State of the Market: Policy or Bust

Politics and investing are a bad combination.  Volatility is at center stage, and the inaction of policy makers is keeping it there.  Issues in Europe and the U.S. are rampant, and until these issues are alleviated, volatility will be the name of the game. On days when the market appears poised for a rally, it ends in a triple digit swoon, and vice versa to the upside.  Inadequate policy efforts have fueled the uncertainty that rests at the core of the recent market volatility.  Such volatile markets offer little hope for short term investors. I had the opportunity to hear Tony Crescenzi, SVP at PIMCO, speak in Philadelphia last week, and I use his quote to surmise the current state of investing, “Investors get chopped up in choppy markets.” If you are not investing for the long term, you are better off on the sidelines.

Do not hold your breath for the end of the markets’ volatile ways.  Analysts have been pouring over charts and economic numbers to determine a market bottom, but this endeavor is left to the fool.  At a time when company fundamentals are vastly ignored and the drivers of stocks are central banks and policy makers, it is nearly impossible to determine the next direction of the market.  The market has an uncanny ability of pricing in many factors, but politics is not one of them.

Europe on a Death Spiral

Europe remains the biggest laggard on the markets, and it will continue to assume this role until concrete policy measures are set forth.  The debt
crisis in Greece worsens by the day and has led to fears of a banking crisis in the Eurozone.  Much of the problem lies in that Eurozone banks hold a considerable amount of Greek debt.  It is becoming more and more likely that this money will not be returned and these banks will face huge write downs on their balance sheets. 

The Eurozone banking environment is eerily reminiscent of the Lehman Brother’s collapse in 2008.  Lehman was forced to write down billions of dollars in toxic mortgage-backed securities.  The news sent Lehman investors running to the hills, which sent Lehman’s stock into single digits.  As demand for ownership in Lehman evaporated, the company was forced into bankruptcy.  Stock prices for Eurozone banks have followed a similar trajectory.  Dwindling market caps have led to ominously low valuations.  Reduced valuations clamp the banks ability to lend, and in a world of growth fueled by credit, no economy can grow with diminished lines of credit. 

French banks are the largest holders of Greek debt and they have found it difficult to raise capital on the open market.  Just this week, France has called for a recapitalization of its banks to sure up balance sheet holes created by Greek debt.  Rumors are that France would like to tap into the European Financial Stability Fund (ESFS) to recapitalize its banks.  However, German chancellor, Angela Merkel, opposes the plea.  She believes that the ESFS should be used as a last resort and that France should recapitalize its banks through the open market or the national government.  French officials fear that national recapitalization efforts will prompt a credit downgrade of the country.  A French downgrade would destroy the crumbling efforts to stabilize Greece.  Greece would default and would most likely be followed by Portugal and Ireland…

The situation in the Eurozone is at crisis level.  It is unclear how the mess will be resolved, but Europe is headed into a recession if it has not started already.  It is imperative that Eurozone leaders come together to formulate a plan for handling a Greek default and ensuring the stability of the European banking system.  Until some finality is reached in Europe, the Eurozone will remain on the brink of catastrophe and volatility will rule the markets.

Rising Tensions in the U.S.

Turning to the American front, the U.S. is in a much better situation than Europe, but it is mediocre at best.  Unemployment remains dramatically high, support for the president is waning, and big businesses are refusing to deploy cash to hire and expand. 

Unemployment in the U.S. has been unchanged at 9.1%.  Ben Bernanke spoke in Cleveland last week, calling the unemployment situation “a national crisis.” Unfortunately, this long duration of unemployment appears to be structural rather than cyclical. Answers for alleviating the unemployment situation are few and far between. 

The effects of the unemployment crisis have been perpetuated by the recent Occupy Wall Street protests.  The original premise of these protests was to attack corporate greed and the governmental pull of Wall Street.  However, the protests have come to signify the general unrest and anger felt by American citizens.  The gap between the rich and the poor is growing, people are out of jobs, people are losing their homes, and there seems to be no hope in sight.  When things get bad, people protest.   The country-wide nature of these protests show that these are not isolated issues.  Americans across the country are fed up and dissatisfied.  An abysmal jobs market and a dead housing market are two catalysts for an unhappy population.  Perhaps, the Occupy Wall Street movement will deliver a wake-up call to Washington.

Much of the dissatisfaction of Americans has been placed on the shoulders of President, Barack Obama.  His approval ratings have followed the course of the stock market.  42% of Americans strongly disapprove of the president’s performance, and 55% of Americans somewhat disapprove of his performance.  These disapproval numbers have increased dramatically since he assumed the helm in 2008.  Although he faces the brunt of American resentment, much of the president’s disapproval stems from the inability of Congress to compromise.  The policy makers on Capitol Hill have utterly failed the American people.  News out of Congress is more reminiscent of drama in a high school than policy makers who are trying to lead a global power in the right direction.  It is imperative that the Super Committee of 8 can reach a credible plan for reducing the debt.  It is also imperative that both parties work together to determine the best ways to facilitate job growth.  The on-going policy uncertainty will leave the market flailing in the wind.

A lack of adequate policy-making destroys investor confidence.  This feeling is not limited to individual investors, but it also has the same effect on big businesses.  Corporations are hoarding cash, refusing to put their money to work in such an uncertain environment.  Given the inability of Congress to agree on pertinent issues like the debt ceiling, there is little incentive for companies to deploy cash without knowing how politicians will affect macroeconomic policies.  Even with unemployment at a steep 9.1%, corporations are stock piling cash with no intention of hiring.  Burdensome regulations on these companies also provide little cause for them to tap their reserves for expansion and hiring.  A move from cash hoarding to hiring would be advantageous to the economy, but once again we will attribute this inaction to bickering legislators.

The Diagnosis

The environment in Europe is awful.  Policy-makers have been moving at a snail’s pace to alleviate the ills in the Eurozone.  There have been several short-term “band-aids”, but it is time to implement a sweeping plan to right the ship.  The U.S. has its own slew of issues, yet we are not facing a banking crisis like Europe.  The crisis in the U.S. can be surmised as a lack of confidence in leadership.  If members in Washington can work together to harness the debt and facilitate job growth, the collective American anger will shift to confidence.  Confidence is the cure to wild market volatility.

All in all, policy-making rules the day.  Investors are not used to investing based on policies, but they are being forced to in the current environment.  As the pressure builds on world leaders, they will be compelled to pass credible plans that will stabilize global economies.  Unfortunately, the amelioration of many of the problems outlined above is easier said than done.  Until policies are ironed out, the markets will remain uncharacteristically volatile.  Do not try to be a hero in this market, remember the quote from Tony Crescenzi, “Investors get chopped up in choppy markets.”  Ride out the storm, brighter days will return…eventually.

AH

“Writing for the People” 

Good Ol’ Value Investing for this Wild Market

Buy or Sell? Although this question is a basic premise of investing, the recent market movements have made the answer to this question more elusive than ever.  Have we entered a bear market, or have we faced a simple correction? Fears of a 2008-2009 plunge have bubbled to the surface after last weeks tumultuous trading.  Headlines on CNBC have been rather ominous, but is all this fear over hyped? I believe so.

The negative headwinds facing this market are clear.  However, much of these are a result of macroeconomic issues, rather than corporate balance sheets.  These issues do put the clamps on a bull market, and more downside could be in store, but this should not spook you out of the market.  If you pulled out your money ahead of the debt-ceiling debacle, I commend you.  However, if you liquidated your holdings during the recent downslide, I do not extend this same applause.  Panic selling is a trigger of fear and is a poor reason to sell stocks.  If the news and facts are really that bad, then selling is understandable, but selling in fear of a highly uncertain possibility is a fool’s endeavor.

Instead of panic selling…

Take a look at your stock investments.  Think about the original reason why you invested in a particular company, whether it was momentum chasing, high growth potential, high dividend yield, or pure speculation. The volatility in the market will bring down the share price of a company, but is the company actually weakening?  Are the macroeconomic issues facing the markets poised to negatively affect that particular company?  If not, then the overall market may just be dragging the stock down.  With continued selling that stock may just be getting cheaper and cheaper.

If you are confident in the companies that you have invested in, then do not sell out of fear.  When you pull the sell trigger, you are locking in losses and preventing the possibility of future gains.  Instead, try a different approach to hedge your losses.  Dollar-cost-average your holdings.  Buy into the sell-offs, and continue to buy on the way down.  This will reduce your cost per share as you buy into the falling share prices.  If the market stabilizes and starts to inch back up you will begin to profit on your positions, and these profits will hedge the losses of positions you entered at higher prices.  Ultimately, if the stock rises past all the points you bought at, you will see very handsome profits.

Many investors find it difficult to buy into a market when everyone is selling, but you must have faith behind your investments.  The best times to buy in a market are when people are skeptical; these provide the best value opportunities.  However, this is not for the faint-hearted investor, you may need to stomach losses for an extended period before you return to profitability.  Hold strong to your convictions, shoot for the long-term, and ignore the noise.

“Be fearful when others are greedy and greedy only when others are fearful” – Warren Buffett

AH

P.S. Investment recommendations are on the way!

S&P, How Could You?

For the first time in history, the U.S. has been downgraded from its pristine AAA rating to AA+.  After enduring one of the most volatile weeks on the market, S&P had the audacity to slap a credit downgrade on the U.S.  Investors have been fearing that a credit downgrade would be the final shock to send the market into…dare I say it, a RECESSION.

With so much negativity swirling around the market, how did S&P determine it was an appropriate time to downgrade the U.S?  The Euro zone is hanging on by a thread with the debt-ridden nations of Greece, Italy, Spain, Portugal, and Ireland on the verge of forcing a break up of the Euro.  The U.S. market has suffered a vicious sell off after the shenanigans in Washington produced a half-baked plan to reduce the debt.  Based on the way the market traded on Friday, any piece of evidence, good or bad, could send the market one way or the other. S&P has made their best effort to push the market off a cliff.

The reason behind the S&P downgrade is that the government’s handling of the debt ceiling was a complete debauchery.  S&P believes it set a precedent for future clashes of American politics and fiscal policy.  Congress is very deserving of the blame, and I agree that a downgrade will force policy-makers to implement tough austerity measures they should have made.  However, with the market in such disarray, a downgrade delivers a stifling blow to the U.S. economy and ultimately, the global economy.  Both Fitch and Moody’s chose to maintain the country’s triple A rating, yet S&P had to be the stickler to slash it.

The impact of a credit downgrade will lead to an increase in interest rates across the board.  The U.S. will be forced to pay higher interest rates on government bonds, thus adding to the current debt and forcing tougher budget cuts a.k.a. job cuts.  Furthermore, interest rate increases will extend to the consumer pocket.  Interest rates will rise on credit cards, student loans, mortgages, etc.  Banks will also charge higher interest on loans to businesses.  This will have a dramatic impact on cash strapped businesses that rely on loans to stimulate growth and expansion.  This is especially troublesome for small businesses and start-ups that simply cannot afford to borrow money with back-breaking interest payments.  Profit margins will be squeezed and growth prospects will be snubbed.  All of this ultimately leads to: a slow down in business growth, more layoffs, a decrease in consumer spending, and a weakening economy.

This move by S&P is deserving, however, it is inappropriate given this current environment. Amidst so much negativity, this crushing blow guarantees a tough road ahead for the economy.  Maybe their goal was to launch a global recession.  Perhaps they all sold their stocks and are now shorting the market…

The fall out of this downgrade could be ugly.

AH

“Writing For The People” 

Default? Not a Chance.

The U.S. is NOT going to default. Neither the democrats nor the republicans will allow the country to default on their accord.  The recent proceedings are simply political grandstanding.  Both sides have stood unwavering to prove to their constituents that they will always and relentlessly fight for their interests.  However, we all know that a default would be the worst outcome for any constituent, regardless of party affiliation.  Therefore, a default WILL NOT HAPPEN.  If you are one of the many people that have been freaking out about a default, I have a suggestion for you. Throw a bag of popcorn in the microwave, kick back, and enjoy the political circus that continues to unfold.  Maybe you will even see Obama do a backflip off Boehner’s head.. A deal will be struck; maybe not today, maybe not tomorrow, maybe not August 2nd, but once the pressure is at its peak, a deal will be made.

Another very important item to clarify is that August 2^nd is MEANINGLESS.  Who came up with this arbitrary default date anyways?  I am not sure, but Obama has embraced it like a person who found their  lost dog.  He claims that if the debt ceiling is not raised by August 2nd, the U.S. will default on its obligations and the economic gods will smite America.  Give us a break, Obama. In a world filled with infidelity, you think we will not catch a bold-faced lie when we hear one?!

Mr. Obama, a lack of  debt deal by August 2nd will not force the U.S. into defualt.  There are funds available to pay the interest on bonds and cover all other necessary obligations.  A lack of a debt deal will not lead to a default unless several weeks pass without a deal.  If a deal is not passed by the “August 2^nd deadline”, the government may have to put a freeze on some expenditures.  Perhaps we would see a hold on the department of commerce, department of agriculture, and other branches of the government that eat up more tax-payer money then they need.  This is not a major issue, it would simply add more pressure on the political parties to get the deal done.

Obama’s statement that an August 2^nd doomsday is inevitable without a raise in the debt ceiling is simply untrue and unwarranted.  His words and actions have rendered him the biggest culprit in this whole political charade. It is a shame that he is resorting to lies and the demonization of the republican party to positively portray his stance in the public eye. Nonetheless, American politics would not be the politics we know and love without Obama starting his 2012 campaign with a fistful of lies and smears.  Oh, American politics!

The short and sweet: NO DEFAULT. The political grandstanding will end and a deal will be struck.  Both sides will wait until the final second to ensure their political egos have been satisfied. If you are holding your breath for financial Armageddon, please stop, you are starting to turn purple…

P.S.  Wondering why I didn’t mention the potential for a credit downgrade?  That will be discussed in my next outburst.

AH

“Writing For The People” 

From Bull to Bear, What Happend to this Market?

Investors entered 2011 with no shortage of bullish optimism.  The market had nearly doubled from its 2009 lows and was well positioned to continue upward.  I, like most other analysts, firmly supported this bullish stance, expecting the market to grow 11%-13% by the end of 2011.  However, I noted in my post back in January that this growth would only be attainable without global disruptions, such as: European bankruptcies, terrorist attacks, or natural disasters.  Now 3.5 months into the new year, the market has been stricken by a variation of these three elements.

The DJIA and the S&P 500 have retracted their early year gains and are right back where they started the year.  Strong earning reports and declining jobless claims have not been enough to keep the market resilient through the recent global turmoil.  North Africa and the Middle East have been a hotbed of political unrest as citizens have clashed with their political superiors.  Revolution and whispers of revolt of have dominated the countries of Tunisia, Egypt, Libya, Bahrain, and Saudi Arabia.  The oil exposure of some of these countries has sent oil prices well over $100 a barrel.  A continued price escalation could stunt global growth.  Companies unable to parlay the cost of rising commodity prices onto consumers will be the most adversely affected.  High prices at the pump will also put a pinch on consumer spending.  The only benefactors of this price hike will be the oil juggernauts, but high profits will be offset by decreased demand.  Increasing oil prices do not bode well for a bull market.

Adding to the burden of expensive oil are the failing economies of several eurozone countries.  The PIIGS (Portugal, Ireland, Italy, Greece, Spain) are squealing again, confirming investor fears that their economies are closer to default then recovery. Greece, Spain, and Portugal are going nowhere fast as Moody’s slapped all three with downgrades this past week. Buying up the debt of these countries appears to be more of a donation rather than an investment.  Their borrowing power is near nothing, suggesting that bailouts may be necessary.  A lack of competiveness in these economies deters any foreign investment and will have a negative impact on their growth.  As the markets become more globally integrated, the failure of one country will hinder the growth of all markets.

Completing the trifecta of negativity is the recent tragedy in Japan.  The country has been devastated by one of the worst earthquakes in the world’s history.  The natural disaster has resulted in billions of dollars in damage and will require billions more for rebuilding.  Additionally, nuclear meltdown fears have crippled Japan’s energy supply and have forced thousands of people to evacuate.  Many people are without homes and jobs, and have little idea when their lives will regain normalcy.  These uncontrollable factors leave Japan’s economy hanging in the balance.  Being the 3^rd largest economy in the world, Japan’s recovery will be crucial for not only Japan, but for all markets.  Fortunately, Japan has one of the best performing economies and has considerable cash on hand to confront these challenges.  However, they may need to free up more cash to pump back into their economy.

Since Japan is the second largest holder of American debt, there is speculation that they will sell off American treasury notes to increase their money supply.  This would dramatically hurt the value of the dollar and put a clamp on U.S. borrowing.  An outcome like this will send the American market downward and have a ripple affect through all global markets.  This is speculation for now, but the events in Japan will continue to dominate U.S. and global markets.  In the short-term, if they can alleviate the radiation risk at the nuclear power plants, much of the existing fear will be taken out of the market.  But until then, fears of nuclear catastrophe will drive investors away from the market.  Japan is a strong economy and it will recover, but the road to recovery may be a long and painful one for investors.

It is rare that the market sees a combination of three separate and very negative events happening all at the same time.  The events in Japan are the most driving factor in the markets right now, but concerns over expensive oil and debt-ridden euro nations will continue to suppress the market.  These events will dominate economic headlines and provide a harsh reality for investors.  The bullish optimism that started the year has evaporated and it is time to get defensive.  In my next post I will discuss some potential investment options to keep your portfolio stable amongst all this turmoil.

AH