Investor's Guide: Into The Gloom

Sparkles Of Light

February 26, 2008 - It's not all bad out there. Stocks are rebounding (the third straight day as this is written). They move higher quickly as investors grasp onto any bit of good news that might have an efficacious effect on stocks. In the last few days, here's the good news, and some of the stocks that have faired well because of it.

On Monday, the rumor continued. On top of that there was a renewed bid for Take Two by Electronics Arts, this time with a higher price tag. Take Two rejected the new offer, but it sparked a rally. The market went up over 100 points.

On Tuesday, data showed that housing prices might be levelling off, even though some areas of the country are still feeling pressure. The Miami area reported the worst decline, down 18% from last year. Housing stocks took off on the news. KBH and TOL were up almost 6% on the day.

Of course, there's lots of bad news as well. Consumer Confidence is at 75, the lowest reading since the Iraq War in 2003, and with that exception, the lowest reading in 15 years. Producer Prices (wholesale prices) were up 1% on a seasonally adjusted basis. Excluding energy and food prices, they were up .4%, twice what was expected. That puts the Fed in a quandary. If inflation gets too strong, it will have to raise interest rates, just as the consumer is already being hit with higher prices on everything else. Higher rates would stop any housing recovery dead.

The ray of hope in all of this is that in spite of the bad news and economic diffficulties consumers are enduring now, the market is grasping quickly onto the good news and letting the bad news go by. Investors are looking forward (as they always do) and have renewed expectations that the housing market will, in fact, recover, and maybe sooner rather than later. However, if interest rates get hiked, that optimism will disappear. For the moment, it's coming through.

Other good news: IBM just announced another major buyback of stock, $15 billion worth. That's on top of a similar repurchase they've recently completed. Earnings are higher for Big Blue, thanks to the global aspect of its business. Management also raised its guidance for earnings for 2008 based on how well business is doing. Since it's still a force in the tech world, investors take these announcements as a reason for confidence in the future, at least in the tech industry.

Other stocks that are starting to get back in favor: the financials, and banks in particular. Bank stocks have been downgraded again in the last few days by several brokerage firms. One of them suggested that Citigroup might trade as low as $16 before all of the write-offs are written off. The stock faltered for a little but it is now trading higher. above where it was when the analyst's report came out.

It's still anybody's guess how the housing and financial stocks will fare as more bad news comes out. If interest rates go higher, that will hurt both of them. But investors don't believe that will happen, or if they do, they're thinking both industries will cope with it. We may be very near the bottom for housing prices, at least for some parts of the country. While prices have gone down dramatically in some areas, there is a sense that many of those sectors are beginning to see stabilization. First comes stabilization, then comes higher prices. It isn't all bad news out there. You just need to find those sparkles of light that are doing well in spite of the tough times.

- Ted Allrich