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.
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