Chadwick: Is There Hope Despite a Disappointing Stimulus Package?

The stimulus package is a real disappointment because it could have provided a serious punch to shock the economy into action. Instead it is a typical – albeit much bigger than normal – spending bill, which means it is has more than the normal amount of pork and less of the incentives needed to stimulate capital investment, jobs and profits. But frankly, given the dismal state of the economy, I’ll take any spending in almost any form at this time – yes, even pork – provided it is done soon and in a big way.

The economy can’t wait much longer.

The stock market appears to be in agreement – it has been in freefall since the stimulus package since was signed. The gallows humor about the pricing of financial stocks (You can buy a share of Citigroup for less than the ATM charge for withdrawing cash) epitomizes the depths of despair investors now feel. This morning’s news that the Government might increase its ownership in Citibank would appear to support its continued role as an equity investor (admittedly a big one) and not a nationalizer. Thank you, Senator Dodd (or should I misspell it as Senator Dudd?) for freaking out investors with your ill-chosen comments.

But a more careful look at the numbers might offer some signs of hope. While the market is rattling around at the lows it hit just three months ago in November, fewer stocks are making new lows. The Dow Jones Industrial average (which with American Express, Bank of America, Citigroup, GE, JP Morgan Chase is hardly an industrial average any more) is performing worse than the more economically sensitive S&P500 while the smaller company averages are still well above their November lows.

And even in the financial sector, there are a few signs of genuine life and for good reason. Goldman Sachs is 60% off its lows in November and Morgan Stanley has doubled since that date. Both are selling for less than book value and employ more conservative accounting practices than the pure banks. So the market seems to believe that there are some smart bankers out there who know how to survive on their own, know how to manage their businesses, and are poised to come out as real winners when the economy eventually turns around. They don’t need Government capital and have announced their intention of paying it back.

Where are some of the places that might harbor signs of new life? Not surprisingly, utility stocks, as a group – both electric and gas - are acting relatively well. While not all of the stocks have safe dividends, many and probably most do, and they benefit from relatively stable revenues. Oil stocks also appear to looking forward with some optimism. Despite the sharp decline in the price of oil, (from a speculatively induced high of nearly $150/bbl to around $40/bbl today), the outlook for energy companies is good. The price of oil will not stay this low for long. Fortunately, the currently low price of energy it is acting like a major tax cut for consumers and encouraging them to drive more. At some point in the next six months or so, it seems to me that the price of oil will again move up to the level that encourages drilling – around $75 - $80/bbl. That will be good for energy stocks. Health care – drugs, biotech and HMO companies – as a group looks good. Again, it is a safe place during the economic storm. Both housing and technology are groups that seem to be getting some life – they are likely to be early beneficiaries of any economic recovery.

Seeking the bottom in the equity market is difficult to do, and catching the bottom is just about impossible to do. The important thing to remember is that the stock market only looks into the future; it does not focus on the past. It will be the best indicator of impending economic recovery and when it sees the first signs of that recovery, we will have a market rally that will rival 1982 and 2003.

Hold on to your hats.

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Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.