Insights & Advice

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Markets Blossom As Spring Arrives in the Berkshires

“Finally,” you tell yourself scanning the wonderful, almost miraculous rebound in your IRA or brokerage account this weekend, “if the market keeps this up, I’ll almost be even for the year. Don’t get your hopes up just yet.

Now don’t get me wrong, the market’s action was great: the S&P 500 and the Dow were up over 4 % while the NASDAQ climbed over 5% for the week thanks to some upside earnings surprises from the likes of Google and less than horrible earnings from the financials, specifically Citibank. This is part of Wall Street’s earnings game that has been around since before I came into the markets.

It goes like this: the economy stinks so brokerage research analysts deliberately drop their earnings numbers on companies to very low levels. They pass their estimates by company managements who “guide” them even lower. Then, when investors expect a downside earnings number that includes everything but the kitchen sink, wham! The company CEO announces a number slightly better and we’re off to the races. So Citibank can report a $5.1 billion loss and cut 9,000 jobs, for example, and still see its stock up 8% since they could have lost $10 billion, right?

Actually, this quarter’s numbers underscore there are two sides of the market. Those companies who sell to us, the cash strapped, barely-getting-buy consumer here in America. They aren’t doing well. Those sectors include the financials, most anything consumer, healthcare and homebuilders just to name a few. But those companies who sell abroad or to companies who sell abroad are doing just fine. In this category we have commodities companies of all kinds, manufacturing, industrial, technology and some consumer non-durables like Coca-Cola.

All week the media focused on food prices, especially rice, in countries like Haiti which are experiencing riots over this increasingly unaffordable stable of half the world. At the same time, The Wall Street Journal ran a front-page story on the surge in natural-gas prices and predicted further gains were likely while oil and gas process broke record after record all week. You might ask how we can have a surging stock market and exploding commodity prices while banks continue to lose money hand over fist and the economy is sinking into recession.

The bulls will tell you that all this bad news has already been discounted over the last six months. The market is focusing beyond that now to the land of plenty just over the horizon. I hope so. As I’ve written in past columns, I do believe that by the fall we will see a glimmer of recovery in the economy. However, this optimist has also been predicting a market “bounce”, our second off the lows so far this year. I expected the S&P 500 index to reach a range of 1400-1416. Today the market closed at 1390. That is five points below the level where the market rolled over and then re-tested the 1270 level on the last bounce.

But things are different now you say, the economy is on the mend, stocks are racing, earnings will improve, the Fed is expected to cut rates again, the elections are coming, it’s springtime, the flowers are blooming with May just around the corner. Yes, to all of the above but remember that saying “sell in May and go away.” Well, it just might turn out to be true. I remain cautious here. If you are invested, stay that way for now but don’t commit any more funds until we breach the 1416 level on the S&P. Time will tell if we break through or fail once again.

Posted in A Few Dollars More, At the Market