The Media at Work

I rarely look at TV during the day, but last Friday I walked into a room where a financial news program was the focus of attention. The stock market had been down on the two previous days and it was dropping significantly on Friday. The talking heads called in their various experts, all of whom agreed that the bad news out there meant the market was doomed! One commentator asked: “Is this the start of a big bear market?” to which the “expert” responded, “It sure looks that way!” Sorry, I don’t buy it. On Monday, one of my longstanding clients called in to ask if he should sell his stock positions because the bear market had started. In questioning him, I discovered that he is an avid fan of free financial news programs and owed his depressed state of mind to watching this chatter on television. Because the weather was so fine, I thought he should turn off the TV and go for a nice walk outside. It’s addictive to watch television news programs because, for the sake of ad revenue, they do all they can to keep you watching. Back in March, these same programs were telling us how rosy everything looked. Now we are being told the economy looks awful. I indicated in my April newsletter that I expected a market correction and that this might be the impetus to create more demand and move the market much higher. Well, here we are with a market correction, still in a bull market, and now it’s time for demand to pick up. In the beginning of the year, I indicated that there would be a gradual change in the economy, which is what is taking place. The economy, like the stock market, does not go up in a nice smooth fashion, but rather moves in fits and starts. Being patient pays off in the long run! Ed Mallon

Reducing Momentum

It seems to me, that the economy and the stock market are like a giant pendulum swinging back and forth; first too far one way, and then too far in the other, with no real middle ground. Earlier this year, signs pointed to a rising economy that was moving much faster than most economists had predicted. The unemployment rate was sinking, the number of new jobless claims was trending down and new job growth was significant. Corporate earnings for the first three months of the year either met or beat the consensus expectations. On this news, the stock market began taking off in the later part of March and through most of April. As we enter early May, a reevaluation of where the economy is headed is taking place. Where the ideal for new unemployment claims was headed close to the magic 375,000 mark or below, which would indicate job growth, the recent four week average is now at 431,000, a jump of 21% in the past four weeks. The service sector that employs about 90% of the work force slowed for the second straight month. The current expectation for new jobs created has fallen from a week ago. All of this is beginning to drag the stock market down. The question in my mind is: Has the pendulum begun to swing in a negative direction or was the perception of how far it had gone in a positive direction overstated? I believe the case is the latter; that we are still on a positive course but one that corresponds more closely to some of the longer term projections made last year. We were bound to see dips along the way to a better economy. It would be wrong to think everything was suddenly going to be “all better.” The economy is coming out of the worst period since the great depression. Housing prices still do not appear to have bottomed out in many places. Commodity price increases got ahead of themselves. Speculators, who believed the world economy would grow at a fast rate, pushed commodity prices up, and are now seeing them collapse, as the world economy appears to be slowing down. Bear in mind that, at the tail end of last year, predictions were that unemployment would remain over 9% through the end of 2011 and would likely top 10% for a portion of the year. Unemployment is currently at 8.8%; not great but a whole lot better than expected. Perhaps the pendulum is slowing a bit, but it is also likely that stock market investors, commodity speculators and others just jumped the gun on how they interpreted the recent economy. Slow and easy seems to be working very nicely, thank you. The municipal bonds that no one wanted three months ago are desirable again, and inflation fears are subsiding, making corporate bonds and government bonds more stable. Now let’s see what we can do about oil prices! Ed Mallon

The Toilet Paper Caper

We don’t like to talk about it, but most of us use toilet paper. It’s one of those things you don’t want running out. We take TP for granted. For years I found the inner cardboard fit nicely on the TP holder. Then I started to notice that the paper seemed to wiggle a bit in the holder. Then it began to seem that the holder had shrunk. I realized that what was happening is that the size of the cardboard holder of the paper was becoming larger. By golly, when I looked, I found the number of sheets of paper on a roll had been reduced. To the eye, the roll seemed unchanged, but it was changed. I noticed this in passing and I also began to notice that the orange juice container was the same size with less product, the coffee bag looked the same but had fewer ounces of coffee, etc. Yesterday, however, the toilet paper caper moved to a new level. While up until now the paper fit exactly into its space, suddenly there was a lot more room around it. Not only was the cardboard roll larger, the width of the roll had shrunk! The next step will be to introduce a new, higher priced, larger roll of toilet paper, that will look like the old roll with a marketing strategy telling me it is Newer, Bigger, Better and overall less expensive! Why is this relevant? As commodity prices have increased, businesses find themselves in a tight spot. They want to keep their profit margins up but they don’t want to raise prices for fear that consumers will not use their products. With the price of oil rising, the cost of gas is increasing, and therefore the cost of transportation is higher, too. We are seeing how insidious inflation can be, even when overall it does not appear to be a problem. Consumer income has not been growing, but consumers are forced to pay more for staples, leaving less discretionary income. If this continues, it could have a negative impact on the growth of the U.S. The key to growth is more money in the hands of consumers for discretionary spending. Ed Mallon

Odd Things - March 31, 2011

Sometimes I see things that strike me as odd. Today is opening day for baseball. Doesn’t seem to make sense, to me, that baseball would begin when the weather, in most of the country, is not warm and sunny. On March 10th, the front page of the Wall Street Journal had two articles next to each other. First was “Discovery’s Last Flight Caps Era in Space Exploration” and next to it “Deficit Proposal Picks Up New Allies.” Seems that only yesterday we were “investing” in space exploration to bring about new innovation here on earth, and oddly, now it’s gone. Recent reaction to continuing drops in job losses and increases in job creation has been mixed. At 10 a.m. this morning, the “Jobs Report” article on MSN Money noted that the DJIA was down because of the report. By the time the “Strong Jobs Report” (same report) was issued by MSN Money at 12:26 p.m., the DJIA was up +87, also noted because of the jobs report. As I was looking at this new posting it was 2:30 p.m. and the DJIA was down again. Seemed odd to me and I wondered if the same report would be renamed again based on how the DJIA finished the day; and it was, to "Lack Luster Jobs Report." So here is the thing: the economy appears to be improving, but what is really happening with the stock market? I like to follow the S&P 500; seems to me that more stocks in the index make it a better gauge of what is happening. On December 31, 2011, the S&P 500 closed at 1257.64. On March 16, 2011, after going up and down for many weeks, it stood at 1256.88 (a slight loss). Now we are at the end of the first quarter of 2011 and the S&P 500 is up about 5.6% since March 16th. It all seems odd to me, but I am happy it is back up. Ed Mallon

Japan 3-11

I couldn’t help thinking, as I watched television this past Friday, that the date was reminiscent of 9-11. The pictures coming from Japan showed devastation and ruin that I knew would result in more than the 40 to 60 deaths that were being discussed at the time. To me, it was in some ways like watching the twin towers coming down all over again. This time, it was Mother Nature reminding us of how precious life is and how delicate the balance under which we all live. We have friends who have loved ones in Japan, we know of military personnel stationed there, and then there are all the people we don’t know who are scared and worried. The emotional impact is chilling! This destruction will have an economic impact for some time to come. Today I noted that the price of oil was receding, stock prices were dropping, and there was a sense that there was not enough information yet to determine what was really happening. This is the point where attitude and fortitude come into play. As bad as it is, we human beings gather ourselves back up, reorganize and move forward. This will happen in Japan. As difficult as it is, they will rebuild. We will help them rebuild. Ed Mallon

A Breath of Fresh Air

For quite some time, we have been waiting for the weekly new unemployment filings to go below 400,000. Even more important is to see the four-week average go below 400,000. For the week ending February 26th, the Labor Department reported the weekly new filings were 368,000 and the four-week average is 388,000. In addition, continuing jobless claims--people who have received benefits for more than a week--fell by 59,000 to 3.77 million. These are all positives on the job front. What we really want to see, however, is new job creation! Well, this too has been a positive. To absorb new workers entering the workforce, the economy needs to create about 100,000 jobs, on average, every month. Since November of 2010, the average is 120,000! The momentum is picking up, with 192,000 jobs added in February. The doom and gloom folks will point out that the number of people employed is still 7.5 million below the end of 2007, but I believe the trend is your friend and in this case the trend is going in the right direction. Hooray! Ed Mallon

Is a Pullback Imminent?

The stock market has been remarkable since the early part of this year. It has risen, with a few pauses, but the direction has certainly been positive. I think we are in a bull market, and still in the first leg of that bull market. The difficulty I am having is that such an uninterrupted expansion with fewer sellers and less demand means that if, for some reason, more sellers begin to show up, demand will likely not support current prices. Since January 29th, when the NYSE 10-Day Moving Average of volume was 4.9 billion, it has dropped about 20% to yesterday, February 17th, when it reached 4.1 billion. Volume should be expanding to support a stock market rally. As I have said previously, I believe we will see a correction with a buying opportunity. Ed Mallon