Market Notes 2.27.09

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There is a tug of war going on between “bottom fishers” seeking to buy stocks at low prices and unnerved investors who are waiting for an opportunity to sell out of the market.

We believe we are seeing buyers come into the markets seeking value thus driving up the prices. As soon as signs emerge of rising prices sellers who are nervous take action and seem to be selling off their positions into any perceived rally.

Add to this bad economic news and ongoing uncertainty about the banking system and you have an extremely volatile market. Today, the S&P 500 broke through the low set in November in intraday trading (source: Yahoo Finance).

According to Morris Segall of SPG trend advisors, the investor sentiment is as bad now as it was in the summer of 2002 and we could be nearing a final “capitulation phase” in the market cycle. Investors could throw in the towel so to speak and potentially send the markets to new lows.

The environment today is an extraordinary tightrope walk. On one hand, a compelling argument can be made that the market is oversold and could experience a possible rally at any point. On the other hand, an argument could also be made that the market could shed another 5%, 10% or 15% at any point.

At this time it is the belief of Lowe fs that downward pressure will prevail and that we are more likely to see new lows set than we are any sustainable rally.

Concerns about the banking industry continue to be front and center. According to the AP wires, the FDIC is today raising fees paid by banks and levied an emergency premium. Clearly, the FDIC is anticipating a flood of bank failures. They have raised the estimate of the cost of failures from $40 billion to $65 billion though 2013. (source: AP)

Additionally, the consumer debt situation has yet to be addressed and there is no definitive policy coming out of Washington about how they plan to address bad mortgages, banks and tax increases.

These factors combined with the overall negative economic news form the basis of our conclusion that a downturn is more likely than any sustainable increase.

So that is the bad news. The good news could be that if we do see capitulation we may begin to be able to take advantage of buying opportunities and potential rebuilding strategies in our actively managed discretionary accounts.

Keep in mind that many of our actively managed discretionary portfolio allocations at this point have extra cash, gold holdings and holdings that have the potential to move in a different direction than the markets. We believe these strategies will carry us through the next few weeks and months. (non-discretionary accounts are not managed or allocated the same)

As we move closer to a market bottom it is likely we will reduce or remove the potential inverse market holdings. We may consider adding inverse treasury holdings and inverse gold positions in certain actively managed allocations (depending on risk tolerance and objectives). It is our belief that once the market bottoms out that treasury yields have no where to go but up. Further, gold could see declines from the recent increases in value. However, we foresee gold as an important component of a recovery strategy so an inverse position allows us to retain any possible gains without trying to time the market.

Our outlook and analysis indicate that a possible two to three year scenario (following a market bottom) could be a fairly strong domestic market. As the market gains strength global markets could begin a recovery and ultimately potentially outperform domestic markets during the latter portion of a recovery cycle. (no guarantee can be made as to any performance and foreign investing carries additional risks) Finally, we believe that the value of the dollar is very likely to decline during this cycle and the price of oil is likely to rebound to over $150 per barrel.

It is very important to remember that even once the market hits bottom the recovery will likely be volatile, painful and long. Sustainability will in our view be predicated on definitive policies from Washington, moving past the banking and consumer credit crisis and stabilizing corporate earnings. Until this happens, even if we hit a bottom on the market we do not expect sustainable gains.

Lowe fs continues to work hard on behalf of our actively managed discretionary clients to monitor the current situation and plan for a longer term recovery.

In other Lowe fs news, Greg and his wife Jan are expecting a new member of their family on or about March 9th. We will keep you informed as their family grows.

Finally, as we have done since 1983, Lowe fs is pleased to share Orioles Tickets with our clients, friends and professional associates. If you are interested in seeing a game on Lowe fs please click here for more information. Requests for tickets are filling up fast but there remain plenty of opportunities available.

We hope you have a great weekend.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us.

Important Disclosures

  • Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us.
  • No diversification can completely protect against market risk or other risk factors with investing. A diversified portfolio could still lose money.
  • An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.

Foreign investing carries additional risk such as currency risk, political risk and different accounting standards.

*Lowe fs is a registered investment advisor.