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

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

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

Today the U.S. Government announced that the jobless rate now exceeds 6.1%. This was an unexpected jump, with most analysts believing we would not see 6% until the end of the year. What might this mean? With this jump in unemployment, the Federal Reserve, which has been worried about the economy all summer, will likely leave rates unchanged after their meeting on September 16th. Also we will likely see consumer-spending decrease substantially in the third quarter, after the rise in spending from the incentive tax rebate of the second quarter. All in all, the economy appears to be slowing down and will likely show little growth, or perhaps a downturn, for the balance of the year. Additionally, the sub-prime loan problems have driven interest rates on bonds to recent new highs. Refinancing of the majority of sub-prime mortgage loans should be complete by February and we may see the housing market begin to pick up again this spring. In my opinion, the inflationary effects of the oil price increases will also take until February or March to totally work their way through the economy. When this occurs, we are likely to see prices stabilize. Perhaps the most important issue is that by November, we should know who has been elected President. The stock market likes to know who will be serving in the White House, and this uncertainty is likely to continue to make the market volatile through Election Day.