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!!!