Frankly, I thought yesterday would prove to be a rough session following the North Korean launch of a multi-stage rocket. Not only because North Korea showed they’re inching closer to a long-range deliver system, but also because of the known relationship with Iran and knowledge (no matter how far behind industrialized nations) sharing between the two. And we propose cutting slashing our missile-defense budget a day later? It’s very dangerous to send the wrong messages. Traders totaling brushed it off, however.
Banks took the brunt of yesterday’s losses following comments from Treasury Secretary Geithner on Sunday. He makes these statements about being prepared to force the removal of bank executives and boards – even if some should be removed all it does is increase doubt over how far they’ll go or what ruse they’ll use to invoke more power within the banking system. As if the government is capable of finding competent replacements anyway. What’s their goal; to overtly direct lending to the channels of the economy that they see fit? It’s troubling to think of the direction they’re taking.
A pessimistic report from a major bank analyst also pushed the shares lower -- financials fell 2.93%.
Basic material, energy and consumer discretionary stocks were among the other drags, as is generally the case on these days in which the market wonders that maybe the economy has yet to bottom. (Odds are it has, but to say so with conviction is not possible at the present. Even if it has it’s difficult to see a sustained expansion – consumer activity as a share of GDP will be curtailed for quite a long time and policy isn’t exactly giving businesses the confidence to boost expenditures, which is already weak simply because of the languid economy.
(What’s needed is policy that fires up business optimism. Policymakers need to acknowledge that it will take some time for the consumer --in the aggregate -- to become healthy/comfortable again. This is why they should be focusing on the business side instead of vilifying the private sector.)
The breakdown of the deal between IBM and Sun Microsystems, as Sun did its best impersonation of Yahoo! by demanding a higher bid among other things, hurt the tech sector. Sun shareholders will wish they took IBM’s price.
Market Activity for April 6, 2009
Even though we lost a little ground activity certainly seemed to be quite positive yesterday – rallying in the afternoon session in front of today’s start to first-quarter earnings season; however, one should not expect this rally to continue unabated and big down days are probably going to with us for an extended period. Yes, stocks typically rebound 4-5 months ahead of an earnings recovery but we have at least two really tough quarters to get through first and we may have to wait until the fourth-quarter to see a meaningful profit rebound.
Financial-sector profits should be much improved for Q1 earnings season – thanks to rising interest margins – but we’ll have to endure depressed results from industrial, technology and consumer-related sectors that will push S&P 500 profits down between 30-35%. And the profit improvement within the financial sector may prove short-lived as a nicely positive yield curve, which is what delivers higher interest income, may not be able to offset rising credit-card delinquencies (simply a result of rising unemployment) and an acceleration in commercial real-estate default rates. Thus the sector may not offer the help some expect regarding Q2 and Q3 overall earnings results. It may take another nine months for the overall profit rebound to unfold.
So, this rally has been a very welcome event, and one could certainly feel it coming as we mentioned in the March 5 letter, but it’s been a strong upswing and traders will eventually look around and find stocks nicely higher from the low, yet many of the same macro (along with economically exogenous) problems remain in play. A degree of caution and a refrain from chasing these rallies is probably the main thing to keep in mind. During normal downturns you don’t want to have these shorter-term tendencies, but this is not normal and we could be range-bound for an extended period; buying at the higher-end of this range should be accompanied by a willingness to accept several stints of continued weakness.
The Week’s Economic Data
We will have to wait another day for a meaningful release. This afternoon we do get consumer credit for February, but this is not one of the big readings.
Tomorrow we get mortgage apps and wholesale inventories. We’ll look for mortgage apps to rise for the fifth-straight week, fueled by refi activity. Wholesale inventories will likely provide additional evidence that the degree of inventory liquidation last quarter was significant. I think we also get the minutes from the Fed’s last meeting – although Bernanke has been so vocal lately I’m not sure there will be anything new to take from the minutes.
Thursday we get the trade balance for February, import prices for March and initial jobless claims. On Friday markets are closed.
Have a great day!
Brent Vondera, Senior Analyst
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