July & stagflation

Stock markets have been thru a lot in recent months, June qualifies as an awful month. Even NAZ which has been doing well in recent times fell in June. Dow Jones Industrials & S&P 500 were clobbered dragging stocks to their lowest levels of the year.

July may have seen an end to the downward slide. Stocks continued falling until mid month. Then the FED put together a rescue package for Fannie Mae/Freddie Mac & some home owners with mortgages which brought a lot of encouragement to stock buyers. From the lows, the Dow rebounded (led by oversold financials) more than 600 followed by a pullback returning prices to near the start of the month. Financial stocks roared. Bank of America (BAC), rose 15 from a low of 18½ while marginal ones (like FNM/FRE) doubled from their lows. Now the bulls & bears will argue about who has the upper hand:





The Alerian MLP index had a bumpy ride, going sideways between 276 & their 52 week low of 262. Oil set records at 147 followed by a sudden 20 point pullback. MLPs this year have been following oil prices, but this time they were dragged down like oil stocks. In July, Exxon Mobil (XOM) dropped almost 10%, much of it in recent days after reporting record earnings. MLPs however are different, they are partnerships (not corps) generally with thousands & thousands of miles of boring of pipelines. At month's end & in early Aug many are/will be going ex-distribution, which can be 2%, a downward influence on the index.





Real estate stocks, REITs, have had a very rough year, not helped by the market down-draft in recent months. Many are selling at lows not seen in 10 years, even though divs have been trending up. In June they were pulled down by concerns over financials. They did not get significant relief in July, some falling to new multi year lows. Yields are 6-10%, some even higher. In personal accounts, many divs are partially non-taxable and/or have a portion taxed as capital gains. Those with excellent track records of raising divs are becoming attractive. They proved to be excellent buys 10 years ago when they were down in the dumps offering similar high yields.

Junk bond funds still can't get no respect, yielding 12% with NO mortgage exposure. Their yields have widened to 800 basis points above the Treasury yield, what has to be a record spread. The brave may start giving them some respect.

The stagflation word has been bandied about as a fear dragging down markets this year. Compared to the early 80's when inflation & unemployment rates were in double digits, this is mild. Growth declined then, today it's bumping along squeezing out small gains. I think this is a mild form of stagflation driving fears which drag down stocks.

Last night I saw the 2 fraidy cats. The older one, she's the mother, seemed to be her usual mellow self with me, relaxed. The younger one, Tom Cat (black cat), came out. He is the most afraid, but ventured out to visit with me for a few seconds, then ran under the futon. Maybe that's a sign the scariest days are behind us, even if the future looks gloomy with no shortage of fears.

Wild, wild week!

Stock markets, highlighted by financial stocks, just went thru a major sell-off followed by a sharp rally in the last few trading days. Financial stocks got the most attention, even more than energy & energy stocks. This year, they've gone from one new low to another with seemingly no end.

The S&P Financials Index, shown on Bloomberg (their symbol for it is S5FINL), went from a high of 510 in May 2007 to a low of 230 last week (more than a 50% decline) followed by a sharp rebound to 280 Fri. The moves are similar to Bank of America (BAC) stock performance even though its had more exaggerated moves, shown below (note high volume recently):

BAC stock has done well, from the 20s in the early part of the decade to the 50s last year. As a member of the S&P 500 Dividend Aristocrat list, BAC had yearly increases with a nice one 12 months ago. Since the peak in early 2007, it had a slow & then a sharp drop to last week's low of 18½ where the stock yielded almost 14% (for those who believed in the div). The 3 day rebound brought the stock back to the what had been a “new low” price reached a month ago. The rebound came on high volume as show below:

Banks have gone thru a lot, especially this year, mostly negative news stories. All major banks operate under a dark cloud which varies from one to the next, but each one has a cloud overhead. A week ago, the banking system had its first failure in what must be at least 20 years. There haven't been any (or many) because a large bank was always available to take over the weak one, then life went on. That concept is barely alive today. The FNM/FNM situation & confusion about their survivability during the credit crisis adds to uncertainty for financials. That's been a lot for investors, whether experienced or novices, to absorb causing wild swings on big volume.

Meanwhile, economic problems drone on. In 1980, the economy had to deal huge numbers for inflation & unemployment while contracting. The combination of events was called stagflation, all economic measures were going wrong. The world is not as ugly today. By comparison, inflation & unemployment are more moderate while the economy is eaking out growth. However, they're ugly enough to drag down markets this year & looks like these conditions will continue.

The depression in housing & autos affects a lot of businesses & workers. Masco (MAS), another member of S&P Dividend Aristocrat list, will eak out their 50th consecutive annual div increase this year (by one penny). If continued, Q4 will be above the prior year by that penny. But they indicate earnings will not cover the current div. Remaining on the list next year is unclear. It will be sad if they are forced to break their 50 year track record next year. While this is just one small story among a great many, it's indicative of tough times the economy is going thru causing stocks to sell off in 2008.

I haven't seen the extreme fraidy cat lately, the black one living most of his life under the futon or in a closet. Maybe that's his way of saying we should be cautious, at best, going forward. More earnings reports will be issued this week including BAC on Mon. By weekend, they will announce the next div (the one they traditionally increase). If earnings are less bad then dreaded, chances are they will have an increase even if it's limited. The earliest signals for this week are the New Zealand market opened higher & pre-trading for Australian stocks is showing a 1% increase suggesting markets will start on a positive note.

Stagflation worries sink stocks

Stagflation worries sank stocks. Dow was down 108, decliners ahead of advancers 3-2 & NAZ was down 17 on just 1.1B volume. The ugly word, Stagflation, is back. That refers to a time 30 years ago when the US economy had high unemployment, high inflation & no growth. Times are a lot less ugly today, but the word is being used a lot. Banks were especially weak on an ugly forecast from Goldman Sachs. It talks about a rebound coming early next year & the need for banks to raise $65B more in capital. Raising capital is associated with div cuts, tough to hold divs flat when asking others to invest. Oil had a relatively good day for the stock market, pulling back only 60¢ in an unusually quiet day of trading. Energy shares had a great day, as investors saw them as a good place to park money. The Alerian MLP index rose a point to 292, the 290 as the support level continues to hold.

Dow is trading at the low end of the 12K range & may be testing to see if the floor can hold. Banks are getting hammered & more selling may be ahead. The Dow has Bank of America (BAC), JP Morgan (JPM), Citigroup (C), plus related financials, American Intl Group (AIG) & American Express (AXP) which are feeling the selling pressure.