“Americans have always been able to handle austerity and even adversity. Prosperity [greed!] is what is doing us in,” said James Reston, former New York Times journalist and Pulitzer Prize winner.
Another chapter in dealing with the current credit and economic adversity was written on Tuesday when the US Federal Reserve announced a no-holds-barred set of measures in a determined attempt to fix the broken credit machine, revive economic activity and stem the deflationary tide.
The Federal Open Market Committee’s (FOMC) policy statement noted: “The Fed will employ all available tools to promote the resumption of sustainable economic growth … In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the Fed funds rate for some time.”
Although the FOMC slashed the Fed funds rate to a target range of 0 to 0.25% – the lowest the central bank’s key rate has been on record – the Fed was actually simply aligning its target rate with the effective rate, thereby pushing the US into an era of Zirp – a zero-interest-rate policy like that used by Japan for six years in its own fight against deflation.
The Fed’s communiqué also said: “The focus of the Committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level.” The statement discussed specific actions that would move the Fed further towards a quantitative easing approach to monetary policy.
Source: Daryl Cagle
President-elect Barack Obama told reporters the fact that the Fed had no more room to cut rates underscored the case for a big fiscal stimulus. “We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” he said according to the Financial Times. Word circulated that Obama may ask Congress next year to approve a stimulus plan of about $850 million.
Investors’ concerns about the outlook for the global economy deepened on the back of the Fed’s announcement, as seen from government bond yields plunging to record lows and a sharp sell-off in oil prices (despite the announcement of the largest supply cut in Opec’s history). Furthermore, the dollar also tumbled on worries about the US’s public debt expansion and the potential inflationary implications of the “printing press”, although a relief rally did take place on Friday. (Also see my post “Greenback slumped on the canvas”.)
As far as stock markets are concerned, investors have again been shrugging off bad news – a pattern seen since the poor manufacturing and payrolls data of more than two weeks ago. “The newspapers may be giving us a parade of bad news, but the stock market is beginning to march to a different drummer,” said venerable newsletter writer Richard Russell (Dow Theory Letters). This is evidenced from the MSCI World Index (+2.4%), S&P 500 Index (+0.9%) and the MSCI Emerging Markets Index (+5.5%) all improving for a second week running.
The scamster Bernard Madoff’s Ponzi scheme also vied for a place in the history books, causing more billions to evaporate to money heaven – yet another example of how greed clouded the minds of people during the halcyon days. (Click here to track the fallout from the fraud.)
Bill King (The King Report), never one to mince his words, commented as follows: “Madoff allegedly engaged in a scheme that is similar to what the US government has been perpetrating for years – giving people benefits now and promising future benefits, even though the benefits are mathematically impossible to pay, by using new cash flows from taxpayers.”
On the bailout front, the White House gave Detroit their Christmas wish, announcing that General Motors (GM) and Chrysler will receive $13.4 billion in emergency government loans in exchange for substantially restructuring their businesses, according to Bloomberg. “Another $4 billion will be available to GM in February provided Congress releases the second half of the $700 billion TARP fund originally set up to bail out financial institutions.”
Some cheer has also been seen in the credit markets, with the TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) declining by 43 basis points to 1.48% – the lowest level since the Lehman bankruptcy in September. Although this measure is moving in the right direction, credit spreads need to narrow further to indicate that confidence is returning and liquidity is starting to move freely again.
The cost of buying credit insurance for US and European companies also eased as shown by the narrower spreads for both the CDX (North America, investment grade) Index (down from 263 to 213) and the Markit iTraxx Europe Index (down from 214 to 191). High-yield credit indices also improved.
There is also some encouragement from the weekly average rates for US 30-year fixed mortgages having declined to 4.94% from 6.30% at the beginning of November, according to Zillow.com.
Next, a tag cloud from the dozens of articles I have read during the past week. This is a way of visualizing word frequencies at a glance. The key words include the usual suspects such as “bank”, “economy”, “Fed”, “market”, “prices” and “rate”.
Regarding the outlook for the stock market, the Wall Street Journal’s MarketBeat blog reported legendary money manager Jeremy Grantham as predicting that beaten-down equities will rally until spring, at which time the bear market will resume.
“While he said that equities in the last couple of months had reached a level of cheapness than had not been seen in years, he still expects more pain to come. Those who can invest with a seven-year time horizon should do well, saying that ‘we’ve popped all of the bigger bubbles’, but he expects ‘we’ll overrun on the downside’.
“He says that the market will likely continue to rally into the spring, and it ‘will be big enough to convince about three-quarters of the players that [the bear market] is all over’. However, he doesn’t believe it is over – expecting a ‘good rally and a different kind of decline, on the sheer grinding of bad news’. He expects something similar to 1974, where the market takes a step forward and a couple steps back, and is fed ‘a diet of ugly earnings’.”
From across the pond, David Fuller (Fullermoney) added: “… markets had fallen sufficiently so that one could nibble on weakness, taking a long-term view. My guess is that China has not only bottomed but is also leading the way back up. However the case is not proven, and will not be until we see base formations for China and most other markets, plus breaks above the 200-day moving averages, which have also turned up. At that point, the next bull market should be well under way.”
The S&P 500 could fall to as low as 600 in 2009 and “alternative assets” like commodities and currencies will provide no shelter for investors, said Gary Shilling in an interview on Tech Ticker (hat tip: Clusterstock). “Having been appropriately bearish heading into this year, Shilling sees ‘few good places to hide’ in 2009. His ‘S&P 600’ prediction, a 33% drop from current levels, is based on a view that S&P earnings will be $40 per share next year (versus the consensus of $83) and the index will trade at a P/E multiple of 15. (Here’s the math: $40 EPS x 15 P/E = 600.)”
Jeffrey Hirsch (Stock Trader’s Almanac) draws our attention to the so-called Santa Claus Rally. This is the trading period from the day after Christmas to the close of the second trading day of the New Year. During this period stocks historically tended to advance, but when recording a loss, it was frequently a sign of trouble ahead.
In my opinion, stock markets are still caught between the actions of central banks pulling out all stops to stabilize the financial and economic situation on the one hand, and a worsening economic and corporate picture on the other. The major US indices seem locked in a short-term trading range, having fallen back below their 50-day moving averages.
The CBOE Volatility Index (VIX) has declined from more than 80 in October and November to 44.9 on Friday. It is not uncommon for short-term volatility to be at extreme levels at bottom turning points, and for stocks to improve as the “storm” grows quieter. It nevertheless remains too early to tell whether a secular stock market low has been recorded on November 20 and, failing further technical and fundamental evidence, I remain distrustful of rallies. In short, we are in a wait-and-see mode. (Also see my post “Stock markets: is this it?”.)
Economy
“Global business confidence continues to slide, falling to another new record low last week. Sentiment is equally negative in North America, South America and Europe, and while Asian business confidence is not quite as dark, it is weakening rapidly,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. The Survey results indicate that the entire global economy is mired in recession.
Economic reports released in the US during the past week confirmed a world of “depression economics” (to coin Nobel Prize winner Paul Krugman’s phrase). According to Briefing.com, industrial production declined by 0.6% in November, housing starts plummeted by 18.9% (marking the largest decline since March 1984), building permits hit a record low, and weekly initial jobless claims held near a 26-year high. Furthermore, the seasonally unadjusted CPI fell 1.9% in November, the largest drop since the 1930s.
Elsewhere in the world, data releases compounded anxiety about a severe global recession, as seen from the following:
• Germany’s Ifo Business Climate Index fell to a record low in December. The outcome reflects the ongoing stresses in the financial markets and weaker global and domestic economic activity, which have weighed on business sentiment. The downward trend in the Ifo suggests that economic activity in Germany will be very weak in the fourth quarter and prospects going forward remain bleak.
• BBC News reports that France will enter recession in the first quarter of 2009, according to Insee, the country’s national statistics agency. France is the Eurozone’s second biggest economy, and would be the latest major world economy to enter recession.
• The Bank of England’s Monetary Policy Committee voted unanimously in favour of the decision to cut the main repo rate by 100 basis points to 2% at the December monetary policy meeting. However, the minutes revealed that the central bank had considered an even more aggressive interest rate cut, heightening expectations that the UK could follow the US in adopting a quantitative easing policy.
• Confidence among Japanese businesses capitulated during the fourth quarter, with the Tankan Survey Index for large manufacturers recording its biggest decline in more than three decades. Business sentiment in Japan is now at its lowest level in more than six years.
• The Bank of Japan followed the lead of the Fed and moved to a near-zero interest rate environment at its December monetary policy meeting. The central bank cut its overnight call rate target by 20 basis points to 0.10%.
• China’s industrial production growth rose only 5.5% year-on-year in November, the slowest gain since 1999 and steeply slower than the 17% growth reported in March, said RGE. Electricity production fell 9.6% – more than in October, which had marked the first fall in a decade.
Source: Financial Times, December 16, 2008.
Summarizing the economic situation, Nouriel Roubini, professor at New York University and chairman of RGE, said in an article in Forbes: “The outlook for the US and the global economy is now very bleak and getting worse as the global economy experiences its worst recession in decades. In the US, recession started last December and will last at least 24 months until next December – the longest and deepest US recession since World War II, with the cumulative fall in gross domestic product possibly exceeding 5%.”
Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.
|
Date |
Time (ET) | Statistic | For | Actual | Briefing Forecast | Market Expects | Prior |
| Dec 15 | 8:30 AM | NY Empire State Index |
Dec | -25.8 | -28.0 | -27.0 | -25.4 |
| Dec 15 | 9:00 AM | Net Foreign Purchases | Oct | $1.5B | NA | NA | $65.4B |
| Dec 15 | 9:15 AM | Capacity Utilization | Nov | 75.4% | 75.8% | 75.6% | 76.0% |
| Dec 15 | 9:15 AM | Industrial Production | Nov | -0.6% | -0.6% | -0.8% | 1.5% |
| Dec 16 | 8:30 AM | Building Permits | Nov | – | 700K | 700K | 708K |
| Dec 16 | 8:30 AM | Core CPI | Nov | 0.0% | 0.0% | 0.1% | -0.1% |
| Dec 16 | 8:30 AM | CPI | Nov | -1.7% | -1.5% | -1.3% | -1.0% |
| Dec 16 | 8:30 AM | Housing Starts | Nov | – | 725K | 730K | 791K |
| Dec 16 | 8:30 AM | Building Permits | Nov | 616K | 700K | 700K | 730K |
| Dec 16 | 8:30 AM | Housing Starts | Nov | 625K | 725K | 730K | 771K |
| Dec 16 | 2:15 PM | FOMC Policy Statement | – | – | – | – | – |
| Dec 17 | 10:35 AM | Crude Inventories | 12/13 | 525K | NA | NA | 392K |
| Dec 18 | 8:30 AM | Initial Claims | 12/13 | 554K | 550K | 558K | 575K |
| Dec 18 | 10:00 AM | Leading Indicators | Nov | -0.4% | -0.5% | -0.4% | -0.9% |
| Dec 18 | 10:00 AM | Philadelphia Fed | Dec | -32.9 | -35.0 | -40.5 | -39.3 |
Source: Yahoo Finance, December 19, 2008.
Next week’s US economic highlights, courtesy of Northern Trust, include the following:
1. Real GDP (December 23): The final estimate of third-quarter Real GDP is expected to be left at -0.5%. Consensus: -0.5%.
2. Existing Sales (December 23): Consensus: 4.90 million versus 4.89 million in October.
3. New Home Sales (December 23): Consensus: 420,000 versus 433,000 in October.
4. Durable Goods Orders (December 24): Consensus: -3.0% versus -6.2% in October.
5. Personal Income and Spending (December 24): Consensus: Personal income +0.0% versus +0.3% in October; Consumer spending: -0.7% versus -1.0% in October.
Click here for a summary of Wachovia’s weekly economic and financial commentary.
Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.
Source: Wall Street Journal Online, December 19, 2008.
This week I am giving the customary review of the various asset class movements a skip as family time calls, especially as we have just moved into a new house (located in the scenic Stellenbosch winelands region – about 35 minutes from Cape Town).
On a different note, Madoff’s jeer at the investing public, keeps reminding me of the old adage: “If something sounds too good to be true, that must be because it is too good to be true.” Let’s hope that the news items and words from the investment wise below will assist in bringing cheer to our portfolios during 2009.
Thank you for your friendship and support in making Investment Postcards such a fulfilling experience. Here’s wishing you a great festive season full of fun, laughter and joy. May you have a wonderful 2009.
Source: Daryl Cagle
