The Yajnik Letter

Everyone, my apologies for the long delay since my last post. I have been out of town for meetings in New York. In the future, I will notify you if I foresee a significant delay again.

Yesterday’s news saw the headline confidence number come in at its lowest level since 1983. The headline was 47.7 from 53.4 in the previous month, while consensus was 54.0. The expectations reading took a dive to 65.7 from 73.3 month over month. Historically, consumer confidence leads market turns and direction. In fact, going back years, the direction of consumer confidence has been an accurate harbinger for the stock market and GDP direction. This is a sensitive time for the market where things are increasingly becoming tougher. I don’t like the way the market is acting from a volatility standpoint when a company just slightly misses earnings or warns that the next few quarters will be challenging as we all know that.

Consumer confidence is limping along weighed down by economic uncertainty and a tidal wave of government spending, wealth redistribution, rules, regulations, and so many other factors that have nothing to do with jobs and prosperity. Americans believe by nature, but they are unsure what to believe these days. Basically, government intervention is making the investor public nervous.

With regards to some economic data, mortgage applications fell again last week as average 30-year rates held relatively flat at 5.04%. Refinancing activity was much higher back when rates were below 5.0%, which is understandable. Now, refinancing activity is at somewhat “normal levels.” Purchases, however, are sinking as well and hit their lowest level since May. It seems natural though that purchase applications would sink seeing as the tax credit for first-time homebuyers is essentially over now with no time for potential buyers to get deals done before the deadline. The latest update from Capitol Hill is that the Democrats have agreed on a tax credit proposal that would extend it through next spring. The updated program would be a 10% tax credit (up to a maximum of $7,250) but would also include buyers who are not first-time homeowners and have higher incomes. Presumably, such a plan would bring purchase activity higher again. Again, this would be fictitious sales because as soon as the tax credit runs out, sales will dip again.

Right now, if you are sitting on gains for the year, you may want to think about taking some of it off the table. Insider selling is up, volatility is up, and the market has been well overstretched to the upside for the past few weeks. We may see a slight bounceback tomorrow but I believe the market will continue is descent downward as people take gains to offset last year’s losses. Plus, the economy is still shaky and jobs are still being lost at a high rate. True recovery won’t happen until job growth occurs. Don’t confuse a stock market rally for an economic rally as a handful of large money managers have the capacity to move the markets at their whim.

-Samir