October 14, 2005
Market Notes
By Brady Willett

October 2005 is only nine sessions old and the Dow Jones Industrial average has already logged seven daily declines.  With twelve sessions in October remaining, and the likelihood of a seasonal boost in stocks fading with every hawkish Fed speech, this does not bode well for investor psychology in the immediate term.  Rather, ‘Dow 10,000’ is making the headlines, heating bills are about to bite consumers, mortgage rates have climbed back above 6%, and investor’s are, justifiably so, growing worried.

In the face of a mini-crash like action in breadth and market internals, one of the positives this month is that the sell off has been exceptionally orderly on the most watched indices. Whether or not stability in the major American markets (Dow, S&P 500, and Nasdaq) are the workings of some hidden hands trying to keep the herd in a state of calm is, as always, unclear.  Nevertheless, when collections of stocks are being trounced for double digit declines on no news and the Dow etches lower by 50 points you cannot help but shake your head.  The Dow’s largest daily decline has been 123 points this month (Oct 5), and the index is off by 352 points since the end of September.  When the bear market was in full roar it was not uncommon to have a 300+ point decline on the Dow before lunch, and that was when the Dow was trading around 8,000 not today’s 10,000. 

Suffice to say, uncertainty in the marketplace may be widespread, but it has yet to really strike a nerve with equity investors. That momentum driven equity players have not rushed to the exits suggests that another negative ingredient is required. With volatility showing signs of increasing and the put/call ratio closing above 1 in four out of the last 5 sessions, that event could well end up being a sharp decline in stock prices themselves.



To be fair, there is the possibility that stocks are forming a near term bottom. This could be the case not only because prices tend to not go straight down, but also because favorable seasonal forces are about to come into play. Quite frankly, so long as individual investors do not pull a Refco and start cashing out their chips anything is possible - especially if some of the negative issues plaguing the markets today turn out to be ‘transient’ (i.e. oil/energy prices plunge, the Fed stops tightening, and/or mortgage rates resume their decline).

Time To Buy?

Despite completely nonsensical claims that “the stock market is baking in a depression right now” (if you back out the 1990s today’s market is one of the more expensive in history), it is nonetheless difficult to find value amidst today’s beaten down stocks. For example, York Water (along with other water utilities) has been pummeled in recent sessions for no apparent reason except changes in investor sentiment.  However, even after YORW’s 14% decline in stock price, the gap between company’s dividend yield (currently 2.8%) and the 10-year yield is wider today than it was a years ago (or during the last ‘peak’).
 

Another company losing more ground recently is UST.  Unlike York, UST is dealing with earnings/pricing related problems, and the recent sell off has made the company look increasingly attractive based upon yield alone. Baring the emergence of some new court battle UST’s dividend is safe.  UST has scheduled its earnings call for October 27.


Other watch list companies taking a beating include, but are not limited to, Angelica and Swiss Water (CND Trust). From an earnings perspective there is no pressing need to jump on AGL. The company should report poor numbers in the foreseeable future and/or so long as natural gas prices remain elevated. The goal is to own AGL before new contracts and renewals start to positively impact the company’s bottom line and/or when the stock reaches a takeover/break-up price level.  As for Swiss Water, the trust may be a buy later this year, or when a more reliable conclusions on the expansion, currency, and pricing issues can be surmised.

Suffice to say, because of the recent sell off more companies are popping up on the value investor’s radar. The worst October in a long time could turn out to be the best October for the value investor in many years.  Such is why the VIX, p/c ratio, and related indicators are worth monitoring: capitulation type selling is likely to take certain share prices, if only for a moment, to bargain levels.

What About Gold?

After an impressive run-up to fresh 18-year highs gold stalled at $480 an ounce. This pause could be healthy, especially if the commercials have covered part of their massive net short position.  However, if the commercials are waiting to cover at lower prices it will probably take a dollar crisis for gold to move to new highs.

One ominous factor in gold right now is sentiment, which is, judging by anecdotal information, raging. Quite frankly, that Joseph Battipaglia - who at the height of stock market mania had a ‘100% equities’ weighting - has turned bullish on gold is worrisome. Moreover, that James Cramer is talking up gold is says that the herd has already arrived.

Remarkably, gold has managed to reach new highs and not get hammered lower even as the US dollar gains.  This could be a signal that the gold market is breaking the chains that the commercials have held the keys to since 2002.