I’m not a technician and in most cases don’t like this kind of talk so take these comments with a grain of salt, but reality is we are in a trading-range environment so one has to acknowledge these support levels. If we can get back to 742, to be specific, that will be the new resistance and a move above that figure may signal we’re onto something.
The NASDAQ Composite posted a meaningful gain as information technology share were one of the best performing sectors.
Financial and basic material shares were the top two performers yesterday. Health-care and energy were the main laggards.
We are in a wait to see moment here as changes to mark-to-market and reinstatement of the uptick rule appear imminent -- we’ll touch on this below. The fact that we remain at the whim of Washington right now, more so than ever, is keeping capital on the sidelines.
That said we see real opportunities in a number of sectors, and the market in general over the near term – opportunities are there certainly for the long term as well, it’s just we will likely have to deal with additional market weakness, even assuming we engage in a strong rally over the next few months, as both fiscal and monetary policy will lower the likelihood of a sustained economic rebound .
As stated before, industrials and tech really stick out to me as screaming buys. The S&P 500 index that tracks industrial shares trades at a P/E below 10 and a dividend yield of 5.22%. For tech stocks, the index trades a bit above a 10 P/E, but this is very low for the group – something closer to 15 seems more appropriate.
Basic material and energy shares appear cheap as well – and both will prove to be an appropriate inflation hedge if that scenario arises.
The broad market trades at it lowest P/E in 20 years and nice dividend yields as well. The S&P 500 trades at a yield of 3.8% and the NYSE Composite offers a yield of 5.2%. However, we need policy that is helpful and inviting before additional capital is put at risk – at the least we need to refrain from vilifying the successful and the lambasting of business – Jamie Dimon put it well in a speech yesterday (hopefully his comments foment other business leaders to stand up to government instead of acting as a bunch sycophants, as has been the trend for a long while now).
Bring a pro-growth agenda to the table, one that inspires the American spirit and rewards success, and this market would be off to the races, posting a robust and sustainable rally. Alas, we’re getting the opposite right now.
Market Activity for March 11, 2009
Omnibus Spending Bill Passes
Congress passed the $410 billion omnibus spending bill Tuesday night, this is related to discretionary spending (outlays outside of entitlement programs, defense, homeland security and veterans affairs). You know massive levels of spending are on the horizon (not that this is a surprise) when you have members of Congress calling the Bush Administration’s budgets the “lean years.” It was also interesting to see, since Congress has been berating executive pay, that the bill included automatic annual salary increases for members as an attempt by Louisiana’s David Vitter to end the 20-year old practice was defeated.
The Private-Public Investment Fund (PPIF)
Mr. Geithner stated Tuesday night, in an interview on PBS – he’s finding a real home there, that the administration plans to use more capital injections as an incentive to get banks to sell distressed securities. Geithern needs this willingness among banks in order to get PPIF off the ground. The reasoning is that these injections will give banks the added capital (and most have capital ratios that exceed requirements already) that allow them to unload these assets at current distressed prices.
However, there’s a little problem. Banks believe these assets are worth more than they are being marked to, especially those performing on schedule. As a result they will hold them. On the other side, private equity likes the distressed prices as these levels allow them to achieve large returns over time – especially as they’ll finance these purchases at a low cost of capital via government funding. PPIF may be going no where if both sides are unwilling to find a clearing price, unless the government forces banks to sell assets. Egad!
If we are to go down this route, the government just needs to buy these securities at higher than currently distressed prices and hold them for however long it takes to get to break-even or achieve a return. The original TARP blueprint was the way to go. If they would have just done this last year, and say even lost money when it was all said and done, the cost would have been a heck of a lot less than they are spending now and without the unintended consequences of all they have done to boot. Of course, the best thing to do is abolish the accounting rule, in which case the PPIF may not even me necessary.
And speaking of which, there will be hearings on Capitol Hill today regarding mark-to-market and it seems we’re getting close to modification of the rule. This would be huge, but you can’t believe anything these days until it actually occurs, we’ve seen too much talk without action. But breaking the link between mark-to-market and regulatory capital (capital adequacy ratios) would be huge and I believe the market will run strong to the upside if in fact they make this change.
Mortgage Applications
Mortgage applications rose 11.3% in the week ended March 6 after two weeks of decline. That magic sub-5.00% fixed 30-year mortgage rate did the trick again, falling to 4.96%.
Refinancing activity, which has been the driver of the index, rose 13.3%. Purchases were upbeat also, up 7.1%.
Monthly Budget Statement
Tax revenue has declined substantially over the past several months, always the result of recession, but the damage done over the last couple of months shows things have yet to bottom. This event began with a corporate tax revenue slide as the financial sector has seen bottom line results obliterated. Now, as one would expect due to the degree of labor market decline, individual tax receipts are declining rapidly.
The latest Treasury Department report showed individual receipts, which make up the bulk of revenue, fell 64.3% in February from the year-ago level – coming in at $8.7 billion vs. $24.4 billion in February 2008.
Fiscal year-to-date, individual receipts are down 13.4% ($388.5B vs. $446.9B); corporate receipts are down 45.5% ($52.8B vs. $96.9B); total receipts are down 11% ($860.8B vs. $967.2B). Of course spending has moved in the opposite direction, up 32% ($1.625T vs. $1.231T).
The response to the economic woes has been to increase government spending as a way to boost aggregate demand and get things moving – an old Keynesian response. But government cannot increase aggregate demand beyond the very short term. Why? Because they must remove capital/income from the private sector to do so as unusually large increases in spending always result in higher tax rates and increased debt issuance.
The correct way to approach this is to slash tax rates, thereby creating incentives to produce and invest. This is essential as we will need private capital to pull us out of this contraction. Policies that cause capital to go into hiding will only elongate the downturn, and hence exacerbate the deficit.
It was Roosevelt’s Treasury Secretary Morgenthau who stated in 1939: “We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot.”
It’s not wise to ignore history.
Have a great day!
Brent Vondera, Senior Analyst
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