U.S stocks got wacked again yesterday, down 12% over the last two sessions, but everyone knows this by now. Right? Some have suggested I start talking about other things, such as the weather; although, the temperature in St. Louis isn’t going to cheer anyone up.
Whatever happened to global warming? I yearn for that warming trend, even if it peaked in 1998, but that won’t stop Henry Waxman from fighting it – we see he’s ousted the business-friendly John Dingell from the House Energy Committee Chairmanship. That’s what we need, someone who proposes austere regulations to cool a climate that’s already begun to do the job on its own. Man, I’m off on a tangent with that one.
Maybe we’ll start reporting on college basketball scores since the season has kicked off – Duke will give NC all they can handle in the ACC this year.
Possibly we’ll begin a daily commentary on pirate activity, since that’s become the entrepreneurial endeavor of late. Maybe shipping firms should just start dropping 10% of their goods off in Somalia – that’s essentially what’s occurring now anyway.
Why ships are not armed and rules of engagement are dangerously weak is beyond me. Now there’s talk of choosing circuitous shipping lanes, paths that would delay delivery times by 8-14 days, and of course raise costs. I guess blowing speed boats loaded with modern-day Barbary pirates out of the water makes too much damned sense.
Market Activity for November 20, 2008
As Andy Kessler discussed in yesterday’s WSJ, we should all ignore the market for a couple of months as it is not trading on fundamentals but rather the de-leveraging event is pushing values lower as hedge funds fall off the map, investors demand their cash back and this triggers mutual fund investors to do the same – what seems to be an endless circle.
This is rather good advice, and it would do us all some good to ignore things for a while, so maybe we will begin to talk about other things. Certainly investors are ignoring the ultra-low multiple of 11.77 times trailing 12-month earnings on indices such as the NYSE Composite and the fabulous 5.49% dividend yield that accompanies it. So why can’t we also ignore the daily pummeling that’s resultant of the over-leveraged nature of the previous few years – a decision certainly inspired by a mistaken Fed that kept rates way too low for too long back in 2003-2005.
There’s something like 20%-30% of S&P 500 members – what’s supposed to be a large cap index – trading at mid-small cap levels. This should be telling the longer-term investor something, but we understand it’s difficult during these times to see things as half-full.
For sure there are economic issues as the credit freeze-up that began in September all but put a halt to inter-bank lending, did major damage to commercial-paper issuance and caused businesses (even those that didn’t have financing problems) to simply put the brakes on capital spending projects. As a result, unemployment will continue to rise (and don’t forget that the jobless rate doesn’t peak until a year after a recession has ended), at least the next two quarters of GDP will contract (with the current-quarter’s degree of contraction being the worst since 1982) and global growth will slow substantially, if it escapes recession. But the market is trading at levels that already assumes much higher unemployment rates, inflation and earnings declines.
Try to hold steady, while it’s tough to see a multi-year rally taking place right now, we’ll see a powerful intermediate-term snap back from these levels.
Crude and the Dollar
The price of oil continue to plunge – good for the consumer. Although tough for many businesses to manage around; there’s no hedging strategy that can offset these swings.
Same is true for the greenback in terms of those with international sales.
The Economy
The Labor Department released its weekly data on jobless claims and it showed a higher-than-expected 27,000 jump to 542,000 in the week ended November 15.
The four-week average on claims (chart below) increased 15,750 to 506,500 – the highest level since 1983. (Longer-term readers will notice we’ve extended the chart to show the 1980 and 1981-1982 recessions, since the four-week average has hit those levels.
This measure (four-week average for claims) has averaged 404,000 during 2008, as the economy has shed 1.2 million payroll positions – 54% of which has occurred over the past three monthly readings. That compares to an average 321,000 in 2007, as the economy added 1.1 million payroll positions.
The number of people staying on benefit rolls in the week ended November 8 – one-week lag from the initial claims figure – rose 109,000 to 4.012 million, the highest rate since December 1982. Although, we’ll point out, again, when one adjusts for the rise in the labor force continuing claims would have to hit 5.3 million to truly compare with the 1982 recession. Back then the labor force stood at 112 million, today it is 155 million, so while 4 million in continuing claims is an elevated reading, it’s not as high as the unadjusted reading makes it seem.
We’ll note continuing claims have jumped for the obvious reason: jobs have been more difficult to come by since Lehman went down in September and triggered the credit event. But the government also continues to increase the period someone can remain on the dole, increasing the period to 26 weeks from 13 weeks. The House passed another 13-week extension last night, ready for the president to sign. This also sends continuing claims higher, at the margin.
In total, this is a very weak report and since this is also the week the Labor Department engages in its November employment survey – for the initial estimate at least – it means the next employment report will be worse than the last. Initial claims have averaged 525,000 for the first two weeks of November, which corresponds with a roughly 350,000 decline in nonfarm payrolls.
In a separate report, the Philadelphia Federal Reserve Bank released its manufacturing survey (known as the Philly Fed Index) for November and, guess what? I know you’re going to be surprised. It was horrendous.
The survey’s general activity index fell to -39.3, the lowest level since hitting -48.2 in October 1990; hey, at least we didn’t fall to 1974 or 1981 levels. We’ve been here before.
All sub-indices posted terrible readings as well. The new and unfilled orders indexes both deteriorated from very weak levels hit in October and the shipments index remained unchanged.
The credit crisis that caused economic growth to collapse over the past three months has forced companies to cut investment and production, which is most evident in these manufacturing figures.
However, the inventory index remained in negative territory as well, which means respondents view stockpile levels as low. And this is true economy wide, as witnessed in the business inventory index and ISM survey. No, one should not expect these levels to spur production over the next couple of months but the fact that they are low is unusual for an economic downturn.
It is the inventory bloat that generally determines the duration of an economic contraction, and while the current situation has been caused by other factors such as the credit event, low stockpiles should result in a ramp up in production a few months out. That is if Congress doesn’t go and do anything that crowds out and damages private sector growth – like forcing infrastructure projects and jacking up tax rates on small businesses to pay for health-care related schemes for anyone that is within 400% of the federal poverty line. This inventory situation is getting zero press, but it’s clearly one of the silver linings.
Real Response
We’ve touched on how the government has tried everything under the sun except a tax-rate response to current issues. In the end, only time can reverse that which ails the economy, just as it took time for the housing froth and over-leveraged position within the financial sector to build.
But a tax-rate response can quickly bring back confidence and optimism like nothing else in the government’s arsenal. Further, it also provides incentive effects that speed up the process of finding a clearly price for certain mortgage assets and spurs a stock-market rally – two things that can immediately boost sentiment.
Roughly six months back we mentioned Congress needs to eliminate the capital gains tax on “troubled” mortgage assets; this would provide a huge incentive to take some risks here, and provide some pricing for this market that is finding few bids. Well, I heard a TV commentator express this idea last night for the first time, so maybe we’re slowly getting somewhere.
Of course, we’d like to go for the big bang and slash tax rates on all capital investments in half – same for dividends – and cut the corporate tax to at least 25%. This would drive optimism much higher and it would have an immediate effect. It would also, 12-15 months out, kick-start federal tax receipts. Now, please.
Instead, all we hear are rebate check, food stamp and state-aid schemes, even though these programs have failed to stimulate the economy in the past – often times prolonging economic weakness. Those attempting to explain why these actions have been ineffective say it’s because they were not large enough, which is why some are floating a $500 billion-$1 trillion “stimulus” package. This is insane. Just do what history has shown works.
I’ve written the White House regarding these topics. I’m sure the letters have made it to Josh Bolten’s desk, just as I’m sure Representative Henry Waxman will help to implement a common sense energy agenda.
Have a great weekend!
Brent Vondera, Senior Analyst
