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HomeApril 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
March 2009 Market Review
Posted by Larry Doyle on March 31st, 2009 7:47 PM |
The markets, overall, experienced a very solid rebound this month. Technically, the market got oversold bottoming out on March 6th when the S&P 500 hit the devilish level of 666!! Perhaps some divine intervention prevailed and shed a wee bit of grace on the market in the spirit of Saint Patrick. Perhaps not, as well. In any event, we rebounded close to 20% over the last three weeks. The bounce has allowed us to catch our breath but I caution everybody to remain on guard.
The rebound gained support from the following factors as well:
1. stabilization in the weekly unemployment claims at the 650k; level
2. improved figures in housing starts and new home sales;
3. speculation that the FASB will relax the mark-to-market; (more…)
The Fed Levers Up
Posted by Larry Doyle on March 18th, 2009 6:30 PM |
When the economy experiences a massive delevering process, the void in the economy needs to be filled. There has been and will continue to be ongoing debate about the effectiveness of the stimulus plan, Obama’s proposed budget, ongoing government bailouts of a variety of industries, and moves made by the Treasury and Federal Reserve. Has enough been done? Is too much being done? Are our global partners pulling their weight? Are protectionist measures likely to exacerbate our economic problems? The answers to these questions will not be known for years.
Today’s action, Fed’s New Steps Shake Up Markets, is a sign that as everybody is delevering (selling assets purchased with borrowed money), the Federal Reserve is levering up. The Fed has indicated they will purchase billions more than previously advertised in U.S Treasury securities, mortgages, and consumer related assets. Why? By making these purchases, the Fed will attempt to drive the rates for these products lower and reignite consumer and institutional demand for credit. The market responded in startling fashion as 10yr government rates dropped an unprecedented .50% !! Equity markets responded by moving higher by 1-2%. (more…)
Market Fades on the Close
Posted by Larry Doyle on March 16th, 2009 6:30 PM |
Monday’s price action in the equity markets was particularly interesting. The market opened firm, up approximately 1%, and continued to trade with a very firm tone all day. What precipitated the strong tone? Fed chair Ben Bernanke was interviewed on 60 Minutes last evening. On that show, Bernanke Defends Recovery Efforts in Rare TV Interview.
First and foremost, it is very uncharacteristic for anybody from the Fed to consent to an interview targeted at a general audience. I view this as Bernanke trying to make the case for himself, the Fed, and the economy during these challenging times. In fairly short order, Bernanke has gained significantly greater credibility than his colleague, Secretary Geithner. Bernanke also spoke well of the economy turning around later this year IF the financial system recovers. That is a mighty big IF!! (more…)
The Global Economic Horizon
Posted by Larry Doyle on March 14th, 2009 2:45 PM |
While there is nothing like a nice 10% rally in equity markets to salve a wounded soul, let’s not get overly ebullient. The global economy is facing a host of issues the likes of which it has not seen in a long time, if ever.
I truly relish the honest perspectives offered by a number of our Thought Leaders. A recent piece posted by Professor Ken Rogoff, a former chief economist for the International Monetary Fund, and currently a professor of Economics and Public Policy at Harvard, lays out a logical road map for global interest rates, economic growth, sovereign defaults, and inflation. Let me preface Rogoff’s piece by stating the road will be long and steep!
What does Rogoff think about the prospects here in the United States under the Obama administration? He writes, “US long-term growth could be particularly dismal, as the Obama administration steers the country toward more European levels of welfare assistance and income redistribution.”
I strongly recommend Rogoff’s What is the Deficit Endgame? Please access a wealth of other global perspectives at the Thought Leaders link (in the left sidebar), which provides access to leading global economists and over 400 periodicals from around the world.
LD
Dead Cat Bounce
Posted by Larry Doyle on March 4th, 2009 3:00 PM |
The equity markets are up almost 3% today. Did we just put in a bottom? Can we at long last expect better price performance? Are we seeing a turnaround in the economy? Well, in Wall Street parlance today’s price action is known as a “dead cat bounce.” I had mentioned a day or two ago that a short term RSI (relative strength index) had fallen below 30%. Anytime that index gets that low, the market is susceptible to a bounce to force some short covering.
The Federal Reserve released a report, known as the Beige Book, and highlighted that they expect No Turnaround Soon in the economy.
Additionally, even though the major market averages are up 3%, why is it that the major capital providers are down significantly on the day? Look at the price changes for the following: (more…)
How Wall Street and Washington Betrayed America!!
Posted by Larry Doyle on March 4th, 2009 11:03 AM |
While politicians, bankers, regulators, and commentators can and will point fingers as to where and how our system of financial oversight broke down, make no mistake it was due to too many people making and taking too much money!! I have highlighted the grotesque system of lobbying that has developed and corrupted our society in More Legalized Bribery.
We watch daily hearings on Capitol Hill in the spirit of doing what is right for our country. Please!! Spare me the nonsense and pandering. While collectively we deal with markets that are now down over 50%, the pols and the bankers have effectively robbed the bank and left the taxpayers with the bill to clean up the mess. Barron’s wrote a brief piece on this topic: how the Financial Sector Spent $5 Billion Lobbying Washington Over the Last Decade!!
It is high time we attach names and faces to those politicians and lobbyists who fed at this trough!!
LD
