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| January 23, 2009 It Could Always Be Worse The markets finished this shortened holiday week essentially flat, which is nothing short of amazing considering Tuesday’s nosedive. Initially blamed on the fact that President Obama didn’t outline a clear plan to address the economic situation in his inaugural address, the more likely culprits were Citigroup’s (NYSE: C) slashing and burning of its dividend, cut to a penny, and the broadening of the UK’s bank bailout efforts on Monday. The S&P 500 finished the week down 2.1 percent from last Friday’s close, the Dow Jones Industrial Average dipped 2.5 percent, and the Nasdaq Composite gave up 3.4 percent. There was little economic data released during this truncated week, and most of what came out had to do with housing. Housing starts and building permits continued their plunge in December, falling 15.5 percent and nearly 11 percent, respectively. Ground was broken on a seasonally adjusted 550,000 homes during the month, down from 651,000 in November, half the rate of construction seen in December 2007 and the slowest pace since 1959. And since permit numbers are a fairly good gauge of future activity--most states require builders to secure permits before beginning construction--the pace of starts will continue to slow. Only 549,000 building permits were issued in December, down from 615,000 in November. According to the Federal Housing Finance Agency, home prices declined another 1.8 percent in November, which doesn’t bode well for the Case-Schiller Index numbers due out early next week. Oddly enough, the worst of the price declines were to be found in the northernmost reaches of the Midwest, with prices in the Dakotas, Minnesota, Nebraska, Iowa, Kansas and Missouri down 2.7 percent. Given that those regions were largely spared from the housing bubble, with the exception of some urban areas, it seems as though prices are finally beginning to fall in response to weakening economics. After 11 straight weekly declines, the average rate on a 30-year fixed-rate mortgage crept up to 5.12 percent this week, off a recent low of 4.96 percent. That helped put a dent in mortgage applications, which fell 9.8 percent as refinancing activity dropped off. The Day Lehman Fell Investors Joined “The New World” and profited 17% That fateful day began the calamity that will define 2008 for generations of investors. Yet a small group of you joined a visionary service that has handed its subscribers a 17% gain since September 22, 2008. Roger Conrad invites you to take a look at his new service, The New World. The continued deterioration of the real estate markets is sapping the confidence of homebuilders, with the National Association of Home Builders housing market index falling from 9 in December to 8 in January. That’s a new record low and helps explain why many builders have cut staffing to the bare minimum and now sit on cash waiting out the economy. They’re putting some of that money to use paying lobbisists, though, pushing Congress for a 10 percent tax credit, up to $22,000, for homebuyers who purchase a home over the next year. Jobless claims once again resumed their upward march, with initial claims reaching the highest level since 1982. The number of workers applying for first time benefits climbed to 589,000 from 527,000, and continuing claims rise to 4.607 million from 4.510 million. And those numbers are going to get much worse before they get better as job losses are creeping out of the construction and financial sectors. Microsoft (NSDQ: MSFT) announced that it will be slashing five percent of its worker force after earnings dived in its second quarter. Net income fell 11 percent as sales of new computers, most of which come preloaded with the Windows operating system, have declined though revenues climbed to $16.6 billion. Despite that, it still made $4.17 billion in the quarter. The cuts don’t stop there though, with IBM (NYSE: IBM) announcing it will be eliminating five percent of its workforce, and Slumberger (NYSE: SLB), the world’s largest oilfield services provider, is planning to cut 5,000 of its workers. And this is an extremely short list of what’s just been announced in the last few days. Unemployment rates will easily hit the low double-digits sometime later this year. All of these losses are going to be bad for GDP growth; the fourth quarter number, due to be released on Jan. 30, is going to be ugly. But there are some factors which could offset it. Commodity prices have fallen, with gasoline and some foodstuffs seeing particularly large declines. Consider that gasoline and milk were both around $4 per gallon just a few months ago, and the former has since fallen to around $2, the latter around $3. That’s real savings that’s likely to go right back out the door in some other form. It’s also likely that we’ll see substantial tax cuts in 2009 as deficit spending becomes less unpopular when it’s about propping up the economy rather than irresponsibility. And while deficit spending is pretty much always irresponsible, at least under these circumstances it’s more understandable. Although it remains to be seen just how large cuts will be, I feel certain they’re just around the corner. Finally, there’s also the benefit of plunging mortgage rates, which despite last weeks uptick I expect to see fall again. There’s still a supply glut, which will never move until the price is right, and lower rates are key part of the equation. And despite tighter credit standards, many homeowners have been able to refinance to take advantage of lower rates, and many more adjustable rate mortgages have reset lower over the past few months. All of that amounts to extra cash to be put to work elsewhere. Unemployment Rate Highest in 16 Years – Investors Flock to Safe 9% Yields Nearly 2.6 million jobs were lost in 2008, with 1.9 million destroyed in just the past four months. It's the biggest job loss in any calendar year since 1945, when 2.75 million jobs disappeared as the wartime economy was demobilized. With the accelerating recession hitting companies in every industry, now is not the time to take chances with your investments. Nor is it time to bank it for measly .2% yields. See how my subscribers are securing their income by carefully plucking 7-9% yields from the safest investments on the planet. Learn how… All in all, while next week’s GDP number is going to be ugly--uglier than current expectations--it could have been much worse. Still, publicly traded educators look like a good bet with millions out of work, and if you have the time it might not be a bad idea to start a side business updating resumes. Things could be much worse. In this week’s Utility & Income, Roger Conrad looks as seasonality and fourth quarter earnings: Are we bullish or bearish? Usually this time of year, investors enjoy a so-called January Effect. Optimism and values created by end-of-year selling have triggered rallies in stocks across the board. A particularly strong January rally has often been taken as a harbinger of a good year ahead, while a weak month or decline is thought of as a warning. Some have extended the critical period to the first six weeks of the year, while still others live by the adage that you buy stocks in November and “go away in May.” I’ve never been a big fan of seasonality as an investment strategy. And in my view, following those rules this time around is going to prove particularly worthless--and in fact dangerous to investors’ well-being. It’s true that the huge declines we saw in global stock markets back in September and October have abated. And we did see a rather strong rally--at least in some sectors--from the end of December through the first week or so of January. But the action in between has been wild and wooly, as well as extremely jagged between individual stocks and sectors. Those looking to buy or sell the market as a whole, a very popular trend with the proliferation of exchange traded funds, have been thwarted more often than not. And while there have been plenty of day trading opportunities in retrospect, the reality has been they’ve been very hard to catch and extremely dangerous to play, as developments have constantly shifted sentiment. The bottom line is we’ve had far more of a “Janus Effect” than a January Effect this year. Like the two-faced god of antiquity, this market has shown us a fiercely optimistic side, as well as a phenomenally pessimistic one. And that’s been fully reflected in share prices, which literally continue to rocket up one day and power-dive the next. Click here for the complete article. |
| Friday Market Wrapup is a weekly e-zine written by Ben Shepherd and published by KCI Communications, Inc. Mr. Shepherd is research editor for Personal Finance.
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Friday Market Wrapup - January 23, 2009: It Could Always Be Worse
