A Rotten Week Ends With A Huge Upward Reversal

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The key word for this past week’s stock market action could be summed up in just one word: reversal. The whole week came down to just one 90 minute stretch this past Friday – from 7:30 a.m. to 9:00 a.m. Alabama time– during which we got better-than-expected revisions to second quarter GDP, and a much over hyped speech from Fed Chairman Ben Bernanke. Although ‘Uncle Ben’ really didn’t say anything of note, when the prognosticators parsed his carefully chosen words, they found that he is more than willing to open the door to more quantitative easing…

Thus the fireworks began with the Dow Jones Industrial Average taking off like a rocket ship and jumping 163 points on the day, with the Nasdaq and the S&P following suit with ‘blasts’ of 34 and 17 points respectively. It really shouldn’t have come as any big surprise for this upward reversal blast, as the bearish sentiment has been building up to ridiculously high levels, what with all the talk of sightings of Hindenburg omens,death crosses and and our own economic vulnerability. And thus the bears couldn’t continue their latest selling spree, so we had stocks head to moon for that one glorious day. Unfortunately, this past Friday bounce couldn’t save the major equity indexes from losing further ground for the overall week. The Dow Jones Industrial Average suffered its third straight weekly loss, as the blue chip index lost 0.6%, and now rests at a level of 10,151. It certainly was a relief to see the Dow avoid another sub-10,000 close. The Standard & Poor’s 500 index gave up 0.7% and has now lost an astonishing 5.1% over the past three weeks alone. Meanwhile, the Nasdaq Composite index gave up 1.2% and sits at the 2,154 mark. Only the smaller-cap stocks as represented by the Russell 2000 managed to eke out a weekly gain, as it rose by 1% for its second straight weekly gain! However, we still face several headwinds going into September and October. Should unemployment spike back above 10% and the housing markets continue to lose ground, we could see more outflows from the equity markets, and this would certainly not bode well for the politicians in the November elections. In addition, what could be even more unsettling for the stock market is what happens with regard to the Bush tax cuts that are set to expire at the end of this year. This would essentially be a sharp tax increase on capital gains and dividends, and that is definitely not what a tattered and battered stock market needs. Given all the commotion coming out of Jackson Hole, Wyoming, where Ben Bernanke was holding camp with a bunch of financial big-wigs, it sure looks like the Federal Reserve still has some ‘tricks’ left in its bag which can be used to combat any further downturn in the economy. There had been talk lately that the Fed was out of bullets with regard to what else it might do, but Bernanke made it clear that the Fed still had the will and the tools necessary to use in the ongoing battle against the weak economy. Treasury yields, which had been driven to new lows by the relentless pessimism about the economy, not surprisingly, shot up last week. The 10-year yield note, which had been hovering around 2.4% this past week, is now at 2.652%. The 30-year bond price plunged twice as much, lifting its yield to 3.696% from 3.595% the previous Friday. Even at the shorter-end of the maturity curve, yields jumped higher as the two-year T-note is now at the 0.564% level, as opposed to 0.455% the previous Friday. Bernanke’s main concerns seem to be the prospect of high unemployment for a considerable period of time, and the fact that inflation has declined to a level that is slightly below that which he feels would be most conducive to a healthy economy in the long run. (Sounds like he’s got his work cut out for him!) Given the fact that interest rates still remain at remarkable low levels, it really shouldn’t come as a big surprise that some investors are content to store their excess cash under their ‘Tempur-Pedic’ mattresses. It’s also no big wonder to see that hard assets continue to get huge inflows from disgruntled investors. Consider the fact that prices are up 43% thus far this year for wheat, 23% for cotton, 18% for both nickel and cattle, 10% for silver, 9% for gold and 6% for copper. However, we would caution investors about chasing performance here, and avoiding stocks overall, even after a decade of dismal stock market returns. Remember the old adage: ‘The markets will do whatever is necessary, to fool the greatest number of people.” Just take a look at all the people who jumped into energy stocks just after the BP Gulf of Mexico oil spill. Crude oil has recently pulled back some 15%, and energy stocks are now the worst performing sector in the S&P 500, down 11.5% thus far this year. Here’s another interesting factoid. The economy is now also getting the blame for the newly established record low birth rate! Get this, experts feel that the this latest recession has led many people to put off having children. Thus, the 2009 birth rate just set the a record: the lowest in a century, as births fell 2.6 percent last year. It was also the second consecutive yearly drop. This situation is a striking turnabout from 2007, when more babies were born in the U.S. than any other year in the nation’s history. Keep in mind that the recession began that fall, dragging down stocks, jobs, and now birth rates. Enjoy the last full week of summer, and remember that this will likely be another low-volume trading week, but we’ll be ready when the Big Dogs get back into action after Labor Day.

Sources:  Barron’s, The Wall Street Journal, The Kirk Report, Kiplinger’s, The New York Times, Associate Press

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