Fagan Associates Commentary

It is the market’s mission to frustrate and annoy the most number of people. Individual investors are particularly mystified by the stock market.

We awake this morning to Dow Jones futures roughly 70 points above fair value and S&P futures 7 points above fair value. Frankly that surprised us! The market has shown a predisposition to pinball between gains and losses lately (and volatilely). We expected a morning run back towards 10,000 on the Dow.
A commmon cry in the office has been “don’t chase” and conversely “pick away at good companies” - this is good advice.
As the market rallies, bide your time and enjoy and as it recedes, gradually establish positions in good companies.

We agree with Nobel Prize winning columnist of the New York Times, Paul Krugman who writes how utterly stupid it would be to cut stimulus spending now.  We add to that “just when the U.S. economy is facing a headwind from a perceived slowing China as well as the sovereign debt crisis impacting Southern European.”  It would be like using kindling wood to try to get a fire going that has not yet caught.  Do you stop adding kindling?  That would only increase the uncertainty that you will NEVER have a fire!  The stimulus money is like kindling.  You need to keep using it until the fire (U.S. economy) really catches fire.

The jobs report this morning was bad–  400,000 of those workers were government workers for the 2010 census. These are temporary jobs and man, there are a lot of temp census takers.
Let me break this out and we will be able to see why government hiring ain’t what we need. We are after all paying these workers with tax dollars.
400,000 workers till fall to count a nation of 300 million.
OK, we assume no one sends in their form. No one!!!! Did you send in your form? I know that I did.

That means each one of these workers has to count 750 people between now and the fall.
There’s roughly 120 days between now and mid-fall. Which means each census worker is responsible for 6 or so citizens a day.
That’s what we call government efficiency.

The market rallied 200+ points yesterday a day after shuffling around the 10,000 level.
Where are we headed here??Will the Gulf Oil spill ever be stopped?
Will the Eurocontagion be the impetus for a second leg lower economically and marketwise for the US?
Are we back on deflation watch?
Will the midterm elections provide the type of animosity that paralyzes and lowers markets?There is so much uncertainty out there that sometimes its best to move even more slowly than you might otherwise. Buy 100 shares of a solid idea with the thought of buying more later. Incorporate a bond holding instead of emerging markets fund.
Discretion is the better part of valor and these are times when that is decidely so - the danger of this market moving dramatically higher over the coming 2-3 months is quite small in our minds - we also feel that the danger of a huge downward move is very low too.
Measure twice - cut once!  Be cautious but don’t be paranoid.

Spain’s debt was just cut by Fitch to AA+.
Interesting as the rating agencies have been widely criticized for their apathy, negligence, misinformation (you pick the word) during the subprime crisis in the US. Here, on a holiday weekend Friday, they’re out there working hard and downgrading Spanish debt.
Not to be polyannish about it but was this unexpected and does this make me think that Spain is any more or less likely to repay their debt or to be able to refinance existing obligations?? And if things are bad in Spain then why AA+? Why not even lower than that?

This move has cost US stocks (as measured by the Dow Jones) about 100 points in the last ten minutes.

Six months ago, we toasted French joie de vivre and held up European health care as models for the US now we can’t get away fast enough from any European economic comparisons to the US.  When will we realize that the economic model that the US should follow is its OWN?

I think it was Shakespeare who wrote “neither a borrower nor a lender be”. These are appropriate words for banks these days but sentiments like that will freeze markets. Our thoughts are “neither a hero nor an ostrich be”. Here’s hoping that 400+ years from now people will be repeating that phrase half as frequently as Shakespeare’s line.
Here’s the thought - now is not the time to make grandiose bets on the markets NOR is it the time to ignore the fact that many great companies and mutual funds are on sale - (this morning the Dow is looking to open below 9900).
Take a look at a Johnson & Johnson (below $60), or a Cisco Systems (below $23) - how about some Payden GNMA fund (holding up nicely). Our point is that THIS is not the end of the world (though it feels that way) NOR is there any guarantee that the markets will not continue lower.
For some time, we have been advising dollar cost averaging and incremental moves and that makes more sense now than ever.
“Don’t be a hero - don’t be a coward”- could’ve been said by Othello, don’t you think?

Bear with us as we use YET another sports analogy to make our point. Gardening, literature, traffic, bird watching analogies all take a backseat to sports analogies here at Fagan Associates.
As Mets’ fans, we watch games and wonder how the Mets are going to lose and how they are going to make it as miserable and excruciatingly painful  as possible! Yankee fans watch and think- “9th inning, its time for some heroics” and boom, another A bomb from A rod and they come back and beat the Red Sox.
Surprisingly, markets have some of that optimism/pessimism built into late day activities. It seems that the last 1/2 hour of the trading day really shows market sentiment and direction. Thats why yesterday’s return from the dead rally (we were down 180+ points intra day) was particularly encouraging.
Try to not get caught up in the hoopla of daily market swings. A little caution is in order but too much caution may leave you lacking returns later this year. A little more cash, a little higher dividend or a little conservative bond fund makes sense. Everything in moderation - especially given the market’s strenghth over the trailing 12 months.

Is there anything in 2010 that is slower than it was in 1965 when we were kids (some of us anyway)?  Planes are faster, food is faster and news is faster - maybe, the only thing slower is a major league baseball game between the Sox and Yankees!

Why then should trading and market movements be slower - technology, news distribution and frequent traders have made markets more volatile and the last week or so has been evidence of that. Too frequently, we get caught up in the fad/crisis du jour. Greece, Times Square bombings, Britain elections and deflation or inflation (or some other type of -flation) are all proof of that. Some of these are even crises of the month!

Investors (especially smaller ones) can’t turn on a dime nor should they want to do so. Inter-day mistakes triggerred by abnormal market action can be costly. Certainly, we aren’t saying buy and NEVER sell but we do believe that investors time horizons should be measure in months and years and not ticks higher and lower.

There are a number of factors supporting this market - improving job market, low inflation and a lack of attractive investment alternatives to name a few. When the brouhaha that is the business media dies down this will be what matters. The headwind that is “sovereign” debt will eventually give way to higher stock prices in the US but lower may be the next move of this market. Stay invested and stay diversified  in these turbulent times.

Likening the market sell-off this past Thursday (May 6) to an earthquake, this past Monday’s sharp move upward, although pleasant, was nonetheless an aftershock.  It was encouraging to see stocks close at or near their highs as well as credit spreads come in.  However, it was discouraging to see the Euro give back all of its earlier gains relative to the dollar. 

This morning it appears as if stocks will open sharply lower as we experience another aftershock.  Generally speaking, we will sit on the sides to see if investors step in to buy.  A close somewhat above the opening low would be encouraging.  As noted above, we recommend just keeping safe on the sidelines and look  to buy or add to positions at somewhat lower levels.  For those that need exposure, buy in moderation, keeping dry powder for additional purchases should the market head lower.

We strongly recommend that investors review their portfolio to make CERTAIN that their portfolio is allocated according to their objectives.  Furthermore, make certain that you have a bit of cash on the sidelines and finally if you are under allocated look to add to positions or establish new ones in investments that you can live with regardless of which way the market moves.  We look at category killers barbelled with dividend players in equities.  With bonds, be careful of high-yield (low investment grade) bonds.

Regarding yesterday, we think it deplorable that retail investors could possibly get sucked into selling after a potential computer trading error sent stocks down 700 as represented by the Dow over a fifteen minute period only to recover 600 of those points over the following quarter hour.

For our clients, feel free to contact us with questions or concerns and rest assured that we are closely monitoring the situation.