Financial Watch

Believe it or not, General Motors is up 44% on the year and is one of the Dow Jones best performing stocks so far this year. Shares of GM are being driven by hopes that its restructuring plan will put the company’s financial results back in the black next year. News that the company’s voluntary severance package is on pace to cut its workforce by 30,000 employees over the next year or so is positive news for the company. CEO Rick Wagoner also successfully led efforts to renegotiate GM’s health plan to bring it a little back in line with what is typical today in the automobile industry. The signs we are seeing from General Motors are positive, but this is a company that lost more than $10 billion last year. It still relies upon its huge SUV lineup to generate profits that offset losses in other car segments. A couple weeks back, General Motor’s latest campaign offered to help purchasers of sport utility vehicles to pay part of their gas bill. The latest promotion clearly points at the continuing problems the company faces should oil prices remain where most economists believe they will and not to mention foreign automakers are pushing further into General Motor’s most lucrative markets.

It was one ugly week on Wall Street. Bonds were just about the only safe haven this past week as both commodities and stocks got hammered. Conventional wisdom on Wall Street is presently split into two camps both of which means bad news for equities. There are those believing the Federal Reserve has been effective in cooling growth and then those fearing that more must be done to ward off inflationary pressures. Data coming out this past week painted a picture of an economy that is cooling at a time when businesses are just now beginning to pass higher energy costs onto consumers. It’s not surprising to see many momentum investors taking bearish positions or moving to the sidelines in this environment.

As we are finally approaching the point where the Federal Reserve will pause in its campaign to slow down the market there seems to be a growing sense of fear on Wall Street. Last week’s chaotic reactions to every bit of news leading up to February’s employment report resulted in a directionless week of trading. Those in the bearish camp are either concerned that inflation is about to spiral out of control or further rate hikes will cause our economy to head into a tailspin. The bulls are not acting too much better either.

Back in the mid 1990’s a U.S. hedge fund no main stream American had ever heard of caused a dramatic meltdown in the U.S. stock market. Long-Term Capital Management (LTCM) lost billions of dollars by investing in highly speculative investment positions. In the early 1990’s spectacular investment returns lead nearly major bank to willing invest its money into LTCM’s portfolio. LTCM’s failure threatened to pull down nearly the entire international banking system including banking giants such as Merrill Lynch and J.P. Morgan. Over the course of several weeks the U.S. markets lost approximately a quarter of their value before the Federal Reserve successfully orchestrated a bailout of LTCM.

The first trading week of 2006 turned in a strong performance as the major market indices all registered strong gains. For the week, the Dow Jones was up 2.3%, the S&P 500 rose a healthy 3%, and the NASDAQ turned in gains of 4.5%. Strong gains during the first week of a new year are not atypical, but positive news on employment growth and more indications that the Fed is nearly done raising interest rates sets the stage for a strong January. On the surface, payroll growth of only 108,000 would appear to many to indicate weak economic growth. However, slower employment growth sends a signal to the Federal Reserve that its campaign to slow down the U.S. economy is working. The Federal Reserve will meet at the end of January to raise interest rates another quarter point. It is possible this will be the last hike for some time. Minutes from the Federal Open Market Committee’s (FOMC) last meeting indicate concerns are growing about over tightening. Further signs of a slowing housing market reinforces our view short-term interest rates should not go much higher.

In what has probably been our worst call of the year, Financial Watch declared the rally dead about a couple weeks back. The data coming out lately is just too good to ignore any longer. Housing is starting to slow down, but the stock market is jumping at the opportunity to create wealth. We did not foresee the quick transition and am interested to see whether is can stay in place long-term. However, for the time being valuations and seasonal patterns are too good to ignore. The Dow will hit the elusive 11,000 mark in a matter of weeks and at that point the bull market will be off and running.