Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

January 2009 Review

Posted by Larry Doyle on January 30, 2009 7:10 PM |

Was it only a mere 4 weeks ago when we had a 3% upward move on the first trading day of the year? Do you recall that most equity analysts and money managers were calling for a turn in the economy by midyear and that people should increase their equity exposure?

In fact, for the first four days of the year the atmosphere was somewhat ebullient with markets holding those 3% gains. I wondered what the analysts and money managers were seeing. Not seeing it myself, I wrote the following on January 8th:

I believe a best case scenario for the equity market is that it merely marks time and does not further retract. I have a very difficult time making a case for a rallying equity market. I am more in the camp that we will likely retest the equity lows seen on November 20th. We may penetrate those lows by another 8-10% which would bring the S&P into the 700-725 area from its current level of 915. I do believe the prices in the corporate bond market, including the high yield space, largely reflect the concerns highlighted above. I also believe that despite the Fed and Treasury purchasing government and mortgage debt, these rates will end up higher at the end of this year than they are now simply due to the growing deficit. A move higher in these rates will potentially cause further anguish within the equity markets.

Every coach knows that the films don’t lie and the stat sheet speaks volumes. In that vein, let’s look at the stats for January and see “which players are making the grade.” The tickers under the high yield, mortgage, and municipal bond headings are electronic trading funds (ETFs) that I use as surrogates for those sectors.













S&P 500




High Yield (COY)




Mortgage (FMY)




Government (ITE)




Municipal (NXR)




10-year Treasury

2.22 rate

2.86 rate

64 basis pts

2-year Treasury

.77 rate

.96 rate

19 basis pts.

















What does it all mean?

The economy is worse than what was thought coming into the year. Earnings estimates were wildly overestimated. The 8.5% drop in the S&P 500 is the LARGEST single drop in any January since this index was formed 81 years ago.

For those who track the markets, there is a 75-80% correlation in the annual moves in equity markets with the performance in January. Without parsing words, this performance in January portends a very challenging year for our equity markets. All eyes and ears remain focused on Washington for a comprehensive financial rescue package (Bank Transition, insurance for other assets, aid to stem foreclosures, et al). Trade the range for now with a very wide band. Buy the S&P as it approaches 750 and sell it as it moves above 900. Otherwise….be patient!!

In the bond space, I did believe and continue to believe that despite the Fed and Treasury promoting the concept of quantitative easing (using the Fed’s balance sheet to buy Treasury, agency, and mortgage related assets), these rates will work their way higher simply due to the MASSIVE financing needs of our government and global governments.

The corporate bond space, led by high yield bonds, had very solid returns this month. As we mentioned, we thought these sectors had already priced in the economic turmoil to a much greater extent than the stock markets. High yield bonds were up almost 10% on the month. I would not add to that sector after that performance.

The dollar inched lower versus the Japanese yen. I believe the dollar will continue to weaken versus the yen, as well as the Canadian dollar. The U.S. dollar dramatically outperformed the Euro and the British pound. The economic situation in Europe is just as bad, if not worse, than in U.S. In fact, a number of European countries are being seriosuly challenged to raise funds. Sovereign credit risks (the risk that a government defaults) have risen considerably.

In the world of commodities, gold outperformed due to the global government credit risk, the threat of longer term inflation, and weakness in currencies. Oil remains very volatile but ended the month down 2.5%. Metals remain weak with anemic demand.

Add it all up and what is one to do? In my estimation, an investor is being paid to WAIT before making any major capital commitments. For those who are significantly underweighted stocks, a dollar cost averaging (add a fixed dollar amount on a regular basis versus one lump sum at one point in time) approach is always recommended. I am not going out on a limb to say that we will retest the lows (down another 7-9%) seen on November 20th.

We are starting to see and hear some hints of liquidity inching back into certain sectors of the real estate markets. While I do think government and mortgage rates may continue to move higher, the other rates in the bond space may not come down much, but I do not think they will move up much either. We saw some healthy issuance of bonds this month. The money being borrowed is expensive, but the fact that the deals are getting placed is a positive.

In regard to today’s GDP report, the -3.8% reading was better than the expectation of -5.5%, but in a behind the scenes review the report is actually much worse than expected because it reflects a buildup in inventories and even slower demand from consumers and businesses. That inventory buildup means businesses will need to work even more aggressively to move those products. Expect ever more aggressive sales and marketing programs from retailers.

Wish I had better news but I hope you have come to expect that you will get NO pandering here on issues of economic interest!!

nqontheairpromo2002For our new readers, we had fabulous interviews on No Quarter Radio this month. On January 4th, we spoke with Kevin Doyle of 12th Street Capital about the sub-prime mortgage industry. On January 11th, we spoke with Sean D’Arcy about the challenges facing the insurance industry. On January 25th, we spoke with “the man to see” Michael Maloney about the past, the present, and the future on Wall Street. You can listen to all archived No Quarter Radio episodes at any time. And don’t forget that No Quarter Radio episodes are also available as free podcasts on iTunes. Just open up iTunes, go to the iTunes store and type “No Quarter Radio podcast” in the search window. Complete No Quarter Radio iTunes instructions are always listed at No Quarter in the right column. As always, THANK YOU to the great folks over at No Quarter!


Recent Posts