Emerging Market Recovery

Stocks have now advanced around 35% from their lows in early March. The Dow and S&P indices are down only in the mid single-digits for the year while the Nasdaq is actually up 5%. I fully expect that we will give some of this back. It is normal for the markets to bounce around like this when the market is making a bottom. Volatility will remain high and the market bounces will be erratic and chaotic until the economy is clearly in recovery.

The emerging markets are beginning to come back to life especially China. The government’s massive stimulus program has helped China avoid sliding into a very severe recession. The Chinese economy is not hampered by many of the same problems plaguing the U.S. The state-dominated economy was able to successfully implement a massive stimulus program in November and without any delays started massive infrastructure projects. This has partially offset slumping export of Chinese goods. One note of caution, in order for China to have a sustained rally, demand for Chinese products from the rest of the world must begin to recover.

In addition, Chinese consumers are very thrifty and are not burdened with heavy debt unlike their western contemporaries. So Chinese consumers are unencumbered by large credit card bills, loans and/or mortgages and are starting to spend again.

The emerging market stock exchanges have moved up sharply maybe a little too sharply in recent weeks. The MSCI Emerging Market International ishares (EEM) are up almost 13% year-to-date. This recovery has been very rapid but the fundamentals do not support such a large swing. I would not be surprised if we gave some of this back.

The Chinese have historically been ravenous consumers of commodities. A rapid recovery could spark an increase in commodity prices and inflation. Currently, we are in a slightly deflationary environment but this could change if demand for commodities increased rapidly. It is difficult to tell if the rally in China and other emerging countries is sustainable. At least the panic is over and the global economy can begin to heal. As the recovery takes hold it will be important to closely monitor commodity prices for signs of inflation.

One Out of Every Ten Americans is on Food Stamps

Our recent economic woes have hit everyone but it has impacted those with the least the most. Nothing brings home the plight of many Americans as recent the recently released government statistics on SNAP/Food Stamp participation. As of January one out of every ten Americans (32 million) is receiving food stamp assistance, the highest participation rate ever. How does this compare to the good times when the economy was humming along in 2000? Well, the number of people participating in Food Stamps in July was 16.8 million individuals, 15 million less than today.
As the economy has continued to weaken and unemployment has surged many households are in trouble. It has hit every region of the country with every state reporting a year-over-year increase in families requesting and receiving aid. The pain was not felt by just the families living in the Sunbelt states and the industrial heartland. In fact, you may be surprised by some of the states that have been hit the hardest.
Eleven states reported greater than 20% increases in their caseloads from the previous year. Idaho experienced the highest year-over-year increase surging 32% followed by Utah (29%), Florida (29%), Nevada (29%), Arizona (25%), Wisconsin (25%), Georgia (23%), Vermont (23%), Maryland (22%), Texas (22%) and Massachusetts (21%). Below is a chart prepared by Food Research and Action Center which shows by state the annual increase in Snap/Food Stamp participation.
The non-profit and private sectors food banks have been overwhelmed by the surge of people needing help. Many local food banks are struggling to stay open because contributions have dried up.
Granted that Food Stamp statistics are lagging indicators like the unemployment rate but it does show the pain that many Americans are experiencing. It will likely get worse so it is important for all of us to look around our own communities and help. Our lives are so busy that it is easy to miss that others need your help. So on this Christian holiday weekend make a donation (of time or money) to your local food bank or food pantry and help combat hunger.

Weekly Market Recap

The U.S. markets rallied for their fourth week. We are now well up from the lows experienced in early March. Last week the S&P 500 rose 3.3% to 843 and the Nasdaq Composite advanced 5.0% to 1,622. Value stocks finally showed strength because the Financial Accounting Standards Board revised the mark-to-market rule giving bank stocks a boast. Value stocks however still lag growth stocks year-to-date. In fact, large to mid-cap growth stocks are now positive for the year.

Though the current rally has provided much needed relief, it does not mean the markets are only headed up. We have seen rallies galore since we started this ascent into hell last year. This is the fifth 10%-plus move we have seen in the past year and the previous rallies did not hold. For this rally to be sustainable the banks and the credit markets have to be functioning and stable.

The economy is still deteriorating. Last week, the official national unemployment rate reached 8.5% (an additional 660,000 jobs were lost in March). The real rate of unemployment is over 10% when you add in those that have been looking for a full time job for more than a year or those under employed (working part time but seeking full time). One out of every ten adults is unemployed and it will most probably only go get worse before it turns around.

This and other data suggest that the economy contracted in the first quarter by approximately 5%. Luckily some of the recent economic data related to housing sales, retail sales and consumer confidence is pointing to a moderation in the rate of decline. The Federal Reserve is also doing its best to pump money into the system and bolster up the banks. The economy is beginning to bottom out but the data is not pointing to a robust or steep US recovery. The economy will begin to stabilize the second half of the year but the going will be rough.

First Quarter 2009 Market Performance

I was quoted in yesturdays Contra Costa Times article on the First Quarter Performance.

Hope you enjoy!

Area stocks outperform market indexes

The stocks of Bay Area and East Bay public companies out-performed their counterparts on the national stock markets during the first quarter — but only by falling less than the Dow Jones 30, S&P 500, and Nasdaq Composite.
By the time the January-March period ended on Tuesday, the East Bay 50 index had fallen 2.7 percent and the Bay Area 100 index was down 0.2 percent. The Dow Jones Industrial Average plunged 13.3 percent, the S&P 500 slid 11.7 percent, and the Nasdaq fell 3.1 percent.
Those three-month losses came despite a general upswing in the stock markets towards the end of the first quarter.
"We seem to have gained some traction in the stock markets in March," said Libby Mihalka, president of Altamont Capital, a Livermore-based financial planning firm. "But we're not out of the woods yet."
The big problem now is financial gremlins continue to haunt broad stretches of the nation's economic landscape. And that has spooked investors.
"Short-term, there are so many things that are unknown," said Royce Charney, president of Oakland-based Trust Administrators, a financial company. "You still have all the bank and financial institution issues, and now we're dealing with the auto industry. But for long-term investors, the market still looks attractive."
Charney defined the long-term
"The collapsing financial system and the problems with the auto companies are hurting consumer psychology the most," said Richard Welty, president of Lafayette-based Welty Capital Management.
Among industry sectors during the quarter, the best-performing national index was the Morgan Stanley Retail Index, which rose 6.3 percent. The weakest sector was the Bloomberg Real Estate Index, which lost 33.7 percent of its value.
The best-performing East Bay companies during the quarter were primarily in the high-tech and biotech industries:
 Novabay Pharmaceuticals jumped 188 percent. Emeryville-based Novabay said a deal it struck to develop and commercialize one of its dermatological compounds could produce $50 million in milestone payments for Novabay.
 Zhone Technologies soared 130 percent higher. Oakland-based Zhone lost money in its fourth quarter, but the loss was in line with expectations. The wireless communications also landed some key deals and moved forward with plans to serve the rural United States.
 Neurobiological Technologies was up 116 percent. The Emeryville-based biotech company said it would seek the sale of the company or its assets.
 Socket Mobile was up 79 percent. The Newark-based maker of mobile-computing devices reported record annual sales in 2008, although the company lost money during the year and the fourth quarter.
 SYNNEX Corp. jumped 74 percent. Fremont-based SYNNEX, a technology services company, announced fourth-quarter profits that beat analysts expectations by a wide margin.
Walnut Creek-based PMI Group was the worst-performing East Bay stock, falling 68 percent. The mortgage insurer reported a smaller fourth-quarter loss. PMI also was jolted by a downgrade by Fitch, which warned that PMI faces more losses and reduced liquidity.
Concord-based Pacer International fell 66 percent. The freight logistics company's fourth-quarter results fell short of estimates for earnings and revenues.
The best-performing Bay Area company was XTENT Inc., a Menlo Park medical devices company whose stock rocketed 367 percent higher. But the improvement may have been due to XTENT's disclosure during the quarter that it had hired an advisor to help it sell some core assets, sell the entire company, or seek a merger partner. XTENT also decided to eliminate 115 jobs, or 94 percent of its workforce.
Investors should be prepared to confront more volatility during the second quarter of this year, financial planners said.
And even after the volatility fades, and the economy starts to look better, it's still quite possible that a rebound won't produce much to cheer about.
"We're going into a slow-growth economy," Mihalka said. "Things will stay slow. And then we may have inflation.

Rally Not Sustainable Without Bank Recovery

The U.S. stock markets rallied for a third week. The S&P 500 index was up 6.2% last week. Stocks have now rallied approximately 25% up from their lows of less than three weeks ago. The rally has pushed the S&P 500 index into single digit losses for the year (down 9%) and for a few days moved the Nasdaq briefly into positive territory until it fell on Friday.

The market loved all the positive economic news it received last week starting with the 5.1% increase in existing home sales followed by a 4.7% increase in new home sales. Durable goods orders rebounded 3.4% and consumer spending rose 0.2%. All these indicators came in at better-than-expected levels. These could be signs that the economic recession may be moving past its peak but it is still too early to tell.

The market also rose last week because investors enthusiastically embraced the Obama’s Administration bank recapitalization plan. The Treasury Department outlined the Public-Private Investment Plan (PPIP) which gives banks the means to remove toxic assets from their books freeing up capital to make new loans. This plan should help the banks and the credit markets to recover and begin lending. Nonetheless, these market rallies cannot be sustained over the long run until the banks are on sound footing. This is not to say that the success of the PPIP is guaranteed. There are numerous details and glitches that need to still be worked out if the PPIP is to be successful. There are, however, numerous reasons to be optimistic about the prospects of this program. The PPIP combined with all the government fiscal programs should eventually bring about a resolution to the credit crisis.

The recent rallies have been encouraging from a technical perspective. Trading volume has been increasing on upward moves and declining on pullbacks. This is crucial to building a bottom, but it creates painful volatility as the markets over shoot on the latest news. There is still much negative news out there, including high levels of unemployment, a very troubled auto industry and an extremely fragile financial system that could still be subject to negative shocks. A market like this will create exciting rallies and sickening declines. These market gyrations are an important part of the bottom building process as the market challenges asset pricing over and over again. So it is important for investors to keep a long term perspective despite the excessive level of volatility.

Forget the Sideshow: Just Resuscitate the Credit Markets

For the second week in a row, equities managed to post a positive gain despite heavy profit-taking at the end of the week. The S&P 500 gained 1.6% to close at 769. From the early March lows the market is up 20%.

The big news is the Federal Reserve’s announcement to institute a program to buy $1 trillion worth of mortgage-backed and Treasury securities in an effort to boost economic growth. The market for mortgage-backed securities has been frozen for months. The Feds attempt to thaw this market has been well received. The move is designed to lower mortgage rates so many homeowners (that are not under water and have jobs) can refinance. This should increase homeowners' cash flow and reduce foreclosures. In addition, this may induce prospective buyers to begin purchasing homes, thus bolstering the battered housing market.

Unfortunately while the Fed is doing its best to prop up the markets, save the banks and jump start the economy, Washington is too busy with its own sideshows. This one comes complete with a freak show of politicians berating AIG bonus recipients. While the outrage engendered by these bonuses is understandable, the grandstanding and legislative response is not productive.

If this proposed tax on bonuses received by TARP recipients is enacted, it will surely hurt the Fed's efforts to prop up the banking system. The bonuses are egregious but it is more important to get the economy jump started than to pursue a witch hunt. Stabilizing the banks should be our first and last priority. If we cannot stabilize the banks the economy will get much worse and the credit markets will freeze up further. Stabilizing the banks and greasing the gears of the credit markets should remain the government’s focus, not sideshows and witch hunts. Punishing these bonus recipients isn’t necessary because in the end the markets will extract its own retribution in the form of reduced pay or no job at all. Sooner or later these kings of finance will find that their industry has changed and the pickings are slim to none.

I anticipate the markets will be a little choppy but the rally will continue at a slow pace. If you are not in the stock market, I highly recommend that you start dollar cost averaging back in.

Turnaround or Bounce? Look To The Banks

Last week’s positive move in the stock market was overdue, but it is unclear whether this is the beginning of a turnaround or merely a bounce from oversold conditions. There is some evidence that market conditions are improving. Last week’s rally was broad-based and volume was heavy, which are strong technical factors. Additionally, lower-quality stocks have been outperforming, which typically happens as markets turn around. However, it is very possible that we are still bottoming-out.

There was good economic news last week. Retail sales figures were surprisingly positive. January’s data was revised to show that sales actually rose, and February’s numbers were down only slightly. All told, it appears possible that overall first-quarter retail sales growth will net out to around zero, a much better scenario than was widely anticipated only a few weeks ago.

Today more good news. An unexpected rise in housing starts and a more moderate increase in wholesale prices point toward a brighter economic outlook. Another plus, the market appears to have leveled off before the recently passed stimulus package has started to have any effect.

That said, the overall economic environment remains troubled, and as Federal Reserve Chairman Ben Bernanke said last week, “Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort.” The banking system needs to stabilize before we see a full recovery.