Leading Index Dives

The Conference Board’s Index of Leading Economic Indicators fell by 0.4% in November, while the closely watched six-month rate of decline was 2.8% — the steepest decline since 1991. The largest contributors to the drop were building permits, stock prices and average weekly initial claims. Only four of the 10 indicators in the LEI registered gains, including new orders for consumer goods, the interest rate spread, money supply and new orders for non-defense capital goods. Meanwhile the coincident index fell for the sixth time in seven months. There’s no doubt that the economy is mired in one of its deepest recessions in decades. Conditions will probably not improve until the new administration takes office in late January. But we remain hopeful for a mid-to-late-year recovery, largely because of the structures-related, jobs-creating fiscal impulse expected to be enacted in late January.

source Argus Research Market Watch, December 23, 2008

Potential Fuel for the Fire

The percentage of Household Financial Assets allocated to cash has risen back to levels last seen in the Bear Market of 2000-2002. According to our calculations, households now have 21% of their total financial assets in either checkable deposits, currency, time and savings deposits or money market fund shares. During the bull market of 2003-2006, the percentage dropped to 19%, as household funds were diverted into corporate equities and mutual fund shares. On a dollar basis, the funds on the sideline for the Household sector now total $8.4 trillion, out of total household financial assets of $39.8 trillion. Were investors to move back into the market as they did in 2003, as much as $1 trillion could be deployed into stocks. This move could have a major impact on the market, as the capitalization of the S&P 500 is now $7.9 trillion.


source: Argus Research Market Watch, December 18, 2008

Tobin’s ‘q’ at 0.76 in QIII

The Federal Reserve recently released its quarterly Flow of Funds data for the third quarter, which permits us to estimate a back-of-the-envelope value of Tobin’s ‘q’ — a measure of market valuation. Investors will recall that ‘q’ is defined as the ratio of the market value of a firm to the replacement cost of its assets – in this case, we are estimating figures for the entire industry. According to Nobel Laureate James Tobin, the ratio of total stock market value to the stock market’s net worth (corporate net worth) is a reliable indicator of market valuation. When the stock market trades at a ‘discount’ to the replacement cost of its assets, the market is inexpensive, or cheaper to buy than build. This discount possesses ‘q’ ratios that are less than 1.0. Conversely, when “q” exceeds 1.0, the market trades at a premium to its replacement cost. The runup from 1996-2000 had ‘q’ approaching the unthinkable value of 2.0. Encouragingly, the most recent level of 0.76 is the lowest since 1965 – quite discounted. The longterm average for Tobin’s ‘q’ is 0.76.


source: Argus Research Market Watch, December 17, 2008

Fed Meets Today

The Federal Reserve is scheduled to meet today to discuss the state of economic affairs. We anticipate a 50-basis-point cut today, and another 50- basis-point reduction on January 28. The Fed Funds rate currently stands at 1.0%, and Street expectations are varied. Of 82 economist polled by Bloomberg, 55 look for a 50 bps cut, 16 for no change, six for a 25 bps cut, four anticipate a 75 bps cut, and one sees the Fed slashing by a full point. A 50 bps rate would be the lowest since 1954, when the Fed first reported the data. Over the last few weeks, the effective Fed Funds rate has been trading at 48 basis points, which suggests a 50 bps cut would probably not impact the financial markets. Also, changes in the funds rate usually influence the economy 12-to-18 months down the road — so there’s really no near-term economic reason to reduce rates.

source: Argus Research Market Watch, December 16, 2008

Market Review After Fed's Bold Steps

FOMC’s decision to go the market one better and reduce its target rate to a range of 0%-0.25%. The Fed also provided a list of potential actions to further prop up the financial system. The market managed to add to gains into the close of trading. Other
economic data released during the session included the consumer price index, which came in below expectations at minus 1.7%,and housing starts and permits for November, which were well below projections. The DJIA closed up 359.61 points at 8,924.14, the S&P 500 added 44.61 points to close at 913.18, and the Nasdaq Composite finished regular trading up 81.55 points at 1,589.89. Bonds rallied strongly following the Fed’s action, and the dollar lost ground against most major currencies. As selling pressure has tapered off in recent sessions and the market has regained a measure of optimism over stimulus actions, recent economic data has been even more negative than many had been expecting. The economy – and corporate profits – may be in for a long slog before again reaching positive postings, but the market is already showing signs of anticipation of the upturn. This is likely to be balanced by further spates of negative turns and outright fear in the markets in the near term, suggesting that while volatility has cooled a bit recently it could remain at elevated levels for some time yet. (author: Kevin Calabrese, Market Digest, Argus Research 12-17-2008)

Profit Outlook is Murky

Earnings estimates are falling on the Street, but there is a wide range of variability in the outlooks. For example, on the S&P website, the bottom-up view of the official index arbiter calls for S&P 500 EPS in the mid-80s next year. Some strategists, however, are as low as 53. Our outlook is for 56, down from an estimated 65 in 2008 and an EPS peak of 91 in 2Q07. Our estimate thus implies a peak-to-trough decline in profits of approximately 40%, which is not far from the peak-to-trough slide in the S&P 500. Why the variability on the Street? For one thing, transparency is lacking in most industries, as demand has shriveled. In addition, the S&P 500 Index has undergone substantial changes this year. Major earners such as Fannie Mae and Lehman Brothers are out, replaced by smaller firms with fewer profits. It may take a few more weeks — and more volatility — until analysts and strategists come closer together with their outlooks for earnings.

source: Argus Research Market Watch, December 11, 2008

Breaking the $10 Barrier

When stocks fall below $10, many investors initially think the bargain shopping has begun. But studies have shown that in most cases, single-digit stock prices don’t climb back to double-digits in short order, if at all. A Merrill Lynch study of Tech stocks in 2001 concluded that only 3.4% that fell below $10 between 1985-2001 rebounded to $15 or higher within the next year. The current bear market has pushed hundreds of stocks below the $10 level during the past year. According to S&P, 101 stocks in the S&P 500 are in single digits — the most in 28 years. At Argus, 249 out of the 708 we cover are below $10. Our chart shows that, once again, many of these companies are in the Tech sector, as well as in the Consumer Discretionary and Financial groups. We do see some attractive sub-$10 stocks, though, including Saks Inc., Nova Chemicals, Genco Shipping & Trading, Och Ziff Capital Management and Mylan Labs.

Source: Argus Research Market Watch, December 4, 2008

From today's reading ...

From SeekingAlpha.com

Bull/Bear Ratio Is a Contrarian Indicator | Walid Nasserdeen | December 1, 2008

The Bull/Bear ratio, a market indicator popular with insiders, is a poll of investment professionals that gauges whether they are bullish, bearish, or neutral on the stock market. The weekly publication by Investor's Intelligence is considered the most relevant measure of market sentiment as participants have daily dealings within the financial markets. The ratio shows the relationship between bullish and bearish advisers and is interpreted to be a contrarian indicator, since extremes in either direction are signals of a reversing market trend. ...

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A Mean One

The current Bear Market settled quickly on Wall Street, and has done extreme damage compared to other Bear Markets since 1900. There have been 12 other periods over this time frame in which the markets have fallen at least 20%. The average decline during those Bears has been 36%. The peak-to-trough decline in the current bear market has been 52% on a closing-price basis, and 53% in terms of intra-day trading. Typically, Bear Markets have taken 16 months to reach the bottom; the current bear is only 13 months old. On the way back up – and there has always been a way back up – investors have waited on average 33 months for the markets to recover. The shortest period was nine months, in 1970. The longest was 151 months, during the Great Depression in 1929-1933.


Source: Argus Research Market Watch, December 1, 2008