Ring of Fire

U.S. stock investors don’t know where to take cover with the constant market swings. Reeling from four straight weekly losses, are entering the coming week’s market torn between confidence in the global economic recovery and fear that foreign governments’ actions will bring the rebound to a sudden halt.

Investors have looked at the two sides and bet on safety, ultimately selling stocks to buy U.S. dollars, Gold and Treasury’s.

There is also the dark cloud looming that China will start to slow growth in its economy, and indirectly, other economies that have benefited from its appetite for energy and basic materials.

And at the same time, investors have grown concerned that high government debt levels in Greece, Spain and Portugal will lead to the type of spiraling financial crisis that froze credit markets two years ago.

The struggle between these opposing viewpoints has contributed to some heart-stopping swings in the last week.

The Dow made triple-digit moves in three of the last five trading sessions, tacking on 230 points by Tuesday’s close. The blue-chip average then gave back the entire advance, and then some, ending 0.6% lower for the week.

Along the way, the measure staged a late, sharp reversal Friday that brought the Dow from a 167-point loss to a 10-point gain by the finish, and a return above the key 10,000 level.

The S&P 500ended the week 0.7% lower at 1,066, with its weekly loss similarly moderated by solid gains early in the week.

Commodities tumbled last week, with their value as an alternative asset to paper currencies eroded by the dollar’s gains. Oil futures ended the week more than 1% lower, while gold futures lost nearly 2%.

Still, the index’s track record is looking tattered over a slightly longer period: It hadn’t posted four straight weekly declines since March 2009.

Investors face plenty of economic and corporate data in next few weeks that could sway sentiment either way.

As the week starts, investors may respond to press statements from the weekend’s G7 meeting of finance ministers in Canada.

Any deterioration in the financial situation in southern European nations also could overshadow U.S. events.

January Effect in 2010 Stock Market

So what is all of this talk of the January Effect?  By Wikipedia’s definition it is “a calendar-related anomaly in the financial market where financial security prices increase in the month of January. This creates an opportunity for investors to buy stock for lower prices before January and sell them after their value increases.”

Therefore, the main characteristics of the January Effect are an increase in buying securities before the end of the year for a lower price, and selling them in January to generate profit from the price differences.

This type of pattern in price behavior on the financial market supports the fact that financial markets are not fully efficient.

The most common theory explaining this phenomenon is that individual investors, who are income tax-sensitive and who disproportionately hold small stocks, sell stocks for tax reasons at year end (such as to claim a capital loss) and reinvest after the first of the year. The January effect does not always materialize; for example, small stocks underperformed large stocks in January 1982, 1987, 1989, 1990, and 2008.

So how much impact has already been felt in January 2010?

Further theoretical explanation of the January effect, and it’s corollary small-cap outperformance observation, is that retail investors who are tax sensitive choose to take capital losses during the month of December, and then after the 30 day wash rule waiting period buy the stocks back in January. Further interpretation suggests that the selling pressure on small stocks from tax selling creates buying opportunities in these “sold off” stocks that is taken advantage of in January. In any event, over the last 85 years most years do record a first half January outperformance of small cap stocks.

This year there have been no losses that people either have or want to take in December. Most taxable investors took losses last December. This year only those that have held stocks through the market cycle still have losses to take. Those long term investor are most likely heartened by the performance of their stocks since March and therefore probably will not sell them to take significantly smaller losses than they had on paper a year ago. People who bought stocks during 2009 , in general, have few losses to take.

There are, however, lots of investors who have short term gains. This is the group that is torn. They fear a correction, but their greed is not fully fulfilled yet. The first wave of these trader/investors will have long term capital gains in April and May. They may want to wait until then to sell. However, if they see a big correction start they may want to sell early next year to lock in profits that they won’t pay tax on until April of 2011.

The real question is whether buyers and sellers in aggregate foresee enough economic challenges coming to warrant selling early next year. Will this group start a correction early in 2010, or will the continued march of a self-sustaining economic recovery keep them locked into stocks as they recognize that we are still very early in a new market cycle.

We still are dedicated to three steadfast rules of rebuilding your net-worth that we have now been chanting for six months. We believe that those that follow these rules will look back in five years with great satisfaction at their decisions.

1.) Don’t sell into corrections, buy more when they happen.

2.) Start investing in stocks in international stock markets.

3.) Keep bond maturities short.

2010 Stock Market Analysis

As we speed through the last few trading days of 2009, it’s time for all of us to turn our attention to what is sure to be an interesting and eventful 2010.

So, let’s take a look at what investors should be keeping in mind – and on their radars – as we enter a bright new year and evaluate the next phase of the economic recovery.

The unemployment rate remains the ultimate barometer of how well the recovery is doing. The initial $787 billion stimulus package was supposed to create or save millions of jobs, but so far success can only be measured in terms of “what could have been”. It’s a safe bet that the stock market can’t get on a sustainable uptrend until new jobs are being created, and the unemployment rate begins to tick down.

As long as unemployment is rising, bears will have strong ammo to retain their stance in market discussions. Investors should remain cautious of companies and industries that rely on consumer spending until we see concrete evidence of higher employment.

Home tax credit extended and the mortgage industry is another key metric to follow in 2010. The $8,000 new buyer credit now runs through April 2010, and an additional credit offers $6,500 to homeowners that have lived in their home for at least five years and are looking to relocate their primary residence. This should help to improve the home market and fringe retailers like Home Depot and Lowe’s, and other home appliance and home improvement stocks.

Housing led us into this mess, and at some point it will need to help lead us out. Housing data follows employment data as the most important economic indicators heading into 2010.

The banking pulse will continue to dominate headlines. We might see the vast majority of TARP funds repaid to the U.S. Government by the end of 2010. On December 2, Bank of America got approval from the Treasury Department to repay its $45 billion in remaining TARP loans. Bank of America subsequently sold nearly $20 billion in stock to raise cash, and its move could be followed by similar actions at Citigroup and Wells Fargo.

The combination of a falling U.S. dollar and higher commodity prices has been the most consistently profitable investing theme of 2009. Most signs point to the dollar remaining low in 2010, but if we see any signs of inflation in economic indicators like the CPI and PPI, expect the dollar to start recovering as short-term interest rates will head higher.

Investors should have some stock exposure to commodities as well as stocks with a high percentage of exports, but don’t bet the farm on them. This area has had an extremely good 2009 and could be due for a drop, or at least a slowdown.

There’s cash in them thar hills! We continue to see investors holding cash, trillions in fact. This means that as more people have faith that we are indeed recovering, there is a lot of kegged gunpowder that can fire into stock markets next year.

Dubai Credit Rattles the Stock Markets

The world stock markets fell on Thursday as Dubai attempted to delay debt payments for six months.   The US stock market was closed for the Thanksgiving holiday, but the S&P futures are down considerably.  Commodities, especially oil prices, are weakening while the U.S. Dollar and Treasury bonds are starting to rise.

Emerging markets are suffering significant losses and money appears to be moving into consumer staples.  Investors remain very cautious as we wait to learn more about Dubai’s credit situation.   Keep in mind that money managers are eager to lock in profits for the 2009, so an event such as this may be a catalyst for year end selling.  Couple this with the fact that the US dollar and Treasuries are at historic lows, and we may see some selling pressure ahead.

Market Analysis

Despite November choppy waters and listless trading, stocks managed to finish at their session high with a gain of nearly 1%. Much of the Obama cabinet selections have helped to contribute to this 12% gain for the week. Stocks still shed 7.5% for November of last year. Still positive gains considering the environments. 

Trade volume was light Friday, thanks partly to shortened holiday session. Less than 1 billion shares traded hands on the NYSE.

The session’s choppy action had stocks trading in mixed for much of the session. A late rally helped 8/10 economic sectors finish in the black. Some analyst were even fearing the gloom of the stock market crash of 1929 proportions.

Financial stocks (+2.9%) outperformed on a relative basis. Bank of America (BAC 16.25, +0.82) made gains despite having trouble with getting its target price cut by analysts at UBS. Meanwhile, more foreign influence as the British government took a majority stake in Royal Bank of Scotland (RBS 17.58, +0.85) after investors snubbed a state-backed capital raising plan for the bank.

Economic headwinds are expected to have retailers expecting a slow holiday shopping season. But early indications per Black Friday only 1.6% lower than 2007. These are numbers we hope to see consistent through the remainder of the holiday shopping periods. 

On the technical analysis front, global handset maker Nokia (NOK 14.17, -0.45) said it will no longer sell mobile phones in Japan, except for certain high-end models. According to Nokia’s latest press release stated that it expected global volume to slow amid weaker consumer spending.

Auto makers have also been contending with a challenging environment, but their performance this session was impressive. Awaiting the final Federal Bailout decision, which is poised to pass, Auto makers surged 19.0% as a group.

Industrial stocks (+2.7%) also made strong gains during the past weeks, led by General Electric (GE 17.17, +0.98). GE gained despite word that Korea-based LG Electronics will not acquire GE’s home appliance unit, ending months of speculation. Looks like these bets were hedged accurately. 

Energy (-1.5%) was the worst performing economic sector. The rush is catching up to the energy sector as it dropped as a result of sliding oil prices. Oil was most recently down 4.0% to $50.25 per barrel, or down almost 65% from its record high. The drop in oil prices has many expecting OPEC to order a cut in production during its meeting this weekend.

With the uncertainty of the markets, investors have been seeking out the relative safety of US Treasury bills, which has pushed the yield of the 10-year Note to historical lows near 2.95%. Rating poor.

Large-cap tech names like Microsoft (MSFT 20.21, -0.28), Apple (AAPL 92.31, -2.69), and RIM (Research in Motion 42.10, -2.60) are all weighing on the Nasdaq, causing it to under perform its peers. 

With uncertainty and Obama administration transition we continue to see uncertainty surrounding the markets. The safety position is too surrounding Treasuries but mortgage lender yields still offering save alternative gains.