As the rhetoric surrounding Financial Regulation continues to heat up as well as the firestorm regarding Goldman Sachs, investors are using this as an opportunity to sell rather than buy. We believe that this pullback, should it continue, much like the pullback prior to the passing of health care reform, will represent a buying opportunity. That said, look for stocks with good fundamentals, a strong forward outlook and dominant positions with proprietary products. Let the prices come down to your level. Don’t chase here. No need to after the big run-up.
Fagan Associates Archive for April, 2010
The stock market is reacting more to the better than expected corporate earnings that have been released thus far this quarter than to the negative news from the announcement that the Securities and Exchange Commission was filing a civil suit against Goldman Sachs. Although we believe that the former will continue to be more of a tailwind than the latter a headwind, stocks could use a rest after the latest ten percent run-up over the past eight weeks or so. That said, we would use such a pullback as an opportunity to accumulate positions rather than use now as an opportunity to exit.
Despite the fact that interest rates have moved up fractionally over the past year or so, the bond market has been able to digest this increase and still provide positive returns as credit quality has improved. That is what we foresee over the near term, gradually rising interest rates accompanied by an improving credit quality. The result, bond returns that exceed those of Certificates of Deposit.
The Summary of Commentary on Current Economic Conditions by Federal Reserve District, commonly known as the “Beige Book” is released eight times per year and as is referred to in its title summarizes anecdotal economic information from each of its twelve districts. It is then prepared by one of the Federal Reserve Districts on a rotating basis. Why is it important to you, the reader? Because, after a deep recession like the one we have just all experienced, how the economy goes, so goes our investment portfolios. What follows are some highlights of this five page report.
Regarding Consumer Spending and Tourism, the beige book noted that “consumer spending increased during the reporting period with relative strength in sales of home furnishings and electronic goods as well as sales of seasonal apparel. The report further details improving vehicle sales due to favorable pricing and credit terms as well as improving conditions in the tourism industry.
Taking a look at Nonfinancial Services, of no surprise was the observation that “professional media services firms in San Francisco characterized sales as flat at low levels” which, in our opinion, provides an accurate description of the mood of business, which is cautious at best. Furthermore, and once again of no surprise, “law firms in Minneapolis specializing in debt collections and bankruptcy saw strong demand, while a Richmond property manager noted a large number of repossessions.”
On the Manufacturing front, the report noted increasing activity “across most of the country” especially in electronic, computers and high technology goods.
Importantly, “bank lending activity was mixed by category in most Districts” as weak loan demand coupled with tighter credit standards along with mixed credit quality dampened lending. It is not surprising that this is the case. Recessions historically lead to tighter lending standards amidst declining credit quality due to rising Unemployment. This should ease as the economy continues to improve.
“Residential Real Estate activity increased, albeit from low levels, in most Districts” with most Districts noting “sluggish sales for high-end home” but with stable home prices. Regarding commercial real estate,” the Beige Book described activity as “slow across the nation” with “Manhattan Class A office rents were down 20 percent to 25 percent year over year.”
Finally, regarding Employment, Wages and Prices, the Fed stated that “while overall labor markets remained weak, some hiring activity was evident, particularly for temporary staff….Wage pressures were characterized as minimal or contained” with modest wage increases at or about the inflation rate being implemented in some districts. Retail price increases remain contained.
THE BOTTOM LINE – This is a hole which the American Economy is in the process of digging itself out from. It appears to be progressing in an uneven fashion. In our opinion it will take some time with a key component being lending activity. Until this increases notably, the economy will move forward unevenly.
That was the rhetorical question just posed by a CNBC anchor- I think it was Sue Herrera. Before you jump to your computer and sell all of your holdings give it some thought.
The Goldman news has rattled the market and its back to 11,000. That’s right in case you haven’t been paying attention, its back DOWN to 11,000 meaning its been over 11,000.
This is a very typical ploy on CNBC’s part to keep viewers tuned on a dull Friday afternoon of trading.
Who’s gonna hold stocks over the weekend?
1. Long term investors who don’t base investment decisions on an SEC action on Goldman.
2. Investors who realize that DESPITE today’s 140 point sell off are still ahead rough .3% for the week.
3. Investors who have considered the alternatives and have concluded that some participation in the stock market makes sense for them.
Please note the preponderence of the word “investor”- we don’t know where the market is going later today or tomorrow but the idea that the average investor should be trading with one weekend in mind defeats the purpose of being an investor.
Investment decisions should be made with careful consideration as opposed to a rhetorical question posed by a business channel designed to create intrigue and raise market tensions.
Who’s gonna wanna hold stocks over the weekend to us has become - don’t go away, don’t change that channel, there’s market volatility coming and you don’t want to miss it. It leads you to think - “no one is going to want to hold stocks and there’s going to be a massive sell off between now and the close”.
Strong earnings reports from Intel Corporation yesterday after the closing bell as well as from banking giant JP Morgan Chase and rail company CSX before the opening bell today, should provide a bid for stocks. That said, should this be sold into at some point during the day, we believe it will be modest. This is a good start to earnings season and perhaps bodes well for the overall market.
With the level of skepticism regarding the bull run over the past year, the cash on the sidelines, the Federal Government stimulus package and the earnings reports noted above, we would be buyers on three to eight percent pullbacks.
Do you feel comforatble about the stock market?
The Dow is above 11,000 for the first time basically in a year and a half BUT do you feel comfortable?
Oddly enough the number of bulls in most investment surveys still falls below 45% despite the massive move higher by stocks. It seems to us that we may never (never is a big word) feel comfortable about the market (or at least for a very, very long time). The two huge corrections, one in 2001 and one in 2008, have left us scarred perhaps forever.
Once betrayed (now twice) forever leery.
This market is a ways from its all time high but that doesn’t mean that a correction isn’t possible and might even be steep (the order of 8-12%). We would welcome such a pullback. We remain of the thought that the market will he higher even 12-18 months but are far from comfortable.
The Dow approaches 11k and it seems like dark clouds are gathering on the inflation/ bond market side of things. The ten year treasury has slid and now yields better than 3.94% after being 3.5% some three weeks ago. With an auction later today, we may see additional weakness in the bond market possibly slowing stock market advances.
We have stayed diversified and relatively short on our bond holdings - diversification with the Ridgeworth Hi Yield fund (STHTX) and some Loomis Sayles (LSBDX)- both are not overly interest rate sensitive and benefit from an improving economy. For intermediate term fixed income exposure, Payden GNMA (PYGNX) makes sense but it has exhibited weakness of late.
We don’t think this is the beginning of bond market armageddon just a back up in interest rates which has long been anticipated and forecast numerous times- gradual rise in interest rates with modest economic improvement is the most likely scenario in our minds.
Any specific stocks named in this presentation may not be representative of current or future investments in the portfolio to which they belong. You should not assume that investments in the securities identified were or will be profitable. We will furnish, upon your request, a list of all securities purchased, sold, or held in the portfolio during the twelve months preceding the date of this presentation.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio.
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