U.S. stocks slid, halting a two-day advance and marked just the third decline in the past 12 sessions, after several companies cut earnings forecasts. We believe the market’s dramatic 42% decline from the October 2007 peak already reflects this bad news, but one never knows and it certainly has an effect on a daily basis when these announcements begin to flow.
FedEx’s forecast was 14% below their guidance just two months back – the stocks dropped 14%. I guess no one cares to pay attention to the fact that a competitor – DHL – has dropped out of the domestic market and fuel costs have plunged. Texas Instruments reported a 50% lower forecast from their October guidance as phones sales have taken a header. Danaher lowered its forecast by 12% citing weaker business activity and additional headwinds due to the 20% jump in the U.S. dollar since mid-July.
Beyond these announcements, the broad market’s 21% rally over the previous 10 sessions likely encouraged traders to take some profits – even bear-market rallies (which are often powerful moves since they’re off of low levels) do not go straight up.
Market Activity for December 9, 2008
Stocks are Cheap
While we’ll have to deal with a weak economy for at least a couple of quarters still, possibly longer if the correct policy responses are not implemented, stocks are cheap. It may take a good deal of patience (which is an essential virtue for investors), but stocks are extremely attractive by a number of measures. We’ve talked about such things as market multiples and dividend yields residing at 15-20 year lows, along with the fact that corporate cash levels sit at all-time highs.
(Even as measured by trough earnings, the multiple on the S&P 500 sits at 14.8, right in line with the long-term average for normalized profits. Assuming trough earnings come in even 33% below what consensus estimates are calling “trough levels” you still come to a P/E of 19, quite low for an earnings trough.)
And on that last corporate-cash point, more and more companies have more cash per share than the value of their stock price. Additionally, cash exceeds both stock price and debt for an increasing number of companies.
The fact that we’re in a disinflationary environment (even deflation-like pressures for the very short term) makes these cash levels more attractive, as a Bloomberg report recently touched on. Very low, or declining price levels, means this cash will buy even more six months down the road. Dividend yields are boosted as well, in real terms.
Now, we don’t expect zero inflation to remain the case for long but for now valuations are extremely low relative to inflation and even when price levels rise this cash may provide a nice catalyst to economic growth – the resources are there for business spending to rebound; it would be extremely helpful if those who will be running the government next year understood this and put in place some policies that would spark optimism and confidence, two things that are in short supply these days. Too bad the Bush Administration has failed to at least offer this type of response here recently, maybe it’s the lame-duck thing.
Which brings us to the next topic:
Credit Crisis Rolls on
The Treasury Department sold $30 billion of four-week bills at 0% and received bids for four times the amount sold as the run for safety continues and money-market managers, foreign central banks etc. care only about getting their dollar back.
We’ll note foreign investors have received a return from these dollar-denominated assets as the greenback has strengthened. The fact that the dollar (compared to a basket of currencies) has jumped 12% over the past three months may have foreigners thinking the run will continue. (The run will likely continue so long as risk aversion remains high, but when things normalize, and it pains me to say this, the massive Fed injections, soaring debt levels and lack of a tax-rate response will very likely result in a weaker dollar over the foreseeable future.)
Treasury sold $27 billion of three-month bills yesterday at a rate of 0.005%. Heck, the three-month bill traded at a negative yield of 0.01% yesterday.
Needless to say the credit chaos continues. Some of this is due to year-end dynamics but it clearly shows risk aversion is heightened to say the least.
We’ve done so much by way of intervention but there is ultimately only one weapon in the government’s arsenal that will get us out of this mess – the Fed can pump all the money it wants to into the system but it cannot make banks lend or consumers and businesses borrow, powerful incentives must be implemented.
We must slash tax rates on capital and incomes; this will get confidence flowing again and as investment dollars come out from under the T-bill rock the stock market will catch fire. As the market rises, optimism will follow, businesses will re-engage in capital outlays and credit will begin to rise. Oh, and disposable (after-tax) income will get a boost, reviving consumer activity. As this combines with the increased activity on the business side the economy will move from stagnation to boom.
Economic Release
The National Association of Realtors reported pending home sales fell at a much less than expected 0.7% in October – a decline of 3.0% was anticipated. This points to a mild decline in existing home sales when the November figure is released in roughly two weeks. Pending home sales is generally a good indication of what occurs the subsequent month on existing sales.
However as we mentioned yesterday, the pending data may not provide the appropriate indication this time around based on the chaotic situation within the credit markets. Pending sales are based on contract signings and some of these potential buyers may have run into trouble actually obtaining a mortgage. Existing home sales are based on contract closings, we’ll see if there is any merit to this thought when existing sales are reported in a couple of weeks.
Mortgage Rates
In any event, mortgage spreads have narrowed nicely over the past 2 1/2 weeks, which has combined with an 80 basis point decline in the 10-year Treasury yield. Fixed mortgage rates moved lower as a result. This should boost home sales for December.
The chart below shows the narrowing in the spread between the 30-year fixed mortgage and the yield on the 10-year Treasury note for which it runs off of. (Notice how the spread hit a high of 2.90 percentage points – which occurred on November 20.) Still, this is much wider than the normal spread of 180 basis points.
Have a great day!
Brent Vondera, Senior Analyst
FedEx’s forecast was 14% below their guidance just two months back – the stocks dropped 14%. I guess no one cares to pay attention to the fact that a competitor – DHL – has dropped out of the domestic market and fuel costs have plunged. Texas Instruments reported a 50% lower forecast from their October guidance as phones sales have taken a header. Danaher lowered its forecast by 12% citing weaker business activity and additional headwinds due to the 20% jump in the U.S. dollar since mid-July.
Beyond these announcements, the broad market’s 21% rally over the previous 10 sessions likely encouraged traders to take some profits – even bear-market rallies (which are often powerful moves since they’re off of low levels) do not go straight up.
Market Activity for December 9, 2008
Stocks are Cheap
While we’ll have to deal with a weak economy for at least a couple of quarters still, possibly longer if the correct policy responses are not implemented, stocks are cheap. It may take a good deal of patience (which is an essential virtue for investors), but stocks are extremely attractive by a number of measures. We’ve talked about such things as market multiples and dividend yields residing at 15-20 year lows, along with the fact that corporate cash levels sit at all-time highs.
(Even as measured by trough earnings, the multiple on the S&P 500 sits at 14.8, right in line with the long-term average for normalized profits. Assuming trough earnings come in even 33% below what consensus estimates are calling “trough levels” you still come to a P/E of 19, quite low for an earnings trough.)
And on that last corporate-cash point, more and more companies have more cash per share than the value of their stock price. Additionally, cash exceeds both stock price and debt for an increasing number of companies.
The fact that we’re in a disinflationary environment (even deflation-like pressures for the very short term) makes these cash levels more attractive, as a Bloomberg report recently touched on. Very low, or declining price levels, means this cash will buy even more six months down the road. Dividend yields are boosted as well, in real terms.
Now, we don’t expect zero inflation to remain the case for long but for now valuations are extremely low relative to inflation and even when price levels rise this cash may provide a nice catalyst to economic growth – the resources are there for business spending to rebound; it would be extremely helpful if those who will be running the government next year understood this and put in place some policies that would spark optimism and confidence, two things that are in short supply these days. Too bad the Bush Administration has failed to at least offer this type of response here recently, maybe it’s the lame-duck thing.
Which brings us to the next topic:
Credit Crisis Rolls on
The Treasury Department sold $30 billion of four-week bills at 0% and received bids for four times the amount sold as the run for safety continues and money-market managers, foreign central banks etc. care only about getting their dollar back.
We’ll note foreign investors have received a return from these dollar-denominated assets as the greenback has strengthened. The fact that the dollar (compared to a basket of currencies) has jumped 12% over the past three months may have foreigners thinking the run will continue. (The run will likely continue so long as risk aversion remains high, but when things normalize, and it pains me to say this, the massive Fed injections, soaring debt levels and lack of a tax-rate response will very likely result in a weaker dollar over the foreseeable future.)
Treasury sold $27 billion of three-month bills yesterday at a rate of 0.005%. Heck, the three-month bill traded at a negative yield of 0.01% yesterday.
Needless to say the credit chaos continues. Some of this is due to year-end dynamics but it clearly shows risk aversion is heightened to say the least.
We’ve done so much by way of intervention but there is ultimately only one weapon in the government’s arsenal that will get us out of this mess – the Fed can pump all the money it wants to into the system but it cannot make banks lend or consumers and businesses borrow, powerful incentives must be implemented.
We must slash tax rates on capital and incomes; this will get confidence flowing again and as investment dollars come out from under the T-bill rock the stock market will catch fire. As the market rises, optimism will follow, businesses will re-engage in capital outlays and credit will begin to rise. Oh, and disposable (after-tax) income will get a boost, reviving consumer activity. As this combines with the increased activity on the business side the economy will move from stagnation to boom.
Economic Release
The National Association of Realtors reported pending home sales fell at a much less than expected 0.7% in October – a decline of 3.0% was anticipated. This points to a mild decline in existing home sales when the November figure is released in roughly two weeks. Pending home sales is generally a good indication of what occurs the subsequent month on existing sales.
However as we mentioned yesterday, the pending data may not provide the appropriate indication this time around based on the chaotic situation within the credit markets. Pending sales are based on contract signings and some of these potential buyers may have run into trouble actually obtaining a mortgage. Existing home sales are based on contract closings, we’ll see if there is any merit to this thought when existing sales are reported in a couple of weeks.
Mortgage Rates
In any event, mortgage spreads have narrowed nicely over the past 2 1/2 weeks, which has combined with an 80 basis point decline in the 10-year Treasury yield. Fixed mortgage rates moved lower as a result. This should boost home sales for December.
The chart below shows the narrowing in the spread between the 30-year fixed mortgage and the yield on the 10-year Treasury note for which it runs off of. (Notice how the spread hit a high of 2.90 percentage points – which occurred on November 20.) Still, this is much wider than the normal spread of 180 basis points.
Have a great day!
Brent Vondera, Senior Analyst
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