Market retrospective - week of 12 June

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “Recovery without government spending”

“The one law that does not change is that everything changes and the hardship I was bearing today was only a breath away from the pleasures I would have tomorrow and those pleasures would be all the richer because of the memories of this I was enduring.” - Louis L'Amour (1908-1988) American Author

Overview

“It’s about time”

The markets are in a lull between earnings report times and are focusing almost exclusively on economic reports. The economic reports have generally been good with the net result being that such action as there was in the averages last week moved the Dow Jones Industrials, the S&P 500 and NASDAQ up for the year. It was quite a tough slog but we’ve made it.

Given the lack of any significant market moves this past week – up or down – as a result of those reports, the trend continues sideways for now. A bull market needs volume to thrive and, until market participants feel more motivated to participate, sideways will rule the day.

Nonetheless, it looks as if we may have just received additional fuel for a near-term continuation to the upside.

This has to do with some technical market data. The NASDAQ’s 50-day moving average crossed over its 200-day moving average last week. It seems likely to me that we’ll see the same type of move for the Dow and S&P very soon. The reason for the move is that the market traders often look at these moving average crossovers as bullish - or bearish - indicators.

In this case, a move of a shorter term moving average (the 50-day) above a longer term average (the 200-day) is seen as bullish. This kind of crossover is an indication of positive market momentum and could help to drive the markets even higher as other traders react.

Stay tuned for the exciting conclusion!

Tea Leaf Readings

(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)

“The US economy will beat China and other economies in shaking off the recession and returning to growth. The American economy is the one that’s looking best in the world at the moment.” - Roger Nightingale, strategist, Pointon York

"We're in this cross current. There's still a ton of money on the sidelines. A lot of professionals don't believe this rally is true. From a short-term perspective, it's anybody's guess. If I had to be a betting man on the near term I would say we're due for a modest pullback. A lot of the technicians out there can only buy if you trade above the 200-day moving average."" – John Buckingham, chief investment officer, Frank Asset Management (See comment in Overview)

“I think growth is likely to warrant (interest) rates as low as they are now for some time. We'll just have to wait to see how the growth process unfolds.” - Jeffrey Lacker, President, Richmond Federal Reserve Bank

“We’re absolutely in a bull market and U.S. stocks will rally for another couple of years. Anxiety is in the part of the people who have missed the rally and they’re trying to talk the market down so that they can get back in.” - Laszlo Birinyi, President, Birinyi Associates

“We’ve calmed down the healthy players that were frozen with fear, so the 91 percent who have a job throughout the crisis are beginning to spend again.” - James Paulsen, Wells Capital Management

“The US economy is in the midst of recovery. We’re at a point where there’s much greater stability. People are now starting to ask, 'maybe I can earn more than zero?' Armageddon is behind us." - Laurence Fink, CEO, BlackRock (On Friday, his firm put their money where their mouth is and acquired Barclays Global Investors for $13.5 billion.)

“The sky is not falling — it’s rising. Ninety percent of all stocks are above their 10-day moving average, which means we’re not going to have any more corrections above 5 to 6 percent—that’s historically a fact.” - Harry Clark, President/ CEO, Clark Capital Management Group

"Market participants' concerns are shifting from a potential lengthening and deepening of the recession to the inflation that might be stoked by a rapid recovery. In the past, high and rising inflation has proven to be a far harder problem to solve than a weakening economy in recession." - Jeff Kleintop, Chief Market Strategist, LPL Financial

"This is quite easily the biggest combined fiscal stimulus the world has ever seen in modern times. That liquidity will impact anything that is sensitive to it, ranging from short-term fixed-income securities through stock prices through property prices and into people's personal wealth." - Jim O'Neill, Chief economist, Goldman Sachs

Economic reports from the past week (with occasional translations…)

National Federation of Independent Business - An index measuring sentiment among small business owners gained for the second consecutive month, moving just below a level that would indicate positive growth in the economy.

Citigroup – The bank swapped $58 billion of its preferred stock into common, and the Treasury converted a portion of the $25 billion of Citigroup preferred it holds, to give the Feds a 34% ownership. This closes the debit noted as a result of the recent bank stress tests.

Oil prices – Oil closed at its highest levels for the year. The surge in price is being driven by a combination of oil being seen as a hedge against inflation along with the International Energy Agency having raised its global oil demand forecast as a result in improving global economics.

Retail sales –Sales numbers rose in May after having dropped in April. This is seen as another indicator of an improving consumer sector.
Initial unemployment claims – For the third week in a row, this number has fallen and it fell much more than had been forecast.

Chrysler - Chrysler and Fiat finalized their government-brokered alliance a day after the U.S. Supreme Court removed the deal's last remaining obstacle. Chrysler will now operate as Chrysler Group LLC.

Perspective

“Recovery - without government spending”

Let’s consider where we are right now.

Since hitting its low point in February, consumer confidence has had the fastest three-month increase ever. The Institute for Supply Management's manufacturing index, which had fallen to historic lows over the winter, has risen. It’s another indicator that the overall economy is now expanding.

In the financial markets, the yield on the 10-year Treasury note is back up to 3.81%, almost exactly where it was in August, 2008, just before the wheels came off the markets. Additionally, key commodity prices, such as oil, copper, lumber and gold are well off their lows.

US companies have reacted to the easier money with new issues of stocks and bonds. In May, according to Dealogic, more new stock was issued by existing companies in US markets than at any time since 1995, when the company began keeping records.

Some of the market gains, of course, reflect choices of investors who believe that the worst of the global recession is over and that investments tied to global growth will be big beneficiaries.

In general then, the economic scene is quickly returning to where it was in September, 2008 – before the horror show started.

Today we have the short-sellers (those who only make money when a particular security or market index is down), together with those many money managers who weren’t ready for the nearly 40% rally of the past three months and have been waiting for a drop, continuing to argue that the stock market will go back to test its lows. Or, they think (hope?) a sharp correction is in order. But this seems to be more of a wish than a legit forecast.

Any short-seller who hasn’t covered their open positions, along with the aforementioned equity managers, has taken a major hit. The only way for them to climb out of that hole is for the market to provide lower prices. The challenge is that with having so many investors in the position of having missed the rally – professional and non-professional alike – this makes a re-test of the lows less likely. This rally won’t be over until these short-sellers throw in their towels – probably along with the rest of their laundry.

My point is that we’re well on the way to recovery - and with no Federal spending having been required. Let me explain a bit.

A new Congressional Budget Office study shows that, through late May, only about $37 billion – that’s just under 10% of authorized spending under the grandly named American Recovery and Reinvestment Act of 2009 (ARRA) - has been spent. In fact, the Departments of Education, Transportation and Energy have spent 2%, or less, of their combined allocations.

In the heat of last fall’s market gyrations, many said that we “needed” this fiscal stimulus and that there was no way we would recover without it. Our current Vice President indicated that virtually all economists agreed with this view. (Not exactly) Given our improved and improving economic outlook, i.e., due to a normal recovery after a recession, it appears to me that haste of passage is going to prove to be a significant and very expensive public policy mistake.

The spending bill was promoted under the (I believe) old-fashioned view that only the federal government was capable of digging us out of the hole that we had gotten ourselves into and that excavating job could only have been done with massive federal spending.

One of the reasons we’re hearing about inflation for the first time in many years is due to the fact that there is this tsunami of money sitting out there - and it’s not really needed. It will come flooding into the economy and help drive many things higher – to include the markets for a time. However, any politician who claims that the ultimate recovery was caused by the ARRA is not exactly being forthright. That would have happened anyway – history shows that to be true.

The good news is that since the impact of this monetaqry tsunami is still somewhat long in coming, the Federal Reserve may be able to be light-footed enough to get us through it. No one really knows. There will be higher interest rates as a result of all this money, in order to fight inflation – but not too soon.

The markets are efficient – unlike government – and to try to influence them through “actions” of government has always proven to be pretty much of non-starter.

In the interim, enjoy the positive fruits of the recovery and invest now to benefit from it.

All my best,

Mike
509-747-3323

PS If you, or someone you know, has suffered the death of a spouse, been divorced or changed jobs and has a retirement plan they’re not sure what to do with, please let them know I can be of help. Thank you.

Closing values as of 12 June 2009:
Dow Jones 8799 NASDAQ 1858 S&P500 946 Oil $72.25/bbl Gold $939.40/oz