Don't Hold Your Breath for a Turnaround

The enormous amount of fiscal stimulus is supposed to fuel an economic recovery that helps stocks rally. This may be true, depending what form the package takes when it is passed. The money injected so far has not accomplished anything, and other than keeping alive some institutions that should have been allowed to die, I do not believe it will.

Does anyone really believe that General Motors (GM - commentary - Cramer's Take) and Ford (F - commentary - Cramer's Take) will not be back for more money before spring? Will Bank of America (BAC - commentary - Cramer's Take) really be able to digest Merrill and Countrywide without additional federal guarantees and loans? Can we really unwind a credit debacle that was 10 years in the making in less than two, simply by throwing taxpayer money at the problem?

We have seen infrastructure stocks such as Fluor (FLR - commentary - Cramer's Take), Foster Wheeler (FWLT - commentary - Cramer's Take) and my favorite, L.B. Foster (FSTR - commentary - Cramer's Take), rally on news of planned massive spending. The ambitious plan to rebuild infrastructure is probably going to create jobs and put some money back into the economy.

A lot of people have compared this plan to the New Deal and pointed out that FDR's program did not work very well. I would compare it more to Eisenhower's enormous highway spending in the 1950s, which did work very well. I believe that this will be very good for some companies and that infrastructure stocks are probably the next bubble. However, the turnaround will take longer than most people expect, and I still have not heard a reasonable discussion of how to pay for it all. The U.S. balance sheet is going to come under a lot of strain this year, and with the exception of this select group of companies, that is not favorable for the stock market

Retail is going to be a disaster this year. Companies that specialize in discount pricing, such as Wal-Mart (WMT - commentary - Cramer's Take), are probably going to do OK in 2009. In the specialty retail and department store arena, there is going to be a massive restructuring. We will see a lot of closures, bankruptcies and reorganizations. As Jonathan Heller very correctly pointed out in his year-end wrap-up, this will be positive for the survivors. It is going to take several quarters for this to play out, so we have no reason to be bullish now.

After considering the bullish view, I find it hard to shift my posture. I believe we need to be very skeptical of any stock market rally or prediction of an early economic return. Buying the very cheap stocks, I find, will always make sense to me from a long-term point of view, but as we enter 2009, my mantra continues to be "Stay small and move slow." I do not believe the bottom is in place yet, and I want to be alive and flush with cash when it happens. I believe that will be late in the year.

There will be some very tradable moves on the way to a bottom. Hopefully we can catch a few of those with a portion of our capital, but I would remain under-committed to long-term positions.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider L.B. Foster to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.