Investor Opportunity: When to Look

At any point in time there is a popular thesis, widely shared by those who hold the marginal trading dollar.  For many months, that thesis seemed to recognize that the market had become excessively pessimistic.  Negative news could be shrugged off.

The prevailing thesis can change very quickly.  The daily mantra  now seems to focus on the ending of certain government programs.

• Cash for clunkers.  Sales went up and now have not sustained the gains.  There is an inclination to attribute the entire auto rebound to this program.  In fact, the idea was to stimulate the industry and attract interest.  The jury is out on the continuing effect, but it should not be dismissed out of hand.
• Home buyers' credit.  Once again, the programs have stimulated activity and firmed up pricing.  This is a good starting point for improvement.  Since the program is set to expire, some predict a relapse in home prices.  No one really knows whether that will happen, or whether Congress will extend the program.
• Stimulus spending.  People have strong opinions about the stimulus bill, but most seem to forget that the spending was spread out over three years, just to avoid the appearance of a sudden cutoff.

Whether one agrees or not, the investing and trading backdrop has changed.  For those who see it as an opportunity (like us) it is time to go shopping.  In our next installment on this theme we will discuss how and where to find ideas.  As we noted in an article last week, we were looking to buy RIMM on the decline after the earnings announcement.  We were buying yesterday and today for recent client accounts.  There are many other fine opportunities, if you have done your homework and have a price target in mind.

Time of Opportunity?

Since one of our missions is to find the best sources on any topic, here is a survey of opinion we find quite interesting.

• Abnormal Returns points out that "Sell in September" did not work, citing several sources including their own work.  Our own article on this topic got some nice circulation in Advisor Perspectives.  Tadas repeats his September conclusion:  Ignore the calendar.
• Barry Ritholtz had a nice appearance on the Kudlow show after a long absence.  He adds a nice perspective.  Tonight he clarified his market position, which grew increasingly bullish beginning in February and is now up to 75% long.  While he thinks the rally has more room to run, he is doing some end-of-quarter hedging.  This is a very balanced perspective from a someone noted as a skeptic on the economy and the market.
• RevShark at RealMoney [subscription required] attributed today's selling to a shift in the Goldman forecast of job losses from 200K to 250K.  We do not question his analysis, but we wonder what people are thinking.  This series, as we have frequently noted, has an error band of over 100K jobs  -- and that is just the sampling error.  (We did not publish our own regular forecast, since it depends upon the ISM report, announced today, and we write in the evening.  Perhaps we can figure out a method for doing an update in situations like today, when the ISM leads the employment report by a single day.)

Our Take

The economic news, as we have frequently noted, is not going to show a straight-line march upward.  This is especially true of employment.  For reasons noted by many, some corporations will be slow to re-hire, or to hire new workers.  Note well:  There is plenty of hiring going on, but it does not match the new job losses reflected in the initial claims series.  We expect continuing increases in the unemployment rate until job growth catches up.

We reject comparisons to a Great Depression situation, as we noted in yesterday's article.  Here is a follow-up to that piece, taken from an authoritative source, The Liscio Report (frequently cited by perma-bear Alan Abelson).  In a nice analysis from January, they looked at the Great Depression and current unemployment rates.  They debunked those who saw unemployment as at Great Depression levels, noting that there was no measure of unemployment at that time.  Any data series must try to reconstruct data from that time and patch the series together.  Like us, they see the BLS as doing a good job in providing unbiased information for this analysis.  Read the entire article, but here is the key chart, carefully merging data series.

Investment Take

As we enter the new earnings season, where we have seen relatively few negative pre-announcements, we expect continuing skepticism.  Since we regard employment as a lagging indicator, it is still a time of opportunity.  Investors should note that consumer spending has remained fairly strong, to the surprise of many.  The tipping point may come when corporate executives start to see more opportunity.  It remains a matter of psychology.

We plan to discuss further some specific stocks for investors to consider.

Comments

[JohnF]

Nice commentary, Jeff.

Not sure if you're into it, but it works in with this post. How much has Cash for Clunkers and the $8000 first time home buyer credit distorted consumer spending?

And what happens now that they are coming to an end, possibly along with unemployment benefits?

Have a great weekend!

JF

[Paul Nunes]

Anther very helpful perspective on labor stats. Thanks as always Jeff for your hard work!