4-9-09
Last week the market advanced 1.84%. If you look at the chart below you can see where I have an
arrow the market opened up strong on that morning. The primary cause of this was good earnings news
from Wells Fargo. As we have discussed before the heart of the economy is the financial sector and the
good news from Wells Fargo is being interpreted as a positive sign for the banking sector. Personally I
suspect many banks will report decent earnings because they can now borrow at such low rates and lend
at much higher rates. Also helping is the amount of money people are depositing at banks because they
are nervous about all other investment options at the moment. However I do not think the worst is over
yet as I anticipate the next big problems for banks will be defaults on commercial loans, commercial real
estate, and credit card debt.  From a technical perspective the view of the market is improving. Most notable last week was the general advance in stocks, the strength in financials, and the reduction of volatility in the options market below its long-term average. The market is temporarily overbought and the odds now favor prices pulling back some if they are to advance further. However with so much professionally managed money sitting in cash we could see continued advances for now just out of fear of managers being left behind. So far the advances in the market have been on low volume, which often means the gains can go as quickly as they came. Most investors are waiting patiently to hear what companies have to say on there earnings conference calls and that kicks in to high gear this week. The drop in earnings for the S&P 500 companies has been unprecedented and if earnings are not going to be advancing soon then the stock market is overpriced at these levels. I am of the opinion that this recession will be unlike any other because of the fundamental changes that need to take place. In most recessions what happens is business gets ahead of itself in good times and overbuilds and then when things slow down employees are let go and inventory is worked off. Once that process is done the economy returns too normal. This time will be different because the true impact of unions has finally taken hold. It is not a coincidence that every town, city, state, public school, and public company offering traditional union benefits is crumbling. The reason for this is the system has now been in place long enough that retired employees and current employees are now overlapping. Baby boomers are retiring at a rapid pace and every time one retirees a new person has to be hired to replace them. Someone walks out the door that you owe an annual income to and health benefits and at the same time someone walks in needing the same thing. Sooner or later significant reform will have to take place in union benefits and the end result is going to be a country that has double digit unemployment for many years and a higher savings rate which will lower our countries gross domestic product. Unfortunately the very people that we need to be responsible for serious pension reform are also members of the “club”. I suspect the first major modification to pensions will be to eliminate the crap that never should have been there in the first place. For example, the state of Massachusetts announced today they want to eliminate the one-day, one-year provision. This provision gives a union member one full year of service toward their pension if they only work one day per year. So the good news is there is lots of money that can be saved just by cutting out the garbage but eventually most unions are going to join the rest of us in the private sector and provide for their own retirement. Looking toward the markets this should prove to be an important week. Many bellwether companies are reporting earnings and this should set the sail for were we are headed. With that in mind I will continue to watch the markets closely so you don’t have to. Click here to download PDF version. (175KB PDF) |