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Commentary and market review for March follows. 

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tom
Crow Financial

MARCH MARKET COMMENTARY

By Tom Crow
April 9, 2012

 

 

Gain (Loss) by Period

Index

Month End

Month

Most Recent Quarter

Year-to-Date

Trailing Twelve Months

Dow Industrials

12,212

2.0%

8.1%

8.1%

7.2%

S&P 500

1,408

3.1%

12.0%

12.0%

6.2%

Nasdaq

3,092

4.2%

18.8%

18.8%

11.2%

 

The indices had weaker months than last, but still managed to complete the best first-quarter rise since 1998. The volatility index remains low, but with the exception of a few standout stocks, the indices are still having trouble pushing above current levels.

 

A much-worse-than-expected jobs number on Friday did little to help when markets opened on the Monday after the long Easter weekend. Despite media outlets reporting a "plunge" in the unemployment rate, from 8.3% to 8.2%, there was little in the report to generate enthusiasm among investors. The selloff started at the open and, although the selling pressure waned late in the day, things were still bad enough to give us our third 1% daily decline of the year. All three indices have backtracked a couple of weeks to mid-March levels.

 

The economy added just 120,000 jobs in March. Economists were expecting 210,000. Further, revisions to January and February were also much lower than analysts predicted, adding only 4,000 to the earlier-reported numbers, and causing some economists to call into question the accuracy of seasonal adjustments.

 

Also, for the first time this year, the drop in the unemployment rate was due entirely to people dropping out of the labor force after almost 1 million had been added this year. Following two strong months, this sharp reversal in employment does not necessarily indicate a trend reversal, but it means next month's numbers will be even more-closely watched in case a new, negative trend is emerging.

 

No matter what the media says, a falling unemployment rate due to people leaving the workforce is not a good sign, especially after a couple of months where the rate was falling while people were returning to the workforce. This month's data could indicate potential workers are again becoming discouraged because jobs are still hard to find, or that there are just fewer jobs out there to be had, period. I suspect both are true to some extent.

 

First-quarter earnings season launches Tuesday night with Alcoa's release. A batch of strong earnings reports and positive outlook statements could push the markets higher before the summer doldrums hit them. "Sell in May and go away" certainly held true last year and following a brief run up, could be just as true this year. Sitting in cash is not always what clients want, and trying to find yield without risk in this near-zero-rate environment is a challenge, but we have a few options available.

 

That said, the review on the most-recent earnings season of 2012 for the last quarter of 2011 didn't pan out so well for the analysts. Less than half of reported earnings were within 10% of their predictions. Notable misses include Apple (AAPL), which came in 39% higher than expected; Amazon.com (AMZN), 116% higher; and Western Union (WU), 83% higher (all according to S&P Capital IQ). And these are highly followed companies, with between 29 analysts (Western Union) and 45 (Apple) predicting results!

 

That record really makes you wonder about the reliability of predictions about some macro event. I mean, if a group of analysts can't come within 10% of the actual result for half of our companies, including some of the most heavily followed ones, why should we trust the prediction of a single person as to when a company will be acquired, where the S&P 500 will end the year, or where the economy is headed?

 

This, dear readers, is why we do not rely on fundamental analysis alone when it comes to selecting stocks. When 45 analysts, some of whom employ armies of folks to dig through reports, sit in on conference calls, and chase down every rumor can't get within 10% of Apple's earnings, we're only going to trust their recommendations so far. That's why we also use technical analysis, that doesn't rely on input or interpretation from anyone as part of our screening process.

 

Some random, drive-by observations to close out this month's commentary...

 

President Obama took to the microphone in the rose garden to criticize oil companies for making profits while receiving tax subsidies, and to criticize congress for not ending them. Let's ignore the fact that they're one of the few industries creating jobs right now. I've said before I'm in favor of cutting out tax breaks for corporations, but not just the oil companies. If they have to play on a level field, so should all other so-called private companies.

 

Please stay with me for a minute. In response to high gas prices, the president wants to punish oil companies for making profits and for charging too much for gas and other refined petroleum products by cutting off their tax breaks. But, in an earlier speech, the one we reference in last month's commentary, he says we need to continue, and even increase our "investment" in alternative energy companies to make them profitable sources of jobs and the energy they produce more affordable.

 

I'm wondering if the president's economic advisors agree or even compare notes on some of these things. Obviously his speech writers don't have a clue that there's a huge discrepancy in these two positions. If giving tax dollars to one industry creates jobs and drives energy prices lower, how in the world does taking tax dollars from a competing industry have the exact-same expected outcome? Answer: It won't, and shame on the media for not calling him on it.

 

Either they don't have a collective clue, or the president, his advisors and the media are perfectly willing to see gas prices quite a bit higher than they are right now.

 

Another one bites the dust...Last April, the U.S. Department of Energy loaned $2.1 billion to Solar Trust of America (STA). STA is the world's largest solar project, and its loan was the second-largest handed out by the Energy Department during current Secretary Steven Chu's tenure. "This project construction is expected to create over 1,000 direct jobs in Southern California, 7,500 indirect jobs in related industries throughout the United States, and more than 200 long-term operational jobs at the facility itself," said Uwe T. Schmidt, chairman and CEO of Solar Trust of America. "It will play a key role in stimulating the American economy."

 

On April 2nd, the Solar Trust of America, LLC, the parent company, filed for Chapter 11 bankruptcy. I'm getting a little tired of hearing folks say "we can't drill our way to energy independence." Ironically, these are the same folks who believe we can spend our way out of debt, but that's a whole can or worms I won't open now. At some point, someone is going to have to start answering questions about whether or not solar and/or wind energy can become viable sources of alternative power without continued taxpayer subsidies. Current efficiency measures, i.e., energy taken to produce the devices vs. energy generated over their useful lifetime, including maintenance, doesn't justify their continued support.

 

So...you want to change your car to run on natural gas? I just saw the report by CNBC's Rick Santelli where they converted a Ford F-150 pickup to run on either natural gas or regular gas. The modification costs about $10,000 depending on make and model of vehicle. Since natural gas is not readily available at most gas stations yet, you'll also need to purchase the device that allows you to fill up your car at home which also costs around $7,500.

 

We happen to have an F-150 in our family. My son is driving it at the moment, and going through about 25 gallons of gas per week. At a realized average savings of about $3/gallon, he'll have to burn through almost 6,000 gallons of gas, or about 4.5 years worth of fill-ups to break even. Obviously this has some applications in the fleet area where usage is much higher, but it doesn't look like the conversion of a few family vehicles is really worth the up-front expense, yet.

 

I just downloaded the 166-page GAO's first-ever audit of the Fed, but that's enough for this month. As always, thanks for reading, and please don't hesitate to contact us by phone or e-mail if you have questions.