Weekly Recap & Outlook – 02.05.10

Tower Private Advisors

No, that’s not a metaphor for the markets, just this blog.  You might have discovered that the link that would normally take you to the blog–like the link I sent out a couple of weeks ago, or just going to the blog’s homepage address–didn’t work.  Well, no one asked me, and we moved our website to a new provider.  As a consequence, most of the older blog posts, and a substantial portion of the relevant pictures and graphics are gone.  I have been assured that, in the future, should we ever need to make a similar decision my concerns and input will be ignored.


  • Stocks continue to correct
  • Earnings continue surprise to the upside and lead stocks to the downside
  • Economic recovery produces some question marks

Capital Markets Recap

Some how, we managed to see a 200-point swing in the Dow, and the intrepid reporters at Bloomberg chalk it all up to “Consumer Credit Data, Speculation EU to Help Greece,” (see screen print below; click to enlarge).

So, after another wild week, one has to ask if this is it?  Is the fairyland recovery in stocks done?  I’d love for you to be able to go back and revisit the January 22 posting to review the charts posted then.  Alas, you can’t, so you’ll have to look at just the commentary and read what’s here.  At that point we weren’t too flapped–isn’t that what you get when you’re unflappable?–as the correction hadn’t done much technical damage.  Let’s revisit that concept now.

The updated chart below shows that we’ve indeed suffered some technical damage.  I’ll admit that it looks a bit like Disneyland, but I’ve tried to identify various levels at which the carnage might stop and X-out those that have failed.  We have just a few left.  The 200-day moving average is sitting at 1024, while the 38.2% retracement of the 2007-2009 decline is at 1013.  Those are the most important support levels, with the 200-day likely to capture more attention.  Around and below those levels are some points (blue horizontal lines) at which the market has reversed course.

What’s the problem du jour?  If you’ve read this blog for long enough you’ll know of the disdain I have for headlines that encapsulate thousands of transactions with neat little sound bytes like, “Stocks fall on Earnings Woes.”  Here’re the real reasons, the ones you won’t get from CNBC because they don’t lend themselves to fancy graphics and pompous hosts/guests.

  • Investors tired of buying stocks in January but were also complacent, as measured by various sentiment indicators.
  • Their expectations had become too high, and even better-than-expected earnings failed to sate them.
  • The dollar’s rally caught many off guard.  It was the currency du jour for funding the carry trade.  Unwinding those trades (sell dollars short, buy risk[ier] assets) exacerbates the problem.

If you must have a reason for the selloff, then chalk it up to the PIGS, Portugal, Italy (probably the I-lands, too), Greece, and Portugal.  Rather than a reason, though, you should consider them an excuse for investors speculators to sell stocks.   Take a look at the long chart below.  I’ve tried to color it in soothing colors so you don’t freak out and turn on CNBC.  The chart shows the cost of insuring against a default by a sovereign (i.e. country) debtor, and it’s relative to the cost of insuring against a U.S. default; it’s the market’s assessment of the likelihood of a default, and it can be expressed in terms of the U.S., like this:  Hungary is about five times more likely to default than is the U.S.

I produced this chart back on December 22, 2009, and since then the numbers have . . . uh . . . changed.  Here are the PIGS comparisons.

Portugal:  then 2x+; now 5x+

Italy:  then ~3x; now ~4x

Ireland:  then 4x; now ~4x

Greece:  then 7x; now 17x(!)

Spain:  then ~3x; now 4x+

It could be that these are canaries in the coal mine of credit.  That, they’re the holes in the dike that we thought was repaired.  That is, they’re reminders that the credit crunch might not be over.

That’s a real concern, as governments with their desire to stay elected help the common man have jacked up spending by issuing debt.  In other words, we haven’t reduced debt, just shifted it from individuals to the governments. 

Beyond the canary discussion, however, Greece’s debt isn’t that big a deal, unless you’re Royal Bank of Scotland, which probably holds debt issued by the devil, based on its track record.  As a percentage of the Euro zone’s gross domestic output, Greece amounts to just 2.7%; Portugal, just 1.8%.  Spain and Italy are relative heavies, comprising 29.2%.

We don’t think it’s game over for stocks in 2010.  So far, this is just a correction (euphemism for you’re going to lose some $)–maybe even a healthy (euphemism for you’re going to lose enough $ to get nervous) one.  If your portfolio has some long-term holdings with big unrealized gains, just sit tight.  If you have some hard-won gains from 2009, sell some.  If you’ve given us discretion to manage your account, we’ve already done that and possibly more. 

  • A correction will serve to reduce some of the market’s optimism;
  • It will reduce valuations a bit, which had become stretched; and
  • It will bring stocks down to a level from which they can rally again.

If, like Congress, you must do something, then here is a list of investment ideas.

  • Sell some stocks
  • Buy some bonds, but be careful, this was enormously popular over the last 12 months, and bond investors could be sporting some big losses if rates perk up.  It’s a boat where all the passengers are on the same side.
  • Hold some cash
  • Buy volatility (vehicles are VXX, VXZ), which rises in times of uncertainty and, if it happens, crisis
  • Buy some bucks (UUP is the Dollar Bull fund)
  • Buy some defensive stocks (staples, health care, utilities, telecom) with proceeds from aggressive stocks (materials, discretionary, technology, energy).  Get yourself some dividends from the list below (click to enlarge).
  • Eventually, the sovereign debt issues are going to be a problem, and gold will, eventually, rise as, eventually, NO currency will get any respect, save for Swiss Francs and Chinese Renmimbi.  We think gold will decline for a while yet, so you don’t need to rush to buy GLD or GDX.  We’ll get interested with gold < $1,000.

News Sampler

Sheesh! the guy makes one good call out of many and he’s revered as a seer.  Like a broken clock that’s right twice a day, Nouriel Roubini, aka Doctor Doom, likes to weigh in and shake things up.  His latest call, at left, is that stocks will be “flat” through the end of the year.  Maybe if he changed his handle he could be more objective.  We are carefully following the goings on in bond land, where investors have piled in.  I’ve probably pointed it out here, but during 2009, equity funds, in toto, saw net outflows–despite tremendous returns–while bond funds were the destination for the proceeds, in spite of record low yields.  The headline above, “Municipal Bond Market Bubble is ‘Quite Close’ to Bursting, Aronstein Says,” captures a part of our fears, this one the result of stretched state budgets, underfunded pensions and the like.  In fact, the case could probably be made that a handful of significant U.S. states are comparable to yet worse off than Greece.

This video is worth a few minutes of your time for some comic relief.  Apparently, it’s an annual thing where CNBC interviews Super Bowl players about various aspects of the economy and the country.  It’s a riot.  Here’s a sampling of questions.

  • Who is this man?  [Ben Bernanke] – Answers:  Dr. Phil, a crook
  • What’s $1,000 of gold worth?


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