Sunday, January 25, 2009

Friday the 23rd was very important day.

On Friday we tested the previous low on the Dow Jones and bounced off that test to close above 8,000 on the Dow, but the Dow was down for the day about 42 points. Of greater interest to me was the fact that the S&P 500 also tested it’s most recent low and finished up for the day over one-half of one percent. The market had every reason to set a new low based on what the futures looked like before the opening.

The S&P 500 hit it’s low for the day at 9:36am, one minute after the market opened. It spent the rest of the day moving up. You can see clearly the support and move up in the chart above. The technical people say every time we sell off and test the low and the lows hold we are “Baking in a Bottom”. Nobody knows for sure how long it will take to start a move off the bottom or for that matter how many times we will test the bottom.

One thing is clear to me, every time we test and hold the bottom it is like winding a spring. At some point in time all that built up tension in the spring will eventually have to be let loose. When the market is caught up in a tighter and tighter trading range, it is only a matter of time before one of two things happen, the market breaks either out or down. The news about the economy continues to be very bad. Now everybody is focused on the next jobs report due out in about two weeks wondering how bad it will be. Citibank and Bank of America look like they could be penny stocks any day.

Most people do not seem to know that there are over 7,500 banks in the United States, but to date only 270 have applied for TARP funds. I realize that almost all of the largest banks in the country have asked for help, but we have 7,200 that have not asked for help and many of them are local community banks that are lending to people like you and me.

I am making these points to try to help you understand what is happening in the broader economy. Yes, people are loosing their jobs and some are losing their homes. The new president is going to try to figure out a plan to fix the serious problems in America. Unlike President Bush who only had four months to solve the economic problems the one advantage President Obama has is that he is not trying for a quick fix. If the President and Congress spend enough time trying to come up with the best possible solution the better the chance it will be accepted by the people. The administration and the Congress do not have a great deal of time to come up with a plan. If we think it will work then confidence will return to the economy. Taking a methodical approach to solving the problems is adding to the tension in the spring of the market. Do not be surprised that one day soon the market just explodes up on what appears to no reason.

Dan Perkins

Tuesday, January 20, 2009

Welcome Mr. President to the Real World

Today we welcomed a new president who is full of hope and millions of Americans are looking to him for better days ahead. From the time the new president took his oath of office the stock market fell. At the final bell, the market closed at the low for the day. So far this month, 20 days, we are off just about 10%. The financial markets are in turmoil again and the major banks stocks look like they are getting ready to turn off the lights and lay everybody off tomorrow.

We broke the support level of the S&P 500 was broken so everything continues look like the end of the world. One equity mutual fund manager was asked today why he was not buying stocks. His response was, “why should I buy today when I can probably buy the ones I like in three months at the same price or perhaps even lower." I said in my last blog that we have a “confidence” problem in the markets. The response of the equity manager sums things up, why do anything now we will have time to buy and maybe at a better price.

In 1987, I was working with Wellington Management of Boston. Wellington manages a significant number of Vanguard mutual funds. You may recall that the market crash of October 19 had many people scared. On the 20th, I sat in the Wellington War Room and listened to John Neff, the legendary money manager of the Windsor Fund, say that “He was buying because he thought he just got another chance to get rich again.”

I had the chance to speak with John later and I told him I liked his courage in recommending to the Wellington managers to buy into the market. He said, “It didn’t take a lot of courage to buy at these levels.” I am not sure what John would say about the markets today, but I believe he would think there were many compelling values to buy. Sometimes it takes courage and conviction to buy at these levels.

On days like today ask yourself, am I being paid for waiting to have this investment go up? How long it will take the market to break out of the trading range will depend on how the markets react to the plans of the new President. If the markets believe that President Obama can change things, the markets will go up. President Obama does not have to do a lot now; he just has to come across as trying to make the change he promised. If he stumbles, the markets will fall back. Let us hope that he does not stumble.

Dan Perkins

Saturday, January 17, 2009

A Rollercoaster Ride called "Confidence" is now Avaiable.

Have you ever been on a roller coaster ride?
My son Nathan and I are the only people in our family who would and did ride roller coasters, we are both in the money management business so I guess we like the thrill of the ride of a roller coaster and the markets. Nathan and I had the last ride on a wooden roller coaster at a park in Scranton PA. The next ride it broke and they closed the ride and the park.

If you have ever ridden a coaster, you know that you start out level and then you start to climb. The climb gets steeper and steeper until you reach the top. For one split second you are to the crest and stop and then you start to move forward over the top. You look down and all you see is the straight drop to the bottom. Your eyes are fixed at the bottom of the ride; you cannot see the next uphill move coming. As you continue to fall to the bottom, you gain speed and you are sure you are going to die.

As you move through the ride the next high point is lower than the previous high and the twists are less and less powerful until at the end you are back to level ground and you are where you started the ride safe and almost sound. I often wondered if they have somebody at the end of the day who goes underneath the ride and collects all the loose changes that falls out--that is for another Blog. What I have described is the chart pattern for the S&P 500, not only for the last four months, but for the last 10 years. If the return on today’s T-Bills up to one year out is zero, then the return on the S&P 500 is less than zero, in fact for the last 10 years the return on the S&P 500 is -31% (see chart above). This S&P 500 roller coaster ride set a new bottom in 2008.

Just when we think we have hit bottom in the stock market and are starting up hill again we take a sharp drop. I believe what we are seeing in the markets is a lack of confidence. The market moves up and we feel good. We think we have made the turn and when we get comfortable that everything is OK. We are moving to the top of another hill and find ourselves swooping down again. These swings in the market demonstrate how fragile the consumer and business confidence is in the US and in many other places around the world.

One thing is clear to me, many people and businesses can only go so long earning zero on their saving or cash. The pressure continues to mount every day for the people and businesses that need income. If they get no income then the only thing left for them to do to pay their bills is to sell their assets. Recently a major US bank revised it's interest rate forecast. In December, that bank was expecting the Fed to start increasing interest rates in the second half of the year. The bank was calling for three, quarter point increases in the Fed funds rate in the last 6 months of 2009. They bank recently reduced that to one 25 basis points increase in August and I think in another month or two they will revise their forecast again.

The Fed Chairman said in a recent speech in London that he expected low short-term interest rates to be around for an extended period. While he did not say specifically how long I suspect he was thinking longer than five and one-half months. When people finally come to grips that a low level of short-term interest rates will be with us for a long time they will look for a ticket to ride on the up side of the roller coaster and buy something other than 90-day T-Bills. Right now, there is no waiting line to buy equities. However, as with everything else everyone will want on the ride when it is too late. The serious money in common stocks will be made by those who have the confidence to get on when the ride is flat. So, consider buying some roller coaster ride tickets today.

Dan Perkins