I'm surprised at the resiliency that the market is showing amongst the deluge of downtrodden economic news coming out each day. Today we came to know that the unemployment rate increased to 6.1% in August, a much bigger jump that the market was expecting. The stock market reacted to it in the beginning but then the negative effect gave way and most of the indices ended the session up, albeit slightly. Most of the news was already incorporated yesterday when the DOW fell more then 300 points. I think the ADP unemployment report that came out yesteday gave a glimpse of what to expect today since those numbers were also worse than expected. Financials led the market today after a downbeat report on the foreclosures, which would have surely spooked some investors had it come out on any other day.
Now we wait to hear the consumer credit numbers on Monday. It will be an important gauge of how the consumer is meandering through this rough phase in the economy where unemployment and inflation are on the rise, credit is shrinking, and a lot of people are either losing their homes or are seeing the equity in their homes evaporate. This is especially disconcerting to a lot of people who invested their life savings in order to have a roof over their head. The most hard hit are those who took out lines of credit on their homes and now owe balances on their mortgage as well as on their lines of credit.
A lot of people have chosen to walk away. This measures up to the report on housing that came out today. The Mortgage Bankers Association said that 4 million American home owners were either behind on their payments or in foreclosure as of the end of June. Most of them took out exotic loans with balooning monthly payments. For the uninitiated, this means that a lot of people took out variable loans where initially they just paid some portion of interest. Whatever was left over got added to the loan balance. This can go on until the balance reaches to about 10-20% of the loan (varies from lender to lender and on the loan agreement). Once this trigger point is reached the monthly payments go up and most of the people are left with an increase of almost 30-40% of what they were paying before this reset. This is a big threat to the US, and the world's, economy. There will be a lot of loans that will be reset in 2009 and 2010. We will not know the extent of those failures for a long time. In the meantine, the housing bill passed by the US Congress has helped some borrowers in staying current with their mortgage payments. In my opinion, this will have a limited effect since in most cases it will just be delaying the inevitable.
Among some of the stocks that saw action today -
AIG jumped 5.3% despite a Morgan Stanley analyst downgrading the stock to "equal weight" from "overweight" citing the fact that the world's largest insurer might need to raise more capital in the near future. IMO this is still a solid stock. Most of the losses they have shown on the balance sheet are due to mark to market accounting and they should be able to recoup most of those when the market outlook turns rosy.
Apple ended the day slightly in the negative territory. This is puzzling to me since they have an event coming up on Tuesday and are expected to announce some new products. I am a fan of their products and am most certain that they will trounce all expectations for the Mac and iPhone sales this quarter.
Visa ended up (+1.8%). I especially like their business model since they don't assume any credit risk. The risk stays with the credit card bank and they make their moeny off of the transactions they process.
Wisdom Tree India ETF ended in the green as well (2.6%). This is a good play on the Indian stock market. Although it has seen its share of volatility in the near term, it still is a good buy since India is an emerging market on track for several years of growth and unlike China, gets most of its growth from domestic consumption.
Freddie Mac ended in the green (+3%). This has proved to be a pretty good stock for swing traders. I've played it a couple of times and still hold some of it for the long term.
MSII did ok, up a penny.
These are all the stocks I own in varying capacities in my personal portfolio. I do my own research and thie should not be misconstrued as an advice to buy them.
Friday, September 5, 2008
Tuesday, August 5, 2008
Market Update - 8/5/08
What a day!! The major averages all rallied today in the final hour of trading. The major propellant was the Fed decision to hold interest rates steady at 2%. ISM data that came out in the morning provided the early impetus to the markets. It came it at 49.5 versus a reading of 49 expected by the economists. Anything below 50 represents contraction, but the market took this number to be a positive since it was higher than what we saw in June. Fed, today, acknowledged the impact of higher inflation on the economic growth. But the ongoing crisis in the financial markets coupled with a slowdown in the consumer spending might have swayed their way towards holding a steady path. Dallas Fed president, Fischer, was the only dissenting candidate. He advocated raising the rates, as he had done at the last meeting in June.
I think this was a good decision. The time is not ripe to start raising the rates so soon. Inflation is a problem, and they had to balance the deterioating aspects of a rise in inflation with the credit crunch and the worsening effect of increasing unemployment on the public. There are a lot of negatives still in this market and we have to sift through all of those before we start seeing any measure of economic growth. Some of those are -
1. Increasing Unemployment (which jumped to 5.7% in July).
2. A still weak housing market (most of the economists still feel that the prices will fall 10% or more from what they are today).
3. Credit Crunch (which is affecting not only big institutions but also people who would like to buy a new home today).
4. Higher Inflation (as a result of higher commodity prices amid a higher than normal demand for those, coming mostly from the developing Asian economies).
5. A risk that more banks could fail (resulting either from bad investments in sub-prime mortgages or CDO's in general).
The only positive that has come out in the last two weeks has been the decline in crude oil prices, which have fallen almost 20% from their peak set in July. This has buoyed the markets and has led to declines in the Energy and Materials sectors across the board. Some of that decline could also be attributed to an expectation that the high gas prices are finally affecting the consumer in the US. This could further lead to a slowdown in consumer spending, and hence the GDP which is a barometer of how the economy is coping up with all the stresses that are being levied on it. Consumer spending accounts for almost 70% of the GDP here in the US.
AIG had a big day today, with the stock rising 12% after an analyst at UBS stated that the worst may be behind this company. Freddie Mac reports tomorrow and Fannie on Friday. Both these reports have the potential to move the markets one way or the other. I am getting a little bit concerned about Freddie since they have a big concentration in Alt-A mortgages which are hard to value. If they need to mark those to market then it could end up costing them a lot of moolah!!
Also, they have to issue new shares as they have promised their regulator. This could again prove costly for the current shareholders since their market cap currently is roughly $5.5B. If they raise additional $5B, as they promised, then they will have to almost double the outstanding float. It will be interesting to see what they report tomorrow.
Today's rally should not be mistaken for a "the worst is behind us" rally. There still are a lot of negatives out there and unless the housing market shows an uptrend, we are in for a very long summer!!
I think this was a good decision. The time is not ripe to start raising the rates so soon. Inflation is a problem, and they had to balance the deterioating aspects of a rise in inflation with the credit crunch and the worsening effect of increasing unemployment on the public. There are a lot of negatives still in this market and we have to sift through all of those before we start seeing any measure of economic growth. Some of those are -
1. Increasing Unemployment (which jumped to 5.7% in July).
2. A still weak housing market (most of the economists still feel that the prices will fall 10% or more from what they are today).
3. Credit Crunch (which is affecting not only big institutions but also people who would like to buy a new home today).
4. Higher Inflation (as a result of higher commodity prices amid a higher than normal demand for those, coming mostly from the developing Asian economies).
5. A risk that more banks could fail (resulting either from bad investments in sub-prime mortgages or CDO's in general).
The only positive that has come out in the last two weeks has been the decline in crude oil prices, which have fallen almost 20% from their peak set in July. This has buoyed the markets and has led to declines in the Energy and Materials sectors across the board. Some of that decline could also be attributed to an expectation that the high gas prices are finally affecting the consumer in the US. This could further lead to a slowdown in consumer spending, and hence the GDP which is a barometer of how the economy is coping up with all the stresses that are being levied on it. Consumer spending accounts for almost 70% of the GDP here in the US.
AIG had a big day today, with the stock rising 12% after an analyst at UBS stated that the worst may be behind this company. Freddie Mac reports tomorrow and Fannie on Friday. Both these reports have the potential to move the markets one way or the other. I am getting a little bit concerned about Freddie since they have a big concentration in Alt-A mortgages which are hard to value. If they need to mark those to market then it could end up costing them a lot of moolah!!
Also, they have to issue new shares as they have promised their regulator. This could again prove costly for the current shareholders since their market cap currently is roughly $5.5B. If they raise additional $5B, as they promised, then they will have to almost double the outstanding float. It will be interesting to see what they report tomorrow.
Today's rally should not be mistaken for a "the worst is behind us" rally. There still are a lot of negatives out there and unless the housing market shows an uptrend, we are in for a very long summer!!
Monday, July 28, 2008
Market Update - 7/28/08
Financials were again on the boilerplate today. The rally which we saw a couple of weeks ago faded into renewed concerns about the health of the economy as well as the financial sector today. More and more people are getting concerned that financial companies would need to raise more capital and hence would end up diluting the current shareholders' positions. If this comes to fruition, then the existing shareholders will see their holdings drop in value.
This week will prove to be quite a roller-coaster. There are a lot of economic barometers that will be reported, starting with the consumer confidence number tomorrow. I recently read a pictorial comment where two people are on a roller-coaster and one of them is asking the other "Is it DowJonesy enough for you?" - this basically sums up what this week will be all about. Dont be surprised to see another big drops tomorrow and on friday when the labor department comes out with the employment numbers.
The IMF came out today blowing its horn loud enough to let everybody know that it expects the recovery will take longer than expected and that the losses could be much more severe than currently thought. This was enough to lead the market, which still had to recover from its dour mood (two more banks were taken over by the FDIC over the weekend), into further negative territory.
I am not surprised to see the market behave in a way that's been the norm over the past one year. The market is not looking at fundamentals or valuations, which form the basis of buy/sell decisions for a lot of money managers. All the market cares about today is momentum, driven by fear. Now this could lead to some people making an investment of a lifetime, or for some it could be a time to look back next year or the year after that and ponder "I wish I had bought that bank stock". Most of the big banks are on a solid footing and it would take a major force to take them out of business or have a firesale on any of those. Let's hope that never happens.
This week will prove to be quite a roller-coaster. There are a lot of economic barometers that will be reported, starting with the consumer confidence number tomorrow. I recently read a pictorial comment where two people are on a roller-coaster and one of them is asking the other "Is it DowJonesy enough for you?" - this basically sums up what this week will be all about. Dont be surprised to see another big drops tomorrow and on friday when the labor department comes out with the employment numbers.
The IMF came out today blowing its horn loud enough to let everybody know that it expects the recovery will take longer than expected and that the losses could be much more severe than currently thought. This was enough to lead the market, which still had to recover from its dour mood (two more banks were taken over by the FDIC over the weekend), into further negative territory.
I am not surprised to see the market behave in a way that's been the norm over the past one year. The market is not looking at fundamentals or valuations, which form the basis of buy/sell decisions for a lot of money managers. All the market cares about today is momentum, driven by fear. Now this could lead to some people making an investment of a lifetime, or for some it could be a time to look back next year or the year after that and ponder "I wish I had bought that bank stock". Most of the big banks are on a solid footing and it would take a major force to take them out of business or have a firesale on any of those. Let's hope that never happens.
Friday, July 25, 2008
Market Update - 7/25/08
A mixed day for the markets today. Technology again led the market, rising more than a percent. The rally that began in the financials gave way yesterday to renewed concerns about the frailing health of the financial sector, and that sentiment continued today. Financials were the worst hit sector in the last two trading days this week. Yesterday's decline was a result of a dissapointing sales in the already subdued housing market. Today, the data was however a little bit better than expected. While the existing home sales number yesterday was a bummer, the economic data today showed the sales of new homes increased better than expected.
I think the theme for the market this week was a by product of an optimism of a bottom in the housing market followed by weak economic statistics, and earnings disappointments by some big names, Apple and VMW being some of the main culprits. We saw a brief rally this week after being surprised on the positive by earnings announcements by some of the big banks, which was quickly forgotten among disappointing earnings outlooks by some of the big technology companies.
It will be hardpressed to label this an inflection point for the stock market. When will that be? Nobody knows, and if someone claims to know then be careful of that quack!! The one thing I know, one thing that stays true, is that the market will always rebound anticipating the economy to turn a corner. This is the time when we dont want to be left out of the party.
I think the theme for the market this week was a by product of an optimism of a bottom in the housing market followed by weak economic statistics, and earnings disappointments by some big names, Apple and VMW being some of the main culprits. We saw a brief rally this week after being surprised on the positive by earnings announcements by some of the big banks, which was quickly forgotten among disappointing earnings outlooks by some of the big technology companies.
It will be hardpressed to label this an inflection point for the stock market. When will that be? Nobody knows, and if someone claims to know then be careful of that quack!! The one thing I know, one thing that stays true, is that the market will always rebound anticipating the economy to turn a corner. This is the time when we dont want to be left out of the party.
Wednesday, July 23, 2008
Market Update - 7/23/08
The market continued its upward climb today with the transportation sector leading it. Financials were the second best today. Had it not been for the 20% decline in Washington Mutual financials might have led the market today as well extending its lead to almost a week now.
Earnings season has been good so far, with most of the major companies reporting earnings ahead of forecasts. What is killing some of those, even after reporting good earnings, is their forecast for the next quarter. The companies are feeling price pressures from rising oil prices which is a concern for the general public as well. This is a double whaamy!!!! They are reluctant to raise prices since that could move some of their customers to their competitors, and if they don't raise the prices their margins get compressed and the stock gets penalized. Costco felt the pain today when they lowered their next quarter's estimates, based on increasing inflation and inability to pass on the increased prices to consumers. The stock fell 10%.
The Fed released the Beige Book today which shows that the economy shrunk in June and July. I'm not surprised to see the consumer tightening their belts since high oil prices are eating into their day-to-day budgets. Couple that with rising unemployment, credit tightening, and depreciating home values and you have got yourself a consumer who is stretched thin from all places. Any more stretching could cause the bubble to burst. This is reflected today in an article on CNN which states most economists believe the median income has contracted over the last 5 years for a middle income family.
Is this the gloom and doom scenario? Nope.!!
There still are good areas to invest depending on an investor's risk appetite. Valuations in the financial sector are at historical lows. If you are investing and have a long time frame, it might be worth having a chunk of your portfolio dedicated to this sector. If you are hesitant to own specific names, then an ETF could be worth a look. Remember I'm not suggesting an overload of this sector in your portfolio - just a small chunk of it. Wealth is not created by earning a salary - it is created by thoughtful investing. Compounding is a magical phenomenon and could work wonders for your portfolio. So, for the young gen - start as early as possible and reap the rewards for your lifetime.
Cheers!!!!
Earnings season has been good so far, with most of the major companies reporting earnings ahead of forecasts. What is killing some of those, even after reporting good earnings, is their forecast for the next quarter. The companies are feeling price pressures from rising oil prices which is a concern for the general public as well. This is a double whaamy!!!! They are reluctant to raise prices since that could move some of their customers to their competitors, and if they don't raise the prices their margins get compressed and the stock gets penalized. Costco felt the pain today when they lowered their next quarter's estimates, based on increasing inflation and inability to pass on the increased prices to consumers. The stock fell 10%.
The Fed released the Beige Book today which shows that the economy shrunk in June and July. I'm not surprised to see the consumer tightening their belts since high oil prices are eating into their day-to-day budgets. Couple that with rising unemployment, credit tightening, and depreciating home values and you have got yourself a consumer who is stretched thin from all places. Any more stretching could cause the bubble to burst. This is reflected today in an article on CNN which states most economists believe the median income has contracted over the last 5 years for a middle income family.
Is this the gloom and doom scenario? Nope.!!
There still are good areas to invest depending on an investor's risk appetite. Valuations in the financial sector are at historical lows. If you are investing and have a long time frame, it might be worth having a chunk of your portfolio dedicated to this sector. If you are hesitant to own specific names, then an ETF could be worth a look. Remember I'm not suggesting an overload of this sector in your portfolio - just a small chunk of it. Wealth is not created by earning a salary - it is created by thoughtful investing. Compounding is a magical phenomenon and could work wonders for your portfolio. So, for the young gen - start as early as possible and reap the rewards for your lifetime.
Cheers!!!!
Tuesday, July 22, 2008
Market Update - 7/22/08
What a Day!!!!! The markets opened lower, a result of the disappointing earnings from Apple, TI, and Wachovia. All these stock were down and out at the open. Apple and Wachovia plunged 10% at the open and so did some of the other financial stocks. But it all turned for the better as oil continued its downward spiral. At one time, it was down $5/barrel. Wachovia was in the green as the day ended based mostly on the fact that the CEO announced they will not be selling more stock and will be cutting their dividend. This news buoyed the entire financial sector, which ended up 3.5% on the day. Freddie Mac was the surprise winner. The stock, which had been down 13% at one time, rallied to finish up 10%.
One other major news was that the ruling coalition proved their majority in the Indian parliament and hence would stay in power for the time being. Look for a major upswing in the Sensex tomorrow. EPI, an ETF based on Indian shares rose 5% today.
Today was another good example of the fact that it is pretty hard to time the market. Stocks which were down 5 or 10% ended the session in the green or pared most of their losses. It doesnt pay to sit at the sidelines for long and trying to find a time to "enter" the market. You should be in it for the long term and not get anxious by the daily swings. This "noise" will be there always and is something that gives us the opportunity to make $$$$$$$$$!!!!!
Cheers!!!
One other major news was that the ruling coalition proved their majority in the Indian parliament and hence would stay in power for the time being. Look for a major upswing in the Sensex tomorrow. EPI, an ETF based on Indian shares rose 5% today.
Today was another good example of the fact that it is pretty hard to time the market. Stocks which were down 5 or 10% ended the session in the green or pared most of their losses. It doesnt pay to sit at the sidelines for long and trying to find a time to "enter" the market. You should be in it for the long term and not get anxious by the daily swings. This "noise" will be there always and is something that gives us the opportunity to make $$$$$$$$$!!!!!
Cheers!!!
Friday, July 18, 2008
Market Update - 7/18/08
Okay, I was wrong in my last post that Citi was going to disappoint. They actually posted better than expected results for the second quarter and that helped the financial sector lead the other major sectors today for the third consecutive day. The NASDAQ, however, had a forgettable outing, down 1.3%, based in large part due to the dissapointing earnings from Google and Microsoft, which are considered as bellwethers for the IT industry. Monday will again be very important. Apple releases its earnings after the bell. Everybody knows (or rather expects) that they will blow the analyst numbers away but the major part of action will be their guidance for the third quarter this year. One thing to remember is that the iPhone 3G sales will not be included in this quarter's results. That being said, I firmly believe that they will not only exceed the estimates for the 2nd quarter but will also guide to a rosy third quarter.
Fannie and Freddie had another good day. There were talks that Freddie is ready to raise more capital in the near future and this boosted the stocks of both these companies, not withstanding the dilution that this have for the current stock holders. I still believe that both these stocks are pretty cheap. The market had priced them as if there was no tomorrow for any of these companies, but that appears to be changing in the past three trading days, not only for these two but for the financial sector in general.
The markets, as efficient as they might be, are still governed by two major themes - "Fear" and "Greed", and these two things feed on each other. When one rules, the other takes a back seat and viceversa. No points for guessing which one is ruling the market today!! Naive investors panic and let their emotions dictate their investing habits. As a result they are dumping stocks either based on rumors or what their broker is telling them to do (guess whose side is he on!!!). This usually leads to pretty good opportunities in the markets if you are in it for the long term. Financials are a pretty good case in point. The sector has been deep in red for the past one year. The market had discounted their valuations to such levels that the book value of some stocks dropped below $1 for the first time. The dividend yields breached the 10% level. To put this in perspective, economists recommend buying stocks when the yields are above treasury yields (for the index as a whole, not an individual stock), and the current yield on a 10 yr treasury note is below 4%. And the third quarters' earnings from all the major banks that have reported till now (except Merill Lynch) have surprised to the upside.
Am I saying that we have already reached the inflection point? No. Have we seen the worst for the financials? No. Nobody knows when the inflection point occurs, we can only see that in hindsight. All I am saying is that we should not wait on the sidelines forever and miss the opportunites that the stock market provides us. It will never tell us when there is a bottom or when we have reached the top, but with careful analysis we can certainly enter at an opportune time and see our savings grow.
Have a nice weekend everyone!!!
Fannie and Freddie had another good day. There were talks that Freddie is ready to raise more capital in the near future and this boosted the stocks of both these companies, not withstanding the dilution that this have for the current stock holders. I still believe that both these stocks are pretty cheap. The market had priced them as if there was no tomorrow for any of these companies, but that appears to be changing in the past three trading days, not only for these two but for the financial sector in general.
The markets, as efficient as they might be, are still governed by two major themes - "Fear" and "Greed", and these two things feed on each other. When one rules, the other takes a back seat and viceversa. No points for guessing which one is ruling the market today!! Naive investors panic and let their emotions dictate their investing habits. As a result they are dumping stocks either based on rumors or what their broker is telling them to do (guess whose side is he on!!!). This usually leads to pretty good opportunities in the markets if you are in it for the long term. Financials are a pretty good case in point. The sector has been deep in red for the past one year. The market had discounted their valuations to such levels that the book value of some stocks dropped below $1 for the first time. The dividend yields breached the 10% level. To put this in perspective, economists recommend buying stocks when the yields are above treasury yields (for the index as a whole, not an individual stock), and the current yield on a 10 yr treasury note is below 4%. And the third quarters' earnings from all the major banks that have reported till now (except Merill Lynch) have surprised to the upside.
Am I saying that we have already reached the inflection point? No. Have we seen the worst for the financials? No. Nobody knows when the inflection point occurs, we can only see that in hindsight. All I am saying is that we should not wait on the sidelines forever and miss the opportunites that the stock market provides us. It will never tell us when there is a bottom or when we have reached the top, but with careful analysis we can certainly enter at an opportune time and see our savings grow.
Have a nice weekend everyone!!!
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