Market sinks like an anchor

I’m fond of telling people that I bought Bank of America (BAC) about a year and a half ago at $52 a share when it was supposedly "cheap."

Its price-to-earnings ratio was around 9 and it paid a respectable dividend.

Well, as the banking crisis continued to unfold, Bank of America’s price continued to slide, and because I was adhering steadfastly to my rule of selling any stock at an 8 percent loss, I cut my losses before serious damage was done.

But as I stared at the ticker on CNBC this past Friday, I was shocked to see Bank of America trading for 3 bucks and change. Holy cow, I remarked to my wife.

"Some people are going to make a killing," she said, referring to those with lots of cash on the sidelines to pour into beaten down stocks.

But I believe that any speculation on devalued stocks at this point is nothing short of gambling.
In fact, Jason Zweig of The Wall Street wrote over the weekend about the perils of playing what he called "lottery stocks" — stocks that have fallen so far in price that investors desperate to make up for recent losses pile into them in hopes of winning the big one.

"Like a Powerball ticket, these stocks cost almost nothing and offer a high chance of losing," Zweig writes, "but that still leaves them with a kicker of hope, because if they do ever win, they could win big."

Zweig spoke with a finance professor at the University of Texas at Austin who has done research that shows people load up on these lottery stocks most during economic downturns.

Every once in a while a lottery stock will win big, the professor said, but more often than not it won’t.

Nationalize the banks?

The weekend Wall Street Journal carried an interesting interview with Nouriel Roubini, a professor at New York University’s Stern Business School.

What was interesting about the interview is that Roubini is in favor of what the prevailing market sentiment seems to be against: nationalizing the banks.

Do it, Roubini says, otherwise we’ll perpetuate the ongoing banking crisis for much longer.

Roubini says that even banks that look solvent today are probably going to start looking insolvent six months from now.

He says it doesn’t make sense to pour huge sums of money into soon-to-be-insolvent banks in order for them to take over banks already insolvent.

"It doesn’t work!" Roubini told the Journal. "You can’t take two zombie banks, put them together, and make a strong bank. It’s like having two drunks trying to keep each other standing."

Roubini advocates a temporary taking over of the banks by the government for restructuring and eventual placement back with private ownership. If nationalization is a dirty word, then call it "temporary receivership" he says.

What do you think? I’d like to know.

Brian

Wake me when the market improves

So much for that rally.

It looked like the indexes were gaining ground and holding at the 8,000 level in the Dow during the last week or two.

But that all fell apart at the end of the week. One shouldn’t expect it to get any better this week, either.

There is a raft of economic data on deck and economists are pretty much expecting it all to be miserable.

As a Sunday MarketWatch article began: "You know things are bad when the best economic news over the coming week is likely to be a report showing that consumers paid higher prices for goods and services."

Housing, manufacturing and layoff data is expected to all be bad.

However, there may be a silver lining.

President Obama is expected mid-week to outline plans to forestall more foreclosures in the nation, which are decimating the country’s wealth and consumers’ spending power.

No doubt, economists and those who play the market will be watching this development carefully, and if enough confidence is deciphered from Obama’s words, it might not be the bloody week in the markets that it is shaping up to be.

As for me, I’m closing my eyes to it all for awhile. And I have to admit, it feels pretty good.

Brian

Market showing stability, but do you bite?

A funny thing’s been happening over the course of the past week or two.

Despite mounting layoffs and dismal earnings data, some badly beaten-down stocks are starting to show some resiliency and improvement.

I’m thinking here of Mosaic (MOS) and Apple (AAPL), just to name a couple.

Nothing seems to explain the fact that Mosaic, which had fallen from the $40s to the $27 range in December, charged back to above $45 during the past week.

Apple, which had taken a drubbing for more rumors about its CEO Steve Jobs’ health and was clinging to the 80s, finished Friday just below $100 a share.

Raise a glass to the buy-and-holders. If I had stayed in either one of those stocks I would have been back in the money.

But I didn’t and I’m not.

It seemed like old times watching Jim Cramer on "Mad Money" on Friday, too.

He seemed to be emboldened and working with a new energy as his sound effects panel shouted, "Buy, buy, buy!"

But should you?

The market has, indeed, been showing some resiliency. Each time the Dow has dipped below 8,000 it seems to fight its way right back up.

Friday’s 217-point rally in the Dow put the index firmly back at the 8,200 level.

But there is still a preponderance of bad news out there.

The nation’s unemployment rate edged up again to 7.6 percent and it’s actually news these days if a company isn’t announcing any layoffs.

This past week The Wall Street Journal reported that retailers, slammed by the recession and the associated lack of consumer spending, had stopped making earnings forecasts about upcoming quarters because their projections are too predictable, given the bloodshed that is almost sure to continue.

So why is the market moving up — or at least stabilizing?

Investor’s Business Daily took a stab at an explanation over the weekend in an editorial titled "A Tale of Two Indicators — Jobs and Stocks," penned by CNBC personality and economist Lawrence Kudlow.

In it Kudlow writes of the widely held belief that the stock market is a forward-looking beast, while economic data view things in the rear-view mirror.

"So stocks may now be telling us that the gloom-and-doom crowd — and its pessimistic economic prognostications that cover all of 2009 and in some cases 2010 — is about to be proven wrong," Kudlow writes.

Kudlow theorizes that cheaper energy, the creation of new money and current financial system rescue initiatives could bode well for a pleasantly surprising 2009.

Then again, Kudlow has always fallen on the side of optimism.

As for me, I’m encouraged, but I want to see this faint light at the end of the tunnel shine on for more than just a couple of weeks before I wade back in to the market.

Brian

More bad news sinks stocks

More bad news came our way this week in terms of the economy.

Fourth-quarter gross domestic product fell 3.8 percent, making for the worst showing since 1982 and a blow to any hopes that 2009 is going to be coming up roses.

President Barack Obama said the poor economic news was another reason that it’s important an economic stimulus package is passed quickly.

The Dow Jones Industrial Average had been working to climb off that 7,900 level, but after the lackluster GDP news, it closed Friday right at 8,000 — far from the 14,100 record level set in October of 2007.

According to the Wall Street Journal, last month was the worst January the Dow Jones every experienced in its 113-year history.

It lost 8.84 percent for the month and saw its fifth consecutive month of declines, the newspaper reported.

"Smart investors are sitting on the sidelines," David Henderson, president of Raven Securities, told the Journal. "There’s not much conviction one way or the other."

More and more ads are showing up on TV appealing to the frugal side of us consumers.

Whether it’s the woman in the grocery store sawing every item in half for affordability’s sake (except the Velveeta) or Wal-Mart telling us how much we can save by eating frozen dinners rather than going out, the prevailing consciousness is saving money at the moment.

And that’s not good for stocks.

Despite the recent rottenness, Investor’s Business Daily still put a border around one of its stock charts this week, signifying the newspaper believes the stock might be a good buy right now.

That stock is Gilead Sciences (GILD), a company that makes therapies and treatments for HIV and other viral diseases.

Gilead has a three-year earnings-per-share growth rate of 35 percent and a three-year sales growth rate of 38 percent, according to IBD.

The company is also about to benefit from China introducing its Viread HIV drug to patients in that country.

Back when things were rocking along, a given edition of IBD might have seven or eight stocks highlighted each day as possible buys.

But with the state of the market, it’s not surprising that there is only one.

There was some brighter news on the retail front this week.Amazon.com (AMZN) saw its profit rise 9 percent in the fourth quarter. Sales grew 18 percent during the same period. The results from the online retailer beat expectations by Wall Street.

But the company has a lot of lost ground to make up.

Amazon’s year high was $91.75. Currently, it’s trading in the $58 range.

Brian