Daily Investment Interpretations

February 19, 2009

2009-2-19 (Afternoon):   The markets dropped a little over 1% today. The NASDAQ was off 25.15 points (-1.71%) to close at 1,443,. the Dow shed 89.68  points (-1.14%) to 7,466, and the S&P 500 contracted 9.48 points (-1.2%) to end at 779. Oil finished up at $38.65 a barrel because of surprisingly low inventory levels, and gold dropped slightly to 976.50. The VIX dropped 1.38 to end at 47.08! 
    What's significant about today is that the Dow broke significantly below its November, 2008, lows, confirming a similar break by the Dow Transports. This led the Dow Theory protagonists to proclaim a new down-leg in the ongoing bear market. Mark Hulbert: Dow Theorists spot a bear. But this bear market thesis wasn't confirmed by the NASDAQ and the S&P 500, which are still several percent above their last-November lows. And once they, too, fall below their lows, the bears will have capitulated, the market will be oversold, and it will be time for at least a short-term rally. Or it's possible that the market will go back up tomorrow, and that this drawdown will be proclaimed a successful retest of the November lows.
    The other item of interest today is that the VIX actually fell, suggesting  complacency in the face of this Dow Theory breakdown.
     In the meantime, this appeared tonight: Signs of success in Fed's Fannie, Freddie programs.
    This might be a good time to mention why I'm not talking about buying high-dividend, blue chip growth stocks, or high-dividend staple stocks. The problem is that although it would be nice to gain 7% a year from high-yield stocks, they could so easily drop by 14% and wipe out two years worth of dividends. With respect to shorting the market or trading the market, the problem is that these are high-risk strategies, and I wouldn't want more than 10% of your portfolio at risk this way. If I relished the thrill of the chase, this might be an exciting pastime, but if I want to be sure I won't lose any more money, I'd probably better eschew these chills, thrills, and spills. Alternative energy is being bruited as the fashionable place to be, but the leading-company green-energy stocks and ETFs I own or have been watching haven't gone anywhere. (They were down today, with the exception of First Solar, which was up 1.61% today.) And for me, the larger problem is that of where this contraction will end. Today's market action reveals the dangers of buying the party line that the November lows were the lows for this cyclical bear market. That may still happen, but I'm glad I haven't put more money into the market just yet.

2009-2-19 (Afternoon):  Today is probably a "swinging-door" day in the stock market. If the Dow soars near the close, then we'll probably have seen a successful retest of its November lows. If it closes much below this morning's opening price of 7,555.63, then it will probably have broken out of, and down from its 2½-month trading range. Right now, it's on a knife-edge. The next hour-and-a-half may be fateful: Dow line holds,but just barely.
2009-2-19 (Morning):  Given all the bearish arguments, and projections of Depression 2, there are still some compelling advocates for a turnaround in the second half of this year. The latest is the Conference Board, which projects "anemic growth" in the second half, with robust growth not returning until "well into 2010": Indicators point to easing recession. Five of the ten leading indicators rose for January, one of which was the amount of money the Federal Reserve pumped into the economy during the month. Increase in money supply means recovery is near, some say However, MarketWatch First Take: Leading indicators are a head fake. This article explains, "The indicators that track the real economy are still falling, while most of the indicators that track the financial system are improving." The article goes on to say that "no one believes the financial system is actually improving in any meaningful way". Most of the improvements in the Leading Economic Indicators reflect the immense amount of money that the Fed has injected into the economy. Normally, this would " ...have a big impact where people actually produce and consume goods and services. But so far, the surge in the money supply hasn't had any impact on growth. The Fed is flooding us with money, but that cash is ending up in bank accounts and in mattresses. But in times like these, with a deflationary liquidity trap threatening, the relationship between money growth and economic growth doesn't hold in the same way, or with the same timing, as it usually does."
    Meanwhile, Economic Report: U. S. weekly jobless claims unchanged at 627,000. Two weeks earlier, the initial jobless claims came in at a four-week average of 631,000.  Continuing jobless claims rose to a record 4.98 million. (The four-week average was 4.83 million (Bear in mind, though, that these are absolute numbers that don't take population growth into account.) The article says, "The claims data point to a 'significant pickup' in the pace of job losses in February and a greater rise in the unemployment rate, said economists John Ryding and Conrad DeQuadros of RDQ Economics. 'Based on a simple regression of initial jobless claims and nonfarm payrolls, the average level of claims thus far in February is consistent with a greater than 700,000 drop in payrolls,' they wrote Thursday, adding they will wait for next week's jobs-related data in the consumer confidence report before coming out with an official forecast. ...producer prices rose by 0.8% in January." (This was primarily because of a rise in the price of oil.)
    This so tricky. The stock market starts up not when the economy reaches bottom but when the rate at which conditions are deteriorating switches from faster and faster to slower and slower. So what we have to ask ourselves is: are the current  economic indicators declining faster and faster or has their rate-of-fall stabilized? If these initial jobless claims are about the same this month as they were last month, then the rate at which people are laid off may be stabilizing, consistent with the notion that the rate at which employees are laid off may begin to fall to 400,000 (as a trailing four-week average) and then, in the next few months, to 300,000, 200,000, 100,000 , with layoffs stopping altogether in six to nine months as employers start to think about rehiring to service the 2010 economic recovery. For example, last fall, the rate at which layoffs occurred suddenly soared, and the stock market sank accordingly. Then at the end of the year and into January, the layoff rate plateaued (along with some other indicators), and the stock market plateaued with it.
    The above considerations assume that the performance of the economy will trace out an upside-down bell curve. But what if it doesn't? What if it undulates as it  continues to decline? Could a "wait-and-see" mindset on the part of professional investors may be why the stock market hasn't already begun to climb?
    Meanwhile, this morning, although the NASDAQ Composite and the S&P 500 are still comfortably above their November, 2008, lows. the Dow, at 7,483, is below its 2008 low and is approaching its 2003 low of 7,400, and its 2002 low of 7,200. Of course, this still falls under the rubric of   NewsWatch: U.S. stock investors eye another test of bear-market lows. Why is the stock market falling? Here's one explanation: Battipaglia: The market is giving stimulus efforts a Bronx cheer.
    Note that this is options-expiration week, and usually bullish for stocks (unless its bearish, in which case, it tends to be very bearish).
    For now, cash is still king. For me, who's mostly in cash, it's wait-and-see. (The dangerous time will come if the stock market moves decisively upward.)