Global Markets in Review: Markets, Economy

<<Return to Page 1- Global Markets in Review: In the Clutches of Uncertainty

As far as the outlook for stock markets is concerned, the primary bear market was reconfirmed on Thursday, at least in terms of Dow Theory. Richard Russell (Dow Theory Letters) said:

The verdict, at long last, is in. Today the DJ Industrial Average closed below its November 20 bear market low. In so doing, the Dow confirmed the prior breakdown of the Transportation Average. The two Averages jointly closed at new lows today, thereby signaling that the great bear market remains in force.

According to Dow Theory, neither the duration nor the extent of a bear market can be predicted in advance. However there are some useful hints. Most major bear markets end with stocks at ‘great values’. This has meant in the past that price/earnings (P/E) ratios for the Dow and the S&P have fallen to single-digit numbers. It has also meant that dividend yields have moved into the 5-6% zone.

Standard & Poor’s estimated GAAP (or “as reported”) earnings of 32.3 cents for the S&P 500 for 2009 implies a ten-month prospective P/E ratio of 23.8. Hardly “great value”.

As mentioned above, the Dow and S&P 500 are floundering around the November 20, 2008 and October 2002 lows, as shown in the columns on the right-hand side of the table below.

click to enlarge

Stock markets remain caught between the actions of central banks frantically trying to fend off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. The next few days will tell whether the key chart levels will arrest the indices’ declines and the three-month trading range will hold, or whether more catastrophe lies ahead.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Stocks between a rock and a hard place” and “Bennet Sedacca: Free Fallin’???“ (And do make a point of listening to Donald Coxe’s weekly webcast, which can be accessed from the sidebar of the Investment Postcards site.)

Economy

A grim picture regarding the global economic situation emerges from the latest Ifo World Economic Survey (WES), showing that the World Economic Climate has declined to a record low in the first quarter of 2009. The deterioration is affecting all major economic regions and the export and import expectations indicate a clear decline in world trade in the first half of 2009.

click to enlarge

Source: Ifo, February 18, 2009.

Further evidence of the economic malaise is provided by the GDP-weighted graphs of the global manufacturing Purchasing Managers’ Index and global services PMI.

Source: Plexus Asset Management

Source: Plexus Asset Management

A snapshot of the week’s U.S. economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

February 20

• CPI report - underlying trend of deflation will fade only later

February 19

• Index of Leading Indicators improved, but wait before taking a leap
• Wholesale prices moved up, but inflation is a non-issue, for now
• Jobless Claims - dismal labor market conditions persist

February 18

• Construction of new homes at new low
• Import prices - sixth consecutive monthly decline

February 17

• Housing Market Index - showing signs of stability?
• Foreign appetite for Treasury securities remains in place for moment

Given the nature of economics reports of recent months, the minutes of the Federal Open Market Committee (FOMC) meeting of January 27-28 come as no surprise. Asha Bangalore (Northern Trust) said:

The FOMC is more bearish about the economy compared with the forecast published in October 2008. The US economy is predicted to contract in 2009 (-1.3% to -0.5%) on a Q4-to-Q4 basis.

The consensus forecast among the Blue Chip Survey participants is a 1.9% drop in real GDP on an annual average basis in 2009. We are predicting a 2.7% decline in real GDP … So, there is a general expectation of a significant weakening of business conditions during 2009.

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
Feb 17	8:30 AM	Empire State Mfg.	Feb	-34.65	-24.0	-23.75	-22.2
Feb 17	9:00 AM	Net Long-Term TIC Flows	Dec	$34.8B	NA	$20.0B	-$25.6B
Feb 18	8:30 AM	Housing Starts	Jan	466K	525K	529K	560K
Feb 18	8:30 AM	Building Permits	Jan	521K	520K	525K	547K
Feb 18	8:30 AM	Export Prices ex-agriculture	Jan	0.0%	NA	NA	-1.9%
Feb 18	8:30 AM	Import Prices ex-oil	Jan	-0.8%	NA	NA	-1.1%
Feb 18	9:15 AM	Industrial Production	Jan	-1.8%	-1.5%	-1.5%	-2.4%
Feb 18	9:15 AM	Capacity Utilization	Jan	72.0%	72.4%	72.4%	73.3%
Feb 18	2:00 PM	FOMC Minutes	Jan. 28	-	NA	NA	NA
Feb 19	8:30 AM	Core PPI	Jan	0.4%	0.1%	0.1%	0.2%
Feb 19	8:30 AM	PPI	Jan	0.8%	0.2%	0.3%	-1.9%
Feb 19	8:30 AM	Initial Claims	02/14	627K	620K	620K	627K
Feb 19	10:00 AM	Leading Indicators	Jan	0.4%	NA	0.1%	0.2%
Feb 19	10:00 AM	Philadelphia Fed	Feb	-41.3	-26.0	-25.0	-24.3
Feb 19	11:00 AM	Crude Inventories	2/13	-138K	NA	NA	4.72M
Feb 20	8:30 AM	Core CPI	Jan	0.2%	0.0%	0.1%	0.0%
Feb 20	8:30 AM	CPI	Jan	0.3%	0.2%	0.3%	-0.8%

Source: Yahoo Finance, February 20, 2009.

In addition to Fed Chairman Bernanke’s semi-annual testimony on monetary policy before the US Senate Banking Committee (Tuesday, February 24), the US economic highlights for the week include the following:

click to enlarge

Source: Northern Trust

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, February 20, 2009.

Scott Cleland (hat tip: Charles Kirk) said:

Analysts can tell you everything about the ship, the crew, the price - but they don’t let you know whether it’s in shallow water or is about to be hit by a tidal wave.

Hopefully the “Words from the Wise” reviews play a part in steering the portfolios of this blog‘s readers through the murky waters.

That’s the way it looks from Cape Town.

Comments

[Mad Hedge F...:]

The longer crude stays below $40, the more production is being taken off the market. At this stage all 35 million barrels of storage at the Cushing, Oklahoma delivery point for west Texas intermediate are brimming with crude. The 709 million barrel Strategic Petroleum Reserve (SPR) is nearly full. And there is another 50 million barrels stored in supertankers at sea which is building by the day. Demand has collapsed so fast, that oil companies can’t shut down production fast enough. The scary thing about this is that when the next crude spike upward in crude comes, it will be worse than the last one. Take advantage of the current distress prices to accumulate oil infrastructure stocks. Kinder Morgan Energy Partners (KMP) has a PE multiple of 25 and a dividend yield of 8.3%. Enterprise Products Partners (EPD) has a $10 billion portfolio of fractionation facilities, storage, offshore drilling platforms, and 32,478 miles of product, natural gas, and crude pipelines, and carries a modest PE multiple of 12 X and a dividend yield of 9.2%. More expensive Kinder Morgan Energy Partners (KMP) with a PE multiple of 25 X and a dividend yield of 8.3% is also worth a look see.

Feb 22 11:20 AM

[coolfusion:]

Balzac's was right "behind every great fortune lies a great crime". For heavens sake, Switzerland is not even a member of the united nations.. and for good reason.. it's hard to vote against the private interests of dictators that deposit their ill gains extracted from the starving oppressed citizens of their respective countries. Secret swiss bank accounts only exist to hide the assets of the corrupt .. embezzlers , war lords, drug kings, politicians, wall street crooks, and old family wealth evading taxes.. The US should not be intimidated by their national Swiss Guard, dressed in the national colors of sponge yellow and plum jam purple, on duty to protect their rancid chocolate and the Vatican's cache of loot. Instead, the US should deploy out of Iraq and send the 101st airborne to do a "shock and awe" on these yodelers.

Feb 22 05:06 PM

[Mad Hedge F...:]

In excessively focusing on our own problems here in the US, it is easy to miss an economic collapse of Biblical proportions that is going on in Japan. Q4 GDP is coming out next week, and the median forecast is -12%, with more dire numbers of -15% out there. This is four times the rate of decline we saw in the US. The global economic shut down is heavily concentrated in the auto industry, of which Japan is the largest exporter. My old friend IMF managing director Eisuke Sakakibara, known as “Mr. Yen”, does not see a recovery for two more years. The country has no ability to convert from an export led to a domestic demand economy in the short term. Bubbles are long in building, and long in deflating. As Vice Minister of Finance in Japan during the lost decade of the nineties, he should know.

Feb 23 07:52 AM