Global Stock Markets: Fleeing for the Exits

The past week witnessed mounting evidence that the world economy was facing a sharp downturn, causing unrest to engulf financial markets. Stocks and emerging market currencies and bonds remained under heavy selling pressure as risk-averse investors rushed to liquidate positions, with the U.S. dollar, Japanese yen and developed market bonds providing perceived safe havens.

Improvements in the credit markets provided little encouragement to battle-weary investors in the face of weak U.S. earnings reports and a poor outlook for at least the next few quarters. Forced selling by hedge funds needing to meet margin calls and redemption requests again featured prominently. The S&P 500 Index lost 6.8% on the week (YTD -40.3%), pulling the Index down to levels last seen in 2003.

With financial woes weighing on investor confidence, I couldn’t help thinking of what President Thomas Jefferson said in 1802:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.

Fast forward to 2008, specifically to former Fed Chairman Alan Greenspan’s testimony to a House Oversight Committee hearing on the roles and responsibilities of federal regulators in the current financial crisis.

Greenspan described the financial crisis as a “once-in-a-century credit tsunami.” He acknowledged that the crisis exposed flaws in his thinking and to the working of the free market system, telling the Committee that his belief that the banks would be more prudent in their lending practices because of the need to protect their shareholders had been proven wrong by the crisis. He called this a “mistake” in his views and said he was “in a state of shocked disbelief.”

He also said:

The housing bubble became clear to me sometime in early 2006, in retrospect. I did not forecast a significant decline because we have never had a significant decline in price.

Whew!

Bill King (The King Report) commented:

Why did no one on Capitol Hill remind Easy Al that he mocked Americans for not taking adjustable-rate and other low-rate gimmick mortgages – only days before he hiked rates.

While we are on the topic of the credit debacle, allow me to share with you, courtesy of David Fuller, a little light relief on the bailout workings:

Young Chuck moved to Texas and bought a donkey from a farmer for $100. The farmer agreed to deliver the donkey the next day. The next day the farmer drove up and said, ‘Sorry son, but I have some bad news, the donkey died.’ Chuck replied, ‘Well, then just give me my money back.’ The farmer said, ‘Can’t do that. I went and spent it already.’ Chuck said, ‘Ok, then, just bring me the dead donkey.’ The farmer asked, ‘What ya gonna do with him?’ Chuck said, ‘I’m going to raffle him off.’ The farmer said, ‘You can’t raffle off a dead donkey!’ Chuck said, ‘Sure I can, watch me. I just won’t tell anybody he’s dead.’ A month later, the farmer met up with Chuck and asked, ‘What happened with that dead donkey?’ Chuck said, ‘I raffled him off. I sold 500 tickets at two dollars a piece and made $998.’ The farmer said, ‘Didn’t anyone complain?’ Chuck said, ‘Just the guy who won. So I gave him his two dollars back.’ Chuck now leads the U.S. bank bailout team.

Next, a tag cloud of the text of the plethora of articles I have devoured during the past week. This is a way of visualizing word frequencies at a glance. Not too many surprises here with “banks” still dominating the words.

The list of well-known names identifying value on the U.S. stock market at current levels is growing by the day and includes the likes of Jeremy Grantham (GMO – “Careful buying is justified"), Warren Buffett ("Buy America. I am"), John Hussman (Hussman Funds - "Why Warren Buffett is right") and Barry Ritholtz (The Big Picture - "Another buy in"). Even perma-bears such as James Montier and Albert Edwards (Société Générale - "Turning more bullish") are increasing their equity exposure, albeit only for the short term.

BCA Research said:

… technical measures of momentum and breadth are at historical lows and valuations have been restored to the point where some notable long-term deep value investors are stepping up their purchases.

However, they advised investors to remain cautious.

The risk/reward trade-off does not yet warrant aggressive accumulation of risky assets, given that many investors are looking for a bounce to lighten positions, redemption orders continue to mount, and a prolonged recession lies ahead. Even if equities are nearing a bottom, there should be several good opportunities to add exposure in the months ahead. We recommend … only nibbling on stocks selectively.

I am still of the viewpoint that stock markets are in a multi-month phase of bottoming out that will see relief, and potentially profitable rallies from time to time. But stock market valuations, in general, are still stretched when considering an environment of economic and profit recession, arguing that a secular low may not necessarily have been reached.

I am about to hit the road again – traveling to neighboring country Mozambique for a few days – and am therefore only doing a shortened version of “Words from the Wise” this week. Although I am not doing my customary review of the financial markets’ movements and economic statistics, I am including a full section of interesting excerpts from news items and quotes from market commentators.

Economic reports

According to the Survey of Business Confidence of the World conducted by Moody’s Economy.com

Business sentiment fell again last week to another new record low. Negative responses to the nine questions posed in the survey measurably out-number the positive ones everywhere but in Asia. But even in Asia confidence has weakened notably. The financial panic which began in early September has been a body blow to global business confidence and thus the global economy which, according to the survey, is now in recession.

Economic data in the U.S. and throughout the rest of the world showed an acceleration in the weakening of activity.

As far as the U.S. interest rate outlook is concerned, Asha Bangalore (Northern Trust) said:

At its meeting of October 28 and 29, we expect the FOMC to reduce its target Federal funds rate by 25 basis points to a level of 1.25%. The Federal funds rate futures market is placing a higher probability on a 50 basis point reduction. The effective federal funds rate has held below 1.00% every trading day since October 16. (Also see my recent post “US rate cut imminent.")

Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Oct 20	10:00 AM	Leading Indicators	Sep	-	-0.4%	-0.1%	-0.5%
Oct 22	10:35 AM	Crude Inventories	10/18	-	NA	NA	NA
Oct 23	8:30 AM	Initial Claims	10/18	-	455K	465K	461K
Oct 24	10:00 AM	Existing Home Sales	Sep	5.18M	4.97M	4.95M	4.91M

Source: Yahoo Finance, October 24, 2008.

In addition to the FOMC’s interest rate decision on Wednesday, October 29 and the Bank of Japan’s monetary policy announcement on Friday, October 31, next week’s U.S. economic highlights, courtesy of Northern Trust, include the following:

1. New Home Sales (October 27): The consensus forecast is a drop in sales of new homes to an annual rate of 450,000 during September from 460,000 in August. In August, purchases of new homes had dropped 66.9% from their peak in July 2005.
2. Durable Goods Orders (October 29): Following a large decline in August, durable goods orders (-1.0%) are expected to have fallen again in September. Consensus: -1.1% versus -4.5% in August.
3. Real GDP (October 30): Real GDP is predicted to have dropped 0.6% in the third quarter, which could possibly be the first of a string of declines. The largest negative contribution is most likely from consumer spending, followed by the housing sector and business equipment spending. Consensus: -0.5%.
4. Personal Income and Spending (October 31): The earnings and payroll numbers for September suggest a drop in personal income (-0.1%). Auto sales and non-auto retail sales have been significantly weak, implying a decline in consumer spending in September. Consensus: Personal Income +0.1%, Consumer Spending -0.3%.
5. Other reports: Consumer Confidence (October 28).

Click here for a summary of Wachovia’s weekly economic and financial commentary.

A summary of the release dates of economic reports in the U.K., Eurozone, Japan and China is provided here. It is important to keep an eye on growth trends in these economies for clues on, among others, the direction of the U.S. dollar.

Markets

The performance chart obtained from theWall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, October 24, 2008.

Be careful and remember the old Street adage: “In a bear market, money returns to its rightful owners.”

That’s the way it looks from Cape Town.

Source: Unknown

Comments

[vbierschwale:]

Good article.

I for one believe the confidence will return when we start letting the leaders that run our corporations into the ground fail, making room for leaders that will do whats right for the corporation, for America, for their fellow Americans, Friends and Neighbors instead of themselves.

When you reward failure, all you get is failure.

Virgil
www.KeepAmericaAtWork....

2008 Oct 26 08:37 AM

[TAMR666:]

YOU ARE SO RIGHT!

2008 Oct 26 10:12 AM

[notsosmart:]

its too late.the self serving bums have the millions stashed in swiss accts.sadly the scam continous.the bailout should have been paid to all tax filers.these people have ruined capitalism.it wasnt perfect but it was the best available.this new socialism for the rich will devastate the middle class.

2008 Oct 26 11:11 AM

[Old Trader:]

A very minor point; PLEASE lose the "tag cloud". It appears these are currently "en vogue", but are a pure waste of pixels.

Thank you.

2008 Oct 26 12:16 PM

[turktribe:]

Normal capitalism calls for rewarding the successful administrators and firing the losers. WE have allowed these failures to be rewarded with either
'more options' or a GOLDEN parachute - which the stockholders pay for.
IF these top notch greedy administrators knew in advance, that their 'fast
buck' actions would require their repayment of personal $$ gains of all
kinds, and being summarily fired, they would give much greater thought
to their programs. ALSO, the Board of Directors should be made to relinquish all their BIG payments for not having done there diligence
that the job required. Most Boards are made up of Friends of the Chief,
who rubberstamp his INCOME requests, and in turn receive very high
payments for quietly acquiescing to his grandious programs.

2008 Oct 26 04:11 PM