Hey, Wait for Me!

You might be wondering where the stock market is going these days. As of the close on September 13th, the DJIA had gained 5.3% since August 31st while the S&P 500 was up 7% and the NASDAQ was up 8.1%. My, what is going on? Let's start by understanding that August was a very poor month for the market. To put it in perspective, the S&P 500 was down 6.8% in August. What we have seen, therefore, is a move back to where the market was at the beginning of August. This is not a bad thing; it’s just that you need to remember we don't have a runaway train on our hands! The news has been good. The private sector added about 67,000 new jobs in August. New unemployment claims last week were 451,000 vs. 472,000 the week before (we are looking for that number to go below 450,000 and will be happier at 400,000 or lower). The economy appears to have grown by about 2.85% from the end of September 2009, which is not great, but it is growth. Today, retail sales were reported to be up, which was totally unexpected. In addition, the winds of positive tax reform appear to be blowing in the right direction. The possible large increase in taxes in 2011 has weighed heavily on the markets. The idea of 100% write-off of new plant and equipment investment through next year sits well with me. I think its biggest impact is on large corporations that have lots of surplus cash to spend. The trickle down of this to smaller businesses, which will manufacture all or parts of the plant and equipment, is good. The one bone of contention seems to be taxes on those who earn more than $250,000 each year. The implication is that these are the "fat cats" but history shows us the "fat cats" can always figure a way out of paying taxes. The real burden of this measure once again falls on small business owners who have been massacred during this downturn with little or no help from the government. All in all, the economy is looking better, consumer confidence may be gaining, and the likelihood of a "double dip" is looking far less likely. So how do I feel about the market? Short term, I think it is too high. September is notoriously a bad month for the stock market as investors start to worry about the all-important third quarter earnings. I think that, between now and the middle of October, we may hit a rough spot or two. Looking out to the mid term and long term, I think we are still in a bull market that is going through a correction. Ed Mallon

Jobs, Jobs, Jobs! Revisited

In my April 5, 2010 blog, I indicated that the jobs picture seemed to be turning around. At that time, the new jobless claims had dropped below the magical 450,000 count and a trend downward seemed to be developing. In addition, my expectation was that job creation would pick up substantially during the second quarter in a manner similar to that of the second quarter of 1975. To put it mildly, this did not happen. The new claims for the past week exceeded 500,000. The trend that had been favorable in April and early May has been reversed and is not looking very good. New jobs formation that was very strong in April petered out in May and has not recovered any meaningful strength. This decline can be attributed to a number of reasons. The first is the sovereign debt problem that began with Greece in the later part of April and then spread to Spain, Portugal, Ireland, and others. As thought, the “other shoe” had been dropped and liquidity in the markets began to dry up. A flight to high quality, such as U.S. Treasury Bills, followed. While the U.S. House of Representatives was able to pass a jobs bill, the Senate has not addressed the bill and is unable to get much of anything done. Increasingly, the likelihood of Congress not acting on tax reform is looming large. Without corrective action the tax rates will return to the higher levels of 2001. In particular, the increase in taxes for dividends and capital gains is weighing heavily on business. It is difficult to tell what the “deal” is since Washington is giving no clear direction. Small banks that traditionally fund small businesses are reluctant to make business loans. Small businesses, even if loans were available, are reluctant to expand because they cannot figure out what the “deal” is on taxes. A small business is a business with fewer than 500 employees. In 2004 the Small Business Administration, Office of Advocacy, indicated that there were 17,000 large businesses, while 24.7 million small businesses represented 99.9% of all the businesses in the United States. While these numbers seem impressive, it should be noted that only 5.7 million small businesses actually had employees. Imagine if each of the small businesses with employees added one more person! I think small business, not large business, needs to be the target to create jobs and get the economy moving again. Ed Mallon

What are American's Buying?

The Commerce Department reported today that retail sales, spending by consumers, dropped 0.5% in June. On the surface, this might appear to be bad news. As with many things in the economy, it depends on how you count the numbers. If you exclude autos (down 2.3%) and gasoline (where the price dropped, creating less spending on the same volume of sales) then retail sales grew by 0.1%. This is not the growth rate we would like to see, but it is growth. So where are Americans spending? Department store sales went up 1.1%, appliance sales up 1.3% and specialty store sales up 0.6%. Now add to this more upbeat view the International Council of Shopping Centers' Index (this is comprised of the largest retailers) which showed a 3% gain in sales for the month, compared to the same month a year ago, and you might not be quite as concerned as the initial report would indicate. The Federal Reserve along with the IMF have indicated that they expect the growth in the second half of the year to be slower than the first half (3% vs. 3.5%). Instead of using percentages, let's see what happens using real money. If you had sales last year of $100 monthly, then your sales in the first half of the year averaged 101.75 followed by an average of $103.53, would you say this is progress? It appears to me that the economy is growing, albeit slower than we would like. In order to get faster growth, the federal government could be clearer about what they are doing so that small businesses and consumers feel more confident. This does not mean spending lots of money, but being clearer on tax, estate and business policies, all of which are unclear at this time. If small businesses understood the "deal" they might begin hiring, which in turn would lead to fewer unemployed, which would lead to consumer confidence. Making banking credit available to small businesses so they don't have to use their credit cards, at high interest rates, to fund their cash flow needs would also be helpful. Ed Mallon

Uncertainty

It seems that the stock market, the bond market and the world are going through a period of uncertainty. Recently, we have seen a new flight to US government bonds as a safe haven for money from around the world. It is reassuring that the world feels the US is a safe place to have money. The problem seems to be that we who live in the US don’t have the same confidence in our economy. As the second quarter ends, there is uncertainty as to how the economy has performed overall. We have heard this week that consumer spending is up. Corporate spending is up. Productivity is up. On the other hand this Friday we will find out what is happening with unemployment, which has not improved of late, and perhaps get some preliminary numbers on new job creation for June. The uncertainty stems from an attempt to discern if the economy is moving forward with greater profits from companies and more confidence from the consumer, or is stumbling. As of yesterday, the multiple on one year forward earnings for the S&P 500 was 13, where normal would be 18. This discrepancy gives us a clear sign of how uncertain the feeling is about the coming year. We will know a lot more as earnings are reported over the next several weeks. Ed

Flag Day

Each year we have Flag Day and it falls on June 14th. I don’t know why, but I always seem to remember Flag Day. Flag Day commemorates the adoption of the United States Flag on June 14, 1777. I’m not a big history buff, but I do remember this piece of history. It tends to make me remember all of the men and women who have gone before us and have done so much to grow and preserve our freedom and way of life. Most of us, or our families, originally came to the U.S. as foreigners. This has been and remains a land of opportunity. As I read about the turmoil in the world and the economic problems, I can’t help but think how lucky we are to be living in the United States. Yes, we too have our problems, but by comparison we have so much more opportunity, coupled with freedom, than anywhere else in the world. It is up to us to take advantage of this opportunity and freedom and use it wisely. This past month and a half have been difficult, with unemployment continuing its march upward, the oil spill in the Gulf, the turbulence in the stock market, and many other issues. Even so, most of us still go to bed at night well fed and feeling secure. What do you think the expectations of our founding fathers were, back on June 14, 1777? Ed

Dow Drops 376.36!

Yesterday, the DJIA had a major drop in value, as did all of the other exchanges. I generally like to use the S&P 500 as the base for reviewing market activity. Yesterday it was down the most of all the exchanges, with a 3.9% drop to 1071.59. What is interesting is that the S&P 500 has dropped from its peak, on April 23, about 12%. What does all of this mean? For the short run it likely means the markets will move up for the next 2 to 7 days as that is what generally happens after a 90+% down day for stocks. Because the volume yesterday on the NYSE was 8.5 billion and the market moved down dramatically it means there was an ample supply of sellers who were likely doing some profit taking. It also means the market, at some future time, will test these lows. Given all of this data what does it mean long term? First of all, I believe this is the correction that I've been anticipating since the middle of March as the market was becoming overbought. I don't think this is a return to a Bear market. By mid April it was very apparent to anyone with an understanding of the market that it was overbought and a correction was coming sooner or later. The actual reason for the correction generally is meaningless in my opinion. In the early part of yesterday the drop was being blamed on the falling euro but the euro climbed from 1.21 to 1.25 so that was not it. Then it was the job data that came out showing new layoffs of over 470,000 instead of the 440,000 that was anticipated. Good story, but I don't think it holds long-term weight since the new job creation in April was 290,000 while what was anticipated was 180,000. Earnings data for corporations look good, consumer spending is OK and inflation does not seem to be an issue. The stock market is a leading indicator. This blip downward would indicate that the rosy picture that Wall Street saw in mid-March is being reevaluated. While the economy is improving it will take some time before it is sound again. In 1990, when we had a recession, the big reason was the failing productivity level in the US. It took the US five years to get back on top of worldwide productivity but it did what was necessary. The darkest cloud over the US currently is the government’s interference with the entrepreneurial spirit of this country. There are over 25 million small businesses in America and they are the heart of the economy. They have to have confidence in the economy, government spending and legislation in order to be willing to expand. Some of the new legislation intended for large corporations is falling on the small businesses both in regulation and more so in taxes proposed in the new tax bill. If this continues it could stall the economy and change the direction of the stock market. Ed Mallon

A Market Correction or a New Bear Market?

After the events of the past two years, it is understandable that the markets are so volatile. As I have indicated previously, the expectation of a market correction has been in the works since the latter part of March and most certainly after mid-April. My own expectation was for a brief correction of about 7%. When the markets get to a point where they are overbought, then a correction eventually comes. The question is when something will happen and what will trigger the change. In this case, the debt of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) was the catalyst worldwide to bring about a rapid descent. At the beginning of 2010, the S&P 500 opened at 1117 and by April 23rd it had reached 1217, up 100 points or almost 10%. Between April 24th and May 7th,the market went down to 1111 for a drop of about 8.7% and below the opening at the beginning of the year. The bond market acted in a similar fashion with interest rates decreasing until the scare from the PIIGS moved interest rates up and the value of bonds down. The action over the weekend to bolster the euro, with a commitment of $1 trillion, was a bold and needed move to keep the financial markets and economies of the world moving away from the recession. The impact worldwide has been dramatic and good. But how about the fundamentals? So far, 381 companies that make up the S&P 500 have reported earnings, and of these 77% have topped estimates. The S&P 500 index is trading at 13.5 times forecasts for earnings during the next four quarters while the long term average for this multiple is 16.4%. This would imply that there is still room for stock price growth. All of this was before Friday's meltdown. If the PIIGS situation remains stable, then it is likely the markets will resume their path higher. I am not complacent at this time because we in the US need to do something about our own Federal red ink! I am hopeful that we will see the light and move to reduce the deficit spending once the broad economy is out of the woods. For now, we continue on a positive path with very large job creation in April (I was thinking 200,000 but instead it was 290,000), inventories being replenished and businesses increasing spending. The signs for a recovery are looking good! Ed