OF MARKETS, ANALYSTS, AND CENTRAL BANKS 6/27/2008

A Mild Week for the Markets Takes a Serious Downturn

Just when you thought it was safe to go back into the water the DOW drops over 350 points on news of further weakness in financial stocks, an assault on General Motors and Citigroup by Goldman Sachs and a spike in oil to over $140 a barrel ($139.64 closing price). While I have to admit that we didn’t expect this particular slide on this specific date, we have been counseling clients that over the next 2-4 weeks we believe that the overall economic weakness will have been priced into the market and it may well be time to take a more assertive equities stance in certain portfolios. We suspect that the market may not make great positive strides for a few months or more, but that it may well be prudent to position some portfolios to take advantage of lower prices and be postured to take advantage of an upturn when it eventually comes.

The US economy, though weaker than most of us would care to have it, isn’t on the rocks and shows some areas of surprising strength. Today’s valuation for many equities reflects a market that is now well ‘oversold’ and may present some meaningful opportunities and positive returns as we wind our way through the remainder of the year. The markets may not do much between now and the presidential election because the markets hate uncertainty, but most observers continue to call for a late year rally of some strength.

Goldman Sachs’ Short Sale Recommendation of Citigroup

Goldman Sachs’ (GS) recent recommendation to ‘sell short’ Citigroup (C) shares may have possibly been an appropriate call given the nature of the financial markets, but when taken in context with the reality that Citigroup is one of Goldman’s most venerable competitors, it seems like a cheap shot. That the stock market reeled from the recommendation only made matters worse and the European Market sold off to levels not seen since 2005. Was this move warranted and do Citigroup shares deserve a short sell recommendation? Hard to tell. The stock is already trading at less than half of its 12 month high of over $52 a share. But then Goldman’s shares are also off by some 30% in the same time frame. Citigroup has been hammered as a result of the credit markets, but has shown a remarkable ability to raise capital. It is hard to believe that this stock, trading at less than $18 a share has more downside risk for shareholders than it does upside risk for short sellers. The next few months will tell the story.

Federal Reserve Open Market Committee Meeting (FOMC)

The Fed’s FOMC meeting earlier this week didn’t impress the markets and certainly didn’t do anything for the strength of the dollar. Though the immediate read wasn’t negative, it also wasn’t positive enough to give the dollar a rally that lasted more than 24 hours. The Fed asserted its intention to reign in inflation and left open the possibility of increasing interest rates in the fall, but pretty well shut the door on a rate hike when the Fed next meets in August.

"Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending," according to the Wednesday statement. "However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."

What was clear is that the Fed sees increasing complexity in our economy, though they also see continually lessening likelihood of a recession. Real GDP growth in the first quarter has been revised upwards to an increase of 1%. New home sales showed a 2% increase in May and durable goods orders remained unchanged – good news on both fronts. The Producer Price Index (PPI) showed a seasonally adjusted increase of 1.4% bringing the 12 month increase to 7.2%, of which energy represented 4.9%. The Consumer Price Index (CPI) reflected similar increases of 1.8% and 8.8% on the May and 12 month figures respectively. None of these numbers are good, by the way, they all evidence inflation at unacceptable numbers, and support the Fed’s current inflation-fighting posture.

It will take a concentrated effort on the part of the Fed, the Treasury and the US Executive and Legislative branches to strengthen the dollar, fight off inflation, and bring down oil’s surreal price levels. That these bodies are all on the same page, or even the same chapter bodes well for the rest of us.

A Word to the Wise

In recent months I’ve heard a radio advertisement for a particular brand of internet and email security software that focuses on the evils of email spammers (read: scammer) and some of the offerings they put up trying to elicit a response. All an individual user has to do is open one of these emails and immediately the user begins to fall prey to the spammer’s agenda, which normally ends in a transfer of funds from the users personal account(s) to that of a scam artist somewhere around the globe – at the very least a virus begins to work its way into the computer and creates hassles and headaches that aren’t soon forgotten. Sadly, most of us have had experiences with some of this.

While it’s hard to believe that rational individuals get drawn into some of the more prevalent scams, it is remarkable just how many of these are successful – to the tune of tens of millions of dollars each year. So... we thought a review of one of the more egregious of these might be appropriate.

As many of us are aware, email fraud is rampant and you or your family may periodically receive an email from someone who identifies themselves as a mid to high-level official at a bank looking for someone to help move a large sum of money out of the country before it is required to be turned over to the government. The email gives assurances that the transaction is perfectly legal and offers a substantial percentage of the money for your facilitating the transaction.

While most of us readily identify it as a scam, I still receive questions from clients regarding the nature of these emails and whether it is a genuine opportunity. These emails are fraudulent.

We received the following reminders from a colleague and thought they were worth sharing.

1) There is no large sum of money that has been abandoned by some negligent contractor and is sitting at a bank somewhere. It is merely a ruse to get your attention and respond to the email or call the phone number;

2) You and about 1-million other people received this same email. This is a game of odds for these criminals. It only takes a few innocent people to engage these criminals and the returns for them payoff, at the expense of the unsuspecting party;

3) If you are corresponding or speaking to an individual, they are not who they say they are – regardless of how proper they sound, or how official the paperwork looks, or the fact that there is a receptionist who answers the telephone as “First Union International Bank of Nigeria”, for example. This is a scam, there is no bank, there is no receptionist, there is no official;

4) My favorite is the email where they ask you to contact their attorney in some other country to add legitimacy to their claim.

Finally, if it sounds too good to be true – IT IS! There is no free lunch, but that still does not stop people from giving it a try – it sounds harmless enough at first. These scams can be financially devastating, especially to the elderly or economically disadvantaged.

Rick Haskell – Signature Wealth Management