Market retrospective - week of 17 April 2009

Overview

The markets were up only slightly on Friday but enough to make sure that the short sellers – those who have held sway over the markets for the better part of three quarters now – are looking a little sickly. We’ve now had six up weeks in the market in a row. The challenge for short sellers is that they can only make money when their investments go down.

Those guys were sure that the results from the banks this week would be weak and give them plenty of chances to benefit yet again. Oops. The banks apparently didn’t get the word and have each/all produced better than expected numbers in a quarter that “everyone knew” would not be so good.

The result has pushed the bank index up for the sixth week in a row. Current monetary policies and much better than anticipated results from their respective capital markets groups have been the main drivers of the improved bank earnings. It appears to me that when the changes in the mark-to-market accounting rules become visible in the second quarter data, this will help move bank earnings to more positive levels.

Continued strength in the bank stocks should help keep the overall markets in a positive trend.

Economic reports

Consumer Price Index (CPI) ~ Consumer prices in March had a slight drop, down 0.1%, but it was enough to contribute to the fact that, for the first time since 1955, consumer prices had dropped on a year-over-year basis. However, when looking at just this year’s numbers, you see a gain of 2.2% through March. Deflation is not a concern. Inflation isn’t dead either – it’s just resting…

Retail sales ~ These declined 1.1% in March. The expectation was for an increase of 0.3%. Part of this can be due to the fact that Easter was in March last year but in April this year so those sales will probably be showing up in April data.

In the first three months of this year, including the March drop, sales are up at a 4% rate. For comparison, in the last three months of 2008, retail sales fell at a 30% annual rate. Seems to me that this trend upward will be continuing. Inasmuch as 70% of our economy is based on consumer spending, that, as they say, would be a good thing…

Consumer sentiment ~ This was up “unexpectedly” in the April report. It’s now back to the level it was last September, before we went into panic mode. With the real estate and stock markets firming up, this should continue to improve as well.

Producer Price Index (PPI) ~ This number fell in March. Of more interest – to me, anyway – is the comparison between the PPI in the first three months of this year v. the last three months of 2008. This year, including the drop in March, the PPI is down at only 0.9% annualized. The annualized rate it dropped at in the fourth quarter was 24.9%. Big difference, to be sure. In American, further proof that deflation is not a concern.

Dow high yield stocks / total return

Please consider this section as food for thought…not as a blanket recommendation.

I was talking with a client this week about improving her cash flow. She was concerned that CDs were still providing such low returns and affecting her cash flow. For instance, here in the Spokane market, the average one year CD is only paying about 1.1% - and that’s fully taxable.

In looking at the companies that make up the Dow Jones Industrial Index, there are a number of world class leaders in their industries that are selling at tremendously great values. Because they’ve dropped so much in price over the last year, the dividend yields are extremely attractive. Moreover, due to the current tax benefit on dividend income, you can keep more of what you receive after-tax than you can with CDs.

Let’s consider AT&T as an example. If you invested in the company and it went up 5% this year, that would be okay. However, be aware that, as of today’s market close, AT&T has a dividend yield of 6.3%. So, in addition to the potential for growth of your investment in the company, you also have the dividend payment. Therefore, if the stock were to appreciate in value just 5% from its current price, your total return – your dividend income plus the growth – would be over 11%. That’s pretty nice from a company that is a market leader and conservatively run.

In this market environment, one which I feel offers you value opportunities that are seldom seen; there are many companies that pay very good dividends. With a great number of these companies, the amount paid out annually as dividends has been increased regularly over time.

So, what you get is a combination of a comfortable income from the investment “while you wait” plus a store of future value in the price potential of the investment. This is true with stocks, mutual funds, unit investment trusts and some ETFs.

Total return is key to long-term investment success.

Tea leaf readers – what are analysts, economists, market strategists and the like saying now?

Marc Faber, publisher, Gloom, Boom & Doom Report ~ “The S&P 500 could drop 5% to 10% from here and will then rally into July. The March lows will hold.” (A drop of that amount would be normal in the greater scheme of market moves.)

Abby Joseph Cohen, Goldman Sachs ~ She predicts that the S&P 500 will be at 900 by year-end. (Not too much of a stretch from here – it closed today at 869…)

Ben Bernancke, Chairman, Federal Reserve Bank ~ “There are signs the economic decline may be slowing.” He is “fundamentally optimistic about the economy.” He believes the key is “stabilizing the financial system and easing the availability of credit.”

Robert F. Carey, CFA, First Trust Portfolios ~ “Bearish sentiment hit a record high in the first week of March, 2009. A very high bearish reading is considered a sign the market is in the process of bottoming. Bearishness tends to spike/peak in periods of economic weakness (1990 - 1991, 2002 - 2003, 2007- Q1 09) then gives way to multi-year gains in the S&P 500.” (I think market cycles and history are good places to look for what to do now.)

Brian Wesbury, First Trust Portfolios ~ “The stage is now set for a major turnaround in home building that will begin late this year and contribute substantially to the economy in 2010-11. Once the excess housing inventory is worked off completely, population growth and knock-downs will require about 1.6 million starts per year, which is more than triple the current rate.
After peaking in early 2006, and falling dramatically for three years, housing starts finally hit bottom in the first quarter of this year. Although overall housing starts fell 10.8% in March, single-unit starts were unchanged and have been above the January level for the past two months. Due to excess housing inventories (roughly 1.5 - 2 million homes), the recovery in starts will be gradual at first.

In other words, starts must climb 200% in the next few years just to get back to normal!"

Conclusion

I hope you find these weekly re-caps to be helpful. My goal is to help you to make informed decisions about your money. Please send me any questions you may have.

Also, please keep this in mind.

Alleviating the effects of the bad markets of the past couple years won’t mean much if we don’t participate in the coming recovery. Review what you’ve been doing in light of the current markets and update your asset allocation to be in line with your goals, needs and desires…

Now would be good.

All my best,

Mike
509.747.3323