How It All Works

July 26, 2010  |  

It seems each week this summer has expressed a different story about the economy and stock market. Some weeks it’s hopeful, others it’s dreadful, but all carry more than a dollop of angst. That uneasy feeling has been a source of gyrations which ironically only create more angst. It’s a vicious cycle; one that I think is deliberately manipulated to shakeout individual investors at certain times and then lure them back later. (Of course, most investors are naturally lured back when the market is higher…much higher.)

I sent an email out Friday afternoon explaining my frustration at subscribers that take losses on my ideas even though I think those ideas will work out. By the way, taking loses is an important part of successful investing, but dumping stocks largely because the herd is moving in one direction is almost always a mistake unless it was an idea bought for a reason that didn’t involve real analysis. The main point is this is a mercurial market but you can’t be a mercurial investor.

Last week, PWER was a big winner and yet 15% of people in the database already sold, most at a loss, for a variety of reasons. The fundamental story and potential never changed, however. This is the case with the broad market. Of course, there are more fundamental risks to the broad market than with a company that’s carving out market share in a fast-growing niche in a super hot sector. But all of the emotional noise from headline events that caused so much havoc may not translate into material changes for our economy. At least not a worst-case scenario. At some point our economy has the potential to reverse course and turn on the jets. In the meantime, if you buy high and sell low the stock market will never work for you. If you sell every stock when it’s down then be prepared for a bumpy and very unprofitable ride. I’ve been at this for a while and this never changes; people simply taking losses out of anxiety.

If you want to be an investor, then be an investor, but don’t think every stock you buy is going to go straight up.

As for the market right now, I’m impressed with last week; not the results but what drove those results.

> Resolve – market could have folded a few times during the week but didn’t

> Earnings – top line growth still problematic, but strong earnings and confident guidance

> Politics – more Democrats saying it’s too soon to let Bush tax cuts expire

Sure, volume continues to be a concern, but that doesn’t mean we aren’t on the cusp of a major rally. Resolve sways back and forth like an old bandana stuck on a barbed wire fence, but it was there last week. It’s a combination of factors, including all that cash on the sidelines becoming antsy. The key characteristic of this earnings season was to be disappointed. Yep, that was the case; we came into earnings ready to be let down. Wide-eyed economists and the Federal Reserve have rushed to lower their expectations for 2H10 growth. So, slow top line growth in the Spring could mean even tougher sequential comparisons three months from now. That means guidance is more important than usual. Last week many mega companies upped their full year outlook and in the process, gave the economy the nod.

It’s not robust, but it’s not double-dip, either. But there are question marks. The biggest is whether the White House will dig in deeper with its goal of limiting corporate profits and redistribution of wealth. A great technique for leveling the playing field would be to hike taxes on the so-called rich while holding the Bush tax cuts for everyone else. I still can’t get over this notion that some are arguing the rich should have their taxes raised because they don’t spend money. The flip side of this, and Nancy Pelosi brought it up recently, is the notion that the best way to get money into the economy is to give it to poor people. While there is no doubt people on welfare and unemployment spend their money it’s unnerving and anathema of the American way that thrift and smarts should be punished.

Moreover, when will those on welfare and long-term unemployment wake up to the fact they are viewed as chattel, just vessels to transfer money from the government into the big businesses that government says it loathes? To grow the nation, new wealth must be created, and that comes with opportunities. Such opportunities can’t happen without the flow of money and confidence as both are bottled by endless rhetoric and new rules and regulations. Last week, the CEO of UPS (UPS) Scott Davis said as much. “There is no doubt that policy uncertainty is an issue out there” he said. Frustration has caused many CEOs to speak out because healthcare reform, financial reform, and cap and trade are going to be very expensive for their businesses. One could imagine what it means to the little guy, still considered rich under tax guidelines but individual microscopic specks in the economy.

Mr. Davis went onto say: “Clearly policy uncertainty is one of the worst things for a recovery.” The war on prosperity has many casualties the most damming is everyone losing complete confidence in what is possible and what is impossible.

With hundreds of rules yet to be written, and scores of agencies and thousands of agents being assembled to descend on the business world, it’s easy to understand why such gargantuan amounts of money are being squirreled away. Already we see how financial regulatory reform can gum up the works. Last week, Ford Motor Credit had to shelve an offering that could have risen between $1.0 billion to $3.0 billion because no rating agency will offer an assessment of risk. In fact, all agencies have said they will no longer allow their ratings to be used in association of prospectuses and offerings involving asset-backed securities. According to Deal Logic, there were no asset-backed deals last week, the first time this year that has happened. Before last week and new Financial Regulation, there has been an average of four deals a week raising $1.8 billion. This is what gets the economy moving, not unemployment checks.

The market is in limbo, edging lower, but mostly waiting for the latest data on housing. New home sales today could make or break the session. I’m looking to see if prices move higher. As we wait for what could be the second lowest reading on record, the Street is mum on the dubious milestone of 100 banks failing thus far this year.

Overseas there is a moot response to European bank stress test results, not sure if people are flabbergasted, embarrassed, or just dismissive of the results (only 7 of 91 banks failed). The situation continues in the United States, where another seven banks failed over the weekend. For 2010, the tally broke through 100 banks that have failed (now at 103) for a total of $72.4 billion in assets and an estimated loss to the FDIC’s Insurance Fund of $18.0 billion. The failures cost the FDIC $431.0 million. The FDIC was already running a $20.7 billion deficit at the end of March 31, 2010.

Fed-Ex Sparks Futures

A pre-report from FedEx turned futures around this morning, with the Company announcing that it expects its fiscal first quarter earnings to be in a range of $1.05 to $1.25 per share (an increase from previous guidance of $0.85 to $1.05). The new outlook reflects better than expected volumes in Express and Ground volumes in addition to more higher-margin International Priority business. It could be a hint that global trade isn’t suffering as much as feared following the various European austerity measures.

Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.

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