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Behind the Numbers…

Posted by Larry Doyle on February 17, 2009 1:43 PM |

behind-the-numbers1While the equity markets globally are down 3-4% today and are within a few per cent of the lows seen on November 20th, let’s take a look “behind the numbers” so we can most effectively “navigate the economic landscape.”

  1. While the United States has lost 2 million jobs over the last three months, China has reportedly lost 20 million jobs in that same time period.

  2. Japan’s 4th quarter GDP came in at -3.3%!! This retraction equates to an annual decline of approximately 13%!!

 Comment….those numbers are not indicative of economies that are weathering the storm or ready to generate domestic consumption. No wonder why both Japan and China are so concerned about protectionist policies here in the United States.

3. The Euro is dropping precipitously today and is now below 1.26 versus the US$.  Why?? Concerns are spreading that European banks have MASSIVE unrealized losses tied not only to toxic assets and underperforming loans, but also to very heavy exposure to Eastern European projects that are likely to default. 

Comment…concerns that European countries are going to have to issue enormous supplies of government debt is raising significant concern of sovereign credit risk.

4. U.S. 4th quarter GDP was initially released as -3.8%. Given recently released data on inventories and exports, it is expected that this GDP report will be revised to the -5% range. 

Comment….this revision will push back the timing of an expected economic rebound as well as the strength of the rebound. No reason to add to risk assets at this juncture.

5. While government bonds have rallied today in a “flight to safety” trade, let’s check the other sectors of the bond market that have greater risk. Certainly they must be rallying with government rates down .2%!! NOT…

High Yield sector which was up 10% year to date has given back 7% today!!

Mortgage-backed bonds have declined .5-1% today as expectations of increased defaults along with government intervention via “principal reduction programs” are driving investors away.

Municipal bonds have also declined by .5-1% today. 

6. Earnings for the S&P 500 appear to be in the $29 range. With the S&P now trading at 790, that imputes to a multiple of 27 times. Typically, the range for the multiple is between 14-18. Earnings will have to rebound significantly and the market will have to price in a very high multiple to help the market hold anywhere close to the current price levels.  Too much risk to even think about buying the market here. Look for at least a 5% pullback from the current level and more likely 10-15%.

The lows in our equity markets seen on November 20th are only a few per cent away; the more important numbers are approximately 6% lower than current levels as those equate to the low in the DJIA seen in late 2002 and early 2003. In my opinion, it is not a challenging call to say that the market will test those levels. 


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