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

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

Can it rain and be sunny at the same time?

On Monday of this week, the inflation rate for the month of July was reported to be 0.8% or an annualized rate of 9.6%. This compares with an annualized rate in June of 7.2%. This would appear to be bad news because it means the price of goods and services are going up at a much higher rate than the Federal Reserve Board (Fed) would like to see (1.5% to 2.5%). In such a situation, you would expect to see the Fed increase their key interest rate. On Tuesday, the Fed met and left the key interest rate unchanged at 2%. This also means that the prime leading rate stays at 5%. The stock markets took this as good news, with a healthy advance in prices. The bond market took it as bad news with interest rates rising (and therefore the price of bonds declining). It would seem that, with the price of oil falling for the past week and the economy not looking its best, the Fed decided to gamble that prices will stabilize as oil prices are reduced. The lower oil prices could benefit food and transportation costs. This in turn could mean that inflation will be reduced. What we are seeing, in any event, is that the current Fed is more concerned with the economy than with inflation. Ed Mallon