Thanksgiving – A Time for Reflection

Tomorrow is Thanksgiving; therefore it is a holiday shortened week that is usually very positive.  So far it's been a pretty good week.  This entire year it would be hard pressed to find four up days in a row.  I'm not sure from a market or economic perspective, what we have to be thankful for, but this week Citigroup (NYSE: C) has about $320 billion reasons to be thankful.  Roughly 18 months ago, it was the world's largest bank by market capitalization.  This week, it was rescued by U.S. taxpayers.

Citibank deal is another in a litany of bailouts enacted by our government's best.  Hank Paulsen forgot he wasn't at Goldman Sachs anymore when he went to the Treasury.  Here is a list of the multi - trillion dollar deals we as taxpayers are now involved with:

The lending and equity positions our leaders have taken could work out nicely for the economy and the government's pocketbook, if all goes well.  On the flip side as taxpayers we could have a lot to lose if these coordinated bailout efforts fail.  I'm not calling it either way, but there is a huge risk to our economic system in the works right now that I am not sure the average man on the street comprehends.

I went to cash - 100% as a move for protection in August, prior to the major market decline.  All my clients are in the same cash position.  My hope is we start to go up but the 12 year low on the S&P 500 was achieved only last Friday.  As much as we all want to be optimists - no one can predict the future.  So I look at how the markets are actually performing - called trend following.  An over simplification is there are four major trends - short, medium, and long term.  The fourth is more for day traders and that is the micro trend. 

The definition of how long each of those trends is subject to my own (or anyone else own as they might define it differently) opinion.  In my opinion is the lengths of time of those trends vary depending on market conditions.  In our current environment, the long term is since last October 2007 - the markets ultimate high.  The medium term is the time elapsed since August 2nd.  Why August 2nd?  That was when the market started to go down in earnest, after Labor Day as I wrote in an 8/28/08 article.  The short term trend is from the Nov. 4th election day, where the market is down 14% in just weeks.  The micro trend for speculators is since last Friday afternoon.  The micro trend is the only trend that is up. The more primary investment trends are all still in a downtrend.

Some of the concerns are that the market at mid week was last week was down 52% from last year's high.  Another concern is that the real economy is predicted to show as much as 3 - 4% negative GDP for the current quarter.  Falling investor and consumer confidence does not bode well either as we head into the holiday shopping season.  The consumer drives 70% of our economy. 

On a final bad news note the biggest rallies in stock market history have all happened during a bear market.  So the near term question, is this a new bull market or short covering?  Always a confirmation of what's happening in the stock market is to look to Treasury Bonds.  The yield on the 3-month Treasury bill edged up a bit this week, but remained near zero. Wary of the stock market, investors have been content to nab virtually zero returns on their short-term investments - rather than risk huge losses in equities.  Last week, the 2-year, 10-year and 30-year government bonds all recorded their lowest yields since the Fed started keeping records in 1962.

Some positive new of note includes the fact that the Institutional Investor poll is considered to be in the early alert signal for a potential market bottom when its bearishness reaches a level above 50%, and bullishness drops below 25%.  Last week's poll showed that bearishness shot up to 57 %, and bullishness dropped to 24% displaying levels of bearishness usually seen at market bottoms. Some more good news if you can call it that is that the markets have been obliterated this year and are so deeply oversold to the point that the recent spread between the market indexes and their respective 200-day moving averages were over 30%.  Levels we have not seen since 1932.

At the bottom of a market decline the "real world" news doesn't have to be good for stocks to rally, the news just has to be less bad than has already been discounted in market prices.  Bob Doll, of Black Rock Inc., in a Nov. 17 report noted more than 60% of the stocks in the S&P 500 have a P/E of less than 10, a situation not seen since 1982.  The market is trading at reasonable valuations compared to the last 25 years.  We are heading into the seasonally best time of the year.  The dividend yield on the S&P 500 is now higher than the yield on the 10-year Treasury bond -- the first time this has occurred in almost 50 years.

So there are good values on many measures, but no buying impetus either.  It is hard to fathom that government bailouts are an indication that things must be looking up.  Time will tell.  For now caution is the word of the wise.  Maybe one day we will look back at Thanksgiving 2008 as the time to back up the truck and buy the highest quality dividend paying stocks you could find.  But for today let's be thankful for what we have, a small loss on the year and our money safe in cash!  Happy Thanksgiving everyone!