Tuesday, January 29, 2008

Looking to the Fed (Again)

The markets have quietly advanced for the last week. I say quietly because the media can't figure out why, so they don't report it. It is mostly because stocks were oversold based on the data available. The emergency rate cut by the Fed appeared to avert what could have been a large global equity sell-off. Although most world markets have declined, the US hasn't faced the sharp drops like others have.

Investors are also anticipating another cut by the Fed tomorrow. I wouldn't get too excited about this one. The last couple of rate cuts have triggered selling on Wall Street. I'm not sure what Bernanke will say that he didn't say last week. The economy is facing more risks ahead, and the downside risks outweigh inflationary pressures, so they cut rates. I think we haven't seen enough data to indicate major economic problems. They key for the Fed is managing stability in the market while we figure out how bad (or not so bad) the economy truly is.

I still think we could be in a bull market correction rather than a bear market. If the markets hold together for the first couple of quarters this year, I think confidence in the credit markets will be restored, and banks will be in good shape. Rates are attractive. Lenders have just become much more strict with who they are lending to.

But its difficult to lean one way or another because its tough to know how the markets will respond. This January is a perfect example. People will sell equities based on fear more than any other motive.

Thursday, January 24, 2008

Looking Ahead

The markets are taking a breather this morning after yesterday's wild session. In any move upward or downward, there are always a couple of one or two day reversals before continuing. The question now is are we nearing a bottom, or is this just stop on the way down further. To me, earnings will be a major catalyst for the next couple of weeks of trading. The bears have been anticipating weaker earnings growth, and so far numbers have come in well. Companies have been giving cautious outlooks for upcoming quarters, but given the recent volatility thats no surprise. The Fed will probably cut rates again next week, and that could help as well.

In the meantime, we get tidbits of data about home prices and unemployment. I think these will continue to be mixed, and show the economy is still fairly strong.

As far as the government stimulus goes, I think its only positive if it helps consumer confidence. Aside from that, its a bad idea to let politicians get involved in things like this. Most of them have little experience and aren't in touch with what drives the economy. Markets should be allow to re-price themselves based on risks as they change. The Fed should be responsible for providing stability in the markets, and so far, I think they've done okay. They can't just rush to judgment and fly in to save the market, as some preach for them to do.

Financial stocks will be the first to make a charge when things reverse. If we see increased weakness, I'll be looking to pick off a stock or two in that sector. Until then, be careful on buying just yet.

Tuesday, January 22, 2008

More Panic Overseas

International markets have been in a panic the past couple of days, and the US markets are responding this morning. The emergency rate cut by the Fed has been welcomed as stocks have bounced off early lows. Since yesterday, I've been wondering how much US stocks could fall based on poor sentiment, considering how much we've already dropped in January. If corporate earnings really start coming in weak, then I can understand further declines. But on sentiment alone, selling can be furious, but I'm not sure how long it can be sustained.

Hank Paulson says the stimulus is needed to shore up confidence in the markets, and that the economy is still fundamentally strong. That will have to be backed up by data, but he should know better than anyone.

We'll see how the market holds up throughout the day.

Monday, January 21, 2008

More Trouble Ahead

I'm back from a week long vacation. It was a tough week to miss as the markets were dropping rapidly. It looks like there is more ahead. Overseas markets are dropping hard today on the potential of a U.S. recession. Although I haven't seen that much negative data, I became convinced things are bad when Bush came out with the economic stimulus. They wouldn't do that if things weren't getting tough. The question now is what will this do to stocks? A massive decline like 2000-2002 is unlikely as stocks never got nearly as high. Some commentary I've read is pointing more toward something like 1990-91.

Although there are a lot of attractive stocks out there, there is no use in fighting the tape right now. I've been holding and adding to short positions, while limiting exposure to the long side. There are still companies performing well (IBM, GE announced solid earnings), but that doesn't mean that they will be spared from declining some. The key now is waiting out the declines for awhile. We can use this time to find some great deals on solid companies. I wouldn't be in any hurry to buy just yet though.

Earnings should give us the best barometer in the coming weeks. The Fed has said that they are ready to cut rates aggressively, and that may help things.

Monday, January 14, 2008

A New Week

Good morning. I'm out of town and don't have all my typical resources, but wanted to get a post in. Stock futures are looking up this morning on the back of a good IBM report, and some positivity, yes positive commentary, from Credit Suisse about the US economy. The Fed has made it clear that they are going to be cutting rates aggressively. We've had some negative economic data, but haven't seen it for a prolonged period. Although some banks are short on capital, they aren't finding much trouble getting it. Banks have also tightened up on their money, which in itself appeared to be like a "credit crunch."

This, along with the media scaring consumers into thinking things are dire, could have created a temporary cut back. But we still could just be starting a new trend of getting worse as well. I like to subscribe to the adage "Its never as good as they say it is, and its never as bad as they say it is."

Ken Fisher's new Forbes Coulumn is out. In times of uncertainty, its nice to hear some clarity from someone who is a professional managing money. Click Here for column.

Thursday, January 10, 2008

Deal Talk

I like the idea of Bank of America(BAC) acquiring Countrywide(CFC). I like what it does for BAC, and I like what it does for the market. Countrywide has been one of the major sources of uncertainty that has shaken the markets. BAC would be buying a lender with a huge portfolio at a huge discount. I think there will be more turmoil among banks, but this would help things out.

Etrade(ETFC), who's fate has weirdly been tied to Countrywide's, is also trading higher today. I'm not sure that the same result wouldn't happen for them. It makes sense. Etrade has a great brokerage with a big customer base. I wouldn't touch any of these names on speculation, because they could easily fall again, but the prices are very attractive if you're convinced of their long term security.

I'm more intrigued in buying something like Credit Suisse(CS). They have avoided the mortgage mess more so than their peers, and they have a great global reach. They've also just entered into a deal to do business in China. Lots of upside obviously there. I'm still hesitant to pull the trigger on a financial stock, as they probably won't start a recovery for a little while yet.

Wednesday, January 9, 2008

Lots of Unknowns

The market has been selling off pretty furiously to start 2008. We've heard the warnings from the media, but now we're getting them from Merrill and Goldman, which makes me listen a little more. On the flip side, Fed president Bill Poole said, "The fundamentals of our economy remain strong ... and 2008 looks to be a year of rising growth."

Judging what I've seen from most economists, the early part of 2008 should have pretty slow growth while banks sort out their mess, but the economy should pick up in the second half of the year. The difference in viewpoints is how much will growth contract, and how long will it last? Because of the growing global economy, the rest of the world may not be affected as much as in a typical US slowdown. It also may pull the US out of its slowdown more quickly as well.

Look at Dupont for example. They guided 2008 earnings up based on strong demand in emerging markets. This could be the case for a lot of larger US based companies, and this is where it becomes harder to predict things. Typically when the US slows down, the market goes into lockdown mode, and investors buy health care stocks and bonds, etc. But the emerging market growth is what could keep things afloat.

All of this remains to be seen. I'd continue to be cautious, while looking hard at valuations on stocks we've been looking to get into. I do think there will be more volatility and potential losses ahead, but it wouldn't be smart to commit fully in one direction. If it makes you comfortable, hedge your positions with some ETF's that short US indexes.

Monday, January 7, 2008

Monday's Action

Shares have struggled to hold onto gains this morning. The media has basically proclaimed we're already in a recession. So I have to ask a couple of questions:

Can we have a bad bear market if everyone calls it ahead of time? Doesn't it take euphoria to over price stocks in order for them to have been overvalued enough to fall that much?

If $100/barrel oil is going to sink the economy, what if oil pulls back to $70/barrel? Still a recession?

Now don't get me wrong, I'm not saying there are not risks right now. There are a lot of them. But when I look at the people speaking up right now, saying how much we'll drop, they are mostly gold bulls who have been making the same argument for the past 5 years, and now someone will listen to them.

There are risks out there. It is a great time to evaluate or re-position your portfolio to account for those risks, but don't overreact. Don't lose sight of the bigger picture. Have a great day!

Friday, January 4, 2008

End of the Week

Today was an eye opener. Anytime you see the Nasdaq drop 100 points, you know you're talking about a sell off. There was nothing to keep the market up today, and if we hadn't traded lower this week already, I think we'd have been down more today. The jobs data was one of the main things bulls were relying on to keep us out of a recession. A lot of what we're hearing is still just noise, and like I've said, its mostly uncertainty right now, and investors don't like that. There hasn't been overly damaging economic data out yet.

Some of the more respected columnists I've read are saying early 2008 will have very small growth, and the second half of the year will be better as the banks sort out their credit issues. It will take time for the rate cuts to have effect as well.

It's tough to jump in and buy much here, but you've got to start looking. Areas of relative strength continue to be oil, infrastructure, and agriculture.

Have a great weekend!

More Uncertainty

The market is getting hit from all angles this morning. First off, you've got two outsider candidates winning in Iowa last night. That brings a lot of potential for change, which the market does not like. Secondly, data came in week this morning. Jobs looked weaker in December, with unemployment making a small jump. Thirdly, Japan fell 4% overnight. The only thing to push stocks upward today is oversold conditions, and I don't think that will do it.

The jobs data troubles me a little, but I'd have to see those numbers continue on this path for a few months before I get too worried.

I'll use this pullback to look for some value in positions that I've wanted to start, but am still somewhat cautious. No point in rushing at this juncture.

Exciting to see things happening in the 2008 race, even if the results rattle the markets a little.

Have a great day!

Thursday, January 3, 2008

Headline Myths

The price of crude oil touched $100 per barrel briefly yesterday, and the aftermath was interesting. It was clear that the media was dying to run the headline of oil hitting $100, furthering their proof of coming economic disaster, or whatever might get the best ratings. Then we find out that the reason it traded to $100 is because one single trader bought a small lot in order to become the first person to buy $100 oil. He quickly sold at a loss, but succeeded in his goal. Most media outlets won't tell you that this morning though. I understand that $100 is a psychological barrier, but the US consumer has proven that oil prices in this range can be tolerated.

Here's the story on yesterdays $100 trade.

The bigger uncertainty right now is the 2008 Presidential election, and people are nervous because the process starts today. It truly is totally up in the air, and investors don't like uncertainty. After the primary process concludes, things will settle down in that arena for awhile.

The bottom line here is that we can listen to the media, but have to be careful on what news we act upon. Keep in mind that the media is there to get ratings. Negative stories usually grab more attention than positive ones. So if a writer or news anchor has no stake in the price of equities, and they get more ratings when things are negative, guess which way they'd rather see things go? If they truly understood markets, they'd be managing money, bottom line.

Wednesday, January 2, 2008

2008 Portfolio

As promised, here are my picks for 2008. I created a portfolio to track the results, and will update them periodically. The picks are based on trends that I see heading into 2008. It isn't necessarily a diversified portfolio, but it covers a fair amount of sectors.

Noble Drilling (NE)
Manitowoc (MTW)
Credit Suisse (CS)
Japan Index Fund (EWJ)
Alternative Energy ETF (GEX)
Potash Corp. (POT)
SAP Software (SAP)
Rio Tinto (RTP)
Schlumberger (SLB)
T Rowe Price (TROW)
Global Water ETF (CGW)
Siemens (SI)

Disclosure: Author personally owns Noble, Manitowoc, and Global Water ETF.