Friday, September 28, 2007

Consumer Recession but Corporate Boom?

Stocks appear to be taking a breather today. One thing to consider is the sentiment right now. We are near all-time highs for the Dow, and there is a lot more negative commentary out there right now than in July when we were at this point. According to Ken Fisher, this should be taken as a sign to be bullish. But then you have Greenspan talking again, saying recession odds are somewhat higher, but less than 50-50. He obviously has the power to move markets, and I think the market will respond today.

On one hand, you have the idea that as data gets weaker, the more likely we are to see more rate cuts, and this has held stocks up during the past week. But in 2000, the declines continued as the Fed cut rates lower, and lower. So there is a so-called "tipping point" where rate cuts can't save the market. Are we getting to that point? I don't think so. But like Greenspan said, the odds are growing.

Everyone is looking for clues that the housing problems will spill over and hurt overall consumer health. But consumers have been strapped for some time. The cost of everyday items is way up, and the main source of investment and capital gains for the average American, their house, is starting to decline in value. A strong housing market is what has kept the consumer in good shape during the past 5-7 years.

But these issues won't necessarily affect the stock market. The stock market has performed well not because of the the health of the average consumer. It is because money has been cheap and companies are experiencing growth from the global boom. Our economy is much more a global economy than ever before. So there actually is the potential for the US consumer to be in a "recession", while US companies are fairly healthy.

As investors, we have to keep this in mind.

Thursday, September 27, 2007

A Pretty Good Position

The market is in a pretty good spot right now. The Fed has proved that they are ready to step in right away if needed. So anytime we get negative economic data, which seems to happen about every other day, stocks respond well because people expect another rate cut. When we get positive news, like GM (GM) yesterday, the market rallies strongly. The only scenario I see for stocks going down in the short term would be what I would call a "shock value headline." For example, if a major bank was in big trouble, or a terrorist attack occurred. Something of an unpredictable nature that would make investors respond with fear. In any event, this is pretty unlikely. Because of the cushion of a rate cut if things go bad, investors are becoming more and more confident.

Nice to see Chevron (CVX) announcing the big share buyback. 15bil seems like an awful lot though. Seems there could be some other ways to spend some of that cash. But it is positive for this company that I've been bullish on ever since I started this blog.

Thursday, September 20, 2007

Opportunities in this Market

Goldman Sachs (GS) again shows why it is the elite investment bank/brokerage. While its competitors are missing earnings and complaining about losses in mortgage securities, Goldman executed a great hedging program and profited from it. Or at least that is the way they spun it. Either way, earnings were great and they appear to be run better than its competitors. The market volatility has to help their commission business too.

FedEx(FDX) reported today. One of the companies that supposedly represents the economy as a whole reported some unsettling news that future profits may be weaker. So does that mean the entire industry is bad? Maybe not. Hello UPS (UPS). They are experiencing a lot of growth overseas, where they have a big advantage over FedEx. They also benefit from a resurgent Amazon(AMZN) heading into a big retail season.

Guy Adami over at Minyanville.com wrote a great article, and had a nice piece on Fast Money last night detailing the whole story.

I'm going to go with this theory and add UPS and Goldman to the portfolio.

Tuesday, September 18, 2007

The Fed's Big Move


Well, we got our answer. A .50% cut in key interest rates. The market has responded accordingly and traded much higher. But what is going to happen next? I thought it was interesting how inflation numbers, which are so easily manipulated, came in lower than expected this morning, which gave the Fed support for this cut. They clearly are taking a "shoot first, ask questions later" approach to this market. It could be purely economics, but who could believe that? There are political dynamics going on, as well as other interests.

The Fed, with all of its control, has become an instrument for people in charge to help control the market. Which is fine for investors, as long as we can quantify what their actions mean. This is the hard part. Its easy to know what will happen today, but how about the next couple of months? Does the surprising hefty cut mean things are worse than we thought? Or does it just mean that everyone was expecting a .25% cut and that would have left room for disappointment.

My viewpoint is that the global economy is strong, and the Fed feels that the US needs to keep up. The funny thing is that the other countries actually have real, organic growth and are RAISING rates to keep things under control. We have kept rates low so we can create our own earnings growth through stock buybacks and mergers and acquisitions. So we have to CUT rates in order to keep our market going up.

Something to think about as we move forward.


The image is used courtesy of Minyanville.com

Monday, September 17, 2007

Big Day Tomorrow

Tomorrow is a big day for the market. The Fed will announce its decision on interest rates. This is probably the most uncertainty I've seen in the markets. As I've discussed before, investors are counting on a rate cut. How much will remain to be seen. If there is no cut, which is a possibility because of inflationary pressures, stocks will retreat. Beyond that, there are lots of possibilities for how trading will go after rates are announced.

We also have the big brokerages reporting earnings this week. These aren't the most forward looking results, but it will be important to see how much they have been affected by the markets volatility, lack of M&A activity, and liquidity mess.

No one will be getting bored with the market this week!

Friday, September 14, 2007

Some Thoughts on the Fed

Next week, the Fed will make its decision on what to do with interest rates. This is the major driving force in the markets right now. The market has virtually already priced in a rate cut, and it would be a shock if no change is made. But I'd like to look at the debate on how much to cut, and what it means. The question is whether to cut a quarter point or a half. The market typically reacts positively any time rates are cut because anytime access to money is cheaper, it helps the economy. But if the Fed cuts a half point, this is basically saying that the economy is worse than most people think, and might make investors worried. If the Fed cuts a quarter point, some investors may think that we were expecting that, and it isn't enough.

Personally, I think the best move is to cut a quarter point, and the rest is up to Bernanke and the message that he delivers. Its up to him to remind investors that the Fed will step in in the future if needed, but isn't here to bail out lenders that made poor loans, or investors that made poor speculative decisions.

The market has been performing decently in the past few days, but Bernanke shouldn't use it as a reason to leave rates unchanged. The market prices in future events, and it is acting pretty well in anticipation of the rate cut. So Bernanke needs to walk a fine line next week.

Wednesday, September 12, 2007

Another Quiet Morning

Another day with relatively little news coming out. This seems strange considering what we've been getting over the past month. I see stocks trading flat to relatively higher until next weeks Fed announcement. The entire market is hinging on that decision, and it is the only thing that is really newsworthy right now.

Oil is trading awfully high, which could bring back the debate of: at what point do oil prices really start negatively affecting this economy? It has been talked about before, and even with oil prices climbing, most companies have been able to absorb the added costs. Although most probably are passing the costs on to the consumer. I think $100/barrel is probably the magic number where things could get difficult.

Tuesday, September 11, 2007

What Today Means

Today marks the six year anniversary of 9/11, and its difficult for investors to not have it in the back of their minds. I've read about "Bin Laden Trades" over the past couple of weeks, in which people have made bets, particularly in S&P options, in case of an attack. So I think there is some early relief that there is no major news. Beyond that, investors are focused on Bernanke and what he will do with rates.

No one is very sure how good or bad things really are, so they are basing investment decisions on something measurable, and that will be interest rates.

I updated the portfolio and results, so take a look.

Monday, September 10, 2007

Counting on the Rate Cut

In the wake of last week's poor jobs report, investors have panicked a little. But the real panic will come if the Fed doesn't cut interest rates at its upcoming meeting. Stocks are being held up on the very likely idea that rates will be cut. This also depends on how much rates are cut as well.

We all know why this is happening. It has been covered for weeks. Now it seems that its a waiting game to see:

1)What the Fed does with rates
2)If things get worse (for example, a lender or homebuilder goes bankrupt) or
3)If the situation blows over.

If we get more "headline grabbing" stories, then we will be headed lower. Stocks can go down if things are actually bad, or if they appear bad. If things stay quiet, stocks will creep back up like a few weeks ago.

Overall though, the see-saw battle should continue. Obviously M&A activity has quieted tremendously as credit has been drying up, or at least appearing to be. Many stocks are relatively undervalued, and funds have been buying on the idea of this being just a small correction.