Global Markets in Review: Stock Market Outlook

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Turning to the outlook for the stock market, Bennet Sedacca (Atlantic Advisors Asset Management) warned as follows in a guest post entitled “Setting the bull trap:“

The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card - and with our money no less. They are also setting up the ULTIMATE BULL TRAP - a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.

BCA Research added:

It is difficult to see how equities can sustain an advance until the monetary transmission mechanism begins to function more normally. In addition, the poor earnings outlook will be a persistent headwind for stocks throughout 2009 and analysts are likely to be disappointed in their overly optimistic profit forecasts: earnings could fall by as much as 25 to 30% as revenue growth slows and margins contract.

Arguing the bullish case from Hong Kong, Puru Saxena’s MoneyMatters newsletter listed the following reasons to support his viewpoint that “the skies are clearing for a four- to five-year bull market." They include surging liquidity, low interest rates, declining corporate bond yields, declining TED spread, low valuations, volatility has peaked, the U.S. dollar rally has ended, global stock markets are making higher lows, and a huge amount of cash on the sidelines.

The short-term technical picture is tricky, with the Dow having pulled back below the 50-day moving average and the S&P 500 (shown in the graph below) testing both the 50-day line and the short-term trendline defining the bottom of a rising wedge (usually a negative chart pattern). The December 22 and 29 lows of 857 are also important initial levels for the uptrend to remain intact.

Commenting on the chart, Richard Russell (Dow Theory Letters) said:

My guess (and I do have to guess) is that the market will be doing work inside the bottom pattern. This is only natural since it takes a good deal of ‘work’ for stocks to break out of a bottom in the face of the ongoing abysmal news. It looks like we are going to have some bobbing and weaving inside the base that has formed. A breakout either way may be a matter of months away.

An old stock market saw tells us the first five trading days of January sets the course for January, and if the month of January is higher, there is a good chance the year will end higher, i.e. the so-called "January Barometer." So far, so good, as the S&P 500 registered a gain of 0.7% over the first five days (although the Dow was down by 0.4%).

Jeffrey Hirsch (Stock Trader’s Almanac) said:

The return of seasonal bullish market action is encouraging. Since the week of Thanksgiving the market has been constructive. Thanksgiving week was bullish, as was the last half of December, the Santa Claus Rally and now the First Five Days. The final arbiter of these year-end/new-year indicators is of course the January Barometer at month-end.

While a sustained stock market advance will rely on the thawing of credit markets, I am of the opinion that selective buying in global markets is in order. However, make sure to winnow the wheat from the chaff. The current default rate on American high-yield bonds is less than 4%, but Barclays Capital is predicting a rate of 14.3% by the second half of 2009.

The Economist said:

If 2008 was the year of systemic risk [i.e. risk affecting all assets], 2009 seems likely to be a year dominated by specific risk [i.e. risk that is unique to each asset].

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Figuring out the lie of the financial land.“

Economy

The latest Survey of Business Confidence of the World conducted by Moody’s Economy.com, said:

Global business confidence began 2009 as dark as it has ever been. While sentiment has improved a bit during the last two weeks, it remains near record lows. Businesses are nearly equally pessimistic across the globe and across all industries. Hiring intentions have turned particularly negative in recent weeks. Pricing power has collapsed, suggesting that deflation is a significant threat.

The eurozone economy contracted by 0.2% in the third quarter of 2008, according to Eurostat. Following a similar decline in GDP in the previous quarter, the monetary union has officially entered a recession.

The latest industrial production data for the UK, Germany and France continued a downward spiral. It therefore did not come as a surprise that the Bank of England (BoE) on Thursday lowered its repo rate by 50 basis points to 1.5% - the lowest level since the inception of the BoE in 1694. The European Central Bank (ECB) is also expected to lower interest next Thursday as a result of gloomy economic reports and the eurozone inflation rate last month falling below the ECB’s target.

Nouriel Roubini (RGE Monitor) said:

Manufacturing surveys reflect simultaneous contraction in manufacturing throughout the G7 and in key emerging markets like China, Brazil and Russia, verifying the global recession that is well on course. PMI and industrial production is at decade lows in key emerging markets, and the US and EU PMI surveys reflect the weakest levels in several decades.

The JPMorgan Global Manufacturing PMI, posting its weakest reading ever in December, bears this out.

As far as the U.S. is concerned, 2008 ended on a depressing note for the U.S. labor market. Payroll employment declined by 524,000 jobs in December, slightly more than expected and the largest one-month decline since December 1974. Payrolls shrank by 2.6 million jobs over the course of 2008, recording the largest annual decline since 1945. The unemployment rate rose to 7.2% - the highest level since the early 1990s.

Bill King (The King Report), said:

The Bureau of Labor Statistics employed seasonal adjusting chicanery to mitigate job losses. Not seasonally adjusted (NSA), 954,000 jobs were lost. Additionally, the BLS’s hokey Net Business Birth/Death Model unfathomably created 72,000 jobs in December.

Asha Bangalore (Northern Trust) summarized the U.S. economic situation as follows:

The Fed is expected to stay on hold for all of 2009 in terms of implementing monetary policy changes via adjustments of the target Fed funds rate, but other non-interest avenues to support/ease financial market conditions remain open. The details of the employment report are grim and provide ample evidence for proponents of a large fiscal stimulus package to revive economic activity.

Week’s economic reports

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Jan 5	10:00 AM	Construction Spending	Nov	-0.6%	-1.3%	-1.4%	-0.4%
Jan 5	2:00 PM	Auto Sales	Dec	-	3.1M	NA	3.3M
Jan 5	2:00 PM	Truck Sales	Dec	-	4.1M	NA	4.3M
Jan 6	10:00 AM	Factory Orders	Nov	-4.6%	-2.0%	-2.3%	-6.0.%
Jan 6	10:00 AM	ISM Services	Dec	40.6	37.0	36.5	37.3
Jan 6	10:00 AM	ISM Services	12/08	-	NA	-	37.3
Jan 7	10:30 AM	Crude Inventories	01/02	6682K	NA	NA	549K
Jan 7	10:35 AM	Crude Inventories	01/02	-	NA	NA	NA
Jan 8	8:30 AM	Initial Claims	01/03	467K	540K	545K	491K
Jan 8	2:00 PM	Consumer Credit	Nov	-$7.9B	$2.0B	$0.0B	-$2.8B
Jan 9	8:30 AM	Average Workweek	Dec	33.3	33.5	33.5	33.5
Jan 9	8:30 AM	Hourly Earnings	Dec	0.3%	0.2%	0.2%	0.4%
Jan 9	8:30 AM	Non-farm Payrolls	Dec	-524K	-520K	-525K	-584K
Jan 9	8:30 AM	Unemployment Rate	Dec	7.2%	7.0%	7.0%	6.8%
Jan 9	10:00 AM	Wholesale Inventories	Nov	-0.6%	-0.7%	-0.7%	-1.2%

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

Source: Yahoo Finance, January 9, 2009.

In addition to a speech by Fed Chairman Bernanke at the London School of Economics (Tuesday, January 13) and the European Central Bank’s interest rate announcement (Thursday, January 15), the US economic highlights for the week, courtesy of Northern Trust, include the following:

1. International Trade (January 13): The trade deficit is predicted to have narrowed in November ($54.5 billion versus a trade gap of $57.2 billion in October), largely reflecting lower prices of imported oil. Consensus: $51.5 billion.
2. Retail Sales (January 14): Auto sales moved up slightly in December (10.7 million versus 10.3 million in November). But lackluster non-auto retail sales and lower gasoline prices should bring down the headline reading. Consensus: -1.2% versus 0.3% in January; non-auto retail sales: 0.2% versus 0.3% in January.
3. Producer Price Index (January 15): The Producer Price Index for Finished Goods is expected to have declined by 1.7% in December, reflecting lower energy prices. The core PPI is most likely to have risen by 0.1% after a 0.2% increase in November. Consensus: -2.0%, core PPI +0.1%.
4. Consumer Price Index (January 16): A drop in the overall CPI, due to lower energy prices, is nearly certain. The core CPI is expected to have increased by 0.1% after holding steady in November. Consensus: -0.9%, core CPI +0.1%.
5. Industrial production (January 16): The 2.4% drop in the manufacturing man-hours index in December is indicative of a large decline in industrial production (-1.3%). The operating rate is projected to have dropped to 74.5 in December. Consensus: -1.2%; Capacity Utilization: 74.5 versus 75.4 in November.
6. Other reports: Inventories, Import prices (January 14), Consumer Sentiment Index (January 16).

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

Markets

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

Source: Wall Street Journal Online, January 9, 2009.

As the Irish say: “Go n-éirí an bóthar leat. May the road rise with you.”

That’s the way it looks from Cape Town.

Comments

[investor88:]

Prieur sounds cautious which is only realistic. In such a market, taking a trading stance [if you good at it] may be appropriate.

Jan 11 07:43 AM

[aspen4ever:]

Buy LOW, sell HIGH!

Jan 11 05:00 PM

[SeekingTruth:]

As always Prieur, we can depend on you for a splendid compendium of highly relevant news and sage remarks. PS: Yes, Wedge Patterns imply uncertainty, although the one following Oct. 1987 turned out quite well. Today, however, is nothing like 1987 as we are in a much larger and deeper hole! I look forward to all your posts. Many Thanks.

Jan 11 10:11 PM