The worst jobs data in decades was, as it turns out, priced into the market — at least for one day. After an early selloff that never quite equaled the hysterics surrounding the loss of 533,000 in nonfarm payrolls in November, the market started to rebuild, steadily putting together gains in the face of economic weakness. It completes a week where three trading sessions were marked by a resilient effort by buyers despite poor economic reports. The financials once again led the markets, and the rally was helped, in part, by the Federal Reserve’s intervention in the credit markets, where it bought $5 billion in Fannie Mae, Freddie Mac and Federal Home Loan Bank debt as part of its new effort to get mortgage rates to decline. The Fed’s moves have helped smack certain fixed-income markets back in line, and since those markets serve as ballast for the more skittish equity market, the Fed’s buy-in helped equities as well. For now the stance of investors can best be described as “watching and waiting,” as the savvy ones dive in during periods of strength and beat a hasty exit when the action turns sour. “I think people are just trying to play the bear market rallies,” says Brian Gendreau, investment strategist at ING Investment Management. “There are some people out there who have to buy financials as they’re running diversified financial funds, so what they’re doing is, they add a financial firm that doesn’t look like a complete car wreck.” Mr. Gendreau says this does not yet feel like a new bull market, but he believes the market has essentially hit a bottom, even if it bounces around along that bottom for a while.
The Treasury market finally pulled back a bit, in part due to recognition that a two-year-note yield of 0.83% is basically ridiculous. But yields can remain low for a lengthy period, despite the slim returns that government bonds offer at this time. “We’re in an environment where Treasury yields can and should stay relatively low,” says William Hornbarger, chief fixed-income strategist at Wachovia Securities. “Does that mean the 10-year stays pegged at 2.55%? It feels low, but I would say that a 3% or 3.25% 10-year note is still low.” The last week of economic data has been horrid, suggestive of a deep contraction in the fourth quarter on the order of a 5% year-over-year GDP decline, and that’s been the motivating factor behind the rally in Treasurys. The end of the year is a strange time, however, one where investors are given to retreat to the safety of a warm blanket like Treasurys. “We remain skeptical that these levels can be sustained over the near term, especially with a lot of other high quality, and in many cases government guaranteed, debt readily available,” writes David Ader, government bond strategist at RBS Greenwich Capital. “We may be premature on this view; investors have been so pummeled this year they are likely hunkering down and stave off bargain hunting until the New Year.”
Managers of small- and mid-cap portfolios are using the broad market sell-off to trade up to larger companies in a bet that the fallen angels of 2008 will beat their traditional holdings in 2009. Some say they have spent the last month buying large caps, or at least companies that had been large caps for years. The market decline “has given us the opportunity to buy companies that were too big for us before,” said Thomas Rozycki, portfolio manager for Principal Fund’s MidCap Blend Fund A. But in order to buy, these same managers have to sell something else. And for now, the selling is going on in many of their traditional small-cap names already held in the Russell 2000 index of small-capitalization stocks. On a valuation standpoint, 75% of the stocks in the Russell are under $500 million in market-capitalization thanks to the sell-off, with the shares of 33% trading at less than $5, and 20% under $3. In fact, almost one in five stocks is under $100 million in market cap in the index. –Geoffrey Rogow
Oil-service stocks have slumped.
A total of 183 stocks hit new 52-week lows on the Big Board Friday. Two of those were oil equipment giants Halliburton andSchlumberger, which have been hit by a hailstorm of selling amid the collapse of energy prices. These stocks, along with their brethren (Transocean and Baker-Hughes, also hitting 52-week lows) have been knocked back as the long-standing commodity bull market has been rudely interrupted, throwing the future earnings of these companies into doubt. But Mark Brown, analyst at Pritchard Capital Partners, recently accentuated the positive for Halliburton, noting the company’s global reach and strong outlook. The widespread negativity in the sector has been noticed in the options market, where traders have started to position for bullish news in a number of these stocks.