Smart401k Blog

In the headlines

A look at some of the market movers over the past week:

• Leaders from the so-called Group of 20 met to discuss the state of global finance
• Company insiders are busy snapping up shares in the open market
• Multiple Goldman Sachs executives opted out of 2008 bonuses
• A survey by the National Association of Business Economists shows a pretty dim outlook for the US in the near term
• Japan’s economy entered recession
• Embattled Yahoo! leader Jerry Yang opted to step down from his CEO position
• Citigroup announced 52,000 job cuts, but couldn’t seem to stem the slide in its stock
• Dallas Mavericks owner Mark Cuban ended up on the wrong side of securities laws
• Bank of America doubled its stake in China Construction Bank
• Industrial output was up more than expected, but may not portend a recovery
• It’s been a rough year for most hedge funds
• The Producer Price Index (PPI) dropped a record amount in October
• Consumer prices posted a likewise steep drop
• Minutes from the most recent Federal Reserve meeting show that more rate cuts could be on the table
• Economic leading indicators fell in October
• Congress held off on pushing through a bailout package for US automakers
• Rumors on Friday suggest that Barack Obama will name New York Federal Reserve president Timothy Geithner the new Treasury Secretary

Commentary

Selling pressure continued on the markets this week with major downswings on Wednesday and Thursday pushing the S&P 500 index down nearly 14% by Thursday’s close — the lowest level on that index since 1997. Excitement over the potential naming of Tim Geithner as the new Treasury Secretary sent markets on a roaring upswing to help Friday finish with a 6.3% gain, but even with that the S&P closed the week having shed over 8%.

Economic news continued provide a drag on the equity markets this week. The only upside highlight of the week was industrial production notching a better performance than expected for October. However, this was largely explained away as just a recovery from a lackluster September because of Hurricane Ike. The Producer Price Index and Consumer Price Index both logged significant declines showing that the drop in energy prices is helping to moderate price levels. While this would have been heralded as good news earlier this year when inflation was beginning to look like a problem, today it’s being taken as a sign that recession is deepening and The Fed will have its work cut out trying to prevent a deflationary spiral.

Meanwhile, company specific events played a big role in the markets this week. Front and center were Citigroup and the “big three” US auto makers. Citigroup’s stock continues to struggle as investors weigh the possibility that loan losses will overwhelm the company and induce a forced sale or government rescue — either of which would make the equity close to worthless. Massive layoffs at Citigroup and a follow-on investment from Saudi prince Walid bin Talal failed to comfort investors. The company, which was at one time the world’s largest bank, now carries an equity value of just over $20 billion and a stock price of under $4 per share.

The US automakers didn’t have much luck either this week. Hopes were high that some agreement would be reached so that Ford, General Motors, and Chrysler would receive some kind of funding or bridge loan to help them survive quickly-dwindling cash reserves. Supporters of such an action say that a failure of any or all of these companies would severely impact the US economy and ripple out into other areas, while opponents claim that the automakers do not have sustainable business models that would allow them to operate profitably without continued bailout funding. Talks reached a standstill when Congress demanded a recovery plan from the automakers before moving forward.

Since the one bit of news that seemed to cheer investors during the week was the announcement of Tim Geithner as a potential successor to Hank Paulson as Treasury Secretary, readers may wonder who Mr. Geithner is and why his appointment is so important. He has a pretty impressive resume, which includes serving as Undersecretary for the Treasury for International Affairs under Treasury Secretaries Robert Rubin and Lawrence Summers as well as serving as a director at the International Monetary Fund. His most recent position as the president of the Federal Reserve Bank of New York is also very notable as he is also the Vice Chairman of the Federal Open Market Committee under Fed Chairman Ben Bernanke.

However qualified Mr. Geithner may be, though, the reaction at the end of the trading day on Friday was much more straight forward. Investors tend to hate uncertainty of any kind. The length and depth of the current recession is a very large current source of uncertainty and investors have certainly reacted very unfavorable to that. Another current source of uncertainty, though, is the Presidential transition from George Bush to Barack Obama. Positions such as Treasury Secretary have taken on extreme importance in today’s crisis, so the unveiling of who will be taking over these financial positions should bring some comfort of certainty to investors.

Looking ahead

With a wake of so much bad news from last week, what can we look forward to next week? Unfortunately, extreme volatility is probably still all that I can promise will be on the menu for sure. It’s unlikely that economic reports will cheer the markets much next week, as it seems unlikely that existing home sales, consumer confidence, personal income, or personal spending will surprise to the upside. A preliminary reading of third quarter GDP also has a good chance of bringing on pessimism as the market expects it to decline to an annual rate of contraction of 0.6% from 0.3% last quarter.

On the brighter side, though, as I’ve discussed in the past, the market tends not to move based on what is happening currently, but rather what is expected in the future. So though current economic readings continue to decline, the market is already looking ahead to the next quarter and next year to see what they will hold. Any indication of light at the end of the tunnel — even two quarters out — could cause markets to begin to recover. At the same time, there have been some indications that President Elect Obama may be naming the rest of his economic posts next week and that could likewise spark markets to the upside.

To a large extent corporate earnings will be lighter next week due to the Thanksgiving holiday. There will however be some notables like Hewlett Packard and Deere that will report prior to Turkey Day. More likely, though, the major company specific news that we’ll see will be continued focus on the travails of Citigroup and the automakers.

In retrospect, this has now been one of the worst stock market collapses that we’ve ever experienced. Not only has any excess excitement been shaken out of the market, but there seems to be an overdose of pessimism which has brought the S&P index’s current earnings multiple markedly below its long term average. While this doesn’t mean that there isn’t room for the market to fall further — after all, investors don’t always act rationally — we don’t recommend making any drastic changes to your long term investment strategy. 

In the headlines

A look at some of the market movers over the past week:

• China unveiled a $586 billion stimulus plan
• As losses increased at AIG, its bailout got bigger
• American Express converted to a bank holding company in hopes of accessing TARP funds
• Citigroup launched an aggressive mortgage modification program
• Talks continued on the possibility of bailing out the big three US automakers
• Hedge funds recorded another lousy month in October
• Economists have turned very bearish on the US economy
• Treasury Secretary Hank Paulson materially changed the way the TARP program will try to achieve its goal
• GE got some help from the FDIC
• Wal-Mart reported a strong quarter, but was cautious about the future
• The OECD cut its growth forecasts for 2009 again, now showing a contraction next year
• The Euro area officially fell into recession
• It’s unclear what can really be expected from the G-20 summit over the weekend
• It may be too late for GM by the time Barack Obama takes office
• Retail sales caused a fresh round of bearishness

Commentary

Investors weary from dizzying volatility were still without respite this week. Though a 1.3% drop on Monday could be considered calm in light of recent times, the gap between low and high was still nearly 5%. Monday was followed by four days all with 2%-plus moves, including a truly rattling day on Thursday where a loss of 4% from the open was followed by a massive rally that took the S&P up 11.5% from the nadir.

The 6% loss that the S&P index finished the week with was driven primarily by increased pessimism over the state of the US and global economy. Though it was a light week for economic reports, nearly all of the numbers reported were worse than expected, from initial unemployment claims to the big drop in retail sales. If there was any economic highlight it was the fact that preliminary consumer confidence readings for November came in above where the market had expected. Meanwhile, as earnings season grinds on the market has been met by one company after another projecting future earnings to be weak.

And the wildcard in the whole mess is the government. Now caught in a bit of a no-man’s-land between the lame duck Bush term and the upcoming Obama Presidency, there is clearly somewhat of a holding pattern feeling in a lot of the government’s actions. Top of mind in this category is the “to bailout or not to bailout” question that faces the government when it comes to the major US automakers. Less the fault of the Presidential overlap, the market also responded poorly to the Treasury’s decision this week to abandon its initial plan to use TARP money to buy troubled assets directly from banks.

Looking ahead

It continues to be tough to say what we have to look forward to next week aside from continued volatility. Monday will likely be dominated by reviews of what the G-20 conference over the weekend accomplished or failed to accomplish.

On the economic front PPI and CPI will be released during the week and both are going to show that price growth on both the producer and consumer side has slowed drastically, though this is less likely to be much encouragement at this point. Midweek we’ll see the minutes from the most recent Federal Reserve meeting, and there will likely be a focus on the implications of what was said at that point.

The earnings calendar remains heavy through next week, with Lowe’s and Target reporting Monday, Home Depot and Saks on Tuesday, BJ’s Wholesale and Ross Stores on Wednesday, Dell and Gap on Thursday, and HJ Heinz and JM Smucker rounding out the week on Friday. There’s no reason to think that the general tenor of the reports will be any different from what we’ve heard over the past few weeks. Current numbers are likely to be moderate to weak, and outlooks will be very much on the conservative side.

As I noted above (and have been mentioning for weeks now), the one assurance that we have in this market is volatility. The reason is simple — financial markets are made up of a combination of actual finance and a healthy dose of psychology. In the quiet times — those years when the economy is relatively stable and the markets don’t move a whole lot in one direction or the other — finance takes a much bigger role. In times of great excitement or great despair, psychology tends to take over. And this is what we’ve seen recently.

The big five and even ten percent swings in the market are simply not dictated by financial or economic fundamentals. Sure, the moves are happening because of changes in some fundamental factors, but they not moving based on those factors. That may seem like a small difference, but it’s important. The economic reports that we’re getting from day-to-day to not equate to fundamental changes of these magnitudes. Instead, what investors are doing is taking these current period changes and reacting based on the direction of these changes and the expectation that these changes will persist and get significantly worse.

The problem with this is that there’s really no way to know whether investors’ are right or wrong in these predictions. Six months ago investors obviously weren’t bearish enough. Are we still in that same situation today? Or have investors swung the other way and gotten too bearish now? A lot of it boils down to a guessing game.

Still, we can’t simply sit back and wait for an economic recovery to show itself before jumping back into the market. Just as investors are trying to anticipate the economic bottom, they will likewise try to anticipate the beginning of the recovery. By the time good economic numbers start coming out, the market will long since have started its recovery.

What’s an investor to do then? We believe the answer for most investors is to avoid playing this guessing game at all and not only keep your money invested, but continue to consistently invest new money. If you don’t need the money for at least the next five years you have the luxury to be able to wait for the recovery and in the meantime take advantage of beaten down stock prices. Unfortunately, we can’t predict the timing of a turnaround, but we can predict that a turn will come and we want you to be there for it.

With the holiday season quickly approaching, it may be time to start thinking about your spending plans in this sputtering economy.  Times are tough for most Americans:  unemployment is rising, the stock market has suffered great losses and home values have decreased (obvious, I know). 

I suspect this economic downturn must relate to anticipated holiday spending, so I went out to find some statistics on what the outlook was for this year.  According to an annual survey by the National Retail Federation (Holiday Consumer Intentions and Actions Survey), U.S. consumers plan to spend more on average this year than last at $832.36; this is up 1.9% over last year’s average ($816.69), but it represents the lowest increase since the survey began (2002).  So it appears that there will be some reservations about holiday spending as Americans look for ways to save money. 

Here are a few ideas:

• Gift Exchange -There are many variations of the gift exchange, including Secret Santa and White Elephant. I can say that this is something we are doing on my wife’s side of the family this year instead of the traditional get-everyone-something arrangement. This is going to save us both time and money.

• Shop Online - Research the items you want to buy and compare prices to make sure you are getting the best deal. Also, look for specials and coupons. Some popular websites that may help:

http://www.dealcatcher.com/  - This site is a good source for printable coupons, links to deals and coupon codes.

http://www.mysimon.com/ - This is a comparison shopping site to research the best prices on almost anything.

• Be creative - at the expense of sounding cliché, sometimes the best things in life are free. A great gift doesn’t mean it has to be expensive, so use your imagination and give something that the recipient will really value. As a parent with a young child, I can say that I would appreciate a night of free babysitting more than just about anything right now. Here is a source for some other good cheap/free ideas:

http://familycrafts.about.com/cs/giftgiving/a/120400a.htm

Even if you have additional money to spend this year, it’s still a good idea to shop smart.  You can always put some extra funds toward retirement.  Please post a comment with your plans for this holiday season and include any ideas on other ways to save money.  Happy Holidays!

Kevin Jaegers, Senior Investment Advisor

In the headlines

A look at some of the market movers over the past week:

• Barack Obama was elected the 44th President of the United States
• Drivers are keeping more in their wallets as gasoline prices continue to fall
• Machinists at Boeing agreed to a 15% raise and returned to work
• JPMorgan is making a huge push to modify $70 billion worth of mortgages
• Despite a rock bottom Federal Funds Rate, mortgage rates are on the rise
• A flagship Goldman Sachs hedge fund has lost nearly $1 billion amidst the market downturn
• Auto sales in October were downright ugly
• Stocks fell hard in a post-election sell-off
• The Bank of England cut rates by a hefty 1.5%
• Forecasted sales declines at Cisco sent investors running
• Analysts’ are heavily cutting back fourth quarter and 2009 earnings estimates
• Reports from the service sector showed worse than expected drop
• Owners of GMAC debt could be out of luck if the auto lender doesn’t turn itself around
• Wells Fargo encouraged investors when it completed an $11 billion sale of new stock to help pay for its Wachovia acquisition
• Though Yahoo! has come back to the table Microsoft does not seem interested in a renewed bid for the search company
• US unemployment climbed to 6.5%

Commentary

While it was a memorable week historically, if not politically, for the United States of America, it was a forgettable week when it came to equity markets.

The election of Barack Obama as the US’ 44th President made him the first African American President, and, to many at home and around the world, signaled a change in direction for the country. However, an historic election day stock market rally that added 4.1% to the S&P 500 was erased by a two-day, post-election plunge of 10%. The S&P index lost nearly 4% on the week, and with the exception of Monday, every day showed a large, volatile swing.

While some may have been cheered by the changing of the guard at the top post in the US, many others continued to focus on the very real near term challenges. Economic reports during the week were pessimistic on the whole, particularly when it came to unemployment numbers. The market continues to seem very unsure of what, if anything, can be done to abate the economic downturn, as well as what timeframe a recovery might come in.

Meanwhile, earnings reports from companies across industries have been mixed on the whole, but the outlooks have been anything but. Whether they’re looking at real data or being extra cautious, management teams have been particularly bleak in their forecasts for the remainder of 2008 and next year. Many investors also still fear that analysts’ earnings estimates for the next three to five quarters remain on the optimistic side.

Looking ahead

If November was supposed to bring an automatic stock market recovery, we haven’t seen it yet. Looking forward to next week it’s hard to know what to expect — aside from continued volatility. The economic calendar will be light, with retail sales numbers and a preliminary reading on the Michigan Consumer Sentiment Index for November coming at the end of the week. A more likely market mover for the next week will be developments in the response of governments around the world to the continuing financial turmoil.

The earnings calendar remains robust next week before starting to taper off somewhat the following week. Retail names will be among the major groups reporting numbers during the week, and pessimism from the CEOs of that group could incite more selling among investors that already fear further slowing in consumer spending.

We understand that our continued beating of the “invest consistently” and “don’t get scared off by the market” drums may seem overly repetitive. However, we believe that it remains just as true today as every past mention. Why is that? When it comes to capturing the returns that equities have historically offered, we have yet to find a system that consistently works for timing the movements of the market. Investing consistently over varying market conditions, on the other hand, has been time tested and battle proven.

Over the past two months, there have been eight days where the market has gained 4% or more in a single day. There have been two days where the market has jumped more than 10% in a single day. Let me repeat that: more than 10% in a single day. When a recovery does come, we expect that it will start in an unpredictable, volatile, and abrupt fashion. Those who have chosen to move to the sidelines to wait for the market to prove it has started into a recovery may miss a very significant part of that recovery. Worse still, sidelined investors may try to jump back in at the wrong times — reentering after a big gain only to get burned by a swing back down and scared out all over again.

So instead of trying to do the impossible — guessing market movements — we choose to stick to what has been proven over time, namely, the long term appreciation of the stock market. This doesn’t mean that the current market crash doesn’t hurt — it most certainly does. But the golden phrase that King Solomon’s wise men told him to engrave on a ring, “this too shall pass,” is no less true today than it was back then.

With the election upon us many of you might be wondering how the stock market might react depending on who’s elected.  So without further ado, here are some interesting statistics on market conditions prior to and after a presidential election.  Currently (and unfortunately) we are going into this election with the DOW down approximately 30% YTD (as of 11/03/08).   

Historically, election years have usually been good for the stock market; the average gain in the last seven months of the year was 7.2%.  Overall, looking at market trends since 1945 the S&P 500 has posted an average gain of 10.7% during the 28 years a Democrat was president vs. 7.6% during the 35 years of GOP residency. While we cannot predict who will win the election or what will happen we can take a look at some historical trends in the market based on party leadership.

There have been 27 Presidential elections since the start of the Dow Jones Industrial Average in 1896.

• The Democrats have won 12 times and the Republicans 15 times with the white house switching parties 10 times
• During election years, the Dow has been down YTD on Election Day only seven times.  Three of the seven times, the incumbent party was defeated.

The two months prior to Election Day the Dow, on average, has increased +1.92%.

• This year the Dow closed 9/2/08 at 11, 516.92 and closed 10/30/2008 at 9,180.69, this is a decrease of -20.28%
• When the current office is held by Republicans, the average is +0.6%
• When the current office is held by Democrats, the average is +3.5%
• When a Republican is elected, the average goes to +2.2%
• When a Democrat is elected, the average goes to +1.5%

In first Year of Elected President’s Term the Dow, on average, has increased +4.85%.

• When the White House stays Republican, the average increase is +8.2%
• When the White House stays Democratic, the average increase is +0.5%
• When the White House changes from Republican to Democratic, the average increase is +13.7%
• When the White House changes from Democratic to Republican, the average goes to being down -4.6%

Whatever the outcome is in the election, it seems as if the historical numbers are in our favor. 

Jessica Slaters, Investment Advisor.

Source: www.stocktradersalmanac.com