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) issued a short-term buy signal on Thursday:

We are once again increasing exposure to equities from 0% to a near fully invested posture. I fully recognize the bad news that is out in the marketplace, but given Treasuries at 0-2.25% and Mortgage Backed Securities at 3-4%, high quality large cap growth stocks (self-financing companies purchased via IVW - the S&P large cap growth ETF) look attractive to me.

We also like healthcare via PPH (pharma holders ETF), USO (oil ETF), XLV (broader healthcare ETF), but have a negative bias towards bonds and have taken substantial profits in recent days in the Mortgage Backed Securities space, where government intervention has led to artificially high bids. We also added a smallish position in XLF (financials). We believe quality is king and that ‘a’ low , but not THE low has been reached in stocks.

Key resistance and support levels for the major U.S. indices are shown in the table below. The immediate upside target is the 50-day moving average, followed by the November 4 highs about 16% to 18% from current levels (not shown on table). On the downside, the December 1 and all-important November 20 lows must hold in order to prevent considerable technical damage.

click to enlarge

An analysis of the number of stocks trading above their 50-day moving averages makes for interesting reading. “With the S&P 500 back into oversold territory and even approaching its November lows, it’s actually surprising to see this breadth measure at 40%,” said Bespoke.

At the prior lows, the number got down to zero! The fact that the overall declines have been limited to a smaller area of the market is a positive for those hoping that the lows will hold.

“As January goes, so goes the year,” is one of the most frequently quoted seasonal trends of the stock market. With the S&P 500 down by 5.9% after two weeks of the month, January is not off to a promising start. According to Jeffrey Hirsch (Stock Trader’s Almanac), every down January since 1950 has been followed by a new or continuing bear market or a flat year. Further research is provided by Jay Kaeppel of Optionetics, but the last word goes to Charles Kirk (The Kirk Report):

With the market closed Monday to observe Martin Luther King Jr., we are set to have another four-day work week and, in my experience, they tend to be some of the toughest. Not only will we have Obama’s inauguration, but lots of earnings reports to sort through.

While the market managed to end the week above S&P 850, we still have a lot of work to do to confirm that we can manage at least a decent counter-trend rally during earnings season. We are still oversold, but we need to see the buyers return in force and with confidence. Both have been missing so far in 2009.

For more discussion about the direction of stock markets, also see my post “Video-o-rama: Gloomy news batters investor sentiment.“

Economy

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

Global business confidence remains very negative, but has improved a bit since hitting bottom at the very end of 2008. It is still too early to conclude that sentiment is improving in any measurable way. 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.

As far as the U.S. is concerned, the Fed’s January Beige Book indicated continued and broad-based weakening throughout the nation. The latest round of economic data also confirmed that the recession was intensifying.

Industrial production declined by 2% in December, with output falling in all three major categories - utilities, mining and manufacturing - for the first time since October. For the fourth quarter as a whole, industrial production fell at an annual rate of 11.5%, more than twice as fast as at any time during the 2001 recession. All indications are that manufacturers will further reduce production in order to bring inventories in line with free-falling final sales.

Retail sales in December were significantly worse than expected, plunging by 2.7% - the sixth consecutive month of falling sales.

The U.S. trade deficit narrowed substantially to $40.4 billion (consensus $51.5 billion) in November, marking the fourth straight month of declining gross exports and gross imports.

News on the U.S. inflation front was relatively good with both the PPI and CPI continuing to retreat in December, falling by 1.9% and 0.7% respectively. Core prices barely managed to stay in positive territory, with core CPI rising by 0.1% for 2008 - the lowest increase since 1954.

Jamie Dimon, chief executive of JPMorgan Chase, predicted in an interview with the Financial Times that the U.S. financial and economic crisis would worsen this year as hard-hit consumers default on credit cards and other loans. Mr. Dimon said:

The worst of the economic situation is not yet behind us. It looks as if it will continue to deteriorate for most of 2009.

Source: Daryl Cagle

Elsewhere in the world, evidence mounted that the recession was widespread and deepening.

In a sign that the decline in economic activity in Japan was worsening, core machinery orders by Japanese businesses slumped by 16.2% in November - the sharpest monthly contraction since records began in 1987.

Germany’s coalition parties agreed on a second economic stimulus package totaling €50 billion (including €36 billion in infrastructure investment and tax cuts), to be put into place in an effort to pull the economy out of its worst recession since the end of the Second World War, according to CEP News. The package also includes a €100 billion “Germany fund” that would guarantee the debt raised by cash-starved businesses.

The European Central Bank on Thursday cut its main policy interest rate by 50 basis points to 2% - the lowest level ever. The total reduction since mid-October amounts to 225 basis points and highlights the Eurozone slipping deeper into recession and inflation dropping sharply.

Eurozone manufacturing continued to fell for the seventh straight month in November, amounting to a decline of 7.7% in year-ago terms.

click to enlarge

Source: Moody’s Economy.com

According to Bloomberg,

The International Monetary Fund’s managing director, Dominique Strauss-Kahn, chided European leaders for failing to grasp the depth of the coming slump in their region, creating the risk of social upheaval.

RGE Monitor reported that China had revised its 2007 GDP growth up to 13% from the 11.9% it previously reported. Nouriel Roubini’s research team said:

With Chinese exports, industrial production and other economic indicators slowing sharply, there is speculation that Chinese officials might smooth growth statistics. Uncertainty about Chinese economic statistics has led many analysts to use proxies for economic output which are more difficult to doctor. These proxies include electricity demand, construction, etc. However, there is a consensus that Chinese economic statistics have improved.

Week’s economic reports

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
Jan 13	8:30 AM	Trade Balance	Nov	-$40.4B	-$51.0B	-$51.0B	-$56.7B
Jan 13	2:00 PM	Treasury Budget	Dec	-$83.6B	NA	-$83.0B	-$48.3B
Jan 14	8:30 AM	Export Prices ex-ag.	Dec	-1.9%	NA	NA	-2.9%
Jan 14	8:30 AM	Import Prices ex-oil	Dec	-1.1%	NA	NA	-1.8%
Jan 14	8:30 AM	Retail Sales	Dec	-2.7%	-1.0%	-1.2%	-2.1%
Jan 14	8:30 AM	Retail Sales ex-auto	Dec	-3.1%	-1.2%	-1.4%	-2.5%
Jan 14	10:00 AM	Business Inventories	Nov	-0.7%	-0.5%	-0.5%	-0.6%
Jan 14	10:30 AM	Crude Inventories	01/09	1144K	NA	NA	6682K
Jan 14	10:35 AM	Crude Inventories	01/09	-	NA	NA	NA
Jan 14	2:00 PM	Fed Beige Book	-	-	-	-	-
Jan 15	8:30 AM	Core PPI	Dec	0.2%	0.1%	0.1%	0.1%
Jan 15	8:30 AM	PPI	Dec	-1.9%	-1.7%	-2.0%	-2.2%
Jan 15	8:30 AM	Initial Claims	01/10	524K	NA	503K	470K
Jan 15	8:30 AM	Empire Manufacturing Index	Jan	-22.20	-	-25.00	-27.88
Jan 15	10:00 AM	Philadelphia Fed	Jan	-24.3	-35.0	-35.0	-36.1
Jan 16	8:30 AM	Core CPI	Dec	0.0%	0.0%	0.1%	0.0%
Jan 16	8:30 AM	CPI	Dec	-0.7%	-1.0%	-0.9%	-1.7%
Jan 16	9:15 AM	Capacity Utilization	Dec	73.6%	74.6%	74.5%	75.2%
Jan 16	9:15 AM	Industrial Production	Dec	-2.0%	-1.0%	-1.0%	-1.3%
Jan 16	9:55 AM	University of Michigan Sentiment -Preliminary	Jan	61.9	61.0	59.0	60.1

Source: Yahoo Finance, January 16, 2009.

In addition to the Bank of Japan’s interest rate announcement (Thursday, January 22), the U.S. economic highlights for the week, courtesy of Northern Trust, include the following:

1. Housing starts (January 22): Permit extensions for new homes fell 15.8% in November, inclusive of a 11.9% drop in permits issued for single-family homes. The weakness in permits is indicative of fewer housing starts in December (595,000 versus 625,000 in November). Consensus: 615,000.
2. Other reports: NAHB Survey (January 21).

Click the links below for the following reports:

• Wachovia’s Weekly US Economic & Financial Commentary (January 16, 2009)
• Wachovia’s Global Chartbook (January 2009)

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 16, 2009.

The Chinese philosopher Lau-Tzu said:

Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.

Wise words indeed, but hopefully thorough research and a dose of common sense will cast some light on the lie of the investment land.

On Tuesday a new President will be inaugurated in the U.S., but the old concerns about financial markets will unfortunately still be around. In the meantime, have a great long weekend in the U.S.!

That’s the way it looks from Cape Town.

Comments

[Kelly Liebe...:]

With foreign governments and foreign investors dumping our long term securities, (report just out) I would say our sh*t just hit the fan. As the rest of the world and Americans wake up to the aroma of BS, they will start to dump and this bubble will be popped. Next?

Jan 18 10:02 AM

[jstratt:]

I think we need Chesley Sullenberger running our economy as Treasury Secretary

Jan 18 10:06 AM

[dadlivonia:]

Talk about 3rd Rails - if governments start dumping treasuries, or even stop buying them, the mortgage crisis is going to look like a minor blip - Obama's trillion dollar stimulus package will be DOA, as someone has to pay for it - also, the $350 billion add'l for the banks - we need this illusion to continue to support our recovery - of course, if we go down, so does the rest of the world and they know it. Hence the continued whistling past the graveyard.

Jan 18 12:41 PM

[Eze.:]

Obama or no Obama as the man in charge, the shit is already everywhere. Please can someone please tell us exactly what to do. Predictions has failed, and as long as America is in this mess, the whole world is in trouble. Whatever affects America, affects the whole world, whether negative or positive.

GOD BLESS AMERICA or what else do I say?

Jan 18 04:23 PM

[lpb:]

Why would god bless america and not the rest of the world?

Jan 18 10:05 PM

[thaipo:]

BO's pick to head the Treasury Dept actually showed the rest of us how to save on taxes. JUST DON'T PAY THEM!!!!

Jan 19 12:56 AM