Has The Market Hit Bottom?

With the close of 2009's 1Q, the stock market has now posted six consecutive quarters of negative performance. During the latest Q, uncertainty continued to surround financial stocks - both in regards to what actions the Federal government might or might not undertake and worries about the balance sheets of the institutions themselves. The financial sector lead the Q's downturn with a -29.5% decline. Industrials were down -21.8%; daily headlines tallied the number of unemployed. Even the energy sector was not immune as even it fell -12.1%. Techs were the only positive group with a gain of +4.0%. For the Q, the market returned a -11.0%.

The market appears to have bottomed out in February. Whether this was a reflection of rock-bottom prices or nascent signs of economic recovery (or at least stability), it is too early to tell. Certainly, there are other shoes that may yet drop: bad loans within the commercial real estate market and waning consumption by a chastened US consumer. Yet, inventories have been whittled down. The Federal government has poured massive amounts of liquidity into the markets. Perhaps a floor has been established on the hope that the rate of bad news has slowed.

There was no overall pattern for what securities worked well for us in the Q. PetSmart was up +14%. General Cable, maker of utility, fiber optic and high voltage cable, gained +12% though admittedly from a depressed base. The pattern for stocks that declined was more discernible: those that reduced or cut their dividends. Cedar Fair was down -22%. The company trimmed its annual distribution to $1.00 to shore up its balance sheet in the face of some maturing debt obligations. International Game Technology, maker of slot machines, also reduced its dividend as the gaming industry has retrenched.

We purchased three securities in the Q. We bought more Cedar Fair given the stock's attractive price. We doubled our Watsco positions at $34 having sold 1/2 of our position last summer at $51. We initiated a new position in ConocoPhillips (COP), the integrated energy company. While we are not making a specific call on oil prices, buying at $45 a barrel is cheaper than buying at $145. Even if the oil markets take time to rally, COP is paying us a 5.0% dividend yield while we wait.

Gold Leaf is an independent Registered Investment Advisor that buys stocks in cash positive companies with sustainable competitive advantages. As an independent firm, Gold Leaf provides objective investment management. Our goal is to protect client assets on the downside while participating in most of the market's upside.