U.S. stocks gave some of the recent rally back yesterday as investors’ concern over the state of the global economy grows. The Dow, for instance, jumped 400 points last week and added another 413 on Monday as credit market indicators have improve, but yesterday the index gave back one-third of that bounce and if futures offer any guidance we may just give back another 200 points today.
Credit markets are thawing – the Ted spread has narrowed another 30 basis points this morning – but the market now seems to be focused on corporate-profit guidance and stocks are under some pressure again as a result. That said ex-financial S&P 500 profit numbers look quite good thus far, up 8.1% with 25% of members reporting to this point. But when we enter such a scenario, the market chooses to look at only the negatives, of which there are plenty – but that will change.
Market Activity for October 21, 2008
No matter what occurs over the near term valuations are very attractive here. I said that a couple of months ago, but it’s truer today. There are many really good companies trading at the cheapest multiples in a very long time, I heard someone state this morning that 40% of S&P 500 members are trading at 8 times earnings -- haven’t had time to look that up yet, seems a bit of an exaggeration, but for sure there’s an abundance of names trading at 10 times or lower and even if 2009 profit results come in 25% below expectations stocks will remain cheap. It’s just going to take patience, but when a sustained rally occurs, it will be powerful.
The Dollar and Commodity Prices
The U.S. dollar has bounced back strong and commodity prices have gotten clocked from the fed-induced peak in July.
A combination of the flight-to-safety trade and expectations of a series of ECB rates cuts has sent the dollar soaring from the low hit in April.
De-leveraging trades and concerns the credit-market freeze-up will damage global growth have combined to fully whack commodity prices.
Both of these develops are good for the consumer and they can be added to realities such as strong corporate balance sheets and low inventory levels to assist in a recovery once we progress from this current weakness. (We’ll note commodity prices are likely not down for the count. We will have an inflation issue to deal with over the next couple of years due to the massive liquidity the Fed has pumped into the system, but for now the objective is to deal with credit-market disturbances. Some will say we should just let things fall where they may, for it is the Fed’s easy money policy that got us into this situation to begin with, but that’s not going to happen, not the way the world works.)
And speaking of which, the Federal Reserve rolled out another lending facility, about the sixth if memory serves. This one will provide liquidity to the U.S. money markets – the program will be termed the Money Market Investor Funding Facility (MMIFF) and will purchase assets from money-market mutual funds to stave off any difficulties meeting redemptions. This program is authorized under section 13(3) of the Federal Reserve Act.
Under the MMIFF, the New York Fed will provide senior secured funding to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. (Eligible assets will include certificates of deposits and commercial paper issued by highly rated financial institutions with maturities of 90 days or less.) JP Morgan will be one of the firms running the program.
This facility is an extension of the commercial paper (CP) program the Fed rolled out last week – some had commented that that CP facility was insufficient because it did not include CDs – a major source of funding for banks. This program is expected to ease strains in the bank funding market and assist in pushing LIBOR rates lower, which has occured.
Let’s hope the worst of the credit-market disturbance is behind us – developments of the past few days suggest this is the case. We’ll be keeping an eye on LIBOR, TED Spread and commercial paper spreads.
Moving On
The WSJ ran an article last night on how big bets in domestic currencies are hammering the emerging market economies, specifically the Latin American regions, but within Asia too. Many countries with which many investors believed offered nearly unstoppable growth prospects are showing trouble related to their own speculative bubbles – namely currency bubbles. As the U.S. dollar enjoys a powerful rally all of those betting against the greenback are paying dearly for that trade.
And there is no glee in these comments pointed at those who have believed in the decoupling theory – the view that emerging-market growth would not be affected by what occurs in the U.S. If the emerging markets are going to endure substantial weakness it makes it that much more difficult for global growth to withstand this period.
This is the time for the U.S. to take the lead – which has been our role no matter the situation for the past 70 years. Congress can call their plans to extend employment benefits and food stamps “stimulus” all they want but any serious person understands these programs are nothing but socialism in disguise. Broad-based tax cuts are needed here and will provide the correct prescription for pulling us out of the weakness clogged up credit markets has delivered. We itemized what needs to be done yesterday, so I won’t repeat the bullet points.
There are some that say you can’t get the bang for your buck in growth from cutting rates from current levels. Certainly when Reagan cut the top income tax rate from 70% a powerful incentive effect was delivered. But let’s not kid ourselves. We have a top income rate of 36%; a corporate tax rate of 35%; dividend and capital gains tax rates of 15% and a terribly onerous repatriated tax of 35%. We can still enjoy huge incentive effects by reducing from these levels and this will spark a stock market rally that gets optimism flowing again. From there, everything else will fall into place.
We’ll find which direction the country chooses in 13 days – a philosophy that believes public works programs will deliver the growth we need; or private-sector inspiring tax cuts that moves the government out of the way of American innovation and its natural entrepreneurial spirit.
Have a great day!
Brent Vondera, Senior Analyst
Credit markets are thawing – the Ted spread has narrowed another 30 basis points this morning – but the market now seems to be focused on corporate-profit guidance and stocks are under some pressure again as a result. That said ex-financial S&P 500 profit numbers look quite good thus far, up 8.1% with 25% of members reporting to this point. But when we enter such a scenario, the market chooses to look at only the negatives, of which there are plenty – but that will change.
Market Activity for October 21, 2008
No matter what occurs over the near term valuations are very attractive here. I said that a couple of months ago, but it’s truer today. There are many really good companies trading at the cheapest multiples in a very long time, I heard someone state this morning that 40% of S&P 500 members are trading at 8 times earnings -- haven’t had time to look that up yet, seems a bit of an exaggeration, but for sure there’s an abundance of names trading at 10 times or lower and even if 2009 profit results come in 25% below expectations stocks will remain cheap. It’s just going to take patience, but when a sustained rally occurs, it will be powerful.
The Dollar and Commodity Prices
The U.S. dollar has bounced back strong and commodity prices have gotten clocked from the fed-induced peak in July.
A combination of the flight-to-safety trade and expectations of a series of ECB rates cuts has sent the dollar soaring from the low hit in April.
De-leveraging trades and concerns the credit-market freeze-up will damage global growth have combined to fully whack commodity prices.
Both of these develops are good for the consumer and they can be added to realities such as strong corporate balance sheets and low inventory levels to assist in a recovery once we progress from this current weakness. (We’ll note commodity prices are likely not down for the count. We will have an inflation issue to deal with over the next couple of years due to the massive liquidity the Fed has pumped into the system, but for now the objective is to deal with credit-market disturbances. Some will say we should just let things fall where they may, for it is the Fed’s easy money policy that got us into this situation to begin with, but that’s not going to happen, not the way the world works.)
And speaking of which, the Federal Reserve rolled out another lending facility, about the sixth if memory serves. This one will provide liquidity to the U.S. money markets – the program will be termed the Money Market Investor Funding Facility (MMIFF) and will purchase assets from money-market mutual funds to stave off any difficulties meeting redemptions. This program is authorized under section 13(3) of the Federal Reserve Act.
Under the MMIFF, the New York Fed will provide senior secured funding to facilitate an industry-supported private-sector initiative to finance the purchase of eligible assets from eligible investors. (Eligible assets will include certificates of deposits and commercial paper issued by highly rated financial institutions with maturities of 90 days or less.) JP Morgan will be one of the firms running the program.
This facility is an extension of the commercial paper (CP) program the Fed rolled out last week – some had commented that that CP facility was insufficient because it did not include CDs – a major source of funding for banks. This program is expected to ease strains in the bank funding market and assist in pushing LIBOR rates lower, which has occured.
Let’s hope the worst of the credit-market disturbance is behind us – developments of the past few days suggest this is the case. We’ll be keeping an eye on LIBOR, TED Spread and commercial paper spreads.
Moving On
The WSJ ran an article last night on how big bets in domestic currencies are hammering the emerging market economies, specifically the Latin American regions, but within Asia too. Many countries with which many investors believed offered nearly unstoppable growth prospects are showing trouble related to their own speculative bubbles – namely currency bubbles. As the U.S. dollar enjoys a powerful rally all of those betting against the greenback are paying dearly for that trade.
And there is no glee in these comments pointed at those who have believed in the decoupling theory – the view that emerging-market growth would not be affected by what occurs in the U.S. If the emerging markets are going to endure substantial weakness it makes it that much more difficult for global growth to withstand this period.
This is the time for the U.S. to take the lead – which has been our role no matter the situation for the past 70 years. Congress can call their plans to extend employment benefits and food stamps “stimulus” all they want but any serious person understands these programs are nothing but socialism in disguise. Broad-based tax cuts are needed here and will provide the correct prescription for pulling us out of the weakness clogged up credit markets has delivered. We itemized what needs to be done yesterday, so I won’t repeat the bullet points.
There are some that say you can’t get the bang for your buck in growth from cutting rates from current levels. Certainly when Reagan cut the top income tax rate from 70% a powerful incentive effect was delivered. But let’s not kid ourselves. We have a top income rate of 36%; a corporate tax rate of 35%; dividend and capital gains tax rates of 15% and a terribly onerous repatriated tax of 35%. We can still enjoy huge incentive effects by reducing from these levels and this will spark a stock market rally that gets optimism flowing again. From there, everything else will fall into place.
We’ll find which direction the country chooses in 13 days – a philosophy that believes public works programs will deliver the growth we need; or private-sector inspiring tax cuts that moves the government out of the way of American innovation and its natural entrepreneurial spirit.
Have a great day!
Brent Vondera, Senior Analyst
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