U.S. stocks ended a horrible week on a down note Friday; however, the late-session rally was encouraging as the pressure the market has endured over the past three weeks has normally been met with late-session deterioration.
Friday’s session was a wild one, as illustrated by the chart below. The Dow Industrials, for instance, began the day down 700 points, bounced all the way back to positive territory 40 minutes later, languished for a while, moved back down to that intra-day low, roared back – gaining 1022 points from that low --, then down 5.1% from that peak in the final 30 minutes. (The chart below shows the broad market – S&P 500 -- was down 7.7% at its worst, rallied 10.9% from trough to peak and then down 6.8% from that high in the final minutes. However, to end down just 1.1% after getting off to such a horrid start is a major victory in our view)
The indices settled at 8450 on the Dow and 899 for the S&P 500, which brings us back to May 2003. The first time we crossed these levels was August 1997 for the Dow figure and November 1998 in terms of the S&P 500’s current quote.
Market Activity for October 10, 2008
As we mentioned last week, the G7 convened this weekend in an attempt to coordinate a strategy for unlocking the credit markets by getting banks to lend to one another for a period longer than just overnight. They failed to get a unified strategy together, which with credit this frozen is pretty much a joke in my view.
The three-month LIBOR chart illustrates the unwillingness to lend.
The TED Spread illustrates heightened aversion to risk. This is the spread between the rates on three-month LIBOR and three-month T-bills. LIBOR rates are high because banks do not know which will be the next to go down and T-bill rates are super low as investors flood to the safety of the Treasury market. That three-month T-bill currently yields 0.18%, which shows many do not care to get paid on this money, so long as they get their dollar back.
On this G7 action, there are plans being discussed but it has been a lack of very specific details that has done more harm than good to this point – investors, specifically private equity, will not step in until they have a good sense what will actually occur. Why step in if you’re going to be wiped out by government capital injections – much like what occurred to Fan and Fred shareholders. Thankfully, we have heard comments that capital injections will not be punitive to current investors, which is huge – although the market will want to see promulgation.
The Europeans – while unable to find unity (you think there’s a lack of unity in the U.S. try throwing 27 different nations into the mix) -- did get some piecemeal responses accomplished and the market seems to like it as futures are up big – although one never knows if this is simply a bounce back from last week’s plunge.
The EU laid out four main points:
1. Rescue banks when needed, which will mean nationalization in most cases
2. Inject capital in other instances
3. Loosen mark-to-market rules (unfortunately, I don’t see anything concrete here. And this goes for the U.S. as well – no official decree)
4. Guarantee bank debt issuance and inter-bank lending.
For the U.S. there’s word the Treasury will lay out their overall strategy tomorrow, but it better include specifics – let’s see if Treasury has learned from the mistakes of the past couple of weeks; the details must be crystal clear.
Moving on to Friday’s economic releases
The Commerce Department reported the trade gap narrowed 3.5% in August to $59.1 billion as export activity fell less then imports declined. Adjusting for inflation, which are the figures used to calculate GDP, the trade deficit shrank to the lowest level since December 2001.
We’ve talked about the trade deficit figure many times over the past several years, as long-time readers know well, and have often stated to those that desire a narrower trade gap to be careful for what you wish – it takes economic weakness to accomplish this in a global economy that offers the free-flow of goods, services and capital across borders. Now, we have that weakness and like clockwork the trade gap narrows. It’s important to point out though that the current economic weakness is not due to the trade deficit – as Keynesian economists attempt to portray it -- the cause and effect is flipped in reality.
Exports declined 2.0% in August as overseas economies weakened – this marks the largest monthly decline in four years for exports. Imports fell 2.4% in August, largely due to falling oil prices. Excluding petroleum, imports rose slightly, up 0.9%. Still, import activity was weak across the various segments, the only bright spots were telecom equipment, pharmaceuticals and apparel.
In a separate report, the Labor Department stated import prices fell the by the largest margin since April 2003 – falling 3.0% in September. Although, that is a decline from a peak that marked the highest rate of import price growth since 1982 just two months back. The year-over-year change remains at an extreme elevation, but a stronger dollar value will assist this figure in coming lower.
A 9.0% drop in energy prices led the overall decline. Excluding petroleum, import prices dropped 0.9% and are not off the high by all that much on a year-over-year basis, as the chart below illustrates.
As stated above, stock-index futures are up big this morning. The first step will be to see the market hold onto early-session gains, and then we’ll see if we can get a multi-day rally going.
One can see a huge bounce back from the damage that has occurred in just a three week period – the broad market is down 28% over the past three weeks – 18% of which occurred over the previous five sessions. Those declines are on top of the 20% fall from the peak (hit in October 2007) that took roughly a year to play out.
But the next clues will be the credit markets – spreads, such as the TED and LIBOR charts posted above will have to come lower – and fourth-quarter earnings guidance. That guidance will be very important in assessing how the credit-market chaos of the past three weeks has hurt expectations for the non-financial sectors of the economy. Even then, things won’t be completely clear. We’ve had firm’s low-balling guidance for five years now and one has to expect, even if they see things are not terrible, they’ll certainly be very cautious with their forecasts in this environment.
Have a great day!
Brent Vondera, Senior Analyst
Friday’s session was a wild one, as illustrated by the chart below. The Dow Industrials, for instance, began the day down 700 points, bounced all the way back to positive territory 40 minutes later, languished for a while, moved back down to that intra-day low, roared back – gaining 1022 points from that low --, then down 5.1% from that peak in the final 30 minutes. (The chart below shows the broad market – S&P 500 -- was down 7.7% at its worst, rallied 10.9% from trough to peak and then down 6.8% from that high in the final minutes. However, to end down just 1.1% after getting off to such a horrid start is a major victory in our view)
The indices settled at 8450 on the Dow and 899 for the S&P 500, which brings us back to May 2003. The first time we crossed these levels was August 1997 for the Dow figure and November 1998 in terms of the S&P 500’s current quote.
Market Activity for October 10, 2008
As we mentioned last week, the G7 convened this weekend in an attempt to coordinate a strategy for unlocking the credit markets by getting banks to lend to one another for a period longer than just overnight. They failed to get a unified strategy together, which with credit this frozen is pretty much a joke in my view.The three-month LIBOR chart illustrates the unwillingness to lend.
The TED Spread illustrates heightened aversion to risk. This is the spread between the rates on three-month LIBOR and three-month T-bills. LIBOR rates are high because banks do not know which will be the next to go down and T-bill rates are super low as investors flood to the safety of the Treasury market. That three-month T-bill currently yields 0.18%, which shows many do not care to get paid on this money, so long as they get their dollar back.
On this G7 action, there are plans being discussed but it has been a lack of very specific details that has done more harm than good to this point – investors, specifically private equity, will not step in until they have a good sense what will actually occur. Why step in if you’re going to be wiped out by government capital injections – much like what occurred to Fan and Fred shareholders. Thankfully, we have heard comments that capital injections will not be punitive to current investors, which is huge – although the market will want to see promulgation.
The Europeans – while unable to find unity (you think there’s a lack of unity in the U.S. try throwing 27 different nations into the mix) -- did get some piecemeal responses accomplished and the market seems to like it as futures are up big – although one never knows if this is simply a bounce back from last week’s plunge.
The EU laid out four main points:
1. Rescue banks when needed, which will mean nationalization in most cases
2. Inject capital in other instances
3. Loosen mark-to-market rules (unfortunately, I don’t see anything concrete here. And this goes for the U.S. as well – no official decree)
4. Guarantee bank debt issuance and inter-bank lending.
For the U.S. there’s word the Treasury will lay out their overall strategy tomorrow, but it better include specifics – let’s see if Treasury has learned from the mistakes of the past couple of weeks; the details must be crystal clear.
Moving on to Friday’s economic releases
The Commerce Department reported the trade gap narrowed 3.5% in August to $59.1 billion as export activity fell less then imports declined. Adjusting for inflation, which are the figures used to calculate GDP, the trade deficit shrank to the lowest level since December 2001.
We’ve talked about the trade deficit figure many times over the past several years, as long-time readers know well, and have often stated to those that desire a narrower trade gap to be careful for what you wish – it takes economic weakness to accomplish this in a global economy that offers the free-flow of goods, services and capital across borders. Now, we have that weakness and like clockwork the trade gap narrows. It’s important to point out though that the current economic weakness is not due to the trade deficit – as Keynesian economists attempt to portray it -- the cause and effect is flipped in reality.
Exports declined 2.0% in August as overseas economies weakened – this marks the largest monthly decline in four years for exports. Imports fell 2.4% in August, largely due to falling oil prices. Excluding petroleum, imports rose slightly, up 0.9%. Still, import activity was weak across the various segments, the only bright spots were telecom equipment, pharmaceuticals and apparel.
In a separate report, the Labor Department stated import prices fell the by the largest margin since April 2003 – falling 3.0% in September. Although, that is a decline from a peak that marked the highest rate of import price growth since 1982 just two months back. The year-over-year change remains at an extreme elevation, but a stronger dollar value will assist this figure in coming lower.
A 9.0% drop in energy prices led the overall decline. Excluding petroleum, import prices dropped 0.9% and are not off the high by all that much on a year-over-year basis, as the chart below illustrates.
As stated above, stock-index futures are up big this morning. The first step will be to see the market hold onto early-session gains, and then we’ll see if we can get a multi-day rally going.
One can see a huge bounce back from the damage that has occurred in just a three week period – the broad market is down 28% over the past three weeks – 18% of which occurred over the previous five sessions. Those declines are on top of the 20% fall from the peak (hit in October 2007) that took roughly a year to play out.
But the next clues will be the credit markets – spreads, such as the TED and LIBOR charts posted above will have to come lower – and fourth-quarter earnings guidance. That guidance will be very important in assessing how the credit-market chaos of the past three weeks has hurt expectations for the non-financial sectors of the economy. Even then, things won’t be completely clear. We’ve had firm’s low-balling guidance for five years now and one has to expect, even if they see things are not terrible, they’ll certainly be very cautious with their forecasts in this environment.
Have a great day!
Brent Vondera, Senior Analyst
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