Market Remains Tough for Longs

by: Market Beating Stocks

Another tough week just ended (June 27, 2008) for stocks as the the S&P and NASDAQ tumbled 3% and 3.8% respectively. Declines were broad-based as nine out of ten sectors fell, this on top of the 3% weekly loss from the prior week. Four out of the five trading days showed losses, but it was the action on Thursday that made up for the lion's share of the weekly decline.

The main catalysts remain surging oil prices, the struggling financial sector and concern over a weak economy. Overall the market has lost 8% in June, and over 12% YTD, in a period of high volatility. Clearly this is a tough market for long investors trying to make money and most should be happy with just losing less than the market.

The Federal Open Market Committee announcement came out on Wednesday, June 25. As expected, the Fed left the fed funds rate unchanged, with statements that largely reiterated the more hawkish comments made over the past few weeks. The Fed view is that overall economic activity continues to expand slowly and that growth will be tempered by tight credit conditions, rising energy prices, and job growth concerns. The Fed reiterated that uncertainty over inflation remains high, although it expects inflation to "moderate later this year and next year". Nonetheless, the Fed believes the downside risk to growth has somewhat diminished while the risk of inflation has moved relatively higher, hence the hawkish stance. We think that the Fed will keep rates unchanged over the short term given the current environment of only sluggish economic growth and extremely weak credit markets.

The Financial sector continues to get pummeled losing another 6.6% last week. News brought more concerns of layoffs and cutbacks from Citigroup (NYSE:C) and Bank of America (NYSE:BAC). Several of the major players were in the news with concerns over the need to raise yet more capital. In addition, analyst reports continue to suggest deteriorating credit quality, with lower earnings forecasts. The technical sector was also hit hard led by Research in Motion (RIMM) which dropped 16% following an earnings disappointment and a lukewarm outlook. Oracle also fell on a disappointing outlook.

Energy was the only sector to post a gain, as crude continues to surge to all-time highs with support from a declining dollar and supply shortage concerns, despite word from Saudi Arabia that it will increase output.

The economy continues to struggle, although the fiscal stimulus package is starting to kick into high gear as May personal income and spending data were both up strong. Based on recent measures, real GDP growth for the year is now expected to be close to 2%, higher than previous expectations. New home sales continue to decline, but at decreasing rates, and existing home sales reversed course and increased month over month. The rate of home price declines is slowing, which leaves hope that we are nearing the bottom.

Nonetheless, housing concerns, rising unemployment and gas prices are weighing on consumer confidence, which has slipped to its lowest level since 1992. The fiscal stimulus package may jump start personal spending over the short-term, but we question what might happen to the economy once that stimulus is spent. Clearly the market trend has not been promising with broad based market declines in high volatility, particularly over the last month. The economy is clearly still very weak, although economic activity remains better than recessionary levels. Housing remains a big concern, but there is hope that we may be nearing the bottom given that house sales and sell prices are declining at slower rates.

However, even if the housing trend changes direction, it may take time before it actually improves. The rise in Commodity prices and energy continues to be a drag on the market. The hawkish tone from the Fed continued last week, suggesting that the rate cutting days are over, although we do not think rates will rise anytime soon. In addition, it appears the financial markets are still facing significant credit and liquidity risks, with capital needs continuing to rise. remains concerned with the overall direction of the market and the risk over a potential meltdown, and would like to see market volatility decrease. This has been a very difficult six months for stock investors on the long side of the market, and those challenges will likely continue for the next few months.

For those that have cash to invest, the following stocks are currently showing on our watch list:

  • SYNNEX Corporation (NYSE:SNX) – Computer Networks
  • The L.S. Starrett Company (NYSE:SCX) – Precision Tools
  • Integral Systems (NASDAQ:ISYS) – Satellite Systems
  • Chart Industries (NASDAQ:GTLS) - Scientific & Technical Instruments
  • Halliburton (NYSE:HAL) – Oil & Well Services

We do not currently own any of these stocks at the time of this writing, but we may choose to buy one or more of these stocks in the very near term. All of these stocks have been strong performers under very difficult market conditions.

Disclosure: None