U.S. stock activity exhibited another extremely volatile session on Thursday, but ended the day on the plus side as the broad-market rallied 5.5% in the final hour of trading. The Dow, which swung 555 points from the session’s peak to trough, jumped 5.2% in the final hour.
I was going to come in today and say it’s a good sign that we’re rallying at the end, but no one really knows in this market, the volatility is insane. Further, overseas markets were hammered last night, and into this morning for the European bourses. Stock-index futures are “limit down” – meaning trading curbs meant to keep things orderly have kicked in and prices cannot fall further prior to the bell. (Orderly, that would actually be nice) So, the fact that the market has rallied at the end of the prior two sessions is probably pretty meaningless right now.
Market Activity for October 23, 2008
We are fairly confident the market has poor earnings assumptions and a meaningful recession priced in at this point – although there are other factors that don’t exactly give the equity investors a great feeling, as touched on yesterday. (The government has pulled every trigger in its arsenal, except for its most powerful – a tax-rate response to this situation. This is beyond puzzling and proving to be a huge mistake)
The market is fundamentally oversold; everyone knows it, but it doesn’t matter right now as de-leveraging and fear continue to play out. We’re likely witnessing the most oversold market since October 1974, which proved to be the most awesome buying opportunity of all time – but just like that period 34 years ago to the month plenty of obstacles remain in the path of progress.
Even though fundamentals have been discarded, longer-term investors should not ignore the fact that multiples have compressed and the S&P 500 market cap-to-GDP ratio has dropped to a point that doesn’t properly reflect the actual size of the economy. To bring it back to a level that makes more sense, it is not unreasonable to expect that market cap to increase by $4-5 trillion, which would amount to a 50% jump in the index. Also, the broad market now trades at 2003 levels, yet after-tax corporate profits are higher by 115% since the S&P 500 last stood at this price.
Of course, if we get policy adjustments that fundamentally change our economy to one that involves more government action for the longer-term, then a jump of this magnitude will only be delayed.
On the economic front, the Labor Department reported jobless claims rose 15,000 to 478,000 in the week ended October 18 – this was double the expected increase, but remains below the peaks of the prior two job-market downturns.
The government stated that 12,000 of last week’s claims resulted from Hurricane Ike, which hit six weeks ago, as shutdowns from that weather-event continue to flow through to firings.
Nevertheless, we won’t be able to blame claims on that weather event from here and other areas of the report are showing weakness will continue – not that that’s a huge surprise based on what has developed over the past few weeks. The ratio of states reporting increased claims to those reporting a decrease is a meaningful sign of weakness – 39 states and territories reported an increase to 13 that reported a decrease. The credit-market freeze up of the past five weeks, and reactions to this occurrence such as an elevated level of caution and holding off, has damaged economic activity for at least the next two quarters.
The four-week average of jobless claims (chart below) fell 4,500 to 480,250. During the September employment survey this measure hit 445,750 – the October jobs report will be released on November 7 and this claims data suggests we’ll see another 100k-plus decline.
The economic deterioration from the credit-market event has occurred with amazing speed – it was just six weeks ago that economic data was suggesting the business side of the economy would offset weakness from consumer activity due to the housing and labor-market downturn. (Business spending on capital equipment was on the rebound, rising 7.0% at an annual rate April-August, but that trend will show a collapse when the September figure is released next week.)
Everything changed when Lehman went down on September 15 and the credit-market disturbance that resulted. Even firms that were not directly affected by this situation have become extremely cautious, which funnels down to job-market fundamentals.
In other economic news, the OFHEO Home Price index showed a decline of 0.6% for August – OFHEO stands for Office of Federal Housing Enterprise Oversight.
For the past 12 months, the index has home prices down 6.6%. As we explain each month, this is quite different from the S&P Case/Shiller Housing index (the index the press focuses on), which has prices down 16% over the past 12 months. This OFHEO index has its flaws, it does not include the high-end market, but it is much broader than the Case/Shiller reading, which includes only the 20 largest metro areas – several of which have endured the largest price declines due to heightened speculation during the boom.
Bottom line, weight Case/Shiller, OFHEO and the National Realtors Association existing home sales data equally and it suggests home prices are down 10% year-on–year. Probably very close to reality for the majority of U.S. regions.
A “Time for Choosing”
Over the past five weeks you all have certainly noticed the tone of the letter has grown negative – at least relative to my normal tone; the data along with thoughts of impending policy changes have that effect. Simply to provide a commentary on weak economic releases and market-specific data by definition leads to less-than-optimistic expression.
Taking a longer-term view though, the U.S. economy has so much going for it. Our entrepreneurial spirit, productive workforce, awesome ability to innovate, ability to attract capital, streamlined corporate structures, geographical breadth and track record of bouncing back from the most dangerous of scenarios are huge benefits that should not be forgotten.
However, we cannot have a Washington that stifles most of these benefits. To move to increased levels of regulation and onerous tax rates will smother our economic benefits like a python squeezing its prey (and I do have in mind Thomas Paine’s Rights of Man with this comment). The direction of policy over the next couple of years will shape whether we have the ability to continue along an economic trajectory that has raised living standards more in the past quarter century than possibly anytime in history or something more in line with Europe, a slow erosion that stifles the national spirit. We have indeed arrived at another “time for choosing.”
Have a great day!
Brent Vondera, Senior Analyst
I was going to come in today and say it’s a good sign that we’re rallying at the end, but no one really knows in this market, the volatility is insane. Further, overseas markets were hammered last night, and into this morning for the European bourses. Stock-index futures are “limit down” – meaning trading curbs meant to keep things orderly have kicked in and prices cannot fall further prior to the bell. (Orderly, that would actually be nice) So, the fact that the market has rallied at the end of the prior two sessions is probably pretty meaningless right now.
Market Activity for October 23, 2008
We are fairly confident the market has poor earnings assumptions and a meaningful recession priced in at this point – although there are other factors that don’t exactly give the equity investors a great feeling, as touched on yesterday. (The government has pulled every trigger in its arsenal, except for its most powerful – a tax-rate response to this situation. This is beyond puzzling and proving to be a huge mistake)The market is fundamentally oversold; everyone knows it, but it doesn’t matter right now as de-leveraging and fear continue to play out. We’re likely witnessing the most oversold market since October 1974, which proved to be the most awesome buying opportunity of all time – but just like that period 34 years ago to the month plenty of obstacles remain in the path of progress.
Even though fundamentals have been discarded, longer-term investors should not ignore the fact that multiples have compressed and the S&P 500 market cap-to-GDP ratio has dropped to a point that doesn’t properly reflect the actual size of the economy. To bring it back to a level that makes more sense, it is not unreasonable to expect that market cap to increase by $4-5 trillion, which would amount to a 50% jump in the index. Also, the broad market now trades at 2003 levels, yet after-tax corporate profits are higher by 115% since the S&P 500 last stood at this price.
Of course, if we get policy adjustments that fundamentally change our economy to one that involves more government action for the longer-term, then a jump of this magnitude will only be delayed.
On the economic front, the Labor Department reported jobless claims rose 15,000 to 478,000 in the week ended October 18 – this was double the expected increase, but remains below the peaks of the prior two job-market downturns.
The government stated that 12,000 of last week’s claims resulted from Hurricane Ike, which hit six weeks ago, as shutdowns from that weather-event continue to flow through to firings.
Nevertheless, we won’t be able to blame claims on that weather event from here and other areas of the report are showing weakness will continue – not that that’s a huge surprise based on what has developed over the past few weeks. The ratio of states reporting increased claims to those reporting a decrease is a meaningful sign of weakness – 39 states and territories reported an increase to 13 that reported a decrease. The credit-market freeze up of the past five weeks, and reactions to this occurrence such as an elevated level of caution and holding off, has damaged economic activity for at least the next two quarters.
The four-week average of jobless claims (chart below) fell 4,500 to 480,250. During the September employment survey this measure hit 445,750 – the October jobs report will be released on November 7 and this claims data suggests we’ll see another 100k-plus decline.
The economic deterioration from the credit-market event has occurred with amazing speed – it was just six weeks ago that economic data was suggesting the business side of the economy would offset weakness from consumer activity due to the housing and labor-market downturn. (Business spending on capital equipment was on the rebound, rising 7.0% at an annual rate April-August, but that trend will show a collapse when the September figure is released next week.)
Everything changed when Lehman went down on September 15 and the credit-market disturbance that resulted. Even firms that were not directly affected by this situation have become extremely cautious, which funnels down to job-market fundamentals.
In other economic news, the OFHEO Home Price index showed a decline of 0.6% for August – OFHEO stands for Office of Federal Housing Enterprise Oversight.
For the past 12 months, the index has home prices down 6.6%. As we explain each month, this is quite different from the S&P Case/Shiller Housing index (the index the press focuses on), which has prices down 16% over the past 12 months. This OFHEO index has its flaws, it does not include the high-end market, but it is much broader than the Case/Shiller reading, which includes only the 20 largest metro areas – several of which have endured the largest price declines due to heightened speculation during the boom.
Bottom line, weight Case/Shiller, OFHEO and the National Realtors Association existing home sales data equally and it suggests home prices are down 10% year-on–year. Probably very close to reality for the majority of U.S. regions.
A “Time for Choosing”
Over the past five weeks you all have certainly noticed the tone of the letter has grown negative – at least relative to my normal tone; the data along with thoughts of impending policy changes have that effect. Simply to provide a commentary on weak economic releases and market-specific data by definition leads to less-than-optimistic expression.
Taking a longer-term view though, the U.S. economy has so much going for it. Our entrepreneurial spirit, productive workforce, awesome ability to innovate, ability to attract capital, streamlined corporate structures, geographical breadth and track record of bouncing back from the most dangerous of scenarios are huge benefits that should not be forgotten.
However, we cannot have a Washington that stifles most of these benefits. To move to increased levels of regulation and onerous tax rates will smother our economic benefits like a python squeezing its prey (and I do have in mind Thomas Paine’s Rights of Man with this comment). The direction of policy over the next couple of years will shape whether we have the ability to continue along an economic trajectory that has raised living standards more in the past quarter century than possibly anytime in history or something more in line with Europe, a slow erosion that stifles the national spirit. We have indeed arrived at another “time for choosing.”
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment