10 things to know about markets now

Stocks finished February with small gains and recovered from an opening slump on Friday. What does that tell us about the market ahead?

By Charley Blaine Mar 1, 2013 8:00PM
Trading floor © Digital Vision Ltd./SuperStockThe stock market ended the past week with small gains and, perhaps significantly, a failed bid for the Dow Jones industrials ($INDU) to set a new high.

The next few weeks are likely to be volatile. The markets have to calibrate the effects of sequestration or a government shutdown on the economy this spring.

And the politicians will have make their own calculations in what has become grim trench warfare over power in Washington.

If some kind of a deal can be cut to end the near-constant threat of abrupt economic dislocation, stocks and the economy potentially could move higher this year.

Here's where things stand.

The stock market is not grossly overvalued. The Dow ended Friday up 0.6% for the week. It gained a modest 1.4% in February. The Standard & Poor's 500 Index ($INX) finished with a 0.2% gain and is up 6.5% for the year. The Nasdaq Composite Index ($COMPX) has gained 5% this year after rising 0.3% in February.
The market may fall back. Many analysts believe market is overvalued by 5% to 7% based on earnings and could fall back some 5% to 7% in the coming months. Stocks saw pullbacks of those magnitudes in 2010, 2011 and 2012. Meanwhile, the major averages are trading 6% to 7% above their 200-day moving averages. That's not an excessive premium. Their relative strength indexes, key measures of momentum, are in the 50s. A reading above 70 is a signal of a frothy market. When the Dow and S&P 500 peaked in October 2007, their RSIs were close to 70 and had been above 80 a week earlier.

Corporate profits were better than expected in the fourth quarter. Nearly all of the S&P 500 companies have reported quarterly results. Profits are up about 6% from a year ago. When January started, the estimate was for 3% growth.

Revenue remains sticky.
Thomson Reuters says fourth-quarter revenue growth among S&P 500 companies is likely to be just 3.7%.  But energy companies saw revenue fall nearly 11% from a year ago. Energy, financial and technology are the three biggest sectors in the Index. It is not clear how much a higher dollar affected overseas sales. Revenue may not be as strong in the first quarter. A big uncertainty is the effect of the budget battles.

The economy is OK and not frothy. The housing market is starting to come back in even the hardest-hit markets. There's lots of investor money pouring into new apartment construction and buying up foreclosures. That may not be a bad thing. It moves foreclosures off the books of lenders. It provides a way to meet existing demand. At some point -- probably this year -- rent increases will be sharp enough to cause some renters to calculate that owning may be cheaper than renting. Auto sales are a good indicator that consumer confidence isn't tanking. February sales were at a seasonally adjusted 15.4 million units, up 6% from a year ago.

Job growth isn't great, but it isn't awful. Some 8 million jobs were lost in the recession. More than 1 million of those losses were related to housing. Construction is just starting to show strength. According to the University of Michigan's Consumer Sentiment Index, consumers believe the job market is improving. Not a lot but enough to be noticeable.

The headwinds, part 1: the budget battles. If sequestration is protracted or a shutdown occurs of any length, few communities will escape the effects. If the shutdowns during the first Bill Clinton administration are guides, retail sales will stall, especially in communities with large government presences. 

The headwinds, part 2: the battle over the Fed. Federal Reserve Chairman Ben Bernanke's vigorous defense of the Fed's ultra-low interest rates until 2015 cheered many investors this past week and has kept the big rally since 2009 alive. The debate is not over, especially when it's not clear if Bernanke will stay on after his term ends in 2014. An abrupt shift in Fed policy could boost rates and depress stocks.

The headwinds, part 3: energy prices. Gasoline prices may be peaking at around $3.80 and could fall, especially if there are sequestration dislocations. If gasoline tops $4 a gallon nationally, that means gas will cost $5 a gallon or more in California and much of the Northeast corridor. The experience of 2008 taught us that the psychological effect of the prices will be heavy and will depress consumer spending. In theory, energy prices shouldn't be a problem. Crude oil (-CL) finished at $90.68 a barrel on Friday, the lowest level in two months. But the Middle East could ignite.

The headwinds, part 4: Europe, China and Japan. The European economy is still a mess. Austerity has pushed unemployment to record levels, particularly in Greece, Spain and Italy. Italy's recent election was a clear signal of austerity fatigue. China, which has soaked up much of the world's copper, steel, coal, oil and other materials, may be slowing down as well. Japan is embarked on a new policy of trying to end deflation. That's depressed the yen against the dollar has weighed on commodity prices.

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18Comments
Mar 2, 2013 2:58AM
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This a a good article. Just the facts.  No political commentary. 
Mar 1, 2013 9:57PM
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excellent, balanced summary article charlie .... we miss you on the main stage!
Mar 2, 2013 9:03PM
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Despite all the hysteria by the talking heads sequestration is exactly what this country needs to accommodate the FED's QE 1-4 low interest inflation of assets strategy. This is the perfect time to take the US off of the wartime economic binge we've been on for the last 10 years and reset expectations for government handouts. Next both parties need to get together and fix Medicare and Social Security by raising the eligibility age for Social Security by one month per year for the next 24 years and tying Medicare eligibility to Social Security eligibility.
Mar 3, 2013 9:59PM
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I like Rog's numbers.  My Daddy taught me my portfolio should be 40 to 50 securities.  Large cap most of the time, healthy dividends, price per share no higher than 7 times earnings per share (stole that trick from Veteran Lender).

 

Rog is right.  It is hard work.  But, so is taking care of your yard.  Or painting your house.  Or getting on the treadmill or going running.  Or picking up the dumbells once in a while.  But . . . . the yard work thing.  Your portfolio is like my wife wife's Iris flower bed.  It's hard work, but in the spring when those blossems come out . . . well, then your hard work takes you to your happy place.

 

And it's not all that hard work after all.  Come on.  We have been down this road before.  Buy some Disney, McDonalds, Johnson & Johnson, Procter & Gamble, Exxon, Conocco, Pinnacle West, Southwest Airlines (no dividend to speak of), Kimberly Clark, Budwiser, Altria.  Yeah, yeah, sorry about Altria, but I do smoke Marlboros.  And good old SL Green.

 

Good luck trading.  I CANNOT WAIT TO SEE TOMORROW'S OPENING BELL.

 

It' gonna be a party.  One way or another.

 

Mar 2, 2013 6:24PM
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Well personally....Countingsheep....I have not been in any Bonds, for several years...

So I'm a poor one to judge, being that an investor my age should be;  By convential knowledge and or wisdom..And with FED manipulation or Inflation, they may be worthwhile...I just don't.

 

And along with that I invest in no Mutuals or ETFs, either..

 

Instead march to my(our) own drum, choosing about 22-25 equities in roughly 9-10 sectors..

And manage 4 portfolios, that for the most part are well diversified...

Fortunate enough to have 2 as Brokerage and 1 IRA and 1 ROTH...Saves a lot on tax ramifications.

Being that I trade about 120-150 positions yearly, I pay little in costs' and no Management fees..

We have a wealth of information at our fingertips; From many sources along with our Trading Institution...Have Trading platforms avalable to us, along with Premium Representives or a Face/face Contact if need be..? Alerts are also available.

 

The last 2-3 years most,dividends have been re-invested...And we average somewhere between 5-6% on total positions....All at a cost of between $700-900 per year.

It takes a lot of research and due dilligence, but worth it; Kinda like a hobby for an older retiree that can read and has the time.. And occeassionally, if I get upset; I get a couple dozen free trades.  

Mar 3, 2013 9:00PM
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Good article, refreshing to get just facts, not hype. Only issue I have is everyone I know who is familiar with China tells me their economy is a bubble about to burst; over built and under funded. The repercussions would derail our economy very quickly and make every other issue moot.

 

Based on that alone, it may be time to get defensive.

Mar 3, 2013 4:47AM
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DON'T EXPECT MUCH WITH THIS PRESIDENT IN CHARGE

NOT PRO BUSINESS.  THE MARKET MAY RECOVER SOME IN SPITE OF HIM NEVER BECAUSE OF HIM

4 YEARS OF UNCERTAINTY UNLESS THE DEMS WIN TOTAL  CONTROL IN 2 YEARS, THEN VERY CERTAIN

Mar 1, 2013 9:10PM
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A Great analytical summary. (unlike the crap Anthony writes)
Mar 2, 2013 3:02AM
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"An abrupt shift in Fed policy could boost rates and depress stocks."

 

I'd be interested in knowing what people think the above what do to the bond markets.

Mar 3, 2013 1:45PM
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I think it could be a fallacy, that Obama is not pro-business...Something out of the Republican, "let's not play book."

I would tend to think he is more against SOME Large Corporations...That are not playing by American rules, such as operating off-shore in a big fashion...Holding huge sums of deposits(money) in Foreign accounts; Not repatriating for tax reasons,etc..

And many of these Companies are getting tax breaks, special interest treatments and the like.

Mostly because of their District Reps..House and Senate...Pork barreling. And Lobbyists.

But "no-doubt" Obama has some of those "same failings also."

I do believe his business interest and forgiveness, lies more in the Smaller Business world where he understands that a 100-500 employees can have jobs and make a difference..Also where those jobs will remain here in the U.S. and contribute to the Economy.?

 

Please do not bring up or point out Solyndra, or some Battery Companies; Those are "small potatoes" and only talking points again from the same "stupid book", Rush, and Faux news...

Pretty much "old News", and look a little deeper into which Reps helped pork barrel these tax incentives and grants...Through the Congress...Both Parties are usually Guilty...IMO

Mar 4, 2013 7:37AM
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"So if the Markets and the Economy recover in SPITE of Obama, "but not because" of HIM. Who do we give CREDIT to ?? Clinton.."

 

Nope. Inevitability. The world never stopped turning so all cyclical activity just continued. The difference is more technique than anything else. The Keynes Theory was to pump money into finance but then it never trickled anywhere so sub-business platforms literally compressed into sub-economic arbitraging. Banks and inherited platforms grew too big for environment. What we have now are two economies in one space, in a race for survival. At the core-- hiring must take place for recovery. MUST. So, do the mass terminated rehire or do the below-the-radar enterprises take on partners, contractors and craft labor? I'm sorry, but I don't see anything big surviving without massive traumatic re-invention. That can only happen (both politically and corporately) by hiring in unconventional talent. History is pretty specific with that. Let's not take our focus off the debt. That aspect of Keynes' Theory will keep us from actual recovery in our lifetimes unless unconventional remedy is had as well. Where to invest? Needful supply bandwagons cause inflation. Like gold, they will be oversold until they crash. Think about capacity. I did long ago. It isn't about supply, it's about who can make the machine that makes the supply, hires their own customer and is liked by those who have the raw ingredients. All else fails. I'll take modest pay everyday over a steak that gets me tied to a stake and BBQ'd.

Mar 2, 2013 4:22PM
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"To be in, or not to be in,"....Is the question or point...imo.

 

Ones that wish disaster onto Wall St. or Investors, I shall never understand..?

 

Unfortunately the same, may have made "poor life choices" or in many cases were not as lucky ??

Of course there are many other ways, besides just Wall Street..

You do what is best for you and your family...That pretty much sums it up.

Mar 3, 2013 1:58PM
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So if the Markets and the Economy recover in SPITE of Obama, "but not because" of HIM.

Who do we give CREDIT to ?? Clinton..

 

When our Country went down the tubes Financially and we fell deep into a Recession along with ??

So I guess......WHEN WE GOT INVOLVED in 2 WARS??

And put deeper into our Recession and loss of jobs and more housing foreclosures..

 

Who do we give Credit to, or not..??  Clinton again, maybe Obama..?

Maybe Reagan?....You've got all the ANSWERS..Please help me decide..

Inquiring minds need to know.

Mar 4, 2013 12:48AM
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"The European economy is still a mess. Austerity has pushed unemployment to record levels..."  As shown in the American Depression and Swedish Economic Collapse of the 90's, you need the government to prime the pump of the economy to get things back to normal because others are afraid to risk money on expansion.  The S&P 500 Companies are sitting on two TRILLION dollars in cash and barely moving any into operations.  The sequester is surely going to make sure that remains the case.
Mar 4, 2013 12:46PM
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Ice Cold.Thank you....And your daddy gave you good advice....It will weather the Storms.

 

Used to have about 30 positions....And it changes.

 

Started consolidating more towards Large Caps and more dividends...Your mantra??

Also added or dollar cost averaged into more of them on dips.

And added more REITS, over the last 2-4 years..To bring up the div % average.

And more into Stalwarts..

Mar 2, 2013 7:37AM
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apple, debut of a new phone every so often is boring now.  i dont own an iphone, but was thinking of buying one to complement my other idevices (pod and pad). but now after seeing those samsung galaxy s4 commercials and the product in the store, i realize you have REAL competition out there.  i will be taking a good look at what samsung and others have to offer and not blindly be glued to what the next iphone will have....yep, just another smartphone.
Mar 2, 2013 1:52AM
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Yippie-ki-yi.....I'll read it tomorrow, but always thought Blaine has done a good job, or better. 
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