Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investors Waiting to See Clarity on the US Economy

Stock-Markets / US Stock Markets Feb 09, 2008 - 03:37 PM GMT

By: Roger_Conrad

Stock-Markets Greetings from the Orlando Money Show 2008, America's leading bazaar of investment opinion and products. There are many ways to make money in the markets, just as there are many ways to lose it. Not everyone is going to be interested in everything at the show. But there are few better places for individual investors to see this much at the same time.

From a professional's perspective, I find investment conferences most valuable for what they tell me about investor concerns, particularly those who read my advisories. And with so much happening in the market over the past several months, they were myriad.

At the top of the list was the US economy. As I've written in Utility & Income, the main problem now is we still don't have any visibility of where the bottom is. No one knows how bad things may get, which makes the market vulnerable to selling anytime something unexpected occurs.

This week, the biggest number in Wall Street's eyes was a survey of purchasing managers in the service industry. The unexpectedly bad number ignited fears that the heretofore steady conditions in the service sector—which now accounts for roughly 80 percent of the US economy—were starting to deteriorate rapidly. That triggered one of the worst single-day selloffs in some time, with damage extending to all sectors as well as markets around the world.

As has been the pattern of late, the selling ended quickly. And in fact, much of the market recovered sharply the next day. But the action is another stark reminder that, until there's some clarity on the economy, there will be near zero tolerance for risk in the marketplace, and even very solid companies will be at risk to tumbling.

In my view, the most important thing to know about the US economy is that the Federal Reserve is on the case. The central bank slashed the federal funds rate by 1.25 percentage points over a nine-day period last month. And despite some inflation concerns from a few of its governors, it's certain to move aggressively again if the economy and markets really weaken.

The closest parallel to the current situation is the deep credit crunch of the early 1990s. Then, the problem in the financial system was the savings and loans, which were in the middle of a massive bailout. The economy was stuck in the doldrums, and the most frequently heard comment was the Fed was “pushing on a string” with its efforts to fire things up by slashing interest rates.

This brings the total to 37 Canadian Trusts from my portfolio that have increased distributions since 2006.

This is a sure-fire indication that these trusts are thriving and will continue to hand investors fat profits.

Eventually, the Fed's efforts were rewarded as growth revived. But until investors were able to see the bottom for the economy, the markets were at risk to selloffs depending on the news flow.

Given how complex and interconnected the world economy and investment markets are currently, it's even more difficult now to declare a bottom. It's still unknown, for example, just how much a US recession would impact economies of developing nations such as China, which in turn would affect prices of commodities across the board, with potentially dire consequences for producers.

Another big question is just how vulnerable is the global financial system to a blowup of bond insurers. A series of credit ratings cuts for insurers such as MBIA, for example, would almost surely lead to massive downgrades in “insured” bonds, which are widely held.

It's very unlikely big banks, the Fed and others will allow a failure of bond insurers, given the consequences. But again, until we have some clarity on how a bailout/shoring up of the system would work, we won't really have visibility on the overall economy, and the stock market will be at risk.

The good news overall is the Fed's moves make recovery certain. The bad news is the timing will remain a matter of speculation, and there's still a considerable risk of more selling in the markets before the picture inevitably brightens.

When it comes to individual companies, the key question for investors is what kind of exposure they have to a slowing US economy. Specifically, the question is what kind of impact slower growth will have on earnings—and dividends, in the case of higher-yielding investments.

A big part of that is how exposed they are to credit conditions. Can they live within their means until money gets a little easier? Or will they be forced to issue equity at a big discount to underlying value, and/or borrow at what may wind up being the equivalent of loan shark rates?

The only way companies—whether they're utilities, banks, Canadian trusts or industrial corporations—can answer these questions is with their numbers. That means earnings results, and the more current the data, the better.

Absent reasonably up-to-date numbers, companies' securities—anything from common stocks, bonds or preferred shares—are vulnerable to perceived risks. And with investor tolerance for recession risk near zero, market response to perceived risks can be extremely deadly.

One of the best examples is in the communications sector over the past month. Traditionally, phone service has been considered recession resistant as an essential service.

With deregulation and the rise of broadband and wireless, however, investor concerns have risen that the industry may be more economically sensitive than in the past. As a result, telecoms today are trading as though they'll be as battered by US economic weakness as any other industry.

We saw this play out in graphic relief with the market's response to AT&T earnings last month. A comment from the CEO on possible exposure to a slowdown was taken as a full-scale earnings warning, and telecoms plunged across the board.

When AT&T did announce, it posted blockbuster results that belied any hint of vulnerability. That stopped its fall but, to date, has done little to revive the stock.

AT&T's “earnings warning” had an even greater impact on rural telecoms, which are perceived as more vulnerable because of a lack of exposure to wireless communications. Unfortunately, these companies tend to report earnings well after the big telecoms. As a result, although AT&T has been able to clarify for investors its economic exposure, there's been an effective knowledge vacuum in the marketplace regarding how rural telecoms are doing.

A vacuum means uncertainty, and investors hate uncertainty. Consequently, rural telecoms have remained weak and prone to selling off on any news that the economy may be slowing more than expected.

The good news: We finally have our first earnings report from a rural telecom—WINDSTREAM CORP—and the results are quite encouraging. In results announced today, the company topped earnings expectations as new broadband connections once again outweighed the loss of basic copper connections. The company has added 28 percent more broadband customers over the past year and continues to increase penetration rates for the service, as well as for its pay television operations.

In short, it was an improvement on third quarter results, just as management had indicated last month. More important, it's clear confirmation that the company's strategy of upselling new services and adding new basic customers with low-cost acquisitions is still working well, despite worries about the economy.

As I've pointed out, the game with rural telecoms isn't earnings or even revenue growth. Rather, it's about generating cash flow to cut debt, buy back stock and pay big distributions.

Windstream's payout ratio in the fourth quarter was only 71 percent, excellent backing for its 9 percent-plus distribution. Clearly, investors have priced in too much recession risk, and the shares' recovery today is a partial reversal of that.

As for the rest of the rural telecom sector, we're in a zero-risk-tolerance investing environment that's fearful of recession. As a result, it's unlikely the companies will get much credit for being recession resistant until they can prove it on a one-by-one basis.

That means we'll have to wait for earnings to come out before there's a recovery in the likes of CITIZENS COMMUNICATIONS and others. But the Windstream results make it pretty certain that we'll see that recovery.

The telecom example is a clear sign that there are strong bargains to be had in this environment—but only if investors are willing to look a little beyond the headlines and have the fortitude to buck the herd's tendency to panic. Remember, damage done to stocks on the basis of perceived risk—in this case, recession worries—is quickly repaired but only if the business behind that stock is still healthy.

Get to know your stocks. There's no better antidote for the current market.

By Roger Conrad
KCI Communications

Copyright © 2008 Roger Conrad
Roger Conrad is regularly featured on television, radio and at investment seminars. He has been the editor of Utiliy Forecaster for 15 years and is also the editor of Canadian Edge and Utility & Income . In addition, he's associate editor of Personal Finance , where his regular beat is the Income Report. Uniquely qualified to provide advice on income-producing equity securities, he founded the newsletter, Utility Forecaster in 1989. Since then, it's become the nation's leading advisory on electric, natural gas, telecommunications, water and foreign utility stocks, bonds and preferred stocks.

KCI has assembled a team of top investment analysts to create the finest financial news service possible. With well-developed research skills and years of expertise in their particular fields, our analysts provide quality information that few others can match.

Roger Conrad Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in