Is the Market a Buy, Sell or Hold?
The last few weeks have been nothing short of confusing.
- Markets are up 15 of 16 days. But when I say Markets, I am referring to Dow Jones Industrial Average and S&P 500. Note that the Nasdaq has had 4 days of higher selling in the last 2 weeks. In essence, the Dow and S&P, have been diverging from the Nasdaq.
- Margin borrowing is at all time highs, which means people are bullish on the market. This is a contrarian indicator to the downside.
- The housing slump is far from over. In fact the higher number of new housing starts is misleading. It translates to higher inventory and lower home prices.
- Default rates on mortgages is up over 50% year-over-year. This will further drag home prices down.
- Unemployment is historically low, but lay-offs from the home builders and mortgage companies have yet to register with the Department of Labor.
- US Economy is slowing down. GDP keeps getting revised lower and money flows into the US equities are much lower compared to what is being invested abroad.
- US budget and trade deficit remains high and the US is still engaged in Iraq and Afghanistan.
- Iran and North Korea remain a threat to geo-political stability and this, along with demand for oil and gas, keeps driving the price of these commodities higher.
- Consumer credit card debt is at all time highs.
On the other hand:
- A weaker dollar means foreign investment is on the rise.
- GDP in emerging markets of China, India and Europe hover over 8%, which means that globally levered US companies will keep growing in foreign markets.
- Dow Jones is at all time highs, while S&P and Nasdaq are at near 7-year highs.
- US Interest rates are still historically low.
- M&A activity is rising steadily with new deals announced almost every week. This, along with stock buybacks at cash rich companies is decreasing the supply of publicly tradable stock.
- Weaker earnings at online discount brokers indicates that individual investors have been holding back. Most of the recent market gains are coming from institutional buying. When individual investors enter the foray, the markets should go higher, although when that happens, that could also mean that a top is near.
- Private Equity firms are sitting on billions of dollars in cash, which will no longer flow into investment homes, rather will be directed towards the financial markets.
- There are just as many pros to this market as there are cons, which makes it all the more confusing for individual investors whether to buy, sell or hold.
My guess is that longer term investors will be ok no matter what happens. The question is, what are the chances that the US economy will see a recession soon? After all, we have not seen one in 5 years. That will certainly impact the overall returns of longer term investors who sit through it.
– Faisal Laljee
