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HomeNovember 28, 2009: Month to Date Review of the Market
Posted by Larry Doyle on November 28th, 2009 4:10 AM |
What a world and what a market.
Despite ongoing economic weakness and now a potential sovereign default (Dubai), the major market equity averages closed the week generally unchanged. The Treasury market benefited the most from the reality that risks remain abundant and, in a flight to safety, capital poured into this sector. The dollar continued its descent into hell while supporting a large number of market segments, primarily commodities and especially gold.
Despite seeming investor indifference to major fundamental developments over the last six months, we disregard the situation in Dubai at our peril. Why? As Bloomberg writes, Dubai Crisis May End in ‘Major’ Default, BofA Says:
Dubai’s debt woes may worsen to become a “major sovereign default” that roils developing nations and cuts off capital flows to emerging markets, Bank of America Corp. said.
“One cannot rule out — as a tail risk — a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s,” Bank of America strategists Benoit Anne and Daniel Tenengauzer wrote in a report.
A default would lead to a “sudden stop of capital flows into emerging markets” and be a “major step back” in the recovery from the global financial crisis, they wrote.
Let’s address economic data released this week prior to reviewing the month to date market returns.
ECONOMIC DATA
1. Existing Home Sales: increased by 10.1%. The expectation of Uncle Sam’s tax credit for housing being discontinued has served to pull demand forward in this sector. I’ll believe that health is returning to housing when mortgage delinquencies, defaults, and foreclosures decline on a regular basis. We’re a long way from that happening.
2. GDP: revised lower to a 2.8% increase from last month’s initial reading of 3.5% increase. Things that make you go hmmmm!!
3. Consumer Confidence: registered a reading of 49.5, which does not compare favorably to an August reading of 54.5. Confidence is all about jobs and housing. Unless and until we see signs of real health return to those sectors, do not expect a robust rebound in consumer confidence.
4. Durable Goods: declined by .6% versus an expectation of a .5% increase. This negative reading is offset somewhat by October’s Durable Goods report being revised from a 1.0% increase to a 2.0% increase. Again, I do not expect to see consistent growth in these figures without real consistency in the housing and automotive sectors.
Let’s move along to market performance. The figures I provide are the weekly close and the month-to-date returns on a percentage basis: 
(more…)
April 2009 Market Review: Brave New World
Posted by Larry Doyle on May 1st, 2009 5:00 AM |
Does the economic activity in April 2009 represent a turning point in the recession which started in December 2007? Does the continuing rebound in the equity markets represent a bright light at the end of the tunnel or merely a rebound from a very oversold market? Have global risks abated or are they being masked by massive government intervention? Let’s get after it.
In my opinion, we are in the early stages of transition to a new global economic dynamic. That process includes:
1. Strict discipline in underwriting. Banks are forced to underwrite to own as opposed to underwrite to sell. The shadow banking system (loans originated to be securitized and sold) is dead as we knew it. Banks have certain assets marked way too cheaply while also carrying plenty of fraudulently underwritten loans worth far less than their mark. Growth potential for the economy as a whole will remain constricted by a lessened flow of credit. There will be a clear distinction in companies which are winners and losers in this process.
2. Lessened consumer demand on a going forward basis.
3. Challenges for companies relying on debt financing and opportunities for companies generating free cash flow. The model based on leveraged finance is dead and not soon to return. Automotive companies need a 13 million rate of unit sales to break even. Without a shadow banking system, I don’t see this happening.
4. Opportunities for consumers buying homes. Don’t expect a rebound in home price appreciation as foreclosures, which were forestalled by banks and Freddie and Fannie, will add supply to the housing market. Housing may stabilize, but I do not think it will improve given the glut of unsold homes.
5. Continued increase in unemployment will keep consumers cautious.
6. Many analysts focused on inventory drawdown in the latest GDP report as being a positive for future growth. Why didn’t analysts highlight the fact that consumer spending was actually a positive 2.2%? Does that statistic represent a return of the consumer? In my opinion, NO. The positive consumer spending was primarily focused on massive price discounts offered in January and February to move product after anemic holiday sales. Personal spending for March was released yesterday morning and came in at -.2%. March retail sales were a surprisingly weak -1.1%.
7. Government intervention in markets may be viewed as necessary in the short term, but a persistent government presence in markets and industries comes with unknown, and in my opinion, very high costs. We are seeing heightened challenges in banking, insurance, automotive, and soon health care, energy, and education. Companies, consumers, and investors will be forced to adapt to a regular presence of Uncle Sam. He is not a good business partner.
8. There is a very distinct shift in economic power towards China and with it a shift in political power, as well. I believe it is a question of when – not if – in terms of a major European country defaulting on its debt and requiring a rescue from the EU and/or IMF.
9. I still see a steady dose of analysts and economists forecasting future economic activity based on past models. I think they are missing the big picture. I believe we need to forecast economic activity based upon traditional bank lending. If the government persists in trying to fill a void which naturally is not there, the risk involved in that undertaking is hyperinflation.
Again, I am happy the markets have rebounded from the lows of early March but in looking forward I see a dramatically different economic landscape than our recent past. People who are able to adjust to that will do fine. People who are trying to maintain a lifestyle predicated on the economy of 2003-2007 will be very frustrated.
As far as my market call, I remain very concerned about the prevailing level of interest rates. I think the market will test the resolve of the Fed to continue to effectively overpay for mortgage and government securities.
In regard to the equity market, we are only 3-7% away from the S&P and DJIA being unchanged on the year. If we do get there, I think it would be a good opportunity to sell positions. I believe the next 10% move will be to lower prices.
In short, I think the delevering process has been given a significant breather due to Uncle Sam’s checkbook but that it is not yet over.
What do you think? There is plenty here for everybody. Please share your thoughts.
LD
