President Obama's Report Card

Where's the money? Where are the jobs? Before President Obama's inauguration he seemed to understand that his most critical role as President was to retain and create 600,000 jobs by this summer. He also knew that he needed a stimulus package to help get the economy back in gear! Congress passed a stimulus package in the amount of $787 billion at his request! Well, how has he done? On the job front, it appears that about 150,000 jobs have either been retained or created. This is far short of the 600,000 that his administration had targeted for this summer. As far as the stimulus package is concerned, thus far about $43 billion has been given in temporary tax cuts and $158 billion has been committed for spending around the country, but only about $53 billion has been spent, according to The N.Y. Times! That means of the total of $787 billion available a little over $100 billion has been used. And now his administration is thinking about asking for more stimulus money. With this as a backdrop, according to the Congressional Budget Office, the deficit for this year will hit $1.7 trillion, which is about 12% of Gross Domestic Product and is a far higher deficit, by any measure, than any President since WWII. The President had indicated early in the year that his administration expected the unemployment rate to go as high as 8.5% by the year's end. Unemployment as measured by the Government is at 9.5% now. This only includes those individuals still receiving state benefits and does not include those receiving the added Federal unemployment benefits, or those whose benefits have run out entirely. President Obama now owns these problems. What is going on? It appears the advice he is getting is to grab for all you can during your first year as President. His eye is off the main event. Get the Health Insurance passed, no matter what! Get an environmental law passed. Spend time visiting other countries. Well, I ask, what has happened to the basic issues that needed to be addressed in January and still need to be addressed: jobs and the economy! I don't like being a taxpayer and owner of GM, Chrysler and AIG. Isn't this what President Bush was chastised for when he suggested we should put some of our Social Security Money into stocks? I am an optimist and am hopeful that Mr. Obama, who is a bright and politically savvy guy, will wake up and get back to the basics. If he doesn't, we may be in a real pickle. His ratings are declining and his personal charisma is waning with too much exposure in the media. His own party is starting to turn away from some of his ideas. If this continues, he will lose his ability to be a leader dealing with the real issues of the economy and may wind up looking more like Jimmy Carter than FDR! Those who are out of work, underemployed or scared of what will happen to them the next time there are layoffs want a leader who is working for them and taking care of the economy! To me President Obama's Report Card gets an "IC", incomplete! This is what a student gets when he drops out. Ed

New Values, New Prices!

It seems at times I'm headed in one direction and suddenly I find myself in a place I had not planned on being. This blog is such a case. As I was reviewing some historic information on the DJIA (started in 1896, the only original stock still in the Average is GE) I began looking at rates of return. I was surprised when I saw a quote from Warren Buffett, commenting on the 5.3% compounded average of the DJIA over the 20th Century, "a wonderful century." This got me wondering about the current compounding rate of the DJIA. It took me awhile to get together all the information I wanted to study but, in summary, the compound average growth rate seems about right. Back at the beginning of 1973, the DJIA was about 1,051.70. If you took that and compounded it at 5.3% you would have a current DJIA of 7,247.44. This seemed familiar and indeed, the DJIA closed on November 20, 2008 at 7,552 and on March 9, 2009 it closed at 6,547, both new lows at the time. At the close of business yesterday, June 23, 2009, the DJIA closed at 8,322 which, based on my starting point, was a 5.7% compounded average. Still in the ballpark. I then used a different benchmark, the closing DJIA for July 1, 1989, which was 2,661. I arrived at this date very scientifically; my computer will only go back 20 years on daily charts. Using my 5.3% compound rate of return, I arrived at 7,662. If I used a rate of 5.7%, I got 8,297, which is very close to yesterday's close. Seemed like 5.7% was a reasonable return overall and compared well with the 5.3% for 100 years. Once I start these things I tend to get hooked, and this was no exception. I took the 1973 starting point of 1,051.70 and the close in October 2007 of 14,165. To get from my starting point to the end point you would have needed a compounded return of about 7.5%. If I used July 1, 1989 as the starting point, I’d need about an 8.4% compound rate of return to get to the October 2007 close. Averages need to be used over long periods of time to be worthwhile, and I'd say 20 years and 36+ years would be a good sample. They show me that the average of 5.3% was greatly exceeded when the stock market hit its high of 14, 165. You may be wondering what all of this means and I have to wonder myself. What I do know is that on June 15th and again on June 22nd we had 90+% down days within the NYSE Operating Companies. This is a very bearish sign when you get two of these within 30 days of each other, let alone 6 days. Usually, after a 90% down day, we see the market go up for 2-7 days. That was not the case following June 15th. Taking this all together, I wonder if the market is about to retrace its steps to the low points noted above of November 20th and March 9th. I also wonder if during a period of excessive leveraging in the markets, prices were raised beyond what was reasonable and perhaps now that we are going through a deleveraging period, we will get a clearer picture of what companies are really worth. We shall see what we shall see. Ed

Bull or Bear?

When looking at the stock market, some individuals consider themselves to be either bullish or bearish about the market. Their perspective rarely changes, as this is their general sentiment. Putting it a different way, some people are optimistic and some are pessimistic. Many, like me, evaluate the current situation and try to determine if the long-term market trend is up, bullish, or down, bearish. Currently, I am bearish! On November 20th of last year, the market hit a bottom, and again on March 9th of this year, it hit a new bottom. From March 10th until the present, the stock market has moved upwards. It is not unusual to see the stock market have a rally within a bear market. The rallies generally last from two to three months. If the current situation is a rally, it will be three months old this Wednesday. We have had periods within bull markets when the rallies have lasted for five months. I don’t believe that will be the case with this rally. Bear markets tend to retrace their steps back to a bottom to test it before a bull market begins. Bull markets are generally found when prices are rising on increasing volume and where the vast majority of stocks are showing new highs in their prices compared to the previous 52 weeks. In addition, the up-volume of stocks is far greater than the down- volume. From March 10th until the early part of April, we saw some of these characteristics in the stock market. Volume had picked up, some stocks were seeing new 52-week highs and the up-volume was stronger than the down-volume. This period ended with a new period in which the market indices were trading within a band showing buying on the down side and selling on the up side (“buy the dips”). Bit by bit, the volume began to decrease. Last Monday, June 1st, General Motors filed for bankruptcy and the stock market made a major move up. While that move was impressive, it was on relatively low volume and seemed to be more of a lack of sellers than demand from buyers. This pattern continued last week. From technical analysis, what seems to be happening is that the rally is losing steam! If technical analysis is not enough, it is hard from fundamental analysis to figure out how the stock market can move forward with 6.7 million people on regular 26-week continuing unemployment claims, another 2.35 million claiming jobless benefits through an emergency program (up to an additional 33 weeks) for a total of over 9 million people out of work, and this does not count the people who have either given up looking for a job or who have settled on being “underemployed.” The economy is giving up more than 600,000 jobs a week! Will U.S. consumers, who are very important, as they represent over two-thirds of the economy, be able to spend or pay taxes if they are out of work? Business has reacted by retrenching and cutting costs as well as workers. In the fourth quarter of last year, the economy was down 6.3%, and for the first quarter of this year it sank 5.7%. Construction is down, capital spending is down and exports are down. Now the logic is that as bad as things are they are better than “before.” This may be the case, but generally stocks rise when the potential for earning is rising, and I find it hard to figure that in the next six months we are going to see a major turnaround in earnings. I could be wrong about looking at a bear market and thinking that, at best, it will be in mid- to late October before we see the real beginnings of a turnaround, but I don’t think so. Ed

Everything is Relative!

It seems the current state of the economy, the stock market, the bond market, and our personal feelings are up from last fall. This is a good thing, because last fall it felt as though the world was coming to an economic end. This new feeling has led individuals and families to change many of their values. People have started to spend less and save more. As a matter of fact, people are saving much more than they have for years! Families play games together and share time together again. There seems to be a feeling of “pulling together” to make it through the current economy. Almost everyone knows someone or knows of someone who has lost his or her job. Perhaps our value system is undergoing a fundamental change. Perhaps it is no longer about the huge house, the most expensive car, the most things, but rather about fundamental life needs: a roof over your head, food on the table, clothing on your back, decent medical insurance, and family. The lack of medical insurance is the problem that is inflicting some of the greatest pain on people who are out of work. With all this having been said, we are not out of the woods. The number of new people losing their jobs weekly seems to be declining, but that still means more people are out of work. In early March the jobless claims ran at about 670 thousand and last week it was down to about 600 thousand. The uptrend in claims now extends back to the summer of 2007 and has not been broken. Putting it another way, “continuing” claims have reached 6.35 million, a record! We are now reading about the bankruptcies of Chrysler and likely General Motors. They are not alone, as we see many local businesses go bust along with regional and mid-sized firms. Commodity prices continue to move lower as worldwide demand is down significantly. The lowering in demand is more prevalent abroad than even in the US. While credit markets are better, they still have a way to go before we see the liquidity that is needed. On the housing front we see a glut of homes on the market, selling prices are moving down, and now mortgage rates are beginning to rise again. The above will be dealt with over time. The point is “over time”. I think that between March 10th and May 8th we witnessed an uptrend in what is still a bear market. I could be wrong, but I would not be surprised to see the stock market move down in the coming weeks. My greatest concern is that while the bankruptcy of General Motors is built into the stock, I don’t think it is built into the emotional side of the overall market. History tells us that markets tend to retreat back to their market lows to test those lows. We saw a dramatic low in the market on November 20th of last year. This was followed by a new low on March 9th of this year. Next I believe we may see the market retreat to Dow 7500 and, if it breaks through that low, to move sharply lower. I view this as if the economy has gone through an earthquake and now we are suffering all of the aftershocks. Often we are not expecting the earthquake but once it happens, we fear the aftershocks. It seems likely to me that we are going to see stocks move lower in the near term. The selling pressure has not changed much since November 20th’s decline. With many sellers and fewer buyers, the market should be declining. For now it would seem cash and quality bonds are the best places to have funds. Ed Mallon

April Showers

Yesterday we had the first conference call for Secure Planning. We had quite a few individuals listening in as I discussed “Managing Investments in a Turbulent Economy”. Hopefully, those of you who listened now have a better idea of how Portfolio Insurance is created with the use of short-duration investments, with lower risk, coupled with longer-term investments with higher levels of risk. This can be very helpful in managing the downside of investing. In looking at interest rates, I’ve noted that overall rates have been decreasing during the month but in the past few days, rates have started to edge back up again. To me this is not a good sign. This is a patient with a temperature who seems to be doing okay. In addition, the stock market still seems to be marred by an overabundance of sellers, with buying occurring sporadically. It would seem with this combination that we are likely still in an overall upward pattern within a bear market. The good news is that most investments are up for the month to date. The bad news is that they could slip back down very easily. I would describe this as a jumpy stock market. In stocks and bonds, we have repeatedly seen this market react rather quickly to both good and bad news. This reaction can actually take place during a single day! At the end of March, the S&P 500 was standing at 797.87. As of yesterday’s close it was at 843.59. It is certainly good to see the market moving in a general upward direction. As I mentioned in my last newsletter, the S&P 500 opened the year at 902.29, so it still has a way to go to get back to where it was at the beginning of the year. The question of course is, will it? My personal concern is that we have not seen the last of the reaction to the current economic situation and will likely see a retrenchment back toward or below the lows of March 9th at some point in the future. The answer for now is to enjoy present sunshine and be prepared for those April showers that will bring us a bull market. Ed

Anticipating Earnings Reports

The initial earnings reports for the first quarter were nothing to write home about and did not impact the stock market. A positive report from Wells Fargo last week, indicating much higher earnings than expected, moved the stock market up. It is possible that reported earnings for the quarter might not be as bad as expected. Bad news and good news appear to set the stock market off very quickly. Today the market started in a down position, seemingly because of weekend news indicating the government’s willingness to let GM go into bankruptcy. While volume remained light for the day the S&P 500 finished in an up position. Thus far we have had five weeks of the market being up. Since earnings expectations are very low, it is possible that the actual earnings figures will come in somewhat better and continue this market rally. We continue to see a disproportionate number of sellers to buyers, which leaves me believing that we are in a correction within a Bear Market and not at the beginning of a new Bull Market. No matter what is causing this upturn in stock prices and lowing of interest rates I am happy to see it and would be even happier if it continues! Ed

Percentages Can Be Deceiving

It's been awhile since the sentiment in the market has appeared positive. With the S&P 500 having come off of a low on March 9th, we have seen a marked improvement in the value of stocks. Remember, however, that this percentage increase is coming from a very low point and that percentages can be deceiving. For example: if I had $100 and it decreased in value to $80, that would be a drop in value of 20%. If that $80 rose in value by 20%, I would now have $96 and still not be back where I started. If you think of the stock market as having dropped about 50% at its low, that means that $100 of investments would now be worth $50. If it were to rise by 20% (sounds like a lot) that would be $10 and we would now have $60. Better than before, but still not good! Percentages can be very misleading. I’d rather see it in dollars so I can understand what is really happening. In six of the seven trading days following the March 9th low, the market was up. In three of the five subsequent days, the market was down. Yesterday, March 25th, the morning saw the DJIA up 200 points. By late afternoon, the DJIA was down 110 points. That is a negative swing of 310 points in a matter of hours. At the close, we had a rally of 178 points with the DJIA showing a nice gain of about 1% for the day. We are likely in what is referred to as a trader’s market. The traders who are buying are not purchasing for long-term investment, but rather to either sell what they don't have (short selling) and buy back in when prices drop, or to purchase when prices are low and sell at the first opportunity to make a profit. In this environment, the supply of stocks available for sale is high while demand is variable. When demand is strong, stocks do well as sellers find willing buyers. When buyers step aside, even for a brief period, the market slides down rather quickly. At this point, the notion that a new bull market has begun is hard to justify. It looks more like an uptrend in a continuing bear market. Confirming this idea is the fact that interest rates, that had decreased earlier in the year accompanying a rise in stock prices, then rose again when stock prices fell, are staying at higher levels than I believe would be consistent with a bull market trend. I am happy with the gains but watchful of where it will lead us. Ed Mallon