Hello all,
This morning as I was brushing my teeth, I saw that the US Fed, along with the European Central Bank, Bank of England, and Bank of Canada, approved a 50 bps cut to the fed funds rate. I was hoping for a full point…maybe that was overly optimistic. However, the collective thought is that additional benchmark rate cuts are needed. The Dow futures immediately rallied in the green well over 100 points but soon took a nosedive to 75 points in the red as investors realized that the credit markets are still frozen and no one knows how the US government will actually proceed in buying $700 billion worth of debt. Once the markets opened, the Dow bounced back to the green, to go red, then late in the day return to green, just to finish 189 points (2%) in the red. Are you dizzy? I surely was. The last few days tell me that there is a lot of confusion in the markets, the short sellers are reappearing, and panicked investors are jumping on the bandwagon selling off their underwater stocks. I still believe that there will be a bounce back as the market is well well well oversold.
Again, pretty much everything was in the red. However, a few stocks stuck out: GLD (2.46%), GDX (14.17%), and SLV (1.14%)…all in the green. I think GLD and SLV are worth while to hold; whereas, GDX can be volatile and can be subjected to a violent sell off should the markets go south in a major way as it is comprised of junior miners. With that said, I have a small position in GDX and choose to keep larger holdings in GLD and SLV due to their share prices being more positively correlated with the underlying bullion.
I really think our economy is in a mess which places a lot of pressure on the equity markets. In addition to financials, the massive sell-offs in airline stocks says that the stock market thinks the good news of lower fuel costs will be overshadowed by the slump in demand. That thesis means that these stocks could never move higher because if the economy is doing well fuel prices will increase, and that will choke earnings. But, when fuel is down it’s because people are broke and that chokes the top line. This is the mess and confusion I am talking about.
Regarding actual bullion, the US Mint announced that they will no longer be making the half and quarter ounce gold eagles for the balance of 2008. How is this possible? Check out this graph of gold eagle sales for the last 15 years. The mint says that they can’t handle the orders this year. Sounds like bologna to me! Take a look at 1998-99 when they were cranking out between 150-230,000 one ounce gold eagles per month. There were no shortages then. One ounce gold eagle sales for all of 2008 are just under 600,000 so far…which isn’t even 70,000/month. Something doesn’t jive here. Is the US Mint deliberately withholding retail gold and silver products from the public? Who knows, but I thought it would be worth asking.
By the way, my credit limit on my AmEx credit card got cut today. I have a low balance (a balance only because I amassed some debt in grad school) and it still got cut. I have heard from others that they are experiencing the same annoyance. I feel for the small business owners who are getting their limits cut from $25K to $18K. How do you run the business since there is the inevitable time lag from when you buy product and when you sell it and then collect on the revenue to pay off the balance? That tells me credit card debt is on the rise and that will be the next problem area. I would stay away from Visa, Mastercard, and AmEx. Auto loans should also be struggling soon.
Today, I bought a few more shares of McDonald’s (MCD) as I feel they will have a stellar earnings season and that dollar menu looks great during these times. Other stocks to consider include Target (TGT), Family Dollar (FDO), and Wal-Mart (WMT). Personally, I like WMT over TGT as they are better positioned to cut prices and still maintain profit during the holiday season. Here is an interesting article discussing WMT and TGT. Also, here is an article on GE, as it as recently taken a beating due to the amount of commercial paper it uses to operate GE Capital. Also, the fact that GE Capital contributes around 50% to GE’s earnings makes it look more like a financial institution. GE is currently de-leveraging itself, raising new capital, and solidifying its strong cash balance. I think they are doing the right things to position itself once the market bottoms out. For those of you with cash on the sidelines, you must be salivating at the P/Es across the board. Plenty of good quality companies at or under a 10 P/E. I am still waiting to go all in. Right now, I am just nibbling away at the dips to make sure the market doesn’t take off north without me picking up some good buys. I don’t like being left behind.
Until later,
Moolah
