A perfect storm of a deepening global recession and banking woes last week battered equities and supported the safe havens of the US dollar, government bonds and gold bullion.
A dismal corporate earnings outlook, fears about bank nationalizations, especially Bank of America (BAC) and Citigroup (C), and a warning by Moody’s Investors Service of possible downgrades of European banks exposed to the slumping economies of Central and Eastern Europe, stoked investors’ fears.
Few stock markets escaped the selling pressure as summarized by the week’s movements of the MSCI Global Index (-7.7%, YTD -16.0%) and the MSCI Emerging Markets Index (-9.3%, YTD -11.4%). Venezuela (+6.7%), Pakistan (+6.1%) and Morocco (+3.7%) were the top three performers, whereas potential debt defaulters – Russia (-17.1%), Ukraine (-12.5%) and Hungary (‑12.4%) – occupied the bottom end of the ranking (data courtesy of Emerginvest).
The major US indices suffered their worst weekly losses this year (to record six losing weeks out of seven): Dow Jones Industrial Index -6.2% (YTD ‑16.1%), S&P 500 Index -6.9% (YTD -14.7%), Nasdaq Composite Index ‑6.1% (YTD -8.6%) and Russell 2000 Index -8.3% (YTD -17.7%).
Negative sentiment dragged the S&P 500 to seven points below its October 2002 low, whereas the Dow stopped only 80 points short of this key level. It is noteworthy that it took five years for the latter to increase from 7,286 to 14,165, but only 16 months to wipe out the entire 2002-2007 advance.
Source: StockCharts.com
With the bears prowling Wall Street, none of the main economic sectors registered positive returns on the week. Among exchange-traded funds (ETFs), the KBW Bank Index ETF (KBE) and the Financial Select Sector SPDR ETF (XLF) lost 16.6% and 15.9% respectively. However, as highlighted by John Nyaradi (Wall Street Sector Selector), inverse exchange-traded funds (ETFs) such as ProShares Short S&P 500 (SH) (+6.8%), ProShares Short Dow30 (DOG) (+5.8%) and Short QQQ ProShares (PSQ) (+5.1%) gained handsomely.
As was the case the previous week with the announcement of Treasury Secretary Timothy Geithner’s financial stability plan, last week’s mortgage relief plan, designed to stem the foreclosure crisis, also made scant impression on the stock market. President Barack Obama earmarked $275 billion to help reduce mortgage payments for up to nine million struggling borrowers and enable Fannie Mae and Freddie Mac to keep mortgage rates down.
Jeff Randall (Telegraph) wrote: “… we are in denial about the causes of recession and therefore cannot face up to the action required to lift us out of it. As Niall Ferguson, professor of history at Harvard University, wrote: ‘The reality being repressed is that the Western world is suffering a crisis of indebtedness.’ In which case, pumping out yet more debt will not be the answer. It is simply a short-term fix that in the long run creates an even bigger disaster, like giving a shivering alcoholic a case of Special Brew.” (Also read RGE Monitor’s recent guest post on the US’s financing needs.)
Barry Ritholtz (The Big Picture) has an interesting post up that lists the names of those favoring and opposing nationalization of the bigger US banks. Yes, I know it is a politically controversial issue, but rather get it over and done with than pussyfooting with “behind-the-curve” measures as being experimented with by the policymakers week after week. If nationalized banks are still alive once the toxic junk has been marked to market, they can start acting like banks and stake their claim to be privatized once again in the next economic upswing.
Notwithstanding supply concerns, government bond yields in the US, UK and Germany declined as investors continued their flight to safety. Yields of 10-year Treasuries, Bunds and Gilts were down by 14, 12 and 12 basis points respectively.
Increasing financial turbulence also resulted in the gold holdings of the world’s largest bullion-backed ETF jumping to a record level. “The SPDR Gold Trust (GLD) holdings have risen by 228.6 metric tons so far this year, to a record 1,008.8 metric tons late on Tuesday, absorbing in the first seven weeks of the year about 10% of the world’s annual mine gold output,” reported the Financial Times. Gold bullion breached the $1,000 level on Friday and closed the week at $1,002 (+6.4%) – within striking distance of its record of $1,031 reached in March last year.
With the yellow metal behaving like “the last man standing”, David Fuller reminded us of the quote by the English poet Lord Byron: “O gold! I still prefer thee unto paper, which makes bank credit like a bark of vapour.”
Besides precious metals shining brightly, the other commodities performed poorly, as shown in the graph below. The Reuters/Jeffries CRB Index recorded a six-and-a-half year low as global growth deteriorated.
Next, a tag cloud of my week’s reading. This is a way of visualizing word frequencies at a glance. Key words such as “banks”, “China”, “financial” and “gold” featured prominently.
As far as the outlook for stock markets is concerned, the primary bear market was reconfirmed on Thursday, at least in terms of Dow Theory. Richard Russell (Dow Theory Letters) said: “The verdict, at long last, is in. Today the DJ Industrial Average closed below its November 20 bear market low. In so doing, the Dow confirmed the prior breakdown of the Transportation Average. The two Averages jointly closed at new lows today, thereby signaling that the great bear market remains in force.
“According to Dow Theory, neither the duration nor the extent of a bear market can be predicted in advance. However there are some useful hints. Most major bear markets end with stocks at ‘great values’. This has meant in the past that price/earnings (P/E) ratios for the Dow and the S&P have fallen to single-digit numbers. It has also meant that dividend yields have moved into the 5-6% zone.”
Standard & Poor’s estimated GAAP (or “as reported”) earnings of 32.3 cents for the S&P 500 for 2009 implies a ten-month prospective P/E ratio of 23.8. Hardly “great value”.
As mentioned above, the Dow and S&P 500 are floundering around the November 20, 2008 and October 2002 lows, as shown in the columns on the right-hand side of the table below.
Stock markets remain caught between the actions of central banks frantically trying to fend off a total economic meltdown on the one hand, and a worsening economic and corporate picture on the other. The next few days will tell whether the key chart levels will arrest the indices’ declines and the three-month trading range will hold, or whether more catastrophe lies ahead.
For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Stocks between a rock and a hard place” and “Bennet Sedacca: Free Fallin’???“. (And do make a point of listening to Donald Coxe’s weekly webcast, which can be accessed from the sidebar of the Investment Postcards site.)
Announcement
Back to Richard Russell, 84-year old writer of the Dow Theory Letters. Business partner John Mauldin (Thoughts from the Frontline) is organizing a “Richard Russell Tribute Dinner” for April 4 in San Diego. This will be a night of memories and good fun with fellow writers and long-time readers of Richard’s newsletter. I will be making the trip from Cape Town and would encourage you, if at all possible, also to attend this very special event. You can register here.
Economy
A grim picture regarding the global economic situation emerges from the latest Ifo World Economic Survey (WES), showing that the World Economic Climate has declined to a record low in the first quarter of 2009. The deterioration is affecting all major economic regions and the export and import expectations indicate a clear decline in world trade in the first half of 2009.
Source: Ifo, February 18, 2009.
Further evidence of the economic malaise is provided by the GDP-weighted graphs of the global manufacturing Purchasing Managers’ Index and global services PMI.
Source: Plexus Asset Management
Source: Plexus Asset Management
A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)
February 20
• CPI report – underlying trend of deflation will fade only later
February 19
• Index of Leading Indicators improved, but wait before taking a leap
• Wholesale prices moved up, but inflation is a non-issue, for now
• Jobless Claims – dismal labor market conditions persist
February 18
• Industrial Production plunges, factory operating rate at record low
• Construction of new homes at new low
• Import prices – sixth consecutive monthly decline
February 17
• Housing Market Index – showing signs of stability?
• Foreign appetite for Treasury securities remains in place for moment
Given the nature of economics reports of recent months, the minutes of the Federal Open Market Committee (FOMC) meeting of January 27-28 come as no surprise. Asha Bangalore (Northern Trust) said: “The FOMC is more bearish about the economy compared with the forecast published in October 2008. The US economy is predicted to contract in 2009 (-1.3% to -0.5%) on a Q4-to-Q4 basis.
“The consensus forecast among the Blue Chip Survey participants is a 1.9% drop in real GDP on an annual average basis in 2009. We are predicting a 2.7% decline in real GDP … So, there is a general expectation of a significant weakening of business conditions during 2009.”
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 |
|
Feb 17 |
8:30 AM |
Empire State Mfg. |
Feb |
-34.65 |
-24.0 |
-23.75 |
-22.2 |
|
Feb 17 |
9:00 AM |
Net Long-Term TIC Flows |
Dec |
$34.8B |
NA |
$20.0B |
-$25.6B |
|
Feb 18 |
8:30 AM |
Jan |
466K |
525K |
529K |
560K |
|
|
Feb 18 |
8:30 AM |
Jan |
521K |
520K |
525K |
547K |
|
|
Feb 18 |
8:30 AM |
Export Prices ex-agriculture |
Jan |
0.0% |
NA |
NA |
-1.9% |
|
Feb 18 |
8:30 AM |
Import Prices ex-oil |
Jan |
-0.8% |
NA |
NA |
-1.1% |
|
Feb 18 |
9:15 AM |
Jan |
-1.8% |
-1.5% |
-1.5% |
-2.4% |
|
|
Feb 18 |
9:15 AM |
Jan |
72.0% |
72.4% |
72.4% |
73.3% |
|
|
Feb 18 |
2:00 PM |
FOMC Minutes |
Jan. 28 |
– |
NA |
NA |
NA |
|
Feb 19 |
8:30 AM |
Core PPI |
Jan |
0.4% |
0.1% |
0.1% |
0.2% |
|
Feb 19 |
8:30 AM |
Jan |
0.8% |
0.2% |
0.3% |
-1.9% |
|
|
Feb 19 |
8:30 AM |
02/14 |
627K |
620K |
620K |
627K |
|
|
Feb 19 |
10:00 AM |
Jan |
0.4% |
NA |
0.1% |
0.2% |
|
|
Feb 19 |
10:00 AM |
Philadelphia Fed |
Feb |
-41.3 |
-26.0 |
-25.0 |
-24.3 |
|
Feb 19 |
11:00 AM |
Crude Inventories |
2/13 |
-138K |
NA |
NA |
4.72M |
|
Feb 20 |
8:30 AM |
Core CPI |
Jan |
0.2% |
0.0% |
0.1% |
0.0% |
|
Feb 20 |
8:30 AM |
Jan |
0.3% |
0.2% |
0.3% |
-0.8% |
Source: Yahoo Finance, February 20, 2009.
In addition to Fed Chairman Bernanke’s semi-annual testimony on monetary policy before the US Senate Banking Committee (Tuesday, February 24), the US economic highlights for the week include the following:
Source: Northern Trust
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, February 20, 2009.
“Analysts can tell you everything about the ship, the crew, the price – but they don’t let you know whether it’s in shallow water or is about to be hit by a tidal wave,” said Scott Cleland (hat tip: Charles Kirk). Hopefully the “Words from the Wise” reviews play a part in steering the portfolios of Investment Postcards‘ readers through the murky waters.
That’s the way it looks from Cape Town.
