Fagan Associates Commentary

The market is stuck in neutral today but not the restaurant stocks. Gains are dramatic across the board - McDonalds + $1.73, Darden + $1.21 and YUM Brands +.74 are just some of the names popping. The financial “talking heads” are saying lower food costs are driving these stocks higher.
Our take is that there is a continued changing demographic in the US. Just like on-line shopping and cell phones have become commonplace so have women working (and not in the home) - a $30 meal at Olive Garden (Darden owned) has become almost a necessity more than a luxury.
We have written several times about “little luxuries” gaining traction and this seems to be more evidence of that - consumers are willing to eat out BUT not take on debt buying a car or furniture.

During an interview on CNBC, White House Economic Advisor Larry Summers, regarding the upcoming NonFarm Payroll Report this Friday, noted that “the blizzards that affected much of the country during the last month are likely to distort the statistics, and in past bliazzards those statistics ahve been distorted by 100,000 to 200,000 jobs, so it’s going to be very important… to look past whatever the next figures are to gauge the underlying trends.”

Sounds to us like Mr. Summers is setting us up for a bad jobs report.  We’re going to mostly sit on the sidelines until then and then, where appropriate, add to positions on the potential dip.  We believe that adding on dips remains a prudent strategy at this time.  We also think that should the jobs number be weak, industrial, material and ag stocks should respond favorably as it may portend a weakening of the dollar.  We’ll see.  As of now, the bond market remains relatively strong and dividend paying stocks are holding up the day.

We aren’t sure which is which. For that matter, this stock market (bulls only) doesn’t know which side to root for. That’s a bit of the rub- do we root for a stronger economy or a stagnant economy or a weaker economy if we want stocks to be higher?
The answer is somewhere between a flat economy to a stong economy and here’s why.
Many companies are in good position with cash on the balance sheet, minimal inventories, and streamlined workforce. Commodity prices have been under control and financing has been cheap though at times difficult to access. A weaker economy would reduce demand and soon make revenue and earnings growth problematic. A super strong economy might spark inflation and surely would induce a series of rate hikes (signalled by the Fed last weak). That olde Goldilocks axiom  is perfect- demand to produce sales and some job growth but not so much as to set off the embers of inflation that seem to be smoldering beneath the economy’s surface.
As we have written, we believe the economy will vacillate between strengthening and setting off inflation fears and weakening and resparking deflation talk. 2010 will (in our minds) be a more boring than 2010 - how could it not be? In the end, it will also be a less profitable one as well.
Dividends (somewhat ignored in the late 2009 market spike) will become more important and may indeed represent 1/4 to 1/2 of stock returns in 2010.Evaulate your own situation but take a look at the ETF symbol SDY. It is a diversified manner to get solid dividend players in one fell swoop.

The Federal Reserve hiked the Discount Rate, defined as the interst rate charged to commercial banks on loans they receive from their regional Federal Reserve Bank’s lending window, making it more costly for financial institutions requiring these emergency funds.  During normal times the banks borrow from each other at a rate called the Federal Funds rate which is at approximately 0.13%.  By raising the Discount Rate, we believe the Fed is moving in a symbolic fashion and indicating that the economy is moving toward more “normal” times.

We believe any substantial (2%-4%) is buyable.  That said, more ”normal” times implies higher interest Rates (Discount, Fed Funds and General Market) during the future.  Be careful of long-term bonds, those maturing more than ten years down the road.

One week ago, CNBC was trotting out one negative money manager after another with a negative viewpoint. The market was waffling around 9800 and seemed destined for lower levels. Today we are trading over the 10,300 level
This is the EXACT reason that we believe market timing defeats the purpose of a long term investor. Big moves either to the sideline and cash or to a 100%+ equity position with margin serve more frequently to hurt an investor rather than help him or her.
The market is destined to frustrate the maximum number of investors -for this reason remain cool under fire and never become too convinced you are right.

Maybe the white snow can cover some of the stains of the imminently bipartisan politicans that inhabit Washington. Send some to Albany too.

Markets are like horse races and favorite recipes. Everybody has an opinion and can justify their position. Many times it seems one person is right (Monday) and then just as quickly that person seems wrong (Tuesday). You can flip those around to suit your persons. This market seems caught in a schizophrenic display of showing how important Greece and Portugal are to the world’s economy. For some clarification - 10 million people live in Greece making it 1/30th or so the size of the US. Its two main industries are shipping and tourism. Portugal also has a population of roughly 10 million people but a per capita GDP that it is the lowest in the EU.
We make these points to show that in the grand scheme of economies both countries are rather small HOWEVER we believe this goes to show investors that this is a market (both stock and bond) that is jittery and ripe for some type of pullback.
Read our 2010 outlook for a better way how to invest this year- we don’t believe investors should be frequent traders NOR should they adopt an all-in or all-out philosophy.

We concluded our Market Commentary yesterday with the statement that “we always advise moving incrementally so if you are feeling uncomfortable with the recent downside moves, take a bit off the table but refrain from ’all in’ moves.”  That is not just a “feeling” but a result of taking a look at the BOND market as well as the stock market.  What we are seeing is spreads between bonds with differing credit ratings has not widened which would have indicated a bigger problem as they did during late 2008 and early 2009.  There is also much evidence of an economy that is recovering rather than moving toward a recession.  Once again, different from the time period referenced above.  Earnings reports as well as the outlook provided by U.S. corporations has also been positive.

We have noted that there will be enough good news to offset the bad news OVER TIME.  That said, on any one day or over any short period, the market can be very unpredictable.  At this point in time, investors are deciding whether or not the recovery is sustainable.  We believe that over the next several months this will turn to how strong the recovery is.  With this in mind, we are sticking with our belief that investors lack faith in the recovery and, due to the pain from the last bear market, are quick to pull the “sell” trigger.

That said, we will keep an eye on market levels and referring back to our intial statement, move incrementally.

The market seems drawn to the 10,000 level on the Dow. The last time that we crossed over the 10k level on the Dow was November 6th of last year as we were headed in the other direction.
Most market moves higher are marked by short, stiff corrections. It has been some 330 calendar days since our last 10% correction so despite the fact that this is scary and discomforting at the present time it appears nothing more than a pullback.
Economic news (with the exception of employment) has been solid. Good retail sales numbers and solid earnings have not provided solace to investors of late. Investors have been focused on exotic places like Greece and Portugal (and not planning their vacations) and the debt bundles that they have amassed over time.
We always advise moving incrementally so if you are feeling uncomfortable with the recent downside moves, take a bit off the table but refrain from “all in” moves.

A month that started so promisingly has ended with the Dow Jones down 3.49% and the S&P 500 down slightly more than that. The Nasdaq was the weakest of all of the major averages down some 5.5% for January. A weak January is not a good barometer if you are hoping for market gains. In years when the Dow is a winner, stock gains on the average exceed 10% - conversely when the Dow is down the average gains are some 1% or thereabouts. Not great news but remember the Dow lost money last January too. The Dow was lower by some 8% last January and finished the year solidly in the black.

Earnings have been good - Ford left the door opened for a continued rebound in car sales (and with Toyota’s missteps Ford could benefit), GE also was solid - the real question in investors’ minds is Washington. Will our politicians get their acts together and exhibit some spending restraint.  To us, that is what upsets this market most. Unbridled spending worries investors.

The coming week will be interesting. Check back here for updates.

More than anything else, investors hate uncertainty.  Unfortunately, at this particular time that is all there is.  Much of this is coming from forces, external to the stock market, that are exerting pressure on the confidence of investors.

As our economy prepares to exit from this deep recession, investors are skeptical about the labor market, wondering if and when jobs will begin to be created.  Wondering where the more than 150,000 jobs that need to be created every month just to keep pace with population growth will be found.  Wondering how long those on unemployment will be able to remain there and maintain their standards of living.  Jobs, we read or hear, are tough to come by.  Some say “after all, what business is going to want to hire with the uncertainty over the direction of corporate tax rates, the cost of health care or cap and trade.”  Wondering how long the Unemployment Rate will stay at or near ten percent.

Forget the job market.  Americans are wondering and worrying about the housing market.  When and at what value will housing prices bottom.  What will the bank do about my home equity or credit line?  If you don’t own a home you are concerned that “banks aren’t lending.”  You ask yourself, “will I ever be able to buy a home.”

The job market and the housing market are just the foundation of our worries.  Add to these worries the concern over rising gas prices, spiraling food cost and the jump in the cost of health care and you begin to panic.  Your mind begins to cloud over and then things really become foggy when you think about America, our country.  How will we pay for all of this?  You begin to worry about the national debt, paying for health care reform and its impact on our children.  Our children, oh no.  Our children are obese from all of that candy they buy at school and no exercise.

Riding home from work, listening to some talk show, you hear that China, that land that consumes almost every basic material in the world, is slowing down.  After all, the talking head you’re listening to notes that their government is trying to prevent a bubble.  Thank God we’ve got Ben Bernanke to head our Federal Reserve.  But, the talking head next states that he may not be reappointed at Fed Chief.  More bad thoughts.

No, things are not good.  They can’t be.  Too many storm clouds.  Too many uncertainties.  The sky is falling.  Stop!  Take a deep breath.  Let’s look on the bright side.  At least we can rely on our elected officials to do the right thing, to try to get us out of this mess.  Uh oh, on second thought, let’s not let our brain go down the path.  They squabble like little kids, poking at each other and hoping that the “other side” fails so that nobody will be able to claim victory.  The Democrats get a leg up and the Republicans sulk.  The Republicans score some points and the Democrats take their ball and go home.  Our lives, our country, has become a political football.

How about a novel idea?  Let’s rely on ourselves.  Let’s dust ourselves off, put our respective noses to the grindstone and fight like we have never fought before.  We can do it and we’ll all be better off for it.  Pay our own debts.  Accept a “hand up and not a hand out.”  Become nobody’s lacky.  Don’t let anybody buy your loyalty.  Accept what is rightfully yours and take a pass on the rest.  We need to rebuild Main Street and the Middle Class.  We need to have faith, not in anybody, but in ourselves.  This is how we get out of this mess.

Oh, but we digress for the last nearly six hundred words!  We’re sorry.  Thanks for reading this column.

THE BOTTOM LINE – Consider this.  Bull markets do not begin when the economy is humming on all cylinders, when there is political peace or when the Unemployment Rate is at five percent.  They begin during the darkest hours, amidst all of this uncertainty.  We believe that we are entering a corrective period in the stock market, but over the balance of this year stocks will move a bit higher, perhaps high single digits from their calendar year 2009 close.