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The Market - Will We See A Repeat Of 2008 Crash?

June 26, 2012

The US stock market had one of the biggest one day drop last week in recent months and had some rebound Friday.

But the rebound proved to be short lived. The market had another big drop Monday. The S&P 500 lost 21.30 points and closed at 1,313.72, barely above 1,300 mark. The Nasdaq dropped 56.26 points or 1.94% and closed at 2,836.14.

Now one question in every investor's mind is where the market will go in the following months. Will we see a repeat of 2008 market crash?

My answer is that the possibility of a repeat of 2008 market crash is quite high even all the major indexes are far above their 2008 - 2009 market lows right now.

In fact most of stocks in several sectors are already priced worse than 2008 market crash lows such as the stocks in coal, steel, shipping, solar sectors etc. Many oil related stocks are dropping very fast recently and are not far from their 2008 lows.

World economy is worsening

1. It is almost certain that European countries are about to enter another recession as can be seen in the chart below.

2. The United States may follow:

In 2008, the US entered the recession first due to its sub-prime lending problem and financial meltdown. European countries followed. This time euro area will enter recession first due to its debt crisis and the uncertainties over euro dollars. the US will be followed. The Fed lowered our 2012 growth forecast on June 20. It now sees 1.9% - 2.4% 2012 GDP growth compared with 2.40% - 2.90% gain predicted in April. Further downward projection may follow.

3. China's economy cooled down considerably in recent quarters and the Chinese government will no longer afford to have the second big monetary stimulus to pump up its economy this time.

4. All recent economy data pointed to a dim economic picture:

- The Federal Reserve Bank of Philadelphia general economic index fell to minus 16.6 in June, the lowest level since August, from minus 5.8 the previous month via estimated zero index change. The Philadelphia Fed's new orders measure slumped to minus 18.8, also the lowest since August last year, from minus 1.2 in May.

- Recent retail sales were much weaker than expected. Quite few retail stocks got hit hard last few weeks after their sales warnings such as JCP, BODY, BBBY, MW, SCSS, GMCR, ARO, ANF, EXPR, JOSB, BKE, SPLS, etc.

- The University of Michigan Consumer Sentiment Index preliminary number for June came in at 74.1, a 5.2 point drop from the May final readings of 79.3 and is the weakest reading in six months. Additional 4.8 points drop will put us into 69.3, the average readings during the previous five recessions.

- Total non-farm payroll employment slowed down in last two month. Employers added an average of 226.000 jobs each month in the first quarter of this year. But only 77,000 jobs were added in April and 69,000 added in May. On the other hand, employers took 1,380 mass layoff actions involving 130,191 workers in May. (data from US Department of Labor ).

On the other hand, there are bright spots in current environment. I have identified the following sectors which may in fact benefit from current situation:

1. Utility sector - Utility companies will benefit from low coal and natural gas prices. Good stocks to buy-and-hold in this sector include WEC, NEE, FE, SCG, etc..

2. Housing related sectors -

  • Housing price has bottomed or near-bottomed. Demand has picked up, inventory has dried up.
  • It becomes much cheaper to build a house now as the cost to buy building material such as lumber, aluminum, copper has dropped big recently.

Stocks to consider include SPF, RYL, LEN, PHM, KBH, TOL, HOV, LENR, PATK, etc.

3. Health Care related - No matter how economy goes, people need health care. This is particularly true as US population becomes aging. New revolutionary drugs will play big rule to improve people's life. Stock to consider include OSIR, MDGN, SNTA, CYTR, ARNA, ROSG and many more.

4. Airline sector - Low oil prices will help airline's bottom line. In addition, airline companies have figured out a way to make money even in high oil price environment: charge additional fees such as baggage fees, seat fees, etc to dig out more money from traveler's pockets. Stocks to consider: LCC, DAL, UAL, JBLU, etc.

5. Food related sector - Food stocks is a safe heaven when economy is in bad shape as people always need to feed themselves. Good managed restaurant stocks are also worth to consider. Stocks such as HZN, DNKN, etc are good examples to own.

6. Mobile phone related - This is a bright spot in technology sector. Similar to PC boom, we still see new phones on market. AAPL, VZ, T and certain software companies will benefit from the boom of new mobile phones and applications.

7. REIT sector - US property prices have stabilized. This will put REIT companies in better shape. Less property write-downs, stable returns. Stocks in this sector include O, REG, RAS, AGNC, TPGI, etc.

Others including good insurance stocks such as ALL, AWH, AXS, WRB; credit card stocks such as V, MA, COF are all good ones to invest.


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