The Recession…It’s Official

By Mike Myatt, Chief Strategy Officer, N2growth

The Recession...It's Official“The Recession…It’s official.” I don’t know about you, but I’m less than impressed with the experts just now arriving at the conclusion that we’re in a recession when I’ve been talking about it since last summer. Like we really need a government agency confirming after the fact what astute business people have known for quite some time now. The National Bureau of Economic Research issued the following statement today: “The committee determined that a peak in economic activity occurred in the U.S. economy in December 2007. The peak marks the end of the expansion that began in November 2001 and the beginning of a recession. The expansion lasted 73 months; the previous expansion of the 1990s lasted 120 months.” Gee thanks for that useful information…Rather than talk about how bad things are going to get (they will get worse before they get better), I’m simply going to refer you to a previous post written in March of this year entitled “Thriving During A Recession.”

Financial Market Update

By Mike Myatt, Chief Strategy Officer, N2growth

With this week’s negative market activity I have had several inquiries asking for my opinion on the direction of the stock market. Let me begin by saying that I’m not a stock picker or market prognosticator, but rather I tend to look at macro and micro economic drivers to make general observations which some have found of benefit over the years. In today’s post I’ll note some of my recent observations which I hope will be of some use. That being said, it is my strongest recommendation that before making any changes in your portfolio that you seek the counsel of a qualified financial advisor. On with my thoughts…

It should be noted that US financial markets have seen a very robust run over the past few years. Just this last week, the Dow reached all time high’s breaking the 14,000 mark. Now this week things appear to have reversed themselves as we have seen a fairly strong regression with back-to-back-to-back market losses, and what could easily be a week in which the Dow falls in excess of 600 points (let’s see what happens tomorrow). So the question I’m getting is this; what is going on and what should I make of this? The answers to this question are varied and complex, and to do the topic justice would require more attention than I normally give in the space of a blog post. So rather than provide a long narrative commentary, or an incomplete analysis, I have chosen to highlight the following 6 observations for your consideration:

  1. A Sign of the Times: Many may want to debate and argue about the overall direction of the market, but one thing I’m fairly certain of is that the markets will be very choppy in the coming weeks and months. My personal opinion is that the market may have topped for now, and that we may in fact be moving into a strong bear trend. Given the worsening economy, it wouldn’t shock me to see a sub 7000 Dow in the coming year. Several economic reports are due out next week as well as a number of major companies announcing performance. It wouldn’t shock me in the slightest that we see foreclosure numbers come in in excess of 50% above where they were last year at this time. If you don’t have the stomach to ride out what is certain to be a period heavy volitility then you may want to consider rethinking your investment strategies…
  2. Market Makeup: Stock indexes are made up of a number of different issues across sectors, and as such, are heavily influenced by industry performance. As an example, while the NASDAQ is off sharply today breaking a key technical barrier by dipping below its 50 day moving average, the news may not be as bad as it looks if you dig a bit deeper. If you view NASDAQ performance by contrasting various industry trends you’ll see that the financial, transportation, and energy sectors are weak while technology stocks are actually doing well. If you look at the NASDAQ 100 it is not even close to falling below its 50 day moving average. This is because it is being underpinned by the strong performance of the technology market and their independence from credit markets. Pay attention to industry and sector analysis more than individual performance if you are investing in funds or indexes. That being said, take note of the caution expressed above about the overall direction I believe we’re moving in. With what I believe lies ahead, it will be difficult to hold any major support levels over the mid to long term.
  3. Trouble Spots: Amid ongoing concerns in the Mid-East, increasing oil and petroleum pricing (I believe the last few weeks price decline at the pumps is a temporary reprieve), increased commodity (materials) costs, poor transportation earnings, and a number of other key indicators, I am not particularly bullish on transportation or construction sectors over the short run. While there is still tremendous liquidity in financial markets, I have growing concerns that we are in the very early stages of a credit crisis that when all is said and done may make the credit crunch of the late 80’s look like a cake walk (does anyone remember the RTC?). With aggressive lending and investment policies over recent years now coming back to haunt financial institutions (and I’m not just talking about the sub-prime market) we may see a strong risk re-pricing. It is likely that rating agencies will strongly adjust lending guidelines in the coming months which will affect the makeup of pools and liquidity in secondary markets. We may also well see the pace of LBOs (at least at the top end) slow and the frothy pace at which hedge funds and private equity firms have been investing may taper-off as well. With the dollar still being crushed globally, resting against all time lows against the Euro and the poor performance in financials described above, I’m worried about consumer confidence and its trickle down on retail spending such that I also have short-term concerns about consumer stocks. Many of the same metrics tend to give me pause on manufacturing plays as well. 
  4. Think Quality: Today is definitely reflective of a sellers market as we are seeing a strong rotation based upon a flight to quality. Money is moving into Technology, Pharmaceuticals, Bonds, and other issues perceived to be more stable investments. Don’t get me wrong; volatile markets can be great opportunities for speculators not adverse to risk, but for those that don’t fall into that category I would suggest taking safe harbor over the short-term.
  5. Think Long-Term: I’m not a day-trader, and I don’t view the stock market as a short-term play. If you are a long-term investor sufficiently diversified you will eventually ride-out the ebbs and flows of market volatility and see better days again in the future. If you’re attempting to pick short-term stock or market movement in today’s environment you will likely find yourself getting whipsawed by unexpected rapid moves that may seem to defy conventional technical or fundamental analysis. That being said, why sit and watch your portfolio take hits if you don’t have to…My personal belief is that playing the down-side or a move to cash would be the best thing for investors at this time. 
  6. Think Globally: US financial markets are not what they used to be. The US economic impact on the global economy is shrinking on an annual basis. If you want to maximize portfolio returns, both stronger markets and emerging markets must be incorporated into your investment philosophy.

The above commentary may sound a bit bearish in nature because it is…It is a wake-up call for caution and prudence. My personal opinion is that we are headed for a recession, and as I noted above, a massive retraction in the equity markets, and a capital and credit crisis the likes of which this country has not experienced. Remember that what goes up, must also come down. All investments contain risk, and the trick therefore is to not only understand the risks, but to align your investments with your risk tolerance relative to the returns you’re willing to accept. While the above commentary is a somewhat high-level and rudimentary analysis consisting of little more than a top of mind brain dump of current market conditions, I nonetheless hope that it will provide some value when formulating your thoughts. Remember to seek the counsel of a savvy investment professional prior to making any extreme changes in your portfolio and best wishes for continued investment success.

A Capital Markets Overview

By Mike Myatt, Chief Strategy Officer, N2growth

I am beginning to sense a change in the winds…While I’m certainly not a dooms-dayer, I am starting to show my bearish teeth as the capital markets are definitely starting to slow their momentum. Virtually anywhere I look, I’m seeing markets showing cautionary signals which I believe merit some analysis for those of you looking ahead into 2007.  The good news is that healthy upward trending markets need to rest on a plateau or even suffer a minor retracement in order to sustain long-term growth. The bad news is that I beleive this not to be the case…While I don’t believe current market conditions are reason for panic, I wouldn’t be at all shocked to see the economy move toward slow growth or no growth (can you say recession) over the next 12 months. I hope that the text contained in today’s post will provide a bit of insight as you make your plans for the New Year…

Let’s start with a quick synopsis of the mergers and acquisitions markets. There is an interesting paradox developing in the M&A market in that the capital targeted for new acquisitions is at an all time high, yet both the number of transactions as well as the aggregate transaction volume has fallen for two consecutives quarters. Q3-06 transaction volume fell to 1900 transactions down from 2200 transactions in Q2-06, and total transaction value slipped to $230 billion dollars down from $290 billion dollars during the same period.

The statement that there is too much money chasing too few quality deals has never been more accurate. Private equity firms, hedge funds, as well as corporate and institutional investors have appeared more like sharks in a feeding frenzy than sophisticated investors over the past few years. The voracious appetite of those on acquisition binges has been in large part responsible for driving valuations to ridiculous heights. Many entrepreneurs have been rewarded by holding-out for premium valuations with no lack of suitors knocking at their doors. However things may be changing as it appears that the smart money is starting to wake-up and exercise some discernment if not straight-out caution…Companies will need to fight harder for valuations next year as the frenetic pace of the last few years will slow in 2007.  The times are changing and my advice is to get your capital while it is still available…

Let’s turn our attention the stock market…Even though the Dow Jones Industrial Average has continued its march into record territory in recent weeks, the closing bell yesterday marked the worst day in four months for the Dow with the market falling 158 points. Are yesterday’s closing numbers just indicative of profit-taking or could this be a sign of things to come? You might consider that the New York Stock Exchange recently announced that it took a $28 million dollar charge-off to fund severance payments for more than 500 employees expected to be cut from its payroll by March. A workforce reduction by the NYSE in a heated bull market seems a bit odd doesn’t it? I wonder if perhaps they know something we don’t…

The economy in general is also showing signs of rapid slowing. While many believe the housing market has hit bottom, it still remains very weak which had a dramatic effect in consumer confidence in October. This weakness in consumer confidence has also had an impact on retail sales numbers as holiday sales are off to a much slower start than forecasted. Wal-Mart, the world’s largest retailer reported a 0.1 percent decrease in same store sales over recorded numbers last year at this time. This is Wal-Mart’s first reporting deficit in a decade and may be yet another indicator of a slowing economy. Further confirming this trend is the fact that the US Dollar hit a 20 month low against the Euro yesterday pointing to concerns that foreign investors may be sensing a weakening US economy as well… 

My point in sharing these observations is not to send you rushing to make adjustments to your portfolio. I’m simply attempting to point out that signs of market transitions are starting to show themselves. My advice in that regard is to consider the impact of weaker capital markets in 2007 on your business, and to factor this into your forecasting for next year. An acronym drilled into me from my days in the military is the principle of the 7 P’s: Prior Proper Planning Prevents P*ss Poor Performance…Plan well!