INVESTORS PREP FOR 4QEPS

Alcoa is due to kick off the fourth-quarter EPS reporting season on Monday. Forecasts for the Basic Materials bellwether call for a loss of $0.20, versus a profit of $0.44 in the comparable period a year ago. This is likely to be a microcosm of the earnings results for the market as a whole. Our Director of Market Strategy David Ritter is calling for a 20% decline in profits for the quarter, which would mark the sixth quarter in a row of EPS declines. Our full-year estimate for S&P 500 earnings in 2008 is $65, implying a 14% year-over-year decline. We look for further weakness in 2009, to $56. In addition to challenges on top-line growth, we expect margins to fall as companies work feverishly to bring costs in line with revenue. We reckon that after-tax profits as a percent of GDP may fall all the way to 5.8%, matching the 1965-70 drop, versus 9.3% at the peak in 2007. Later in 2009, though – and after months of heavy job cuts – the outlook for margins and profits may brighten. We think stocks will anticipate this so we are bullish on equities, despite the near-term fundamental challenges.


source: Argus Research Market Watch, Thursday January 8, 2009

Obama, Madoff and More...

Obama forecasts bleak future without stimulus. Obama painted a grim picture of the country's economic future sans immediate stimulus action, saying he doesn't "believe it's too late to change course but it will be if we don't take dramatic action as soon as possible." Without a rapid fiscal stimulus package, he warned, the economy will become 'dramatically worse,' unemployment could reach double-digits and the recession 'could linger for years.' The speech marked the launch of what is expected to be an aggressive campaign to raise public support for the stimulus plan.

How much will Madoff investors see? Based on the value of Madoff's brokerage, and assets including real estate, boats and jewelry, scammed investors may have access to as little as $1B of Madoff's money to satisfy as much as $50B in claims. The bulk of any refunds would likely come from other clients who withdrew money from Madoff recently, and government payouts (SIPC, tax refunds). According to one calculation, average Madoff victims might eventually get back $0.20 on the dollar. Small, direct Madoff clients could get back much more thanks to SIPC payouts of up to $500,000 per account. Large, indirect Madoff clients might not get much of anything at all. Meanwhile, insurers who cover financial institutions may be on the hook for over $1B to cover the legal costs for investment managers who gave client money to Madoff.

Swiss secrets revealed. UBS (UBS) will close 19,000 secret offshore accounts of wealthy U.S. clients under pressure from federal authorities who suspect the IRS is getting ripped off (no!). Balances will be transferred to other banks or UBS divisions, or else checks will be sent directly to clients - creating a damning paper trail. Here's how one UBS client puts it: "You can either take that check and throw it in the woods, or deposit it somewhere and get busted." Prosecutors suspect U.S. citizens have about $18B buried in UBS accounts (that's all?).

Unemployment came in down 524,000, better than the consensus of 525,000 and much better than the whisper of 600+. The unemployment rate reached 7.2%. Including "underemployment" the rate is around 13+%. Biggest concern with the date was the average work week of 33+hours. This points to an accelerating downturn in hours worked/week and potential for an increase in additional accelerating layoffs.

Will U.S. Treasuries Be the Next Asset Bubble to Burst?

In 2008, the Treasury market had its best annual rally in more than 25 years on fears of global credit crisis, recession, deflation. 10yr and 30yr Treasury yields fell to all-time lows and T-bill yields even dipped into negative territory for the first time since the Great Depression. The total return of the 30-year bond was c. 45%, its best year since 1982. Treasuries in general returned 14%, outperforming S&P 500 by 53 percentage points

In 2009, any signs of a less than dire economic outcome may burst the bubble in Treasuries. With the U.S. government expected to issue between $1.5 trillion to $2 trillion of debt into the $5 trillion Treasury market to finance its rescues of the financial system, the risk of a sudden drop in prices is growing. 10yr and 30yr Treasuries are still yielding between 2-3%, 2yr notes less than 1%, T-bills near zero. The TIPS market is anticipating less than 0.5% annual inflation for the next 10 years.

Breaking Through Resistance

Stock prices seem to have stabilized somewhat since the Fed lowered its target for the Fed Funds rate to 0.25%-0.00%, the Obama Administration began to detail plans for a fiscal stimulus package and Detroit automakers convinced Congress to give them at least three more months. After the rally on January 2, the S&P 500 actually moved above the resistance established by the 50-day moving average. From a technical standpoint, the next major test will be the 100-day moving average, which is currently 1028. Before stocks can hit that threshold, though, the fundamentals will need to show improvement. While we think much of the bad news regarding 4Q results has been priced into the market, investors may not yet be anticipating the challenges that the first quarter will bring, despite government intervention. We look for the S&P 500 to trade in a range of 800-1000 for much of the first half, until it becomes clear that the economy is – or isn’t – gaining traction.

Argus Research Market Watch, January 5, 2009

2009 A Look Ahead

2009: Hoping for a turnaround, bracing for a thud. 2008 was a tumultuous, messy year, shaking investors' belief in basic market premises, including the value of the buy-and-hold strategy and the idea that stocks will outgain other assets over time. Volatility was startling, the stock market had its third worst year in over a century and the government spent billions of dollars frantically trying to plug holes in the economy. Some analysts believe a dismal '08 at least provided a bottom to this market, citing November's multiyear lows and the upswing that followed, though others expect another sag in 2009. Forecasters for 2009 have covered the full range of outlooks, from continued heavy losses to healthy recovery. Investors, meanwhile, are hoping 2009 brings a turnaround, but aren't counting on one.

FDIC goes back to the future. With at least 171 banks on the FDIC's 'problem list,' the agency is turning to a tool last used during the savings and loan crisis. Called 'loss sharing,' the mechanism provides an incentive for healthy banks to take on the troubled assets of a failed institution, with the government agreeing to cover the majority of future losses. The FDIC tried out the model several times in 2008, including in its initial rescue effort for Wachovia (WB) and as part of an aid package to Citigroup (C), and is feeling out industry interest in the approach.

Quotables. Warren Buffett's Berkshire Hathaway (BRK.A) fell 32% in 2008, marking its worst performance in over thirty years. Buffett, however, appears unfazed. "It's happened to me three other times. It happened when it went from 90 to 40 back in 1974, and it happened in 1987. It went down 50 percent in 1998-to-2000. I mean, I hope I live long enough so it happens a couple more times."

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