week except for this morning with the existing home sales report for September. The numbers were very good although everyone is ignoring that bit of news. Sales rose by over 5% and inventory shrank. Prices are still weak and will remain so for a while but they have come down to a point that is attracting buyers. Despite a very tough mortgage environment year over year sales were up for the first time in 3 years. New home sales will be reported on Monday but at least, for the moment, we see the first hints of a housing market that is not collapsing.

Commodity prices have and continue to fall sharply putting further pressure downward on inflation. World wide inflation is retreating at a record pace. This is very good news for the U.S. consumer who has been beaten up for well over a year in dealing with higher prices for food and energy. A sharper reduction of gasoline prices can only help both the consumer and our economy. It will act like a huge stimulus package. This package could have more impact than the Bush stimulus package because it would be on going,as long as demand for oil stays contained. That won’t last for very long, maybe a couple years, however that is long enough to help our current economic slump.

Earnings this week have been mixed but looking deeper you will see, outside of financials and builders, average earnings growth of about 8% with free cash flow at similar levels. At the same time major corporations are guiding future expectations of earnings downward. That of course is to be expected in our current economic slump.

Prices for stocks are extremely low on any basis you wish to use to determine valuations. Earnings are likely to fall. That is the definition of a recession. We are probably in a recession at this time but we won’t be certain until 3rd and 4th quarter GDP numbers are reported. We will see third quarter’s numbers next week. It will likely be negative by a small degree and since this financial crisis peaked this month, the first month of the 4th quarter, it is hard to see anything by shrinkage in our economy on the 4th quarter, thus we are in a recession as defined by two or more quarters in a row of contraction. The market knows this already. Prices of a recession are already in place, now it is the length and depth of the recession that the market is trying to determine. That is the reason for the very large swings in the prices of the indexes. It is likely to continue to gyrate at least until next month. With the conclusion of the presidential election and more time given for the reliqudfication of the financial system to work we should see some calming of the market. A return to normal volatility would be a relief in and of itself.

From the investor’s point of view, the market is one to buy not sell. Fear is rampant. I know it is not comfortable and in fact it is a test of your sanity but it is time to buy. We have not seen this market condition since 1973-74. That is where the market fell 45 to 50%. That fall was no different than the 2000-2 market fall but in 1973-4 valuations were very low like we have today, but in dotcom fall valuations were at extreme highs.

History tells us that after a major sell off, and I would consider a 40 to 45% sell off that we have experienced so far as a major event, that the market within one year will be significantly higher. However, that does not mean it is time to jump in. Cash is still king but you should start to take a dollar cost average attitude into the market. We are holding in a managed accounts a large position in cash but will trade this market, moving and in and out at certain points. We have also teased into a couple of new positions and added a little to our blue chip stocks. You will not see these low prices again in another generation. Of course stocks prices could go lower, which is always a possibility so be careful, we are.

Add to:

  There has been massive fear that the end of the world as we know it is upon us.

Truly we are and have experienced one of the most widespread historic financial crisis ever. Most of this crisis was caused by our mortgage market that spread worldwide, a system that was drunk on debt. Now that debt is unwinding and it is happening very fast. That unwinding has caused a run on most financial institutions and that has destroyed all confidence in some of the most well known and oldest companies in the world, some of whom where destroyed because of their greed. 

That is all doom and gloom and it has expressed itself by tanking stock prices of not only the financial companies but all companies.  

The real question is will all the rescue plans by all the governments in the world work? The answer is a resounding yes. It will take time and it is going to mean deficit spending on a grand scale but it will work. 

The final issue is what do we do? Has the market bottomed? When do we start aggressively buying stocks? If you have not Sold already it is too late to start now, you might as well ride it out. For those with cash, when do you plan to put it to work? 

Good Trading
Steve Peasley

Add to:

With the credit markets this week becoming even more frozen the equity markets around the world have dived dramatically. Mutual fund redemptions are at record levels which causes selling regardless of fundamentals. The increased flight to treasury bills and away from risk have launched yield spreads to astronomical levels.

On Monday the market plummeted when the expectations that the TARP plan passed by Congress on Friday would spark a rally never materialized. The news on Monday was light, however concerns over AIG’s ability to repay their loan was in question and as it turns out they later revealed they had to borrow more money from the government to stay solvent. There were also additional downgrades of stocks by brokerage firms that added insult to injury.

Tuesday the Federal Reserve took the drastic step of entering the commercial paper market and lent money short term to sound companies that need cash for everyday operations. The Fed has never done this before and it goes to show how far the government is willing to go to free up the credit markets. The result of their action did not change our situation much but something should be said for how aggressive the Fed is being in their attempts to clear up our credit problems. None the less the market was down nearly 200 points, but unfortunately that was only just the beginning.

Wednesday came in with mixed news before the open of trading. IBM came out with earnings that beat estimates, but the retail sales report was weaker than expected as the entire country has felt the credit and housing mess. However the market did not react well as more panic selling met a lack of buying conviction that brought the market down nearly another 200 points.

If you thought that was about all you could take, then you were in for a real shocker on the back end of the week. Thursday was a light news day, but that just beget more selling pressure as the Dow plummeted at the end of the day to 8,579 down 679 points. Friday however could be argued to be a much wilder day. General Electric came out with earnings that met its previous pre-announcement and the market acted mixed. There was massive selling on the open and the market traded lower most of the day. However, the final hour was by far the brightest part of the dismal week. The market rallied over 700 points at one point from the bottom, but selling near the end of the day pushed the market to a close of only down 128 points.

Altogether the Dow Jones Industrial Average closed down 1,874 points or 18.15% for the week. We are witnessing history here. This is a market that we will not see for decades to come. The investing opportunities out there are many, but prudence is needed. The market is currently ignoring fundamentals on most companies and the time to be searching for them couldn’t be more enticing. Some stocks are trading at levels you might never see again, but there is still more work to do. The credit markets also pose immense investment potential because of the huge disruption. Yields in those markets must turn lower before equities can mount a comeback. The Fed and global central banks are taking very bold steps to clear the credit pipes, but it is obvious more needs to be done. The G7 meetings that are taking place this weekend will be solely focused on fixing our now Global credit crisis. LIBOR rates are sky high and must come down in order for the market to feel confident again. There is talk about the government’s guaranteeing the loans between banks, which would push the rate back down to normal levels. Will that happen? No one really knows, but it is obvious to all financial leaders that this has transformed from a U.S. housing bust into a problem that is affecting all corners of the globe. It may not seem like a time to be optimistic, but now is the time to get excited about the opportunity in front of all investors.

Was the brief market rally on Friday the sign of the bottom? Who knows, but I do know that the key to that answer lies behind the doors at the G7 meetings. The ideas they may formulate and how well they are received in the credit markets are the tools that will bring us back from the abyss. Look for these signs before getting too excited, but keep your head up. With history being made during such a bad time there will also surely be history being made when the sun is shining again. When that happens, remember this week! It was one for the record books!

Add to:

Later this week we will get the official jobs report which is estimated to show a loss of about 70,000 jobs. However, interestingly the ADP report on jobs came out this morning and it said there was a growth of 30,000 jobs. That is strikingly different than expected. However, the ADP report has consistently overstated job growth compared to government stats. We will have to wait another day or two.  

The big news this week so far has been oil as it fell to $122 per barrel. It was only two weeks ago that it was at $145. The market will likely continue to rally if oil keeps falling. At the same time the dollar has risen. I think the dollar rise combined with slowing worldwide demand is putting downward pressure on oil prices. With the fall of oil other commodities are coming down as well. That is very good for future inflation. It will be coming down. 

The GDP number for the second quarter and the employment data over the next couple of days will tell us more about the economy. Most traders are waiting to see what those reports say. Stock trading, though volatile, has been light so far. That light trading has mostly been on the positive side. 

This could be the beginning of a larger rally but the odds are this is a summer rally that might not have staying power. The stats will tell us the story.   

Good Trading
Steve Peasley  

Add to: