Why do we have unprecedented market volatility now? For several reasons: first and foremost, it has to do with consumers leveraging their homes for cash via refinancing as rates fell over the last few years. Everyone who owned a home did this, and many times those consumers rolled into ARMs (adjustable rate mortgages) which are known to become toxic as rates rise. Secondly, the NYSE removed the uptick rule for short selling; why they chose to do this in 2007 remains a mystery to many market watchers. It’s like giving a hedge fund another arrow in the quiver to fire through the heart of the retail investor who still braves the day trading game.
The good news is we are oversold and are due a bounce; we are also up for the year in most indexes. The Dow is up 5 percent, the Nasdaq is up 3 percent, and the Russell Small Cap Index is unchanged.
The bad news is that there will be no money to bump retail sales this year in these refinancing deals of recent past, which is the only reason we have had consistent retail numbers over the past three to five years. Because of this, you can expect year over year numbers to be down. I suggest you review the recent 10Q filings for the retail sector to get a feel for guidance for the main retailers in the sector. While you’re at it, look at the retail index itself for clues about what the technical pattern tells us today. The U.S. economy has survived on the back of the U.S. consumer, and in fact, the global economy has taken its clues from the pockets of back-to-school spending and the disposable income reflected in many restaurant sales.
These were always clues in my days spent managing a consumer hedge fund in early 2000. The point of the matter is this: we are due for a dead-cat bounce across the board, but there are many clues about what is in store for the markets for the rest of 2007, and it is this writer’s guess that all major indexes will be down for the year. This means we all need to be better stock pickers; this starts with choosing the correct sector. It will not be as easy (it never is) as buying metals, oil or alternative fuels. We all need to understand the largest export present in our economy – entertainment; the correct sector to be is in the media sector, and there are several companies in the space which are a value, including Modavox Inc. (OTCBB: MDVX), XA Inc. (OTCBB: XAIN), and several private companies which will be rolled up in 2007 as the media space consolidates. This will be the safe haven, and you heard it here first. Happy hunting!!
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