U.S. stock indices erased another 3.5% on Friday, but considering futures hit ‘limit down” prior to the bell, as overseas markets got clocked 5-10% the night prior, we’ll consider it a moral victory. It wasn’t a stretch to expect an 8% down day based on those pre-market indications. The very broad NYSE Composite lost 4.3%.
The economic data may have helped a bit – existing home sales blew through the expectation – although the market realizes next month’s data will reflect the credit-market disturbance of the past five weeks. It is a distinct possible the selling may be close to exhaustion as the S&P 500 has plunged 30% since September 19 – down 44% from the peak hit on October 9, 2007. Regarding the NYSE Composite, the index is down 34% since September 19 and 48% from its peak, hit on October 31, 2007.
The good news is there is $3.8 trillion sitting in money market funds, waiting. That’s enough to buy 47% of the S&P 500 and 30% of the NYSE Composite.
Market Activity for October 24, 2008
In addition to concerns about global growth – which has combined with the credit-market freeze-up to keep pressure on stock indices – the market is now worried about lower-than-expected earnings guidance. (Although I’ll point out ex-financial S&P 500 profits are holding up well for now as the current earnings-season’s results are up 8.2% -- about half of firms have reported to this point.
But everyone is focused on guidance to get a sense of how badly the credit-market disturbance has affected overall growth prospects – our feel is that this event has done substantial damage to the next couple of quarters. But on guidance, let’s not get too carried away just yet, what we’ve seen so far is not disastrous. Then, consider that firms have been low-balling guidance for five years now – and will certainly err on the side of caution this go around for sure. No doubt profit growth is going down, but assuming S&P 500 profits come in 50% below current expectations, the market remains quite cheap.
Compounding global growth fears is the pummeling every currency across the globe has endured, save the yen and U.S. dollar. Global institutions made bets that the greenback would continue to fall, and thus virtually all other currencies would continue to rally. But fears have caused the typical flight to safety to take place and that means dollar buying. (This is yet another effect of Federal Reserve policy mistakes. These currency bets would have never have been put on in the first place if the Fed hadn’t erred on the easing side so badly (keeping rates too low for too long) and now that things have snapped in the opposite direction, it is going to do additional damage to emerging market economies – which means more pressure on global growth. Further, it may not inspire great feelings among trading partners as everyone looks around for someone to blame, and that isn’t good news for trade pacts.
All of that said, such deep bear markets do offer opportunities, and the 40% pummeling the indices have endured over the past year does present a gift that only occurs every 35 years or so – now one must reach out and grab that gift. This does not mean we think stocks will engage in a prolonged rally anytime soon – we’ve got legislative uncertainties to deal with as well. But for the long-term investor, this will prove to be a time that much wealth is created. For those with only a five-year time horizon, even if future policy halts a sustained rally, it is very likely we’ll see powerful short-term rallies from these levels. The S&P 500 is 30% below its 200-day moving average, and that doesn’t occur very often.
Friday’s Economic Data
On the economic front, the National Association of Realtors (NAR) reported existing home sales rose 5.5% in September (to 5.18 million at an annual rate from 4.91 million), led by a 16.8% jump in the West. Sales came at the expense of a foreclosure-driven decline in prices of 5.5% last month – down 8.6% over the past 12 months and 17% from the summer of 2006, the peak. .
The boost in sales may prove short-lived as the October reading will reflect the credit turmoil that occurred last month. (Existing home sales are counted when the contract closes as opposed to the new home sales figure, which are counted when signed – thus these September sales are the result of August lending)
Foreclosure-related sales accounted for 35% of last month’s sales, according to NAR. Of those, roughly 80% were for primary residences, higher than the average of 75% and suggesting investing (rather speculative purchases back when things were booming) were not the primary reason for the jump in foreclosures.
By region, sales jumped 16.8% in the West (which has witnessed the largest decline in prices), sales rose 4.4% in the Midwest, 2.2% in the South and fell 1.2% in the Northeast.
The supply of existing home – as a percentage of sales – did come down nicely, but still much room to make up.
Credit Markets
The credit-market indicators illustrate the freeze-up has thawed considerable, but seems to have taken a respite for now.
The TED Spread, an indication of risk aversion has leveled off as three-month T-bills have rallied (yield has fallen) due to another round of flight-to-safety trading – three-month LIBOR continues to tick lower, which is good. The spread has narrowed nicely, but there is more work to be done. Risk aversion will dissipate at some point and when it does the credit markets will flow again and stocks will rally, if not before.
Have a great day!
Brent Vondera, Senior Analyst
The economic data may have helped a bit – existing home sales blew through the expectation – although the market realizes next month’s data will reflect the credit-market disturbance of the past five weeks. It is a distinct possible the selling may be close to exhaustion as the S&P 500 has plunged 30% since September 19 – down 44% from the peak hit on October 9, 2007. Regarding the NYSE Composite, the index is down 34% since September 19 and 48% from its peak, hit on October 31, 2007.
The good news is there is $3.8 trillion sitting in money market funds, waiting. That’s enough to buy 47% of the S&P 500 and 30% of the NYSE Composite.
Market Activity for October 24, 2008
In addition to concerns about global growth – which has combined with the credit-market freeze-up to keep pressure on stock indices – the market is now worried about lower-than-expected earnings guidance. (Although I’ll point out ex-financial S&P 500 profits are holding up well for now as the current earnings-season’s results are up 8.2% -- about half of firms have reported to this point.
But everyone is focused on guidance to get a sense of how badly the credit-market disturbance has affected overall growth prospects – our feel is that this event has done substantial damage to the next couple of quarters. But on guidance, let’s not get too carried away just yet, what we’ve seen so far is not disastrous. Then, consider that firms have been low-balling guidance for five years now – and will certainly err on the side of caution this go around for sure. No doubt profit growth is going down, but assuming S&P 500 profits come in 50% below current expectations, the market remains quite cheap.
Compounding global growth fears is the pummeling every currency across the globe has endured, save the yen and U.S. dollar. Global institutions made bets that the greenback would continue to fall, and thus virtually all other currencies would continue to rally. But fears have caused the typical flight to safety to take place and that means dollar buying. (This is yet another effect of Federal Reserve policy mistakes. These currency bets would have never have been put on in the first place if the Fed hadn’t erred on the easing side so badly (keeping rates too low for too long) and now that things have snapped in the opposite direction, it is going to do additional damage to emerging market economies – which means more pressure on global growth. Further, it may not inspire great feelings among trading partners as everyone looks around for someone to blame, and that isn’t good news for trade pacts.
All of that said, such deep bear markets do offer opportunities, and the 40% pummeling the indices have endured over the past year does present a gift that only occurs every 35 years or so – now one must reach out and grab that gift. This does not mean we think stocks will engage in a prolonged rally anytime soon – we’ve got legislative uncertainties to deal with as well. But for the long-term investor, this will prove to be a time that much wealth is created. For those with only a five-year time horizon, even if future policy halts a sustained rally, it is very likely we’ll see powerful short-term rallies from these levels. The S&P 500 is 30% below its 200-day moving average, and that doesn’t occur very often.
Friday’s Economic Data
On the economic front, the National Association of Realtors (NAR) reported existing home sales rose 5.5% in September (to 5.18 million at an annual rate from 4.91 million), led by a 16.8% jump in the West. Sales came at the expense of a foreclosure-driven decline in prices of 5.5% last month – down 8.6% over the past 12 months and 17% from the summer of 2006, the peak. .
The boost in sales may prove short-lived as the October reading will reflect the credit turmoil that occurred last month. (Existing home sales are counted when the contract closes as opposed to the new home sales figure, which are counted when signed – thus these September sales are the result of August lending)
Foreclosure-related sales accounted for 35% of last month’s sales, according to NAR. Of those, roughly 80% were for primary residences, higher than the average of 75% and suggesting investing (rather speculative purchases back when things were booming) were not the primary reason for the jump in foreclosures.
By region, sales jumped 16.8% in the West (which has witnessed the largest decline in prices), sales rose 4.4% in the Midwest, 2.2% in the South and fell 1.2% in the Northeast.
The supply of existing home – as a percentage of sales – did come down nicely, but still much room to make up.
Credit Markets
The credit-market indicators illustrate the freeze-up has thawed considerable, but seems to have taken a respite for now.
The TED Spread, an indication of risk aversion has leveled off as three-month T-bills have rallied (yield has fallen) due to another round of flight-to-safety trading – three-month LIBOR continues to tick lower, which is good. The spread has narrowed nicely, but there is more work to be done. Risk aversion will dissipate at some point and when it does the credit markets will flow again and stocks will rally, if not before.
Have a great day!
Brent Vondera, Senior Analyst
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