CI Outlook - Archives

July 2012

Pessimism is the majority view on both Main Street and Wall Street.  On Main Street the latest monthly survey of consumer confidence darkened.  It showed the number of respondents expecting lower stock prices jumping over 10%, from 32% to 42%.  This is very unusual and has happened only 7 times since 1987.  On Wall Street analysts have been lowering market and earnings expectations for 10 straight weeks.  This is another very remarkable occurrence.  Importantly, this sudden spike in negativity is coming right before second quarter earnings announcements begin.  We think the combination of negativity along with the uncertainty over earnings news explains the subdued price action over the last three months.  A period in which markets declined sharply before rebounding strongly in the last week of June.

Those declines were not limited to equities but also extended to most commodities.  For instance oil fell from $105 in May to $77 in June before snapping back $10 last week to $87.  And natural gas was even more dramatic falling from about $3 to $1.50 before bouncing back to almost $3.  We believe these levels of volatility are becoming a self perpetuating source of investor anxiety and are a major contributor to the feeling of gloom and potentially a malaise that could overcome investment markets.  That malaise may be starting.   Volume has contracted to 50% of normal, investors continue to dump stock mutual funds and major news announcements no longer move the markets.  Amazingly this is potentially good news!

We know that statement makes it sound like we have lost our sanity.  But long experience has taught us the validity of an old adage.  “Bear markets die with a whimper not a bang.”  We are fast approaching that time when “nobody” (read very few people) will care what the markets are doing.  Everybody who wants to sell their stocks will have done so.  Money will be invested in anything but stocks and daily volume will be very low.  At that point investors will have reached maximum disgust with stocks.  They will not believe in the possibility of ever again making money in stocks.  That is the low point and we may be approaching it faster than anyone realizes.

Not only is volume is drying up but major news announcements no longer drive correspondingly large moves in the market. For example recent big interest rate cuts in Europe were greeted with a yawn, and the Libor scandal hardly caused a ripple.  For the last few years earnings news has driven the markets.  The upcoming second quarter earnings announcements are scheduled to start July 9th with Alcoa.  Those earnings announcements may be the markets litmus test.  Most may be lower than hoped for and many companies economic outlook for the future will be negative.  If that news combined with worries about world economic growth does not meaningfully depress prices then we may be hearing “the whimper”.  Even so it will take time to build investment confidence.  For now uncertainty about this year’s Presidential election, the fate of the healthcare bill and lack of budget action by congress should continue to depress confidence.  Without confidence the markets may continue to trade up and down without direction.  But, having heard the whimper we can start to believe that the worst of the bear markets damage is behind us.

In that case we will continue to pursue the course of action laid out last month.  We will continue to concentrate on income producing investments with occasional momentum type trades as they become available.  We would hope to become more aggressive in our investment thinking once the market begins to trend higher.  And we hope that would be as early as this fall.

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