U.S. stocks rallied, ending a tumultuous eight-session decline in which everyone watched the Dow Industrial Average and S&P 500 plunge more than 22% -- that was on top of an already 20% decline from the peak set last October. The surge marked the fifth-largest percentage gain for both the Dow and S&P 500. The NASDAQ Composite has rocketed 20% from Friday’s intraday low!
It was nice to see the strength build at the end – the opposite had become the norm.
While the degree of the response was not usual, yesterday’s market bounce was bound to occur and is quite typical -- looking back at history, powerful rallies follow aggressive moves lower whether it be the various points during the 1929-1948 period, the 1968-1982 epoch or the 1987 crash. Surely, the market also responded kindly to proposals from European policy makers over the weekend – all will be waiting to hear what our own Treasury Department has to say today on the subject of freeing up the credit markets – which we’ll get to below.
Market Activity for October 13, 2008
Obviously, on a day of such strength, all 10 major industry groups jumped in the session. Energy and basic material stocks – the hardest hit over the past couple of weeks – led the surge, rising 18.48% and 13.28%, respectively. Utility, healthcare and information technology shares were the next in line – up 13.52%, 12.43% and 12.14%, respectively. The remaining five rose between 7.28% and 10.23%.
We should be under no illusion though that this will be a V-shaped event. For sure, what has occurred over the past three weeks especially, has presented an awesome opportunity – one that does not come around often.
However, even if common sense valuation analysis has been abandoned as the de-leveraging process takes place and moves valuations below longer-run intrinsic fundamentals there are potential challenges on the horizon. Some of these challenges are things we talk about all the time, others are related to possible policy changes from a new administration and the regulations that always follow these types of events. The point of this comment is not to push people away from the equity markets, but rather to reinforce that investing is a longer-term proposition. Setting these expectations to a reasonable level actually encourages stock-market investing, for it is the unreasonable ideas that cause people to flee when their scurry for return fails to pan out.
On the credit markets, the three-month LIBOR rates and the Ted Spread came off of their highs a bit, but the bond market was closed yesterday due to Columbus holiday so it’s difficult to get a good read. The next couple of days will be telling and the market will be intensely focused on how three-month LIBOR and the TED Spread react.
These indications, in addition to the spreads between high-yield corporate debt and Treasury bonds, suggests economic weakness for at least a couple of quarters. The longer the credit markets remain locked up, to no surprise, it only extends the duration and severity of the downturn.
Over the past year we’ve heard many calls of recession, but it never came to pass, even as the housing market weighed heavily on overall growth. However, everything changed when Lehman went down one month ago tomorrow, and some level of contraction will occur as an unwillingness to lend has hit certain industries directly. Even for those somewhat immune from this situation, the caution that ensues will have a meaningful effect on GDP.
This morning the big news will be the Bush/Paulson/ Bernanke press conference to lay out the latest plan to unlock the credit markets. What we know at this point is this:
Ø The government will guarantee inter-bank lending and debt issuance. (What this does is hopefully take away some of the unwillingness to lend to one another as the measure means banks will not have a problem rolling debt.)
Ø Non-interest bearing accounts will be insured (this is huge and something former Fed Governor Larry Lindsay suggested a month ago as these are small business accounts. These accounts are used to meet payroll, and often amount to more than the $250,000 currently insured. This takes away a bank run concern because if businesses believed a bank was going down they wouldn’t hesitate to pull funds.)
Ø They will buy bank preferred shares to inject capital into the financial system. (These will be non-voting shares and have a 5% yield that will move to 9% after five years if a bank does not raise private capital and call those shares – that’s good news and will get the government back out one hopes. $250 billion of the $700 billion TARP plan will be used to fund this – and yes, this was an original option within that plan)
These plans seem to have widespread backing as even people such as William Poole from the Cato Institute – a libertarian think-tank -- are in favor of the idea. Poole has been one of the most out-spoken opponents to what Treasury has proposed heretofore.
The really important aspect of this last point is that the Treasury’s terms seem to be friendly with regard to private investment. It is essential that these measures do not scare away private capital – or obliterate it like what occurred with Fan and Fred – a terrible mistake.
Overall, the great unknown is will all of this intervention only prolong the problem – surely a very significant problem – and have unintended consquencs that make things even worse or will it be successful in averting something that is terribly severe. This is the great question that will only be known after the fact.
Futures are nicely higher on the news, but with government officials talking today let’s hope we hold onto early gains – it has become the trend for the market to sell off just about every time these people step to the mic. and begin speaking. Let’s hope it’s different this time.
Have a great day!
Brent Vondera, Senior Analyst
It was nice to see the strength build at the end – the opposite had become the norm.
While the degree of the response was not usual, yesterday’s market bounce was bound to occur and is quite typical -- looking back at history, powerful rallies follow aggressive moves lower whether it be the various points during the 1929-1948 period, the 1968-1982 epoch or the 1987 crash. Surely, the market also responded kindly to proposals from European policy makers over the weekend – all will be waiting to hear what our own Treasury Department has to say today on the subject of freeing up the credit markets – which we’ll get to below.
Market Activity for October 13, 2008
Obviously, on a day of such strength, all 10 major industry groups jumped in the session. Energy and basic material stocks – the hardest hit over the past couple of weeks – led the surge, rising 18.48% and 13.28%, respectively. Utility, healthcare and information technology shares were the next in line – up 13.52%, 12.43% and 12.14%, respectively. The remaining five rose between 7.28% and 10.23%.We should be under no illusion though that this will be a V-shaped event. For sure, what has occurred over the past three weeks especially, has presented an awesome opportunity – one that does not come around often.
However, even if common sense valuation analysis has been abandoned as the de-leveraging process takes place and moves valuations below longer-run intrinsic fundamentals there are potential challenges on the horizon. Some of these challenges are things we talk about all the time, others are related to possible policy changes from a new administration and the regulations that always follow these types of events. The point of this comment is not to push people away from the equity markets, but rather to reinforce that investing is a longer-term proposition. Setting these expectations to a reasonable level actually encourages stock-market investing, for it is the unreasonable ideas that cause people to flee when their scurry for return fails to pan out.
On the credit markets, the three-month LIBOR rates and the Ted Spread came off of their highs a bit, but the bond market was closed yesterday due to Columbus holiday so it’s difficult to get a good read. The next couple of days will be telling and the market will be intensely focused on how three-month LIBOR and the TED Spread react.
These indications, in addition to the spreads between high-yield corporate debt and Treasury bonds, suggests economic weakness for at least a couple of quarters. The longer the credit markets remain locked up, to no surprise, it only extends the duration and severity of the downturn.
Over the past year we’ve heard many calls of recession, but it never came to pass, even as the housing market weighed heavily on overall growth. However, everything changed when Lehman went down one month ago tomorrow, and some level of contraction will occur as an unwillingness to lend has hit certain industries directly. Even for those somewhat immune from this situation, the caution that ensues will have a meaningful effect on GDP.
This morning the big news will be the Bush/Paulson/ Bernanke press conference to lay out the latest plan to unlock the credit markets. What we know at this point is this:
Ø The government will guarantee inter-bank lending and debt issuance. (What this does is hopefully take away some of the unwillingness to lend to one another as the measure means banks will not have a problem rolling debt.)
Ø Non-interest bearing accounts will be insured (this is huge and something former Fed Governor Larry Lindsay suggested a month ago as these are small business accounts. These accounts are used to meet payroll, and often amount to more than the $250,000 currently insured. This takes away a bank run concern because if businesses believed a bank was going down they wouldn’t hesitate to pull funds.)
Ø They will buy bank preferred shares to inject capital into the financial system. (These will be non-voting shares and have a 5% yield that will move to 9% after five years if a bank does not raise private capital and call those shares – that’s good news and will get the government back out one hopes. $250 billion of the $700 billion TARP plan will be used to fund this – and yes, this was an original option within that plan)
These plans seem to have widespread backing as even people such as William Poole from the Cato Institute – a libertarian think-tank -- are in favor of the idea. Poole has been one of the most out-spoken opponents to what Treasury has proposed heretofore.
The really important aspect of this last point is that the Treasury’s terms seem to be friendly with regard to private investment. It is essential that these measures do not scare away private capital – or obliterate it like what occurred with Fan and Fred – a terrible mistake.
Overall, the great unknown is will all of this intervention only prolong the problem – surely a very significant problem – and have unintended consquencs that make things even worse or will it be successful in averting something that is terribly severe. This is the great question that will only be known after the fact.
Futures are nicely higher on the news, but with government officials talking today let’s hope we hold onto early gains – it has become the trend for the market to sell off just about every time these people step to the mic. and begin speaking. Let’s hope it’s different this time.
Have a great day!
Brent Vondera, Senior Analyst
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