U.S. stocks began the day substantially higher on Tuesday, but quickly reversed course as the market looked beyond the global push to unlock credits markets and turned focus on earnings expectations. The broad market began the session up 4% but that didn’t last long, as the chart below illustrates.
People look around and probably wonder why stocks are so depressed – even with Monday’s huge rally – since the market continues to get what it wants. It wanted TARP, and got it. It demanded a coordinated central bank effort to cut short-term interest rates, and got it. The market wanted capital injections into the financial sector, and is getting it. Why haven’t we at least returned to 10,000 on the Dow?
Markets don’t always move on a dime, exactly when it may be expected after a series of intervention. Certainly, moves can be quick and substantial, but patience is needed, especially when we’re talking about rebounds from aggressive moves lower. When you least expect it, it will occur.
The major indices trade at multiples not seen in over a decade and dividend yields are too. Regarding the S&P 500 one has to go back to 1992 to see a yield of 3.00% and back then the 10-year Treasury yield was 7% -- today we’re looking at 4%, making that S&P 500 yield that much more attractive. The yield on the Dow is 3.48% and 3.96% on the NYSE Composite – these are very attractive levels. Patience will pay off, but one must have a multi-year view, we’ve got some issues to work through first and if tax rates are increased a sustained rebound will be delayed.
Only two of the 10 major industry groups managed to gain ground yesterday and financial shares were one, jumping 6.41%. This is important as it shows how much smarter the latest plan to inject capital into the sector is than the decision to obliterate the Fan and Fred shareholder.
That decision was very damaging as banks held preferred shares in those GSEs (one of the few preferreds by regulation they can own) – beyond the additional pressure this put on capital ratios, financial-sector preferreds have been damaged big time as a result of this mistake. The new plan is investor-friendly and the sector is responding to the upside, bouncing 27% from the October 9 bottom. Interesting how the sector that has put the most pressure on the market bottomed exactly one year after the broad market made its all-time high. Don’t’ know if it means anything, I just find it of interest.
Market Activity for October 14, 2008
For now, we’ll have to see the credit markets begin to flow again and get past earnings season -- especially fourth-quarter outlooks that will certainly be lower-than-expected – the four-week lock up of
credit markets have done significant damage.
Yesterday’s pessimistic tone seemed to result after PepsiCo Inc. delivered a forecast that was below expectations – although the lower forecast was only 1.3% below the original guidance and represents a 9% improvement from 2007 results. Further, the reduced outlook was largely due to a stronger dollar, which doesn’t mean things deteriorated in an overall economic sense – this isn’t like demand was significantly weaker. Coca-Cola has just reported third-quarter results and operating profit was up 16.9%, which corroborates that last statement.
After the bell, Intel reported that operating profit advanced 12.9% as sales remained strong for notebooks and other electronic goods made with their chips. This has to be somewhat encouraging. Point is at least the turmoil that has hit the financial sector didn’t do damage to this sector, and this probably means the rest of the tech-sector will report pretty good results. The concern is that the current quarter will show weakness – probably a sure thing as businesses have become increasingly cautious after all that has occurred.
We’ll all be watching fourth-quarter guidance for clues as to the degree the credit-market chaos has hit not just tech’s but other sectors as well. One should keep in mind though that firms have been low-balling guidance for five years now, so any negative comments should be viewed as worse than they actually are – I think that’s a logical concept. Nevertheless, the market may not respond too kindly to the likely pessimistic tone from corporate America -- for those with the patience to see past the current situation it means additional longer-term opportunities.
On the economic front, the Treasury Department reported that the 2008 fiscal budget deficit ballooned to $455 billion – the government’s fiscal year ended last month. This amounts to a deficit-to-GDP ratio of 3.2%. In 2007 that ratio was reduced to just 1.2% -- the 30-year average is 2.4%. For the month of September, the government recorded a surplus, which is not unusual due to quarterly tax payments.
For the year, tax receipts fell 4.5% and outlays jumped 30% -- not a good combination. On the revenue side, receipts were hurt by a weak job market (smaller tax base) and a decline in corporate profits due to financial-sector weakness. On the spending side, a 144% jump in Social Security payments and the $175 billion rebate check “stimulus” program did significant damage.
In terms of total national debt as a percentage of GDP, the figure runs about 68%. This stacks up well against other major industrial regions as the EU debt-to-GDP stands at 75% and Japan 180%. Nevertheless, we need to be very careful here, current entitlement programs are not sustainable and if not modified to come in line with demographics it will cause problems. Pro-growth policies are also a necessary condition to keeping this figure under 70%.
This morning we get a number of important economic releases as the Labor Department releases September producer prices, Commerce releases retail sales and August business inventories/sales and New York manufacturing is also released.
Have a great day!
Brent Vondera, Senior Analyst
People look around and probably wonder why stocks are so depressed – even with Monday’s huge rally – since the market continues to get what it wants. It wanted TARP, and got it. It demanded a coordinated central bank effort to cut short-term interest rates, and got it. The market wanted capital injections into the financial sector, and is getting it. Why haven’t we at least returned to 10,000 on the Dow?
Markets don’t always move on a dime, exactly when it may be expected after a series of intervention. Certainly, moves can be quick and substantial, but patience is needed, especially when we’re talking about rebounds from aggressive moves lower. When you least expect it, it will occur.
The major indices trade at multiples not seen in over a decade and dividend yields are too. Regarding the S&P 500 one has to go back to 1992 to see a yield of 3.00% and back then the 10-year Treasury yield was 7% -- today we’re looking at 4%, making that S&P 500 yield that much more attractive. The yield on the Dow is 3.48% and 3.96% on the NYSE Composite – these are very attractive levels. Patience will pay off, but one must have a multi-year view, we’ve got some issues to work through first and if tax rates are increased a sustained rebound will be delayed.
Only two of the 10 major industry groups managed to gain ground yesterday and financial shares were one, jumping 6.41%. This is important as it shows how much smarter the latest plan to inject capital into the sector is than the decision to obliterate the Fan and Fred shareholder.
That decision was very damaging as banks held preferred shares in those GSEs (one of the few preferreds by regulation they can own) – beyond the additional pressure this put on capital ratios, financial-sector preferreds have been damaged big time as a result of this mistake. The new plan is investor-friendly and the sector is responding to the upside, bouncing 27% from the October 9 bottom. Interesting how the sector that has put the most pressure on the market bottomed exactly one year after the broad market made its all-time high. Don’t’ know if it means anything, I just find it of interest.
Market Activity for October 14, 2008
For now, we’ll have to see the credit markets begin to flow again and get past earnings season -- especially fourth-quarter outlooks that will certainly be lower-than-expected – the four-week lock up of
credit markets have done significant damage.
Yesterday’s pessimistic tone seemed to result after PepsiCo Inc. delivered a forecast that was below expectations – although the lower forecast was only 1.3% below the original guidance and represents a 9% improvement from 2007 results. Further, the reduced outlook was largely due to a stronger dollar, which doesn’t mean things deteriorated in an overall economic sense – this isn’t like demand was significantly weaker. Coca-Cola has just reported third-quarter results and operating profit was up 16.9%, which corroborates that last statement.
After the bell, Intel reported that operating profit advanced 12.9% as sales remained strong for notebooks and other electronic goods made with their chips. This has to be somewhat encouraging. Point is at least the turmoil that has hit the financial sector didn’t do damage to this sector, and this probably means the rest of the tech-sector will report pretty good results. The concern is that the current quarter will show weakness – probably a sure thing as businesses have become increasingly cautious after all that has occurred.
We’ll all be watching fourth-quarter guidance for clues as to the degree the credit-market chaos has hit not just tech’s but other sectors as well. One should keep in mind though that firms have been low-balling guidance for five years now, so any negative comments should be viewed as worse than they actually are – I think that’s a logical concept. Nevertheless, the market may not respond too kindly to the likely pessimistic tone from corporate America -- for those with the patience to see past the current situation it means additional longer-term opportunities.
On the economic front, the Treasury Department reported that the 2008 fiscal budget deficit ballooned to $455 billion – the government’s fiscal year ended last month. This amounts to a deficit-to-GDP ratio of 3.2%. In 2007 that ratio was reduced to just 1.2% -- the 30-year average is 2.4%. For the month of September, the government recorded a surplus, which is not unusual due to quarterly tax payments.
For the year, tax receipts fell 4.5% and outlays jumped 30% -- not a good combination. On the revenue side, receipts were hurt by a weak job market (smaller tax base) and a decline in corporate profits due to financial-sector weakness. On the spending side, a 144% jump in Social Security payments and the $175 billion rebate check “stimulus” program did significant damage.
In terms of total national debt as a percentage of GDP, the figure runs about 68%. This stacks up well against other major industrial regions as the EU debt-to-GDP stands at 75% and Japan 180%. Nevertheless, we need to be very careful here, current entitlement programs are not sustainable and if not modified to come in line with demographics it will cause problems. Pro-growth policies are also a necessary condition to keeping this figure under 70%.
This morning we get a number of important economic releases as the Labor Department releases September producer prices, Commerce releases retail sales and August business inventories/sales and New York manufacturing is also released.
Have a great day!
Brent Vondera, Senior Analyst
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