The Chairman came through yesterday in his best performance I’ve seen. In his testimony to Congress, Bernanke smoothed things over (after the administration along with Senator Dodd scared the heck out of the market again via its lack of clarity) by explaining that additional capital injections and more government control over banks would only occur if absolutely necessary. That helped things out enormously in yesterday’s trading; thank you Mr. Ben.
Regarding the administration, it’s like they’re afraid to say anything terribly concrete for fear a policy will fail and they’ll have to take responsibility – this is a major issue for stocks right now; we cannot afford additional uncertainty.
Financials led the rally; the index that tracks these shares jumped nearly 12%. Consumer discretionary and energy shares also outperformed.
It’s tough to get excited though as the political environment is costly right now. We have higher tax rates on the horizon (and I can’t even believe the President’s comment last night that he’ll raise corporate tax rates), way too much government involvement and much more regulation coming down the road.
There are reasons stocks now trade at these low levels. Yes, one is earnings are weak. Yet another factor is massive selling pressure due to de-leveraging. But there should be little doubt that valuations also reflect the fact that after-tax return expectations have been diminished and a coming regulatory burden that always crimps growth. We do not need more regulation we need enforcement, along with sound monetary policy that does not encourage excess credit expansion. Higher tax rates are the worst thing we can do right now, they must be driven lower.
In the end, nearly the entire universe of stocks offer great return potential over the next decade – even if the next couple of years will be tough; the more the government does, the longer the rebound will take. Beyond that, assuming we snap back and do not go the way of Western Europe, which is one of the questions the market is dealing with, the potential in stocks is huge.
The really sad thing about all of this is that U.S. firms are streamlined, energy prices are very low, stock multiples are compressed (S&P 500 trades at the lowest P/E since 1986 on a 10-year average earnings basis) and there are mounds of cash on the sidelines. If we could just get policy that drives incentives and offers some economic confidence we could really be on to something. Of course, there is no magic bullet, only time can correct for the credit excesses fostered by mistaken monetary policy and government involvement in the housing market (Congressional demands to offer easy credit to poor credit-score borrowers). But bold action with regard to after-tax returns on capital, incomes and profits would be a huge jolt to the American spirit – this is what’s missing. We’ll find that groove again. For now though, ebullience is absent.
Market Activity for February 24, 2009
Home Prices
The S&P Case/Shiller home price index continues to show rapid deterioration, the year-over-year decline sped up to 18.5% for December from 18.2% in November – setting a new record.
The table below speaks for itself, so not much reason to expound on its figures. All in all, I don’t like this indicator as it only follows the 20 largest metro areas, about half of the index involves the cities in which speculation was most rampant. Housing market traders would set up consortiums, and spec houses using no money down (because they didn’t have to) and simply walked away when prices began to fall. Hence, foreclosure rates are hitting this index harder than any other.
Another look is the Federal Housing and Finance Agency’s (FHFA) home price index, which offers a very broad look at the housing market. Its results for December were out yesterday too, showing prices actually rose 0.1%. This marks the first monthly increase since February 2008 and only the second since April 2007.
Unfortunately, it’s too early to get jazzed just yet as price increases in the West region is what drove the number into positive territory. Prices have been so wrecked in the West that some sort of increase was bound to occur. The Northeast, Mid Atlantic and Southeast continue to show robust declines. This index has home prices down 9.5% over the past 12 months.
Consumer Confidence
The Conference Board’s consumer confidence survey dropped to a stunning reading (even in this environment) of 25.0 in February from 37.4 last month – this is a record low. The expectations index got slammed, coming in at 27.5 after posting 42.5 in January. The survey was taken after the announcement of the stimulus plan.
Consumers’ assessment of the labor market conditions is dirt – no surprise there. The percentage of those judging jobs as “plentiful” fell to 4.4% in February from 7.1% in January, while those viewing jobs as “hard to get” rose to 47.8% from 41.1%. Thus the net “plentiful” less “hard to get” index fell to -43.4% last month from -34.0% in January. (That January reading improved a bit, giving some people hope, but this latest look will crush that feeling, if last Thursday’s jobless claims data hadn’t already.)
The market will have its eye on mortgage applications and existing home sales data for January today. Existing home sales rose 6.5% last month, so we’ll be looking to build on that and get some kind of trend going. Fixed mortgage rates are very low, but a positive trend is probably a ways out still simply because the weak labor market will delay a rebound in sales. We shall see.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment