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If You Can Keep Your Head

Posted by Larry Doyle on February 20, 2009 6:00 AM |

These are clearly the times that try our souls. In an attempt to bring a measure of perspective to the markets and economy, let me review some month-to-date stats for February and add economic commentary:



S&P 500





Flat to -10%, depending on sector


94.14 vs.89.81


1.262 vs. 1.280


38.78 vs. 41.60


975 vs. 929

There really has been no place to hide. Why? Very simply because in a “massive margin call” (selling assets purchased with borrowed money) when debt cannot be refinanced, all assets are “on sale” in order to pay down debts!!

We have achieved the objective we were looking for in the DJIA and are about 5% away from the objective on the S&P. If there are people who were outright short the market “nobody ever went broke taking a profit.” The question is where do we go from here? In order to address that question, we need to break it down into its component parts.

Will we see more forced selling and by whom?
Yes . . . hedge funds, private equity, insurance companies and others all will be sellers. Wall Street banks will NOT allocate balance sheet to take on assets. As painful as this is, I personally do not think we have seen a capitulation. While there will be some pools of private capital to provide liquidity as need be, they will be patient. As bad as the market feels, it does not strike me as oversold or overly cheap based upon expected earnings and the degree of uncertainty/risk.

Interest Rates
While we saw healthy activity in various sectors of the bond market in the first 6 weeks of the year, many sectors have given back a lot of ground this week. Credit risks, default risks, and foreclosure risks are keeping investors away. With a whiff of inflation today in the Producer Price Index and the Federal Reserve minutes focusing on inflation more than deflation, I do think we can see a serious move higher in government rates.

Global Markets
Europe is worse off than the United States. Asian markets had initially bounced but have since given back those gains. These export based economies have come to a screeching halt. Germany indicated it may take a stand, if need be, to support the Euro. Eastern European losses pose major concerns for Western European banks. I also read a startling stat today that Western European banks hold 75% of emerging market debt, while the U.S. and Asian banks hold less than 10% each. Sovereign credit risks are very high. Could a government default or devalue its currency to manage its debt? Most definitely!!

It is all focused on global government intervention. While the Obama Administration has only been in office for a month, the markets are not giving him, Secretary Geithner, and team a resounding welcome. The Administration has created measures of uncertainty while Congress was nothing short of pathetic in the process and execution of the stimulus plan. The housing plan and bank plans also present a wide array of “unintended consequences” which unsettle the market.

When can I get constructive?
I will go back to my piece entitled “Reason for Optimism” which I wrote on the heels of the Administration propping the “bad bank” (remember, I liked Bank Transition). For those who forget, the DJIA moved up toward 8600-8700 at that point and is down approximatley 13% since then. I do think the market is going to price certain banks to the point where the government will have little choice but to temporarily nationalize them. Where is Sheila Bair? We used to hear from her regularly. Has Secretary Geithner stifled her? The sooner the government makes this move, the sooner the markets may start to stabilize while not necessarily improve. Can you make investment decisions based on what wonks and policy mavens in Washington may do? We’ll keep our ear to the ground but don’t hold your breath because they have not given us a lot of confidence to this point.

I’ll keep writing. Please keep your cards and letters coming!!


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