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.

Interest Rates are Coming Down!

For some time I have indicated that I did not believe a strong market upturn could happen until corporate bond interest rates came down from their high. When interest rates go down the value of bonds rises! I wanted to see the value of our bonds rise! Back in November of 2007, the corporate interest rate on core bonds was about 4.75%. In March, rates had risen to about 6%, which I thought was a good buy. From March until mid-June, interest rates declined to about 5.5%, but then we heard about Freddie Mac and Fannie Mae and their problems. In a matter of days, the interest rates shot up to almost 9.5% on core corporate bonds as many investors left corporate bonds and turned to the safety of short-term U.S. government bonds. Fear was running the markets! It has been my belief that we needed to see the core corporate interest rates decrease to below 7% before we would see relief from the fear that has driven this market all year long. Interest rates last month did finally get down to a range of 7.5% to 7.65% and stalled at that point . . . until this week! I mentioned to some clients that we might see the core corporate interest rates, when they did decrease, look something like the drop in the price of oil, with a rapid drop in rates and a corresponding increase in the value of bonds. Well, it happened! On Monday the interest rates on these bonds dropped to 7.35%. On Tuesday the rate dropped to 7.22%, still higher than my target of under 7% but looking better than we have seen in a long time. On Wednesday they went to 6.91% and I wondered: is this for real? Thursday confirmed the trend with the rate dropping to 6.71%. This is a major change in a very short period of time. Until yesterday there had been no real drop in the interest rates on high yield bonds that had risen from about 11% in March to 23%. Yesterday we saw the first meaningful drop as the rates went down to about 21.65%. The drop in interest rates seems to be the first signal since last June that the fear that has swept the market seems to be receding. I believe this is a good trend and I am optimistic about where we might go from here. Ed Mallon

Holiday, Followed by Turkey

Last week seemed to be an optimistic prelude to the Thanksgiving holiday. The stock market managed four successful up days followed by a fifth on the Friday following Thanksgiving. Unfortunately, on Monday, the market was a “turkey” and gave back about half of what it had gained during those five up days. Some of this is profit-taking after such a run up, but part of it is that the economic news is still not very good. It has been my belief, and still is, that in order for the economy to move forward, we need to see the interest rates on corporate bonds decrease to a level that makes some sense. This has not happened. Interest rates rose in October and were followed by additional increases in November. If it takes lower interest rates to move the economy, then the stock market cannot do much until lower interest rates occur. Corporate bonds, in some cases, are linked to commercial real estate, and as the economy worsens, the question becomes “what is the value of the real estate that supports the bonds”? There seem to be many questions at present but few answers. The old administration in Washington is wrapping up their loose ends and likely will do little between now and the time that the new administration enters. I had a list of what I would do if I were the President-Elect and I must say that Obama is doing all of the things on my list. He will need to hit the ground running, and to this end he appears to have assembled a competent group to help him launch meaningful economic reform. I wish him well! Ed Mallon

False Breakout?

The rally we saw on Tuesday, which appeared to be a breakout moving the markets higher, seems now to have been a false breakout. Yesterday's total market downturn, another 90% down day on the NYSE, was followed by an additional downturn today. From a technical standpoint, the downturn on Wednesday could be seen as a pullback, but today's results seem to indicate that the market may be reversing direction and going back to test the lows of October 10th and 27th. The support level for the S&P 500, for instance, had been considered to be at approximately 930. As of this writing the S&P has broken through that level and is at about 904 (down over 48 points for the interday). In a similar fashion, the support for the DJIA had been considered to be at about 8900 and as of this writing it is at 8696. Historically, the market tends to backtrack and test its lows before rising on a consistent basis. This movement of a rally period followed by a pullback period can take several months after it appears a bottom has been formed in the stock market. I would not be surprised to see the DJIA go back and test, or break the low of 7882 set during the day on October 10th. We will see. For now it would not appear a rush into stocks is a good idea.