How low can it go? The Fed will likely shave its key fed funds target rate to just 1% today, and signal further reductions to levels unseen since Dwight Eisenhower was president. "Inflation risks are off the table," economist Mark Gertler says, which is why it can afford to be 'very aggressive' in stimulating the anemic U.S. economy. "If the economy shows additional signs of a deepening recession, I think the Fed will decide that the floor is not 1 percent," former Fed governor Lyle Gramley said. "Zero is a possibility."
Consumer confidence plunges to record low. The Conference Board's Consumer Confidence Index plummeted to an all-time low of 38, down from 61.4 in Sept., falling way short of consensus estimates of 52. "The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers' confidence," it said. "In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic." Ian Shepherdson of High Frequency Economics called the data extraordinarily awful, and noted the lower-than-expected expectations index indicates real consumer spending could fall at an annualized rate of about 3.5%, even worse than the 3% he previously expected.
Home prices drop, again. Home prices fell 16.6% in August from a year ago, in-line with forecasts, after a 16.3% decrease in July. It's the 20th straight monthly drop in the S&P/Case-Shiller index. "The downturn in residential real estate prices continued, with very few bright spots in the data," S&P's David Blitzer said. Sales of distressed properties accounted for 35-40% of the month's total. "House prices will remain on a downward trend for some time and until they are low enough to stimulate sufficient demand to clear the market," economist Joshua Shapiro said.
source: seekingalpha.com
Wednesday, October 29, 2008
Tuesday, October 28, 2008
Quote of the Day
The shoe that fits one person pinches another; there is no recipe for living that suits all cases.
-- Carl Jung
-- Carl Jung
Monday, October 27, 2008
Unemployment & Stock Returns
The stock market anticipated the 1990-1991 recession as early as September 1989, and started to decline. But the unemployment rate didn’t start to rise until June 1990. By the time the unemployment rate peaked at 7.8% in June 1992, stocks were back to delivering positive 12-month returns. The same pattern held up in the 2001 recession. Stocks started predicting a recession the spring of 2000. The unemployment rate didn’t start to rise until June 2001. This time around, the markets started weakening in the summer of 2007 and unemployment readings began heading up earlier this year. To be sure, unemployment seems likely to increase further. So we can’t see a peak in that number yet. But businesses are aggressively cutting costs and the plunge in commodity costs should begin to help margins. With stocks already down nearly 50% from their peak, weak earnings may already be largely priced in.
source: Argus Research Market Watch, October 27, 2008
source: Argus Research Market Watch, October 27, 2008
Thursday, October 23, 2008
5 Ways the Global Economy is Rebounding
By Jim Wiandt, IndexUniverse.com
Despite the latest plunge, the market feels like it may be finding its legs now. Here are the early signs.
The last month to me feels like the way you feel when you are just knocked out by a flu or with a debilitatingly sore back. You realize how fragile everything is and how mortal we are. And then when you come through to the other side, you get a renewed perspective. The colors seem a little brighter, you savor your morning coffee a bit more, maybe take a few days off with the family.
That is how I feel about the market. Essentially we've gotten quite a crisp view of the market's mortality and have been able to understand, in a very visceral way, how the global economy could fall to pieces, practically overnight. And looking at continuing market action, we're certainly not out of the woods yet, and all signs point to a protracted economic slump. But it's not going to be the Second World Depression (a la the Great War being renamed the First World War). Here's why:
1. Credit spreads are coming in. As Matt Hougan details in his blog (which rehashed my blog of the day before which apparently Mr. Hougan hadn't read), LIBOR rates are coming down quickly and the TED spread is beginning to seriously come in. This is the fundamental constipation in our financial system that must heal before the economy recovers. And it is. Billions of dollars of government intervention appears to be doing the trick. Look at that TED Spread chart from today—it's dropped off a cliff.
2. The dollar is seriously on the rebound. The U.S. dollar has been stuck in prolonged doldrums as the current account and trade deficits for the U.S. soared. It's clear that the U.S. must lead the fight out of the recession, and the dollar's surge indicates that the market thinks it will, as it continues to see the U.S. as a safe haven.
3. Commodities continue to stall. While you can argue that the falling of commodity prices are a reflection of the coming recession (and probably be right), lower energy and commodity prices ultimately will also lead to a recovery and some balance on supply and demand, which felt badly out of whack. Gold's stalling despite the economic downturn is odd, and feels like it indicates that the world does not believe we're heading for depression, but is in value-seeking mode for equities and other hard-hit asset classes.
4. Real estate is finding reality, while other asset classes are catching up with the bottom real estate has set. A dynamic of hard falling prices is necessary and healthy to get the economy back in line with its actual productivity. Prices coming down on real estate, and credit becoming first impossible to receive and then more realistically tied to the prospects of payback, are good trends for economic stability.
5. There is a ton of money looking for a place to go. Ultimately, the overall financial system is juiced to the gills with potential as money is looking for a place to find bargains, and it will pour into the system once it's clear that a bottom has been established.
I think that even while the wild volatility continues, the market is gradually moving from panic to resignation that we're entering a time more based in the reality of our actual economic productivity than a giddy fantasy greedfest, where it feels like money is growing on trees. Ultimately this is healthy for our economic stability and for the prospects of grounded future growth.
Despite the latest plunge, the market feels like it may be finding its legs now. Here are the early signs.
The last month to me feels like the way you feel when you are just knocked out by a flu or with a debilitatingly sore back. You realize how fragile everything is and how mortal we are. And then when you come through to the other side, you get a renewed perspective. The colors seem a little brighter, you savor your morning coffee a bit more, maybe take a few days off with the family.
That is how I feel about the market. Essentially we've gotten quite a crisp view of the market's mortality and have been able to understand, in a very visceral way, how the global economy could fall to pieces, practically overnight. And looking at continuing market action, we're certainly not out of the woods yet, and all signs point to a protracted economic slump. But it's not going to be the Second World Depression (a la the Great War being renamed the First World War). Here's why:
1. Credit spreads are coming in. As Matt Hougan details in his blog (which rehashed my blog of the day before which apparently Mr. Hougan hadn't read), LIBOR rates are coming down quickly and the TED spread is beginning to seriously come in. This is the fundamental constipation in our financial system that must heal before the economy recovers. And it is. Billions of dollars of government intervention appears to be doing the trick. Look at that TED Spread chart from today—it's dropped off a cliff.
2. The dollar is seriously on the rebound. The U.S. dollar has been stuck in prolonged doldrums as the current account and trade deficits for the U.S. soared. It's clear that the U.S. must lead the fight out of the recession, and the dollar's surge indicates that the market thinks it will, as it continues to see the U.S. as a safe haven.
3. Commodities continue to stall. While you can argue that the falling of commodity prices are a reflection of the coming recession (and probably be right), lower energy and commodity prices ultimately will also lead to a recovery and some balance on supply and demand, which felt badly out of whack. Gold's stalling despite the economic downturn is odd, and feels like it indicates that the world does not believe we're heading for depression, but is in value-seeking mode for equities and other hard-hit asset classes.
4. Real estate is finding reality, while other asset classes are catching up with the bottom real estate has set. A dynamic of hard falling prices is necessary and healthy to get the economy back in line with its actual productivity. Prices coming down on real estate, and credit becoming first impossible to receive and then more realistically tied to the prospects of payback, are good trends for economic stability.
5. There is a ton of money looking for a place to go. Ultimately, the overall financial system is juiced to the gills with potential as money is looking for a place to find bargains, and it will pour into the system once it's clear that a bottom has been established.
I think that even while the wild volatility continues, the market is gradually moving from panic to resignation that we're entering a time more based in the reality of our actual economic productivity than a giddy fantasy greedfest, where it feels like money is growing on trees. Ultimately this is healthy for our economic stability and for the prospects of grounded future growth.
Tuesday, October 21, 2008
Great Quote
Courage is the first of human qualities because it is the quality which guarantees all others.
-- Winston Churchill
-- Winston Churchill
Monday, October 20, 2008
More from today's readings ...
Valuations Need To Fall Further for a Sustainable Rally
October 20, 2008 | Matt Blackman | Seeking Alpha
Last week we discussed Robert Shiller’s S&P 500 trailing 10-year price earnings ratio that has averaged 16.3 since 1881 and the fact that it had dropped to 15 as of October 10th. While we saw prices increase last week and a rise in P/Es, what does the longer-term future hold?
In our next chart, we show annual trailing 10-year P/Es from 1920 to August 2008 using Dr. Shiller’s data. As we see from this chart, every major recession has resulted in P/Es falling below 10 for an extended period of time - lasting decades, not years - typical of secular bear markets.
At 15 last week, the P/E was back to just below the long-term average, but this was a daily drop, not an annual P/E. It will take many more months (possibly a year or more) to get back below 15 on an annual basis, meaning we probably won’t see this occurring till 2009 or even 2010.
After that, it could take a few more years to get back to single digits like we had during the last major recession in 1981-1982. In other words, markets and economies will need a long rest with P/Es below 10 before they will be able to mount the next sustainable bull market. A similar situation occurred during the Great Depression into the early 1950s, as we see from the chart above.
Could we get another cyclical bull market rally lasting a few weeks, months or even years as we saw between 2003 and 2007? Very possibly, but as we learned, more often such rallies are short-term and often end abruptly and rather unexpectedly. There are also the raft of fundamental financial challenges facing a sustained U.S. economic recovery like the crushing levels of debt, rapidly deflating derivatives and housing bubbles, falling Treasury sales and mounting government deficit as a result of more than $2 trillion in bailouts so far.
But that doesn’t mean you can’t make money trading the powerful reactive rallies embedded in every secular bear market. This is a trader’s market where it's important to set tight stops and take profits off the table regularly, not a time to buy and hold for the long-term, as the so-called pundits would have us believe, if we are in a true secular bear market.
October 20, 2008 | Matt Blackman | Seeking Alpha
Last week we discussed Robert Shiller’s S&P 500 trailing 10-year price earnings ratio that has averaged 16.3 since 1881 and the fact that it had dropped to 15 as of October 10th. While we saw prices increase last week and a rise in P/Es, what does the longer-term future hold?
In our next chart, we show annual trailing 10-year P/Es from 1920 to August 2008 using Dr. Shiller’s data. As we see from this chart, every major recession has resulted in P/Es falling below 10 for an extended period of time - lasting decades, not years - typical of secular bear markets.
At 15 last week, the P/E was back to just below the long-term average, but this was a daily drop, not an annual P/E. It will take many more months (possibly a year or more) to get back below 15 on an annual basis, meaning we probably won’t see this occurring till 2009 or even 2010.After that, it could take a few more years to get back to single digits like we had during the last major recession in 1981-1982. In other words, markets and economies will need a long rest with P/Es below 10 before they will be able to mount the next sustainable bull market. A similar situation occurred during the Great Depression into the early 1950s, as we see from the chart above.
Could we get another cyclical bull market rally lasting a few weeks, months or even years as we saw between 2003 and 2007? Very possibly, but as we learned, more often such rallies are short-term and often end abruptly and rather unexpectedly. There are also the raft of fundamental financial challenges facing a sustained U.S. economic recovery like the crushing levels of debt, rapidly deflating derivatives and housing bubbles, falling Treasury sales and mounting government deficit as a result of more than $2 trillion in bailouts so far.
But that doesn’t mean you can’t make money trading the powerful reactive rallies embedded in every secular bear market. This is a trader’s market where it's important to set tight stops and take profits off the table regularly, not a time to buy and hold for the long-term, as the so-called pundits would have us believe, if we are in a true secular bear market.
From this morning's reading ...
The Credit Crunch Is the Solution, Not the Problem
October 20, 2008 | Jason LaValley | Seeking Alpha
Since roughly October 2007, the world’s financial institutions have trembled, credit markets have seized, and as the government bailouts arrive, a consensus view has developed that the root cause of our recent misery is the greed of over-levered, under-regulated financial institutions, helpless in the face of overwhelming losses caused by indefensible gambles on sub-prime mortgage loans for over-valued residential housing.
While reasonable conversations can take place regarding the root cause of mortgage lending standards (e.g. the Community Reinvestment Act in the Carter era), the simple truth is that the true nature of the economic crisis has been obfuscated. Most Americans believe they are in for a severe recession caused by the unwise decisions of bankers. They may not understand they are coming out of a severe recession facilitated by the very government now coming to the rescue.
Theme I: We’ve experienced a much more severe inflation shock than reported.
Let’s keep it simple. When we greatly expand the number of dollars that exist, each of them will be worth less (i.e. prices will rise). The facts are clear:
- Most official measures of the U.S. Dollar money supply show a recent record of minor, very stable growth – all the hallmarks of a concerned steward of stable prices. In fact, in March 2006 the US government stopped reporting “M3” a critical component of the money supply which helps indicate how much money supply growth is attributed to commercial bank lending via institutional deposits, money funds, and Euro dollars, etc. While official monthly money supply measures (M2) show the supply of US Dollars growing in a 4-6% range since 2003/04, private individuals who have continued estimating M3 growth show that the world’s commercial banks have increased the growth rate of dollars by up to 16%.
- That’s OK, you say. The government carefully measures inflation, ensuring that swift and prudent action is taken the minute money supply growth impacts the stability of the prices for this we must buy as part of our daily lives. Now I ask, does that sound like the U.S. federal government to you? The government does continue to measure price inflation, but they have made two significant changes since our last inflation shock in 1980 when Paul Volker killed inflation by raising interest rates. Back then, the rampant, unacceptable inflation rate touched 15% . Of course, this time in the worst of it (2008) we only touched 5 ½ %... except that we changed how we measure it. If you still measured inflation the way we did in 1990, before the Clinton-era changes, we experienced 9% inflation in 2008. If we measure it the way we did in 1980, we touched 13% - almost to the Volker era highs. You weren’t crazy. Did you get a 13% annual pay raise?
- And the markets weren’t fooled for a minute. Gold (priced in dollars) rose 235% from 2005 through 2008. Oil by 247%. Now, U.S. GDP only rose 11% from 2005-2007, Adjust for the ‘new’ inflation numbers and you find the line you hear in the media. “We’re not quite in a recession yet”. Adjust GDP for something approximating the way we measured inflation in recent history and you see that we’ve been in a rather severe recession for some time now. Ask yourself – hasn’t it felt that way?
- And, as it always does, capital flowed to more hospitable places. It doesn’t matter if you looked at U.S. investment in anything overseas (especially emerging markets), anything not priced in dollars, or if you just flat out look at the currency. The US dollar dropped in value (against a basket of other currencies) by more that 40% from its peak in 2002 to trough in 2007.
Theme II: This time we didn’t need to raise interest rates
In 1980, the Volker fed needed to raise interest rates to extremely high rates to break the back of inflation. I’m sure we can all agree we’d prefer not to incur borrowing costs in excess of 15% - so why do we get to avoid that pain?
In this case, the cause of the problem (the rampant creation of too many dollars by the commercial banking system) seems to have been corrected by the market itself. After peaks in 2008:
- The U.S. Dollar has risen 14% in 2008 from its lows.
- Gold has declined 21% from its highs
- Oil has declined 34% from its highs
- Credit creation by commercial banks has declined from 18% to 2%.
In other words, the current “credit crisis” is in fact the source (commercial banks) of the problem (inflation caused by M3 supply growth) correcting itself (reversing through the refusal to extend credit) through market forces (which question the real value of the collateral e.g. houses) for the loans.
Theme III: The Return of America
So how do we interpret the current state of our economy? The majority of media outlets repeat the standard line that the lack of available credit will negatively impact the earnings potential of U.S. equities. They claim that the best expectations for growth continue to lie in emerging markets - and that we are still in for a ‘deep’ recession, not coming out of one.
Phoey! The run up in energy and commodity prices was largely due to these commodities being priced in the free-falling dollar (doubt me? check a chart of oil priced in Euros or gold compared to dollars) . The strengthening in the dollar caused by the fact that commercial financial institutions no longer have the capital to debase the currency represents a massive tax cut for productive US industry. US industry, whose consumers have already seen the worst of a very deep economic recession.
- In terms of momentum there is no better currency in the world.
- There is a flight to the quality of the US, both in terms of currency and equity of commercial and real assets that will be levered for foreign investors by the continuing strength of the dollar.
- For the undervalued US Equities, expect a new era of “going private” and/or the ‘new conglomerates’ as balance sheet cash and real dollar profits are put to work buying over-levered or foreign assets.
As markets adjust from the paradigm of a weak dollar we are:
- Long Volatility (VIX)
- Long US Dollar (USDX)
- Long US Equities (SPY)
- Short World Equities Ex-US (especially the Euro zone) (VGTSX)
- Short Commodities priced in dollars (DBC)
- Short the US Government, not a having truly independent measurement of monetary statistics.
October 20, 2008 | Jason LaValley | Seeking Alpha
Since roughly October 2007, the world’s financial institutions have trembled, credit markets have seized, and as the government bailouts arrive, a consensus view has developed that the root cause of our recent misery is the greed of over-levered, under-regulated financial institutions, helpless in the face of overwhelming losses caused by indefensible gambles on sub-prime mortgage loans for over-valued residential housing.
While reasonable conversations can take place regarding the root cause of mortgage lending standards (e.g. the Community Reinvestment Act in the Carter era), the simple truth is that the true nature of the economic crisis has been obfuscated. Most Americans believe they are in for a severe recession caused by the unwise decisions of bankers. They may not understand they are coming out of a severe recession facilitated by the very government now coming to the rescue.
Theme I: We’ve experienced a much more severe inflation shock than reported.
Let’s keep it simple. When we greatly expand the number of dollars that exist, each of them will be worth less (i.e. prices will rise). The facts are clear:
- Most official measures of the U.S. Dollar money supply show a recent record of minor, very stable growth – all the hallmarks of a concerned steward of stable prices. In fact, in March 2006 the US government stopped reporting “M3” a critical component of the money supply which helps indicate how much money supply growth is attributed to commercial bank lending via institutional deposits, money funds, and Euro dollars, etc. While official monthly money supply measures (M2) show the supply of US Dollars growing in a 4-6% range since 2003/04, private individuals who have continued estimating M3 growth show that the world’s commercial banks have increased the growth rate of dollars by up to 16%.
- That’s OK, you say. The government carefully measures inflation, ensuring that swift and prudent action is taken the minute money supply growth impacts the stability of the prices for this we must buy as part of our daily lives. Now I ask, does that sound like the U.S. federal government to you? The government does continue to measure price inflation, but they have made two significant changes since our last inflation shock in 1980 when Paul Volker killed inflation by raising interest rates. Back then, the rampant, unacceptable inflation rate touched 15% . Of course, this time in the worst of it (2008) we only touched 5 ½ %... except that we changed how we measure it. If you still measured inflation the way we did in 1990, before the Clinton-era changes, we experienced 9% inflation in 2008. If we measure it the way we did in 1980, we touched 13% - almost to the Volker era highs. You weren’t crazy. Did you get a 13% annual pay raise?
- And the markets weren’t fooled for a minute. Gold (priced in dollars) rose 235% from 2005 through 2008. Oil by 247%. Now, U.S. GDP only rose 11% from 2005-2007, Adjust for the ‘new’ inflation numbers and you find the line you hear in the media. “We’re not quite in a recession yet”. Adjust GDP for something approximating the way we measured inflation in recent history and you see that we’ve been in a rather severe recession for some time now. Ask yourself – hasn’t it felt that way?
- And, as it always does, capital flowed to more hospitable places. It doesn’t matter if you looked at U.S. investment in anything overseas (especially emerging markets), anything not priced in dollars, or if you just flat out look at the currency. The US dollar dropped in value (against a basket of other currencies) by more that 40% from its peak in 2002 to trough in 2007.
Theme II: This time we didn’t need to raise interest rates
In 1980, the Volker fed needed to raise interest rates to extremely high rates to break the back of inflation. I’m sure we can all agree we’d prefer not to incur borrowing costs in excess of 15% - so why do we get to avoid that pain?
In this case, the cause of the problem (the rampant creation of too many dollars by the commercial banking system) seems to have been corrected by the market itself. After peaks in 2008:
- The U.S. Dollar has risen 14% in 2008 from its lows.
- Gold has declined 21% from its highs
- Oil has declined 34% from its highs
- Credit creation by commercial banks has declined from 18% to 2%.
In other words, the current “credit crisis” is in fact the source (commercial banks) of the problem (inflation caused by M3 supply growth) correcting itself (reversing through the refusal to extend credit) through market forces (which question the real value of the collateral e.g. houses) for the loans.
Theme III: The Return of America
So how do we interpret the current state of our economy? The majority of media outlets repeat the standard line that the lack of available credit will negatively impact the earnings potential of U.S. equities. They claim that the best expectations for growth continue to lie in emerging markets - and that we are still in for a ‘deep’ recession, not coming out of one.
Phoey! The run up in energy and commodity prices was largely due to these commodities being priced in the free-falling dollar (doubt me? check a chart of oil priced in Euros or gold compared to dollars) . The strengthening in the dollar caused by the fact that commercial financial institutions no longer have the capital to debase the currency represents a massive tax cut for productive US industry. US industry, whose consumers have already seen the worst of a very deep economic recession.
- In terms of momentum there is no better currency in the world.
- There is a flight to the quality of the US, both in terms of currency and equity of commercial and real assets that will be levered for foreign investors by the continuing strength of the dollar.
- For the undervalued US Equities, expect a new era of “going private” and/or the ‘new conglomerates’ as balance sheet cash and real dollar profits are put to work buying over-levered or foreign assets.
As markets adjust from the paradigm of a weak dollar we are:
- Long Volatility (VIX)
- Long US Dollar (USDX)
- Long US Equities (SPY)
- Short World Equities Ex-US (especially the Euro zone) (VGTSX)
- Short Commodities priced in dollars (DBC)
- Short the US Government, not a having truly independent measurement of monetary statistics.
Thursday, October 16, 2008
From the desk of Louis Navellier
Dow Plunges 733 Points
Rapidly Declining Retail Sales and Gloomy Beige Book Sink Stocks
Reno, NV (Marketmail) - October 15, 2008
Stocks suffered another major setback today after dreary economic data essentially confirmed that the U.S. economy is in recession.
September retail sales dropped 1.2%, significantly more than the -0.7% consensus and the largest decline in three years. Sales ex-autos fell 0.6%, tripling the -0.2% consensus.
Sales fell on a year-ago basis for the first time since 2002 and only the third time since 1991, according to Economy.com.
"Core sales, which we define as total sales ex- autos, gas, and food, fell 0.8% for the second straight month, pushing the three-month annualized rate down to -5.7%, the worst since the current dataset began in 1992. Another sharp drop in consumption is assured for October, and there can be no doubt now that the economy is in recession. It will be there for a while," said Ian Shepherdson, Chief U.S. Economist at High Frequency Economics.
The October Beige Book report, a survey of labor market conditions, retail sales, consumer spending, construction and real estate, manufacturing, banking and finance, agriculture, energy, and natural resources, indicated widespread weaknesses across all 12 Federal Reserve districts in the U.S.
San Francisco Federal Reserve President Janet Yellen said, "Indeed, the U.S. economy appears to be in a recession."
Marisa DiNatale at the Dismal Scientist said the Beige Book "is the first glimpse at how regional economies have reacted to the credit crisis."
The bleak news hammered the Dow with a 733 point loss, the S&P 500 with a 90 point loss, and the Nasdaq with a 150 point loss. Moreover, cumulative losses from yesterday and today wiped out the majority of Monday's record rebound, when the Dow exploded 936 points higher.
Conclusion
We're not surprised that most of Monday's rebound has evaporated. We regained too much ground too quickly. Since volatility is at exceedingly high levels, and markets often overshoot on the downside and upside, we expected some 'back and filling' to occur after the big rebound, but we must admit we didn't expect it to happen by this magnitude, this suddenly.
With the VIX Index, a measure of market volatility, above 55, we can expect significant volatility to continue in the coming weeks. As such, several 500+ point rallies and sell-offs could be in our future. It's part of the bottoming process in bear markets.
We could have a retest of the lows tomorrow or Friday. Hang in there.
...
Rapidly Declining Retail Sales and Gloomy Beige Book Sink Stocks
Reno, NV (Marketmail) - October 15, 2008
Stocks suffered another major setback today after dreary economic data essentially confirmed that the U.S. economy is in recession.
September retail sales dropped 1.2%, significantly more than the -0.7% consensus and the largest decline in three years. Sales ex-autos fell 0.6%, tripling the -0.2% consensus.
Sales fell on a year-ago basis for the first time since 2002 and only the third time since 1991, according to Economy.com.
"Core sales, which we define as total sales ex- autos, gas, and food, fell 0.8% for the second straight month, pushing the three-month annualized rate down to -5.7%, the worst since the current dataset began in 1992. Another sharp drop in consumption is assured for October, and there can be no doubt now that the economy is in recession. It will be there for a while," said Ian Shepherdson, Chief U.S. Economist at High Frequency Economics.
The October Beige Book report, a survey of labor market conditions, retail sales, consumer spending, construction and real estate, manufacturing, banking and finance, agriculture, energy, and natural resources, indicated widespread weaknesses across all 12 Federal Reserve districts in the U.S.
San Francisco Federal Reserve President Janet Yellen said, "Indeed, the U.S. economy appears to be in a recession."
Marisa DiNatale at the Dismal Scientist said the Beige Book "is the first glimpse at how regional economies have reacted to the credit crisis."
The bleak news hammered the Dow with a 733 point loss, the S&P 500 with a 90 point loss, and the Nasdaq with a 150 point loss. Moreover, cumulative losses from yesterday and today wiped out the majority of Monday's record rebound, when the Dow exploded 936 points higher.
Conclusion
We're not surprised that most of Monday's rebound has evaporated. We regained too much ground too quickly. Since volatility is at exceedingly high levels, and markets often overshoot on the downside and upside, we expected some 'back and filling' to occur after the big rebound, but we must admit we didn't expect it to happen by this magnitude, this suddenly.
With the VIX Index, a measure of market volatility, above 55, we can expect significant volatility to continue in the coming weeks. As such, several 500+ point rallies and sell-offs could be in our future. It's part of the bottoming process in bear markets.
We could have a retest of the lows tomorrow or Friday. Hang in there.
...
Wednesday, October 15, 2008
From this morning's reading ...
Historical Sector Weights of the S&P 500
Bespoke Investment Group
Seeking Alpha, October 15, 2008
With the extreme action in the markets lately, we thought it would be good to update our charts on historical S&P 500 sector weightings. In the first table below, we highlight each sector's representation in the S&P 500 (in percentage terms) since 1990. For each year, weightings are color coded from red (smallest) to green (largest), with the biggest sector highlighted in white font. For 2008, we provide weightings as they stood on July 15th (a short-term market bottom and the top in commodities), September 19th (the temporary peak following the initial TARP announcement and "No Short" rule), and yesterday.
As we've noted in the past, sector weightings go through cycles, and looking at where representation stands versus its historical average can offer insight into the long-term overbought and oversold levels of a sector. It also offers a good glimpse of the economic trends of the country.
As you'll see in the table below, the consumer sectors and industrials made up the majority of the market in the early 90s, while financials and technology were two of the smallest sectors. That changed quickly in the mid-90s, and financials and technology have been either the first or second largest sectors since 1996.
Unsurprisingly, the energy sector rose significantly over the last few years, and for a brief period this year, it was the second biggest behind technology. The doubling of its weight from '04 to '08 and the big movement above its historical average were clear signs that the energy sector had become overheated. Since July, the energy sector's weight has fallen from 15.3% down to 12.8%, and it now ranks behind financials, technology, and health care.
The trend this year for the financial sector's weighting has also been interesting. Back in July, the problems in the equity market were still largely contained to financials, and its sector weighting fell sharply from 17.6% at the end of '07 to 12.9% on 7/15. Since 7/15, however, the credit crisis has hit every sector hard, and financials have outperformed many of them. This has resulted in the financial sector's weighting actually increasing back up to 16%, once again making it the biggest sector in the S&P 500.
As our economy changes over the next few years due to everything that has happened this year, it will be interesting to see how sector weightings change. Will the consumer sectors and industrials stage a comeback? Will technology move into first place and widen the gap again like it did in the late 90s? Will financials no longer be the largest sector of our economy?
Below we highlight individual sector weighting charts over time. The red line represents the average weighting for each sector since 1990.
As shown, financials and technology are currently resting just above their long-term averages, while industrials and utilities are resting just below. Health care has recently moved quite a bit above its average, and energy remains well above its average but continues to head lower. The materials sector has tried to move back up towards its long-term average over the last few years, but the recent selloff in the sector has halted the trend. And consumer staples has moved above its long-term average this year, while consumer discretionary is at its lowest weighting since 1990. The consumer discretionary sector probably stands out the most as the one due for a big rally.
Bespoke Investment Group
Seeking Alpha, October 15, 2008
With the extreme action in the markets lately, we thought it would be good to update our charts on historical S&P 500 sector weightings. In the first table below, we highlight each sector's representation in the S&P 500 (in percentage terms) since 1990. For each year, weightings are color coded from red (smallest) to green (largest), with the biggest sector highlighted in white font. For 2008, we provide weightings as they stood on July 15th (a short-term market bottom and the top in commodities), September 19th (the temporary peak following the initial TARP announcement and "No Short" rule), and yesterday.
As we've noted in the past, sector weightings go through cycles, and looking at where representation stands versus its historical average can offer insight into the long-term overbought and oversold levels of a sector. It also offers a good glimpse of the economic trends of the country.
As you'll see in the table below, the consumer sectors and industrials made up the majority of the market in the early 90s, while financials and technology were two of the smallest sectors. That changed quickly in the mid-90s, and financials and technology have been either the first or second largest sectors since 1996.
Unsurprisingly, the energy sector rose significantly over the last few years, and for a brief period this year, it was the second biggest behind technology. The doubling of its weight from '04 to '08 and the big movement above its historical average were clear signs that the energy sector had become overheated. Since July, the energy sector's weight has fallen from 15.3% down to 12.8%, and it now ranks behind financials, technology, and health care.
The trend this year for the financial sector's weighting has also been interesting. Back in July, the problems in the equity market were still largely contained to financials, and its sector weighting fell sharply from 17.6% at the end of '07 to 12.9% on 7/15. Since 7/15, however, the credit crisis has hit every sector hard, and financials have outperformed many of them. This has resulted in the financial sector's weighting actually increasing back up to 16%, once again making it the biggest sector in the S&P 500.
As our economy changes over the next few years due to everything that has happened this year, it will be interesting to see how sector weightings change. Will the consumer sectors and industrials stage a comeback? Will technology move into first place and widen the gap again like it did in the late 90s? Will financials no longer be the largest sector of our economy?
Below we highlight individual sector weighting charts over time. The red line represents the average weighting for each sector since 1990.As shown, financials and technology are currently resting just above their long-term averages, while industrials and utilities are resting just below. Health care has recently moved quite a bit above its average, and energy remains well above its average but continues to head lower. The materials sector has tried to move back up towards its long-term average over the last few years, but the recent selloff in the sector has halted the trend. And consumer staples has moved above its long-term average this year, while consumer discretionary is at its lowest weighting since 1990. The consumer discretionary sector probably stands out the most as the one due for a big rally.
Tuesday, October 14, 2008
From Our Reading This Morning...
The Dangers of Timing the Market
Seeking Alpha, October 14, 2008, David I. Templeton
Today's sharp move higher in the stock market sheds light on the dangers of an investor trying to time the market. I wrote a post earlier this year, Focus on the the Long-Term, in which it was noted missing just a handful of the market's best days in a given year can really penalize returns. If an investor missed just 40 of the biggest up days in the market over the last 20 years (1987-2007), their return would have totaled 3.98% versus remaining fully invested and achieving an average annualized return of 11.82%.
The market research firm DALBAR went one step further and looked at the returns of mutual fund investors over the 20-year period, 1986-2006, and reported the average market timer return was -2%. During this same time period, the S&P 500 Index returned 12%.
Source:
Market Timing Doesn't Work
Charles Schwab OnInvesting
By: Liz Ann Sonders
Fall 2007
Volatility and Complacency Make Strange Bedfellows
Charles Schwab OnInvesting
By: Liz Ann Sonders
Summer 2007
Seeking Alpha, October 14, 2008, David I. Templeton
Today's sharp move higher in the stock market sheds light on the dangers of an investor trying to time the market. I wrote a post earlier this year, Focus on the the Long-Term, in which it was noted missing just a handful of the market's best days in a given year can really penalize returns. If an investor missed just 40 of the biggest up days in the market over the last 20 years (1987-2007), their return would have totaled 3.98% versus remaining fully invested and achieving an average annualized return of 11.82%.
The market research firm DALBAR went one step further and looked at the returns of mutual fund investors over the 20-year period, 1986-2006, and reported the average market timer return was -2%. During this same time period, the S&P 500 Index returned 12%.
Additionally, during the 10-year period 1997-2006, the S&P 500 Index achieved an annualized return of 8.4%. If an investor missed just the top 20 days during this period, their return fell to -.4%.- Further, 21 of the best 40 days came during the bear market period 2000-2002.
- Lastly, nearly three-fourths of the 40 best days came within two weeks following a worst market day.
Source:
Market Timing Doesn't Work
Charles Schwab OnInvesting
By: Liz Ann Sonders
Fall 2007
Volatility and Complacency Make Strange Bedfellows
Charles Schwab OnInvesting
By: Liz Ann Sonders
Summer 2007
Monday, October 13, 2008
Third-Quarter Profit-Warning Trends
After a handful of third-quarter earnings reports last week, the major banks take center stage this week and next. BofA pre-announced weak third-quarter results last week, probably a harbinger of things to come from the banks. However, there have been surprisingly few profit warnings from blue-chip companies outside the banking sector. Still, for the stock market as a whole, the number of negative warnings and the ratio of negative-to-positive pre-announcements are both up sharply from the second quarter. This is, perhaps, an indication that smaller companies are starting to really struggle. The ratio of negative-to-positive pre-announcements varies a great deal at the sector level. What jumps out to us is that there have been nearly as many negative warnings from Technology stocks as from Consumer Discretionary stocks. Again, since the warnings have not come from the likes of Cisco and Apple, they are perhaps not as visible. But we could be starting to see a broader weakening of earnings.
source: Argus Research Market Watch, October 13, 2008
source: Argus Research Market Watch, October 13, 2008
Thursday, October 9, 2008
Market Pricing for Big Earnings Decline
Are analyst estimates far too high? The market seems to be saying so. In the previous bear market of 2000-2002, the S&P 500 fell by nearly 50% from its peak and earnings ended up falling about the same degree from peak to trough. The S&P 500 is currently down about 35% from its peak of 1576 late last year. S&P 500 earnings peaked at an annualized rate of about $87.50 per share in the second quarter of 2007. A 35% decline from that peak implies earnings of about $57, well below the Street’s most bearish forecasts. Attaching a long-term average P/E of 15 to earnings of $57 implies a fair value for the S&P 500 of about 850 — implying a further decline of about 15% for the S&P 500. While we may need to cut our EPS estimates further, we do not expect earnings to fall by nearly as much as currently implied by stock prices. We recently reduced our 2009 EPS forecast for the S&P 500 to $85 from $90 per share. Our 2008 EPS forecast remains $80.
source: Argus Research, Market Watch, October 9, 2008
source: Argus Research, Market Watch, October 9, 2008
Wednesday, October 8, 2008
World Central Banks Cut Interest Rates in Unison
Federal Reserve and other central banks announce reductions in policy interest rates. The Fed cut its key lending rate by 50 BPs to 1.5%. In a coordinated effort, ECB and Bank of England each drop their key rates by 0.5%, to 3.75% and 4.5% respectively. "Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets. Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability. Some easing of global monetary conditions is therefore warranted."
Louis Navellier's Thoughts on the Market
This is Louis Navellier. It is Tuesday, October 7th.
Well, let me tell you what's happening. First of all, we had good news on the commercial paper front. The Federal Reserve is intervening and starting to buy commercial paper. This is so important, folks, because the commercial paper market has been frozen ever since Lehman Brothers went bankrupt.
So, this is a very, very positive development. Big companies like General Electric and credit card companies go to the commercial paper market for short-term funding. So, that was a big development. That's the good news.
The bad news is the LIBOR rate, which is the inter- bank lending rate, is still very, very high because banks don't trust each other. There are very serious banking problems in Britain. They've been having some meetings, there's supposed to be a bailout package announced on Wednesday, but the truth of the matter is, is any bailout package is just a bandaid on the problem. What the market needs, what the market wants, and what the market is demanding are massive central bank rate cuts. Now, we had a rate cut in Australia, a full one percent. What we need is a rate cut from the Bank of England, they're going to meet this week, so we expect at least a half percent cut. The European Central Bank is supposed to meet in early November. We need a cut from them; a significant one half a percent would be nice. Our Federal Reserve meets on October 28th and 29th and in all candor we expect a full one percent rate cut but we'd like it before then. You see, Ben Bernanke talked today and he acknowledged that the economy is weak; he acknowledged that there are some complications out there and so we're all saying, "Okay Ben, where's the rate cut?" And the market sold off after his speech today because we're just waiting for the cut. We want a full one percent Federal Reserve rate cut; that would spark an incredible rally in the market. The cash on the sidelines is well over thirty percent of market value; it's the highest I've ever seen in over three decades.
So, this if very, very exciting. We think there will be a spark that will cause money to pour into the market. In the interim, our energy stocks and agricultural stocks were up for much of the day. They did settle down late in the day, but they held up much, much better. We hope they will merge an oasis. This is where some of the strongest earnings are and the third quarter earnings are around the corner. According to Zacks, they're supposed to be up six percent over the same quarter a year ago. These are easy year-over-year comparisons because in the third quarter a year ago, there were some big write downs, but the market can get bailed out by earnings, but more than likely they'll be bailed out by a Federal Reserve rate cut. So, hang in there folks. We're not sure what's going to spark the market. It could be something as simple as Mr. Obama saying that he can't raise taxes in this environment. That could spur the market on, but I think we really need leadership from the Federal Reserve. So, let's hope they have that full one percent rate cut and then we'll have a big rally and we'll wonder what the fuss was about. In the interim, this is a challenging environment, but I am encouraged that a rate cut is definitely going to be forth coming. I'm encouraged by the strength in agriculture, energy, and other stocks that are going to have good third quarter earnings. We can almost see the light at the end of the tunnel here folks. Let's just hope that we get our rate cuts so that the market can rally and remove a lot of the uncertainty out there. Take care everybody, I know this is tough for a lot of people and I know this is very, very stressful.
...
Well, let me tell you what's happening. First of all, we had good news on the commercial paper front. The Federal Reserve is intervening and starting to buy commercial paper. This is so important, folks, because the commercial paper market has been frozen ever since Lehman Brothers went bankrupt.
So, this is a very, very positive development. Big companies like General Electric and credit card companies go to the commercial paper market for short-term funding. So, that was a big development. That's the good news.
The bad news is the LIBOR rate, which is the inter- bank lending rate, is still very, very high because banks don't trust each other. There are very serious banking problems in Britain. They've been having some meetings, there's supposed to be a bailout package announced on Wednesday, but the truth of the matter is, is any bailout package is just a bandaid on the problem. What the market needs, what the market wants, and what the market is demanding are massive central bank rate cuts. Now, we had a rate cut in Australia, a full one percent. What we need is a rate cut from the Bank of England, they're going to meet this week, so we expect at least a half percent cut. The European Central Bank is supposed to meet in early November. We need a cut from them; a significant one half a percent would be nice. Our Federal Reserve meets on October 28th and 29th and in all candor we expect a full one percent rate cut but we'd like it before then. You see, Ben Bernanke talked today and he acknowledged that the economy is weak; he acknowledged that there are some complications out there and so we're all saying, "Okay Ben, where's the rate cut?" And the market sold off after his speech today because we're just waiting for the cut. We want a full one percent Federal Reserve rate cut; that would spark an incredible rally in the market. The cash on the sidelines is well over thirty percent of market value; it's the highest I've ever seen in over three decades.
So, this if very, very exciting. We think there will be a spark that will cause money to pour into the market. In the interim, our energy stocks and agricultural stocks were up for much of the day. They did settle down late in the day, but they held up much, much better. We hope they will merge an oasis. This is where some of the strongest earnings are and the third quarter earnings are around the corner. According to Zacks, they're supposed to be up six percent over the same quarter a year ago. These are easy year-over-year comparisons because in the third quarter a year ago, there were some big write downs, but the market can get bailed out by earnings, but more than likely they'll be bailed out by a Federal Reserve rate cut. So, hang in there folks. We're not sure what's going to spark the market. It could be something as simple as Mr. Obama saying that he can't raise taxes in this environment. That could spur the market on, but I think we really need leadership from the Federal Reserve. So, let's hope they have that full one percent rate cut and then we'll have a big rally and we'll wonder what the fuss was about. In the interim, this is a challenging environment, but I am encouraged that a rate cut is definitely going to be forth coming. I'm encouraged by the strength in agriculture, energy, and other stocks that are going to have good third quarter earnings. We can almost see the light at the end of the tunnel here folks. Let's just hope that we get our rate cuts so that the market can rally and remove a lot of the uncertainty out there. Take care everybody, I know this is tough for a lot of people and I know this is very, very stressful.
...
Tuesday, October 7, 2008
Louis Navellier's Thoughts on the Market
Louis' Transcript:
This is Louis Navellier. It is Monday, October 6th.
Obviously it's very stressful out there for all investors, and I'd like to just kind of take a step back and explain to everyone what's going on and what this latest development in the stock market meltdown is all about.
What's happening is there's a credit crisis out there, and you've heard about the commercial paper market falling apart after Lehman Brothers went broke; now what's happening is something called the LIBOR rates -- the London Inter-Bank Offering Rates -- are skyrocketing because the banks don't trust each other. Now what happened last week is Ireland stepped in and said, "We're going to back our banks."
Now in Europe they don't have bank insurance like we do in the United States. In places like the U.K., insurance is only £2000 per account so that's less than $4000. So for a country like Ireland to come out and say "Well, we're guaranteeing everything in Ireland," really sent shockwaves through the European Union. So they had an emergency meeting on Saturday, and then they came out with a statement that they wanted to reassure everybody that they're going to back all the banks, so they're going to do the same thing Ireland did. But there was no "teeth" to their plan; there were no specific proposals, and it was widely reported that the German finance ministers were very annoyed at the Irish finance ministers, etc.
So the banks still don't trust each other; and on Monday, just a day, the LIBOR rates went up. And that is why the market got up on the wrong side of the bed, for lack of a better word; and it opened up poorly in Europe, and it opened up poorly in Asia, and of course it carried over here to the U.S.
Now if you want some reassuring news, our Fed and the Treasury has done a lot of intervention here starting today; of course the $700 billion bailout package was signed, so there is a lot of market intervention. However, market rates have plummeted so what we're really going to need is a Federal Reserve rate cut -- and secretly, I was hoping the Fed would cut rates today, a full one percent -- we'll see.
If you watch CNBC you've heard rumors that the G8 were going to get together and there might be a coordinated rate cut. This week the Bank of England is getting together and we expect a cut by Thursday. The European Central Bank has already hinted at a cut at their next meeting in November. And of course our Federal Reserve meets on October 28th and October 29th, which is the Federal Open Market Committee Meeting and we expect a cut then.
So, the question is why do we have to wait for the cut when market rates have collapsed? Can't the Fed cut rates now? I think a Fed rate cut is coming. In the interim, at least in the last hour today the market did have, for lack of a better word, what I would call, "dead cat bounce." There were some bargain hunters out there.
You know the woes in the financial services industry are not going away. Bank of America announced after the close that their earnings were sub-par, that they're cutting their dividend in half and that they're going to have to raise some capital in the open market. So, this leads to weak opening on Tuesday for the financials, but earnings are coming out soon and we know some of our stocks started to rally late in the day, so that's very, very encouraging.
So, let's hope we get the Fed rate cut, we have a lot of good earnings reports coming out for our stocks, and as long as the silver lining of critical path emerges I think we'll be fine.
Please remember folks that we go into every earnings season locked and loaded. Our stocks have stunning sales, stunning earnings they trade at very reasonable price-earnings ratios, and right now there is over $4 trillion of cash on the sidelines that represents over, literally over 30% of market value. What we're waiting for is a spark, whether it's a Fed interest rate cut or Mr. Obama saying there's not going to be any tax increases, something like that to get the market going because there's a lot of a fear out there in the market. So, interesting times we're in, very stressful but on all counters it's too late to sell. There's been a lot of very serious liquidity problems out there and we expect that a Federal Reserve rate cut in the upcoming third quarter earning's announcement's season will help show up our stocks immensely. So, hang in their folks, we know it's been very, very painful for a lot of you but I think help is very, very near.
...
This is Louis Navellier. It is Monday, October 6th.
Obviously it's very stressful out there for all investors, and I'd like to just kind of take a step back and explain to everyone what's going on and what this latest development in the stock market meltdown is all about.
What's happening is there's a credit crisis out there, and you've heard about the commercial paper market falling apart after Lehman Brothers went broke; now what's happening is something called the LIBOR rates -- the London Inter-Bank Offering Rates -- are skyrocketing because the banks don't trust each other. Now what happened last week is Ireland stepped in and said, "We're going to back our banks."
Now in Europe they don't have bank insurance like we do in the United States. In places like the U.K., insurance is only £2000 per account so that's less than $4000. So for a country like Ireland to come out and say "Well, we're guaranteeing everything in Ireland," really sent shockwaves through the European Union. So they had an emergency meeting on Saturday, and then they came out with a statement that they wanted to reassure everybody that they're going to back all the banks, so they're going to do the same thing Ireland did. But there was no "teeth" to their plan; there were no specific proposals, and it was widely reported that the German finance ministers were very annoyed at the Irish finance ministers, etc.
So the banks still don't trust each other; and on Monday, just a day, the LIBOR rates went up. And that is why the market got up on the wrong side of the bed, for lack of a better word; and it opened up poorly in Europe, and it opened up poorly in Asia, and of course it carried over here to the U.S.
Now if you want some reassuring news, our Fed and the Treasury has done a lot of intervention here starting today; of course the $700 billion bailout package was signed, so there is a lot of market intervention. However, market rates have plummeted so what we're really going to need is a Federal Reserve rate cut -- and secretly, I was hoping the Fed would cut rates today, a full one percent -- we'll see.
If you watch CNBC you've heard rumors that the G8 were going to get together and there might be a coordinated rate cut. This week the Bank of England is getting together and we expect a cut by Thursday. The European Central Bank has already hinted at a cut at their next meeting in November. And of course our Federal Reserve meets on October 28th and October 29th, which is the Federal Open Market Committee Meeting and we expect a cut then.
So, the question is why do we have to wait for the cut when market rates have collapsed? Can't the Fed cut rates now? I think a Fed rate cut is coming. In the interim, at least in the last hour today the market did have, for lack of a better word, what I would call, "dead cat bounce." There were some bargain hunters out there.
You know the woes in the financial services industry are not going away. Bank of America announced after the close that their earnings were sub-par, that they're cutting their dividend in half and that they're going to have to raise some capital in the open market. So, this leads to weak opening on Tuesday for the financials, but earnings are coming out soon and we know some of our stocks started to rally late in the day, so that's very, very encouraging.
So, let's hope we get the Fed rate cut, we have a lot of good earnings reports coming out for our stocks, and as long as the silver lining of critical path emerges I think we'll be fine.
Please remember folks that we go into every earnings season locked and loaded. Our stocks have stunning sales, stunning earnings they trade at very reasonable price-earnings ratios, and right now there is over $4 trillion of cash on the sidelines that represents over, literally over 30% of market value. What we're waiting for is a spark, whether it's a Fed interest rate cut or Mr. Obama saying there's not going to be any tax increases, something like that to get the market going because there's a lot of a fear out there in the market. So, interesting times we're in, very stressful but on all counters it's too late to sell. There's been a lot of very serious liquidity problems out there and we expect that a Federal Reserve rate cut in the upcoming third quarter earning's announcement's season will help show up our stocks immensely. So, hang in their folks, we know it's been very, very painful for a lot of you but I think help is very, very near.
...
Thursday, October 2, 2008
Bank Failures Expected to Increase
Bank failures exploded with the real estate bust and S&L crisis of the 80’s and early 90’s. In the current environment, we are not predicting anything on that scale in terms of the number of failures to come. First of all, there are thousands fewer commercial banks today after years of M&A. Also, banks generally hold more capital against their assets. So bank failures have become very rare – and or several quarters, from 2004 through late 2006, there were no bank failures at all in the U.S. But smaller banks are very exposed to consumer loans and tend to hold mortgages on their books (versus securitizing them). While they often are more conservative underwriters than the big banks, they are still staring at major losses. Also, smaller banks tend to focus on lending to local real-estate builders and developers, another shaky industry in which the big banks are experiencing rapidly deteriorating credit quality. When we first ran this piece in June, there had been 3 failures in 2008. Currently, that number stands at 13.
source: Argus Research, Market Watch, October 2, 2008
source: Argus Research, Market Watch, October 2, 2008
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