Fundamentals Remain Negative This Week 13 comments
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There is a loose correlation between the market and the economy. If there was a tight linkage, the market would move up and down based on economic factors alone. It does not as the market and the economy functions as if it were in a chess game. The market is trying to anticipate future conditions to be able to take advantage of them when they happen.
I like the chess board analogy as it pits the economy against the market not as a single force but many forces interacting with each other. Each chess piece has its own logic and moves independently of the others. The economic chess pieces impact each other and create dynamics which at times are larger than the sums of the individual parts. The market chess pieces are acting and interacting not only to their vision of future dynamics but also to unexpected realities.
We are in a bear market, inside a bear economic cycle, inside of a Great Recession. Things are not predictable as there are too many extreme forces in play. The big players in the market know no more than you about the economy. The market’s movements this month are not based on knowledge of any new fundamentals, but more on changing existing chess piece placement.
The guidance given from corporations are guesses. Although corporate executives know more than you about their company and its market, they do not know more than you about the economy.
There is a lot of noise out there about the future and what it holds. In these unpredictable times, you need to listen and understand points made by people you agree with and do not agree with. I stop reading or listening to opinions when no substantiation is given – even if I agree with the opinion. I learn from understanding the rationale of opposing views.
When will the market improve? – tomorrow, next year, 2015 – who knows. Do not confuse the market with the economy. However, if the market improves over time and the economy does not, the market will reverse any appreciation it has made. That is why it is so important as a capital conserving type investor to wait to enter the market until some positive forward looking economic indicators start to appear.
Big News of the Week
The WSJ ran an unsubstantiated story this week about the Federal Reserve wanting to issue its own debt. In the Federal Reserve Act which is outlined in US code, title 12, chapter 3, I can find no paragraph which allows for the Fed to issue debt. The Fed’s actions are becoming more and more outrageous – and Congress which holds the constitutional power for the Fed’s activity does not appear able or willing to oversee what is going on. In this writer’s opinion, the Fed is single handedly debasing the US dollar.
Detroit appears to be getting a little TARP help from the White House to keep GM and Chrysler alive until January when a new Congress is seated. GM is stubbornly resisting bankruptcy believing it would end their existence. I believe the automakers must be helped, but only under bankruptcy where the government can act as guarantor of debt – and the auto industry can continue. Detroit’s destiny would then be guided by the bankruptcy court – not Washington. Collapse of any automaker at this point will have a cascade effect on the economy – almost guaranteeing a depression.
The market rose Friday on no good news. The worst news was the evaporation of another $50 billion of capital under the guidance of Bernard Madoff in a giant ponzi scheme. I would not be surprised if this has many consequences that are not obvious right now.
Summary of the Week’s Economic Fundamentals
I saw nothing this week to influence my asset preservation investment strategy. I am watching currency fluctuations and gold (as always), but see nothing yet which could be described as a trend. I see early signs of the Fed and Treasury winning their struggle to debase the dollar against other currencies. Also, the indicators this week reinforce the deflationary trend which has been slowly growing over the last few months.
Point blank – there is no good news. The economy is continuing to deteriorate. There are really no positive signs even looking ahead six months.
Please note that my idea of indicators may be at variance with NBER or The Conference Board. And I am ignoring data on money supply because of the unparalleled intervention of liquidity and debt (and buying debt with liquidity) by the Fed makes any meaningful analysis impossible. Below is a list of news which happened this week which either reinforces or contradicts any investment strategy.
Positive Leading Indicators
None this week
Negative Leading Indicators
The World Bank 2009 economic forecast predicts slowing world growth to just 0.9 percent and trade volume would fall 2.1 percent, as the financial crisis takes its toll on rich and poor nations around the world.
ECRI’s Weekly Leading Index which forecasts economic expansion or contraction is at 60 year lows. This forecast is forward looking approximately six months. This week’s forecast can be found by clicking on “bio & more articles” under my picture.
Positive Coincident Indicators
The price of oil closed at $46.28 a barrel on the New York Mercantile Exchange. Oil did gain 13% this week. In my view, any number lower than $60 per barrel has a positive effect on the economy.
Negative Coincident indicators
Mortgage loan application volume decreased of 7.1 percent on a seasonally adjusted basis from one week earlier according to the Mortgage Bankers Association.
In the week ending Dec. 6, the advance figure for seasonally adjusted initial claims was 573,000, an increase of 58,000 from the previous week's revised figure of 515,000.
Positive Trailing Indicators
US Manufacturing Corporations profits for 3Q 2008 rose over 23% from 2Q 2008 according to BLS. For large mining corporations, profits rose over 300% over 2Q 2008. Large wholesale trade corporation’s profits were unchanged. However, since 2006, Corporate profits are relatively unchanged, and there is a significant downward revision of forward profit guidance by Corporations.
Negative Trailing Indicators
Conference Board Employment ETI index down 1.6%.
The U.S. Import Price Index decreased 6.7 percent in November as falling prices for both petroleum and non-petroleum imports contributed to the decline. Export prices declined 3.2 percent in November, the fourth consecutive monthly decrease.
According to BEA, in October both imports and exports fell (month-over-month) – but the trade deficit increased anyway.
The rate of growth of credit in 3Q 2008 is falling dramatically (except for the Federal Government) according to the Fed. Consumer credit actually contracted.
China, the world's fourth biggest economy, saw its imports and exports fall in November for the first time in seven years. This is not good news for those who hoped China could lead the world (and the USA) out of this recession.
BLS reported that the Producer Price Index (PPI) for finished goods fell 2.2% in November. As this loss came from the fall in price in oil this is not necessarily a negative. However, intermediate goods prices fell 4.3%, and crude goods fell a massive 12.5% which is deflationary (this negative trend began in Aug 2008).
The U.S. Census Bureau announced Friday that advance estimates of U.S. retail and food services sales for November decreased 1.8 percent (±0.5%) from the previous month and 7.4 percent (±0.7%) below November 2007.
The U.S. Census Bureau announced Friday that sales and manufacturers’ shipments for October were down 3.5 percent (±0.3%) from September 2008 and down 1.6 percent (±0.5%) from October 2007. Manufacturers’ and trade inventories were down 0.6 percent (±0.1%) from September 2008, but up 4.6 percent (±0.5%) from October 2007. The inventory / sales ratio is still rising, and very indicative marker of the beginning of a recession
Quotes of the Week
From Kip Herriage in Lower Markets Are Still to Come
Remember folks, this very scary process is just getting underway…this is the deleveraging process that must follow the credit bubble we’ve just now said adiosto, and I expect it to last a minimum of 12-18 months longer. In a consumer based economy (which is 70- 80% of our domestic growth), rather than a manufacturing based one, our economy MUST continue to shrink until the consumer returns to support it.
From Brett Steenbarger where he is warning that the Fed has an intention to devalue the dollar:
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today," Bernanke assures listeners, "it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.
Justin Lin, the chief economist of the World Bank, describing the World Bank 2009 economic forecast issued this week:
The financial crisis is likely to result in the most serious recession since the Great Depression. …… The global economy is at a crossroads, transitioning from a sustained period of very strong developing country-led growth to one of substantial uncertainty.
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> Sitting at 100% cash right now. I see no reason to buy stocks at
> $30 a share when they'll be at $22 in a couple months
And in a couple of months will you be saying, "I see no reason to buy stocks at $22 a share when they will be at $16 in a couple of months."?
The other disconnect that is persisting is the credit market/equity market divergence. Corporate spreads, cds, etc. are wide while the stock market has rallied. The credit markets worsened on the bad news that sent the stock market upwards. That usually resolves itself in the favor of the credit markets, at least recently.
I guess the critical question is, when will the bear rally end? What will push the market past the bullishness and end all the long-only managers coming on TV and announcing the the bottom is in and that everyone should go buys stocks.
You may remember Keynes' image: It is not about choosing the prettiest lady, it is about picking the lady that the market as a whole views as the prettiest. So we don't care about what you (or I, for that matter) think, we care about what Mr. Market thinks.
With the S&P 500 cut in half, dividend yields above bond yields for the first time since 1958, monetary and fiscal policy in full reflation mode, positioning a portfolio for a deflationary outcome means betting heavily against the impact of policymakers on the economy. Could be right, but unlikely.
Today's doomsayers are akin to yesterday's real estate or dot com bulls. Remember "they don't make real estate anymore"? "Tech stocks are a safe heaven against interest rates as they're valued differently"?
Not calling a bottom here. I think we're in a secular bear market since 2000, probably ending sometime in 2015 or 2020. My bet (that's what it is, just a bet) is that the bulk of the cyclical bear market (S&P down from 1550 to 750 or so) is behind us.
So, upside potential far outweighs downside risk today. We may (35% probability?) undershoot, because that's how markets work. It's worth the risk in my best judgment.
Isn't it funny that the "smart money" fat cats invested with Bernie Madoff would bail out now, to the point that Bernie's voodoo finance thingy would implode? If they're smart, then you're right. If they're not so smart, then I may have a point.
Today's doomsayers are akin to yesterday's real estate or dot com bulls."
I agree... this ends up being about time horizon. in a 3-5 year horizon, now to the next 6 months would be a good time to buy as was 20022003, as was 1990-1991. in a 3-5 month horizon, who knows if we saw the bottom on nov 20th, or we will see it in the next few months.
It's a nasty recession, but we also had the nastiest bear market so far in a long time. I am finding and buying below book value companies and stock with single digit PEs even after lowered estimates. so the economy may be off 5% in the next few quarters. find a stock off 75% and wait for recovery.
Why havent corporate spreads gotten better, give the large amount of liquidity that will be sloshing about? The prices are out of whack to fundamentals, which are bad but not nearly as bad as the spreads would indicate.
If I stay on the sidelines and I am wrong then what could I miss out on? A 35% run-up to say S&P 1,200 (there's no way we'll be marching any higher than that back to 1,500 or even new highs any time soon).
If I jump in and I am wrong then how much could I lose... Could the S&P get cut in half again, and again? I know that in "normal recessions" a 43% correction would probably be closing in on the bottom, but is this a normal recession or is it going to be worse? How much worse? Will this one be truely multi-generational? The kind of world-wide economic contraction that they say only comes around after the people who have experienced the last "big one" have all died off.
I'm ok right now but am afraid if I lose a lot more then what financial situation I might be in. The upside just isn't so attractive right now vs what could yet potentially still happen on the downside.