Locally based CPA firm since 1956

U.S. equities ended the second week of April with the largest weekly recovery ever. We don’t think this will hold. Uncertainty and credit Issues are the two biggest challenges for markets. The markets are not looking for the light at the end of the tunnel, only that it is less black. We know this: the economic impact will be extreme, we are certainly in recession, and we will certainly see bankruptcies. We expect it to be a messy road ahead with several false starts, a handful of peaks and valleys in the market, and most certainly not a linear path upwards.

Generally speaking the money managers we read and listen to believe this is presenting the greatest bargains since 2008. The question is which companies are the bargain and which are the falling knife? The hardest hit with a 95% reduction in demand are the airlines, auto-manufacturers, integrated oils, and financials. The emerging markets and especially Latin America will suffer as folks who work in the United States, who are laid off, will not be able to send money home via Western Union.

People’s safe money, bonds, has suffered in valuation because liquidity disappeared in the Credit Markets. There has been no ability to trade bonds due to lack of demand. However, over the second week of April, due largely to Fed action, liquidity has improved. The Fed has not offered to support the high yield bond market keeping liquidity dry there. The high yield bond market will be volatile with the uptick in expected bankruptcies. During a call on the 8th, the Chief Investment officer at Morningstar recommended increasing high yield holdings but only through active management, believing that good active management will be able to discern between the high yield issues that are most at risk and those that have enough cash generation to avoid bankruptcy.

Technicians who trade the markets based on historical trends and charts are expecting a bounce back, which we have seen during the first two weeks of April, then sell off to a further low, then a second bounce back.

What we know is this: the price of a stock reflects the present value of future cash flow, over entire life of that stock. The difficult thing to project in this environment is just exactly what that cash flow will look like over the next one or two years. Our thought is that the economic recovery will look like a very wide U and the market will look like a W or a WW.

Have a question? Let me know! Email me at kcompton@wsmtexas.com.