U.S. stocks engaged in another day of wild fluctuations on Friday as the broad market was higher by 4% just after lunch, but we lost it all in the final two hours of trading to close in negative territory. Nevertheless, it was a good week, the first in four, as the benchmark indices closed higher by nearly 5%.
The Dow Jones Industrial Average gained 4.75% over the past five sessions, following the worst week in the index’s history – down 18.15%. Despite the 400-point rebound last week, the Dow remains 2,570 points lower since Lehman Brothers went down on September 15. That marked the point the credit markets became disturbed, to put it lightly.
Market Activity for October 17, 2008
As of the past few days though, the credit markets do appear to be thawing – hopefully the trend continues, but one should not expect to accurately extrapolate based on the trend of the past week – the ride lower will probably not be straight down.
Below are two key indicators the market has been watching, and we’ve spent much time mentioning.
The first is three-month LIBOR, which shows the inter-bank lending rate for the specified period. While it shows banks remain unwilling to lend to one another, or charge a high rate to do so, it’s come down nicely over the past three sessions.
The next is the TED Spread, which illustrates the level of risk aversion in the marketplace. This spread is the difference between the rate on three-month LIBOR and three-month T-bills. The spread shows people continue to run to the safety of the Treasury market. That is, short-term Treasury yields remain very low due to huge demand for these securities. Once this fear wanes, rising T-bill rates will combine with falling LIBOR and this will, obviously, cause the spread to narrow – a clear sign things are normalizing.
Rates for one-month commercial paper also fell to a three-week low.
Friday’s Economic Releases
On the economic front, U.S. housing starts fell more than expected in September as construction of single-family homes plunged to the lowest level in more than 25 years, indicating the slump intensified and will be a larger drag on GDP – residential investment has weighed on economic growth for 10 quarters now; that drag eased in the second quarter, but will get worse again with regard to the final two GDP reports of this year due to the chaotic state of the credit markets.
The only time in the history of this data, which goes back to 1959, single-family starts were this low was in the middle of the 1981-1982 recession.
While this development hurts for now, it is a necessary condition for bringing the housing market back. Inventory levels as a percentage of sales remain at an extreme elevation and a serious reduction in supply is needed. That said, the homes available for sale data (not adjusted for the current sales pace) has plunged. So, when the sales numbers do begin to pick up again, the inventory-to-sales ratio (the supply figure that remains elevated) will come down fast.
It will take some time still, especially as the labor market has deteriorated. Further, demand will not improve substantially until the perception that prices have bottomed takes hold. And obviously, tighter credit conditions – rather, all but frozen credit markets – delay the rebound as well. We do believe though that the next chart illustrates some very important work has been accomplished.
We will have to see the permits reading bounce before housing begins to flatten out.
Digressing
Capitalism is certainly under assault after what’s occurred over the past month – referring to the plunge in stock prices --, but we should be very careful not to throw the baby out with the bathwater. Capitalism, for all of its flaws, remains the best of all of man’s inventions with which to allocate scarce capital, goods and services in order to fulfill unlimited wants. Period. Choose something else and you get lower growth, less prosperity and less choice – such as in Europe for instance. From the perspective of an individual country, tax capital more and it will simply go elsewhere as it seeks out the places where it is most welcome and best treated – to paraphrase the words of the late Walter Wriston.
Policy proposals to raise taxes are harmful. The claim that such an endeavor is necessary to punish the rich is perverse. While it may punish some in the upper class, it truly punishes those attempting to climb the economic ladder. The rich and well-off can shelter their income from onerous tax rates. What it does to other achievers is close the door to wealth – making it more difficult to walk through that door. We should not forget also that the majority of those that make up the top tax brackets are small businesses – the most prolific job creators in our economy.
It is no coincidence why rich Europeans are those that have been wealthy for generations. Conversely, in the U.S. you can run into a multi-millionaire today who didn’t have anything but good ideas and a strong work-ethic 10 years back. This is the key difference between the U.S. and Europe (this is just not a cultural difference but one of tax rates) and those that have the desire to move to the European model are actually punishing those they claim to help far more than those they claim to punish.
And on this claim that de-regulation is what brought us to this point, a topic we spent some time dispelling last week explaining that Congress has net increased regulations over the past several years coming out of the tech bubble and bust, there were two excellent Op/Eds in the WSJ on Saturday. One – the first link below -- explains the regulatory changes that helped deliver us down this path. The other – an interview with the brilliant Anna Schwartz – explains was put us on this path. For those with WSJ subscriptions, these are worth the read.
http://online.wsj.com/article/SB122428201410246019.html?mod=todays_us_opinion
http://online.wsj.com/article/SB122428279231046053.html?mod=todays_us_opinion
Have a great day!
The Dow Jones Industrial Average gained 4.75% over the past five sessions, following the worst week in the index’s history – down 18.15%. Despite the 400-point rebound last week, the Dow remains 2,570 points lower since Lehman Brothers went down on September 15. That marked the point the credit markets became disturbed, to put it lightly.
Market Activity for October 17, 2008
As of the past few days though, the credit markets do appear to be thawing – hopefully the trend continues, but one should not expect to accurately extrapolate based on the trend of the past week – the ride lower will probably not be straight down.Below are two key indicators the market has been watching, and we’ve spent much time mentioning.
The first is three-month LIBOR, which shows the inter-bank lending rate for the specified period. While it shows banks remain unwilling to lend to one another, or charge a high rate to do so, it’s come down nicely over the past three sessions.
The next is the TED Spread, which illustrates the level of risk aversion in the marketplace. This spread is the difference between the rate on three-month LIBOR and three-month T-bills. The spread shows people continue to run to the safety of the Treasury market. That is, short-term Treasury yields remain very low due to huge demand for these securities. Once this fear wanes, rising T-bill rates will combine with falling LIBOR and this will, obviously, cause the spread to narrow – a clear sign things are normalizing.
Rates for one-month commercial paper also fell to a three-week low.
Friday’s Economic Releases
On the economic front, U.S. housing starts fell more than expected in September as construction of single-family homes plunged to the lowest level in more than 25 years, indicating the slump intensified and will be a larger drag on GDP – residential investment has weighed on economic growth for 10 quarters now; that drag eased in the second quarter, but will get worse again with regard to the final two GDP reports of this year due to the chaotic state of the credit markets.
The only time in the history of this data, which goes back to 1959, single-family starts were this low was in the middle of the 1981-1982 recession.
While this development hurts for now, it is a necessary condition for bringing the housing market back. Inventory levels as a percentage of sales remain at an extreme elevation and a serious reduction in supply is needed. That said, the homes available for sale data (not adjusted for the current sales pace) has plunged. So, when the sales numbers do begin to pick up again, the inventory-to-sales ratio (the supply figure that remains elevated) will come down fast.
It will take some time still, especially as the labor market has deteriorated. Further, demand will not improve substantially until the perception that prices have bottomed takes hold. And obviously, tighter credit conditions – rather, all but frozen credit markets – delay the rebound as well. We do believe though that the next chart illustrates some very important work has been accomplished.
We will have to see the permits reading bounce before housing begins to flatten out.
Digressing
Capitalism is certainly under assault after what’s occurred over the past month – referring to the plunge in stock prices --, but we should be very careful not to throw the baby out with the bathwater. Capitalism, for all of its flaws, remains the best of all of man’s inventions with which to allocate scarce capital, goods and services in order to fulfill unlimited wants. Period. Choose something else and you get lower growth, less prosperity and less choice – such as in Europe for instance. From the perspective of an individual country, tax capital more and it will simply go elsewhere as it seeks out the places where it is most welcome and best treated – to paraphrase the words of the late Walter Wriston.
Policy proposals to raise taxes are harmful. The claim that such an endeavor is necessary to punish the rich is perverse. While it may punish some in the upper class, it truly punishes those attempting to climb the economic ladder. The rich and well-off can shelter their income from onerous tax rates. What it does to other achievers is close the door to wealth – making it more difficult to walk through that door. We should not forget also that the majority of those that make up the top tax brackets are small businesses – the most prolific job creators in our economy.
It is no coincidence why rich Europeans are those that have been wealthy for generations. Conversely, in the U.S. you can run into a multi-millionaire today who didn’t have anything but good ideas and a strong work-ethic 10 years back. This is the key difference between the U.S. and Europe (this is just not a cultural difference but one of tax rates) and those that have the desire to move to the European model are actually punishing those they claim to help far more than those they claim to punish.
And on this claim that de-regulation is what brought us to this point, a topic we spent some time dispelling last week explaining that Congress has net increased regulations over the past several years coming out of the tech bubble and bust, there were two excellent Op/Eds in the WSJ on Saturday. One – the first link below -- explains the regulatory changes that helped deliver us down this path. The other – an interview with the brilliant Anna Schwartz – explains was put us on this path. For those with WSJ subscriptions, these are worth the read.
http://online.wsj.com/article/SB122428201410246019.html?mod=todays_us_opinion
http://online.wsj.com/article/SB122428279231046053.html?mod=todays_us_opinion
Have a great day!
Brent Vondera, Senior Analyst
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