After the market gained in 7 of the 8 trading days following August 19, we have been met with 3 consecutive down days wiping out about half of our gain (about 5% at today’s close).
The financial sector has brought us down because of European bank concerns combined with the effects of the Federal Housing Finance Agency filling several new massive lawsuits against 17 large banks including BAC, GS, JPM, C, and WFC.
Meanwhile, the earlier $8.5B settlement formerly settled by BNY Mellon, representing a number of similar litigations, is being challenged by a host of unhappy recipients.
The most significant other litigation includes a suit by state attorney generals against more or less the same group. The potential losses could well exceed $20B and perhaps exceed the reserves established by the group.
Perhaps Warren Buffett’s purchase of $5B of preferred stock in BAC is the beginning of a solution for the large banks that may not bode well for the common shareholders of the subject banks (since they will be the last to receive company assets), but it could possibly provide enhanced settlements with the large block of litigants. In any event it is a major question mark hanging over much of the financial sector.
At its worst point in the last three days, the financial sector fell 10%. The Euro (NYSEARCA:FXE) fell about 3% in the same period chiefly due to concern about the stability of European banks and currencies.
Facing a $9.2B deficit, the United States Postal Service is considering laying-off 120,000 workers. However, that is not their only alternative as they have a surplus in their retirement fund and are requesting emergency funding from Congress.
Aside from the crisis in the banking world and the possibility of a post-office lay-off, more news has contributed to the three-day fall. Consumer confidence hit its lowest point since 2009 last Tuesday at 44.5 versus an expected 52 and its prior month value of 59.2 (anything less than 50 represents a lack of confidence by consumers). Last week, jobless claims, in both the private and public sectors, were a bit worse than expected while unemployment remained at 9.1% with essentially no job growth over the past few months. Housing sales and construction spending were disappointing as well.
However, these unpleasant numbers were in part offset by slightly better readings from the Chicago PMI report, Factory ISM, and Consumer Spending. Today’s ISM for the services sector, 50.6, was modestly above expectations but still below the prior reading of 50.9.
Regardless of the bleak picture above, corporate cash remains very high and the President may present a few opportunities for them to spend that cash Thursday night.
Market Stats. Sector performance last week closely tracked our SectorCast predictions with Energy, Basic Industries, Consumer non-durables, Utilities, and Health Care leading with slight gains while Consumer Durables, Capital Goods, Technology and the aforementioned Financial sector at the bottom with modest losses. Mid-cap growth (+0.65%) was the strongest style cap while Small value was the worst (-1.39%).
Our forward-looking SectorCast rankings are led by Basic Industries, Energy, Finance and Health Care. However, due to the recent nature of the drop in the Financial sector, the numerous revisions rumored to be in the mill have yet to be factored in and may send the sector plummeting towards the bottom of the ranking.
Early Tuesday, the market fell sharply to nearly a 3% loss for the S&P 500, but it rallied to close at a slightly less than 1% loss after the modestly positive ISM number. The rest of the week will have sparse data with the earnings season mostly complete and further government data including only the Beige Book tomorrow, followed by Jobless Claims, International Trade, Consumer Credit and Wholesale Inventories later in the week.
What to do? A flight to safety seems in order. With stock price valuations still modest, there remain opportunities to buy bargains although they should probably be restricted to the safer sectors: Health Care, Utilities, and Consumer non-durables. Nibbling at bargain priced growth stocks has always been wise in the long run under these conditions.
Appropriate hedges could include the VXX Volatility Fear index, an ETF which rises on investor fears. The Euro value ETF FXE, mentioned above, can be shorted if you fear further problems for the PIIGS and European major banks.
4 Stock Ideas for this Market
This week, I started with the Undervalued Large Cap Growth preset search in MyStockFinder. I also included Buys (in addition to Strong Buys). Here are four stock ideas from the more defensive sectors in Sabrient’s forward-looking SectorCast model (i.e., those sectors with the best Bear scores):