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We’ve Seen This Movie Before

Posted by Larry Doyle on March 10, 2009 2:37 PM |

The stock markets are having a very robust, broad based rally today. All major market averages are up almost 5% or better. Gold is down approximately 3%. Foreign stock markets also had significant rallies. Can we put this pain behind us? Is it finally over?

In dealing with markets and the economy, it is never over. The critical, mental acuity in dealing with the markets and economy is understanding the dynamics at work and the associated risks. Along with a host of other goals, I firmly hope that my work here at Sense on Cents is able to help people understand those dynamics and the accompanying risks. It is a process, but I will keep after it and I hope you find it enlightening and informative. If so, please comment and share Sense on Cents with your friends. (In fact, you can share this piece, and any other piece here at S o C by using the “ShareThis” link underneath the title line of each story). Let’s assess today’s market action.

The market is up primarily on the heels of Citigroup CEO Vikram Pandit’s statement that the first two months of 2009 have been the best first two months to a quarter in the last two years. Citi’s stock is up 27% on the day!! It is now trading at $1.33 (still less than an ATM fee)! Pardon my sarcasm.

Let’s take a deep breath and maintain perspective. For the month, the major stock averages are still down 3%. Government bonds are flat for the month, while other credit sensitive sectors of the bond market are down approximately 2% with the high yield sector down 5+%.

Has the market bottomed and can we at least stabilize here? Perhaps. Markets have been trading on much lighter volumes indicating that the bulk of activity is primarily day trading versus longer term investing. As day traders get caught overly short, the market is very susceptible to rallies of the sort that we are experiencing today.

Markets also never move one way all the time. That sort of price action would not be natural. In fact, it is not inconceivable that the market rallies another 3% which would bring us back to unchanged for the month and down approximately 18-19% for the year. If we do rally another 3%, it would bring us back towards the 7050 level on the DJIA. Last week I commented that I was very surprised we went through that level as quickly and easily as we did. It would make sense for the market to revisit that level.

Ultimately, though, we need to focus on the underlying forces at work in our economy and determine if those forces portend a real turn in our economy and, in turn, our markets:

Housing: most analysts see further price deterioration given the massive supply overhanging the market.

Unemployment: forecast to increase at least to 9% with many economists now predicting double digit levels. This move will continue to keep consumer spending under wraps and pressure retail stores.

Earnings: no indication of any improvement based upon orders received. At the current expected level of earnings, the market looks to be quite expensive.

Global Pressures: according to noted Harvard economist Martin Feldstein, Europe is “in denial” about the current woeful state of their economy and is not willing to undertake the necessary fiscal stimulus. While the EU has the monetary facilities in place to make a collective move, they do not have meaningful fiscal facilities in place to do the same on the spending front. Europe is the weakest spot on the global map and they are the slowest to move both monetarily and fiscally. This lack of action will lead to a very contentious meeting of the G-20 (group of 20 leading economies) in April.

Defaults/Writedowns: the worst remains in front of us, especially on the commercial front. Do I think banks, insurance companies, private equity, and other holders have recognized these expected defaults? No.

In summary, I will take a +5% day versus a -5% day. However, I am not anywhere close to adjusting my views on the economy or markets. Tougher times are ahead.

LD

  • getfitnow

    LD, I heard that Citi “made a profit” the first months of ’09. That’s different than posting “the 2 best months”. If Citi is doing so great, why did they receive more bailout money just last month? I really wish somebody would pull the curtain back so we could see whatg’s really going on. I trust very few these days. Sheila Bair is a rare exception.

  • Larry Doyle

    It must be “new math”…Actually this institution had not had a profitable quarter since either the 2nd or 3rd quarter of 2007.

    You’re right. Perhaps they took the conversion of the government’s preferred position with an 8% coupon to common equity as a profit for this quarter’s earnings. It actually is a very profitable move at the taxpayers expense but if used as part of the basis for a good quarter just a further continuation of the joke being played!!

  • getfitnow

    LD, I heard last night on the radio that Citi reported its earnings but refused to report the expenses. Could this be right and/or legal?

  • Getfitnow…given that it is the middle of the month a formal earnings announcement would only occur after the end of the quarter. Look for Citi’s 1st quarter earnings to be released probably around April 10th.

  • thinkaboutthis

    I have friends who were waiting for the jump yesterday for the sole purpose of pulling every penny out of the stocks and converting to the cash and money markets ( I believe— not sure on the jargon) — the point is they pulled all funds out of the stocks — do you think that was wise — just the little I have been paying attention to in the last two months — I am not confident anything has turned around other than the PR and power of persuasion fronts. Also Larry, do you think it is a good time to go into a service oriented basis as an independent contractor. Friends of mine that have been very successful entrepreneurs say it is not —they suggest to keep working for someone else — let them pay the taxes that are coming and squirrel your money. They equate it to the Carter administration that made business very difficult and threatened many small businesses to fold. Myself – I look at it differently, if one were to charge a rate which anticipated the higher taxes and still gave them the profits they wanted – what would be the difference. The taxes in the future would be neutralized before they began. Of course I do wonder if the SSN and Medicare taxes could increase in a way we have not anticipated. Will they be included with the tax increases? Turbo Tim is getting ready to talk —watch the stocks plunge — lol talk to y’all later. Just dawned on me — this little talk is to divert the 410 omnibus that he is signing today. When are these diversionary tactics going to stop — it is so insulting to the American people.

    • Larry Doyle

      Thinkaboutthis…Thanks for your in depth questions/comments. I hope it is an indication that you like the site and the product. If so, please share it with your friends.

      I would make the following comments in response:

      1. in regard to the market, we had a strong opening, up 1-1.5% but are now down slightly on the day. In my opinion, there are not a lot of long term investors putting capital to work in the market. In regard to investing and the market at this juncture, ultimately it all depends on one’s age and personal circumstances. What is one’s asset-liability situation? What is one’s risk profile? What are one’s short term liquidity needs? Lots of questions. I am happy to get more involved if you’d like. Please encourage your friends to come to the site and ask questions on this front as well.

      2. in regard to starting an independent service business. Both the risks involved and rewards to be gained are increased at this juncture. Clearly tax rates are headed higher in the future. Plenty of businesses will suffer and not make it. Others, though, should be able to gain market share in the process. Expense management and maintaining ready lines of credit are critical. What is the service provided. Is it more of a consumer discretionary product or a consumer necessity? Consumer discretionary spending will continue to decline.

      3. Our political process in general and results generated typically smell….and it’s not a pleasant smell at that!!

      Thanks for your support!!

  • Mark Stevens

    Nice job. Now that we are up 60% from the bottom you clearly missed, and cost your readership untold millions in potential gains, Let me know when you finally get bullish.

    • Larry Doyle

      Mark,

      Nice job.

      When you get finished reading the posts from March 10th until October 2nd, get back to me and let me know what you have learned and then maybe we can pick the discussion up…

      Having dealt with blowhards and loudmouths on Wall Street all the time, I look forward to engaging you further.






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