U.S. stocks endured the second 3.00%-plus down day this week as investors are faced with the same concerns that have plagued the market for three weeks now – frozen credit market, the delayed passage of the Treasury’s rescue plan and the likely affect this has had on both the domestic and global economies.
Of the 10 major S&P 500 industry groups, four took a substantial beating – basic materials (-7.67%), industrials (-6.72%), energy (-5.29%) and technology (-4.23%). To no great surprise, all 10 ended the day lower, the best performers being those that traditionally perform well in a down market – health care (-1.12% and consumer staples (-1.10%).
I will add, and we understand it’s tough to see through the fog of pessimism and credit-market troubles, that the market as a whole (as measured by the NYSE Composite) trades at a multiple that is very attractive from a multi-year perspective. Sectors such as industrials, energy and technology are screaming cheap. But patience will be needed for some time still.
Market Activity for October 2, 2008
Credit markets tightened up further yesterday and the develops of the past two weeks, which began when Lehman went down on September 15, have caused corporate short-term borrowing to shrink – this has been the case for several months but the degree of the decline has increased . Commercial paper outstanding tumbled $94.9 billion, or 5.6%, to a seasonally adjusted three-year low of $1.6 trillion for the week ended October 1, according to the Federal Reserve.
Credit is the life-blood of the economy – our economy is all about creating capital and channeling in to where needed. The capital is there – not that much has been created over the past year, but trillions in wealth has been built over the past several years – fear is currently blocking this capital from getting distributed to the areas that need it.
This is what occurs when we’ve had years of mistaken Fed policy and the abandonment of risk-management that followed. When this occurs, the desire to take risk swings from one end of the spectrum (grab all the risk you can) all the way to the other (except none of it). But fears wane and the risk-taking comes back to the middle in time.
In the meantime it is essential to get the Treasury plan approved and signed. And in my personal view it’s time to eliminate, or at least suspend, mark-to-market accounting that is making the situation much worse than it otherwise would be – the rule fails to even make a distinction between noncash-generating assets like equipment and cash-generating assets like securities.. (We’ll note again, FASB rule 157 – mark-to-market – grants the SEC authority to suspend the rule – do it!)
The dollar continues to rebound and has moved through the 80 level, as measured by the Dollar Index, as the ECB (European Central Bank) will be forced to cut rates. They held their benchmark rate unchanged yesterday but the financial crisis has reached another level in Europe and ECB President Trichet acknowledges the risks to growth are mounting even as inflation remains higher than he would like it.
Commodity prices continue to plummet on fears credit issues will substantially slow global growth. We don’t play the game of trading, but simply for illustrative purposes notice how the 50-day moving average has screamed through the 200-day – when a short term average moves through a longer term average it normally means there’s more room to fall.
On the economic front, the Labor Department reported initial jobless claims rose 1,000 to remain at the elevated level of 497,000 – a seven-year high and too close for comfort to the major psychological level of 500,000. Certainly the biggest housing correction in a long time has had a large effect on the figure, but the financial turmoil of late has clearly done additional harm.
There is a silver-lining, however. Much of the rise in claims over the past couple of weeks has been result of Hurricanes Gustav and Ike. For this latest data, the Labor Department states 45,000 in new claims resulted from the havoc created in Louisiana and Texas – more than two million people were evacuated from eastern Texas alone. So if overall claims rose 1,000 even as 45,000 new claims resulted from these weather-related events then there must have been some nice reductions in other states – and yes,36 states and territories reported a drop in claims. Among the 17 states that reported a rise in claims – outside of the Hurricane effect – the damage was due to intense auto industry woes.
The four-week moving average jumped 12,000 to 474,000 in the week ended September 27. We may see this measure ease in the coming weeks as weather-related damage to the figure wanes. Still, this morning’s September job report will likely be the ugliest we have seen thus far in this nine-month labor-market contraction.
In a separate report, the Commerce Department released factory orders for August, which mirrors what the latest durable goods orders and manufacturing data have shown – orders for big ticket items, specifically on the business side (capital spending) have abruptly changed course.
Factory orders fell 4.0% in August and ex-transportation orders were down 3.3%. With the exception of computers and electronics, which jumped 2.0%, every component was down.
Business capital spending fell 2.4% according to this report after the segment had been on the rebound over the previous few months. One hopes the decline in overall factory orders is more a respite after five months of solid gains, but hope is worthless without action. It is difficult to imagine a bounce back when the September data is released due to Wednesday’s weak manufacturing report and significant troubles within the credit markets that have begun to hit small businesses especially hard.
Have a great weekend!
Brent Vondera, Senior Analyst
Of the 10 major S&P 500 industry groups, four took a substantial beating – basic materials (-7.67%), industrials (-6.72%), energy (-5.29%) and technology (-4.23%). To no great surprise, all 10 ended the day lower, the best performers being those that traditionally perform well in a down market – health care (-1.12% and consumer staples (-1.10%).
I will add, and we understand it’s tough to see through the fog of pessimism and credit-market troubles, that the market as a whole (as measured by the NYSE Composite) trades at a multiple that is very attractive from a multi-year perspective. Sectors such as industrials, energy and technology are screaming cheap. But patience will be needed for some time still.
Market Activity for October 2, 2008
Credit markets tightened up further yesterday and the develops of the past two weeks, which began when Lehman went down on September 15, have caused corporate short-term borrowing to shrink – this has been the case for several months but the degree of the decline has increased . Commercial paper outstanding tumbled $94.9 billion, or 5.6%, to a seasonally adjusted three-year low of $1.6 trillion for the week ended October 1, according to the Federal Reserve.
Credit is the life-blood of the economy – our economy is all about creating capital and channeling in to where needed. The capital is there – not that much has been created over the past year, but trillions in wealth has been built over the past several years – fear is currently blocking this capital from getting distributed to the areas that need it.
This is what occurs when we’ve had years of mistaken Fed policy and the abandonment of risk-management that followed. When this occurs, the desire to take risk swings from one end of the spectrum (grab all the risk you can) all the way to the other (except none of it). But fears wane and the risk-taking comes back to the middle in time.
In the meantime it is essential to get the Treasury plan approved and signed. And in my personal view it’s time to eliminate, or at least suspend, mark-to-market accounting that is making the situation much worse than it otherwise would be – the rule fails to even make a distinction between noncash-generating assets like equipment and cash-generating assets like securities.. (We’ll note again, FASB rule 157 – mark-to-market – grants the SEC authority to suspend the rule – do it!)
The dollar continues to rebound and has moved through the 80 level, as measured by the Dollar Index, as the ECB (European Central Bank) will be forced to cut rates. They held their benchmark rate unchanged yesterday but the financial crisis has reached another level in Europe and ECB President Trichet acknowledges the risks to growth are mounting even as inflation remains higher than he would like it.
Commodity prices continue to plummet on fears credit issues will substantially slow global growth. We don’t play the game of trading, but simply for illustrative purposes notice how the 50-day moving average has screamed through the 200-day – when a short term average moves through a longer term average it normally means there’s more room to fall.
On the economic front, the Labor Department reported initial jobless claims rose 1,000 to remain at the elevated level of 497,000 – a seven-year high and too close for comfort to the major psychological level of 500,000. Certainly the biggest housing correction in a long time has had a large effect on the figure, but the financial turmoil of late has clearly done additional harm.
There is a silver-lining, however. Much of the rise in claims over the past couple of weeks has been result of Hurricanes Gustav and Ike. For this latest data, the Labor Department states 45,000 in new claims resulted from the havoc created in Louisiana and Texas – more than two million people were evacuated from eastern Texas alone. So if overall claims rose 1,000 even as 45,000 new claims resulted from these weather-related events then there must have been some nice reductions in other states – and yes,36 states and territories reported a drop in claims. Among the 17 states that reported a rise in claims – outside of the Hurricane effect – the damage was due to intense auto industry woes.
The four-week moving average jumped 12,000 to 474,000 in the week ended September 27. We may see this measure ease in the coming weeks as weather-related damage to the figure wanes. Still, this morning’s September job report will likely be the ugliest we have seen thus far in this nine-month labor-market contraction.
In a separate report, the Commerce Department released factory orders for August, which mirrors what the latest durable goods orders and manufacturing data have shown – orders for big ticket items, specifically on the business side (capital spending) have abruptly changed course.
Factory orders fell 4.0% in August and ex-transportation orders were down 3.3%. With the exception of computers and electronics, which jumped 2.0%, every component was down.
Business capital spending fell 2.4% according to this report after the segment had been on the rebound over the previous few months. One hopes the decline in overall factory orders is more a respite after five months of solid gains, but hope is worthless without action. It is difficult to imagine a bounce back when the September data is released due to Wednesday’s weak manufacturing report and significant troubles within the credit markets that have begun to hit small businesses especially hard.
Have a great weekend!
Brent Vondera, Senior Analyst
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