Here Comes Santa Claus!

First a little bad news: the government revised the third quarter GDP downward from 3.5% growth to 2.2% growth. Notice that it was still growth, and remember that in the second quarter we had negative 0.7% GDP. I believe we will have higher GDP growth reported for the fourth quarter. We have already seen the number of new people losing jobs diminish. Unemployment overall seems to be decreasing. Yesterday it was reported by the Bureau of Labor Statistics that the number of temporary workers being hired has surged. Last month, 52,000 temps were added, greater than the number of jobs created in any other category. This is usually a precursor to full-time hires. These jobs also take people off unemployment. Finally, it was reported today that in November previously-owned home sales rose to 7.4%. At this rate of sales, the country has a supply of about 6.5 months. Yes, the prices have dropped again but by the smallest amount in two years. Overall, the economy seems to be moving upwards. The loss of this past Saturday as a shopping day along the east coast is meaningful, but it may be made up in the aftermath, as consumers are buying. As we head into the end of the year and look to next year, the news seems to be getting brighter. Ed

Wondering and Waiting

As I look back at the past month I notice that the number of people who are losing their jobs is receding. The overall unemployment numbers are beginning to drop. Earnings reported for the third quarter by large corporations were reasonably good, even if it was through cost cutting and layoffs. The consumer seems to be a bit freer in their spending. While savings rates have dropped since the summer they are still above 4% which I also consider to be a good sign. Finally, banks and government are beginning to talk about loans for small businesses and General Electric Credit is actually advertising the availability of such loans. This is important since small businesses drive most of the jobs in the U.S. and they need a source of credit. All of these tidings seem to bode well for the economy going forward. Nothing appears to be jumping forward at a rapid rate but slow and steady can win the race. I am still waiting and wondering if all of this will hold and I am thankful for the signs we are seeing. Ed Mallon

Happy Thanksgiving News!

Just in time for Thanksgiving, the Labor Department has given us some good news by announcing that the weekly jobless claims for last week fell to the lowest since the first week of January. The jobless claims dropped to 466,000. As I indicated in my November 13 blog, the number needs to get to about 400,000 to signal a real turning point, but it was a surprise to see the number go below 500,000 for the first time since early January. Another seemingly positive sign is that the number of payroll cuts expected in November is about 145,000 vs. about 190,000 in October. These seem to be trends that are going the right way. Consumer spending also appears to be increasing with the savings rate dropping from 4.6% in September to 4.4% in October. The only issue is that spending is outpacing income growth. Can this be sustained? All and all, it is nice to see positive news even if it is not conclusive.

Unemployed!

“What is your job?” “Unemployed!” Imagine having to say that for more than a year. Millions of Americans are in this unenviable position. They are waiting for someone--government, big business, anyone-- to do something so they can have jobs. No job often means no health care insurance along with many other issues. How do you feel about yourself when you’re unemployed? For many, it leads to serious depression. The latest statistics say that the unemployment rate is now at 10.2%. This is, of course, misleading because it only includes those individuals who are on state unemployment. If you count Federal unemployment payments, people who have stopped looking and those who have taken lesser positions just to put food on the table, the number is more like 21%. These are just numbers, and are not personal. To the people who are out of work, it is very personal! It hurts! What it all means to me is that we have a lot of hurting Americans. We need to get a jobs program going. For the past month, the Obama administration has become more publicly vocal about the situation and seems to have acknowledged that job creation is now necessary. Congress for now seems mired in the Health Insurance Plan. It must be very frustrating to be unemployed at this time and listening to advisors and economists saying that this may be a “jobless” recovery. It seems to me that the idea that was broached by President Obama several weeks ago, of a tax credit for small and medium sized businesses for hiring people, makes sense. Doing something for the unemployed makes more sense than just preserving jobs. My next concern is with the jobs that have been “preserved” with stimulus money that will not be there in the future. Ultimately we need growth! My belief is that if Americans see job creation, a lowering of the unemployment numbers and a drop to below 400,000 in new weekly unemployment numbers, confidence would begin to be restored and we would move forward at a faster rate that in turn would create jobs. I think the next several weeks will be an important time in finding out about the willingness of consumers to spend money during the holidays. If they spend equal to or greater than last year, we may be headed in the right direction with the economy but not necessarily with jobs. Ed Mallon

The People on the Bus Go Up and Down

When my children were little and we went traveling they would sing “The People on the Bus Go Up and Down” song. I couldn’t help thinking about this on Friday as October came to an end. During October the market was headed up and down each day. By the end of the month the DJIA was flat, the S&P 500 and NASDAQ had losses and basically nothing much had happened. The municipal bond market did take a bit of a hit during the month as interest trended up and the value of the bonds went down a bit. The announcement last week that GDP went up for the third quarter at a 3.5% annual rate, which was good news, was offset by the thought that this would not continue and was only because of “special Government assistance.” The good news that new weekly unemployment rates were dropping was offset by the total size of the number of people who are unemployed. The lack of new jobs was meet with the administration stating that if they hadn’t acted more jobs would have been lost and that they had managed to save about 650,000 jobs. It all seems to go back and forth. The real answer is that no one knows the real answer. It seems clear that new job creating is needed but the winter months historically are not good for job creating. If you go back to the 1973-1974 recession jobs did not turn up until March. With all of this said it would seem that the fourth quarter of this year may still look reasonably good. The Wall Street Journal reported this morning on their front page that “Jittery Companies Stash Cash.” They went on to point out that big businesses are hoarding money that they could be spending. They also noted the good news that many big companies have money available to hire people, when they are ready. Consumer spending is also down with the consumer also hoarding their money. It will take a sense of confidence in the government and the economy before all of this turns around. The upcoming holiday season may give us a clearer picture as to the confidence level. Ed Mallon

Waiting for Quarterly Results

This is often an interesting time in the market. It is the period between the end of the third quarter and waiting for the financial results to come in from businesses for the first nine months of the year. It appears that the expectations for improved earnings are running very high. It is clear that the "Cash for Clunkers" program gave a robust push to July and August for auto makers. Retailers are indicating that September was better than what they had expected. The newest job loss numbers released today were also better than expected. All and all, the markets are basking in a very pleasant light. If results come in as expected it will be a good sign for the economy. You always wonder when everything seems to be going better if one item not going according to plan will upset the apple cart. Between now and early November we should get a clearer picture. Ed Mallon

What to do with Cash?

If there is a recurring theme that I am hearing from my clients, it is this: what do I do with short-term cash? Many have found that their money market account, savings accounts and CDs are paying little or no interest. (If you haven’t looked lately, you might be surprised to see rates on CDs at less than 0.50%). If you invest these funds in some type of long-term investment, you might be facing the prospect of inflation eroding the interest paid and the principal declining in value. The real question, therefore, is “where do I put money that I want to have liquid but get a fair interest rate without taking undue risk?” As investments go, the shorter the term of an investment--from the time you invest until you get your principal back--the lower the risk, if you buy quality! On the other hand, the shorter the term of the investment, in general, the less the interest rate your principal will earn. What I have found this year is that short-term taxable investments are paying little or no interest. This is in large measure because the Federal Reserve (Fed) target for short-term interest rates has been 0%. The Fed gets what it wants! But the Fed does not care about nor does it control the short-term interest on tax-exempt investments. What we have seen so far this year is that a good place to invest for liquidity, quality and a fair interest rate has been short-duration municipal bonds. If this sounds like something you might want to consider, give us a call and we can discuss it. Ed Mallon

Who will Bear the Cost?

It seems to me that much of the news in September has been "Bad News". It was reported last week, for example, that the U.S. Deficit for the year hit an all time record, well over $1.25 trillion dollars. Last week the dollar hit a new low. Many investors have been looking outside the United States to obtain better rates of return as the Federal Reserve has been targeting a key lending rate of 0% to keep interest rates very low. Earlier in the month it was also reported that the unemployment rate has hit 9.7%. We now have about 14.9 million individuals out of work, according to Christopher S. Rugaber in his September 4th Associated Press article. This does not include those who have taken reduced salaries or lower paying jobs and those who must take furloughs. For some of these individuals, who will bear the cost? For some of these individuals, the unemployment checks are about to end, leaving them in desperate situations. We are also hearing that the "rebound" of the economy may be a "jobless rebound". With all of these reports, it is no wonder that consumers who have jobs have cut back their spending, are saving more and are worried. We have to be thankful for the clunker and new homeowner's programs, as brief as they may be, in motivating consumers to spend. All of the above made me wonder how the Federal Debt will be repaid? It can't be repaid by those who are out of work. We are finding, on an international level, we are losing manufacturing jobs and not getting the new high tech manufacturing jobs because our corporate tax rates are too high (see Business Week Sept 21, 2009, "Can the Future Be Built in America?"). It therefore seems unlikely that increasing corporate taxes is the answer. The answer is that individuals will have to carry the burden of added taxes. For years, we have heard about the widening gap in earnings at the top end. Certainly this top group of earners is the group to go after. One of the problems with this is that the top earners are seeing their incomes declining. According to an article on page 1 of the September 10th issue of the Wall Street Journal, "Income Gap Shrinks in Slump at the Expense of the Wealthy", while the top 1% of tax returns in 2007 accounted for 23.5% of all personal income, it appears this will be reduced to about 15% in 2010. This top 1% of tax returns paid 40.42% of all the taxes collected in 2007 according to The Tax Foundation. To be in this rarified 1%, you had to have had an adjusted gross income of $410,096. The top 5% of tax return filers are also seeing their incomes declining, and in 2007 paid 60.63% of all Federal taxes. These were filers with $160,041 of adjusted earnings. If this group is seeing their earnings coming down, then the taxes collected from them will also come down. A combination of less government spending, higher income taxes and more jobs is likely to be in our future. The good news with all of the above is that there is an awareness of what is happening and a real opportunity to set Federal policy to go after the high tech manufacturing jobs, develop new jobs relating to the environment and move away from high reliance on the financial services sector in creating jobs. The United States has responded in the past and I am sure will do so again. Ed

What to do?

Many times it seems that “action” is better than no action. When we see things happening around us we want to “do” something. Recently the stock market has moved up quite nicely and you begin to wonder “did I miss the boat?” I do not have a crystal ball but I have been saying for several months that you need to have a game plan that makes sense rather than reacting to the stock market. The game plan I am pursuing is one based more on historical information than on what is happening with the stock market day-to-day. Historically the month of September is the worst month for the stock market. I think this occurs because investors realize that while gimmicks and onetime adjustments (such as lowering employees pay or not buying equipment now that you know you will need later)can work in the short-run you cannot build business profits using these methods. Ultimately, growing profits move stocks higher. The expectations in the first and second quarter for earnings is fairly small. By the time you get to third quarter earnings the expectation is much greater. Third quarter earnings are the last earnings we will see for the year since year-end earnings are not reported till the following year. It seems that the worry about what the third quarter results will show tends to drive the stock market down. Will that happen this year? I don’t know what will happen in the future but I don’t think you want to increase risk in your portfolio at this point in time. Ed Mallon

Stock Performance

Since the March 9 low in the stock market, the market has risen almost 50%. If you had invested $1,000 at the beginning of 2008 and that fell to $500 by March 9, between then and now you would have gained about $250 (50%) and be back to $750. That is still 25% below where you started, but it’s a lot better than where you were on March 9. This stock market is up 49% in five (5) months. To say that this is unprecedented is to put it mildly. You have to go back to the early 1930s market rally to find when it last happened. Of course, that rally was followed by a decline through 1932 that led to prices being down about 82%. I don’t want to burst anyone’s bubble but it appears to me the stock market is ahead of itself. Consumers account for about 67% of the spending in the economy. Currently, many consumers are out of work. It is unlikely that they will increase their spending. An article in today’s Wall Street Journal, “Debt Burden to Weigh on Stocks,” indicated that: “. . . household indebtedness peaked in 2007 at 132% of disposable income. That was the highest level since the end of WWII and quadruple the 36% of 1952. By the end of March, with families boosting savings, repaying debt and defaulting the ratio had fallen to 124%, a tad lower but still miles from the level of, say 69% in the middle of 1985.(WSJ,pg. C1,08-10-2009)” Consumers are not borrowing but are paying down debt and saving. If that is the case, how is the economy going to grow? How are corporations going to see profits increase? When will companies begin to create new jobs? I have to agree that we are better off now, than, say, last November when things looked bleak. But are we so much better off that the stock market should be up 49%? In a news story today on Bloomberg.com, the reporter indicated that Mark Mobius at Templeton is expecting a 20-30% correction in the market. They also report that Warren Buffett is shifting out of equities and into U.S. corporate bonds and foreign government bonds. These are two very astute investors who manage a lot of money. If the market declines 20 - 30%, it will not be down as much as it was on March 9, but it still would bring us close to that point. If we take the $750 that we now have from our original $1,000, a downturn of say 25% would leave us with $563. Of course, the future will tell all, but for now I would not get carried away buying equities. Ed Mallon

S & P 500 Up 7.5%

Good News! The S&P 500 is up 7.5% between July 8 and July 17! In a period of about a week and a half we saw the S&P 500 go from 875.07 to 940.31 on recent good news. It is being reported that various aspects of the economy seem to be showing signs of either nearing a bottom or possibly bottoming out. This, it would seem, has pushed the stock market up in a meaningful way in a short period of time. On the flip side of this is the fact that from January 2 of this year through July 17 the S&P 500 has gone from 931.80 to 940.31 or up about 0.9%! So, is the glass half empty or half full? I don’t really know. In looking back on the past month we saw the S&P 500 close at 944.89 on June 11 then go down to 875.07 by July 8 to return to 940.31 on July 17. In other words, the S&P 500 went down 7.4% then went up 7.5%. As this up and down process went on from mid June through this past Friday, the 30 day average volume on the NYSE has been going down. Lower volume is not the normal condition for the beginning of a new bull market. Whatever is going on, this sideways movement of stocks would appear to be containing the trading range with no dramatic current movement either up or down. My expectation for the market this summer has been either no substantial change or a gradual move downward until mid September. The positive surprise has been some of the good earnings reports and the fact that they seem to have had an impact on the market. Perhaps the lack of volume is due to the summer doldrums and investors waiting for the main event: earnings reports for the third quarter! Ed

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

How's Your Market?

I was thinking today, as the market was falling, how am I doing? I realized that my values, my faith, and my belief that the U.S. is still the best place to live have not changed. What appears to have changed is our collective relationship to money. For a long time, "getting and spending" money was relatively easy. The "Big Easy" seems to be over. The new reality is that, as a country and a world, we may have to work hard simply to keep what we have. This is worthwhile, and will likely strengthen our values, just as WWII and the Great Depression did for past generations. This is not the kind of reality check we like, but here it is. We must be strong, stop whining, and keep our spirits up. If you’re looking for the media to do this for you, give it up. Watch an old comedy instead. It will be more meaningful. Ed Mallon

Positive Negativity

Good news: Everyone thinks the economy is only going to keep getting worse! It seems that when "everyone" knows something bad is going to happen the worst is often behind us. I was thinking yesterday, as some of the stock market indexes reached new lows in this bear market, about the price of oil just a few months ago. The price had reached about $140 per barrel and the talk was that it was bound to rise to $200 or $250. Very, very few "knowledgeable" people thought it would go down. Where is the price of oil now! Would you believe it has fallen about $100 per barrel to roughly $40. Bear markets generally begin to wane when "everyone" is sure there is no hope! In listening to what has been going on lately it would seem we may be close to that point. Yesterday, when the S&P 500 and the NYSE indexes reached new lows for this market downturn, I found that not many stocks were reaching new lows. This too may indicate that the market is getting to an oversold place and is only waiting for the time when the signal to buy emerges. I have read reports by some that the Dow will drop to 5500. This is possible. I have not been reading much from people who are saying the market could go to 10,000. I think that this, too, can happen. This may not be the bottom, but the sentiment is so bad, and so much negativity has already been built into the price of stocks that we may well be approaching the bottom. After a year and a half of being pessimistic about what is going on, I now feel optimistic! I don't think the ship is going to sink! Ed

Volatility and Interest Rates

For some time I have indicated my concern that, unless interest rates came down, this economy and the stock market would have a difficult time moving forward without excess volatility. Since the latter part of January, we have seen interest rates on both core and high-yield bonds rising again. The move has not been as significant as it was last year, but the trend is not what I'd like to see. During this same period, we have seen the stock market trending downward. In the last couple of days we have seen high-yield rates on bonds dropping a bit and the stock market moving upwards. What is most interesting is that this has come at a point when unemployment has been reported at 7.6% and the number of the newly-unemployed is the highest since 1974! What we don't know is whether government actions will have an impact on interest rates and business in the short run or whether it will take several years. Once again, we must remain patient and maintain the belief that things will get better eventually. As businesses become leaner through layoffs, it is concerning that more and more people become unemployed. We need to see efforts directed at creating new jobs and getting people back to work! Ed

It Makes Me Wonder!

It makes me wonder, is it a coincidence that Obama made his acceptance speech at the Democratic National Convention on the 40th anniversary of Martin Luther King's famous "I have a dream" speech? It makes me wonder, is it a coincidence that Obama will be sworn into office as President of the United States the day after the Martin Luther King Day celebration? It makes me wonder, can hope replace fear? I sure hope so! Ed

Happy New Year!

This is the New Year we talked about during the old year! The old year was unkind to almost all asset classes. It did start to redeem itself late in the year with interest rates declining and stocks rising a bit. The nicest thing that I noticed was that after my blog on December 19th, both the core and high-yield bond values continued to increase as interest rates continued to drop. At this writing we have seen the core interest rate go from 7.22% on December 19th to 6.33% on January 6th. That is good for bond values. In addition, the interest rate on high yield bonds has gone from 21.65% down to 16.21%. What this seems to be telling us is that the fear in the credit markets is beginning to subside and investors are becoming more rational about prices. In a similar fashion, we are seeing a fairly stable trading range in most of the stock market indices since December 16th with no real significant changes. This appears due, in large measure, to the lack of sellers (supply) rather than strong buying (demand). As long as the sellers are unwilling to sell at current prices, this is fine! This will not, however, move the market up very much. The key to bringing this market up is greater demand for stocks.