February 22, 2009
“It depends on what the meaning of the word ‘is’ is. If ‘is’ means ‘is and never has been’ that’s one thing-if it means ‘there is none’, that was a completely true statement.”-Bill Clinton, former President, during Grand Jury deposition, 1998
Weekly percentage performance for the major indices
Based on last Friday's official settlement...
Tuesday’s market action was similar to the entry point I discussed in Monday night’s letter, a big spike in capitulative selling. I upped my long exposure this week from 5% to 8%. I also made a chicken buy and sell on the QLD, so my exposure was a touch higher for about three hours. As you know I have been suggesting adding exposure when the market eases towards the lower end of its range, and now that we are down near the November lows, I’d say that it is time. I’ll be looking for quality names to increase my long exposure, and hope I don’t get blitzed in another series of new lows.
This quote was from midday Tuesday, courtesy of David P. Nicoski at Vermillion Research:
“I just want to inform you all that the breadth of the volume is 25 to 1 on the downside. This is an extreme level based on historical volume breadth ratios. On November 20th of 2008 the ratio was 100 to 1 on the downside. I would consider this to still be an extreme level as concerns regarding the stimulus and financial bailout continue with more unanswered questions.”
Nationalize The Banks!
Christopher Dodd said it, but others have repeated it, and the market certainly took it as a bad omen this week. The thought of nationalizing the banks drove the financial stocks down dramatically during the week. If you owned one share each of Citigroup, Wells Fargo, and Bank of America, you wouldn’t have enough money to buy lunch at McDonald’s for a family of four. Eighteen months ago this same basket of stocks would have allowed you to buy a nice steak dinner for two, a bottle of wine, and still have a couple of shekels left over to tip the valet.
Remember, in a bear market it’s never too late to sell!
Politics as Usual?
I was fortunate to be invited to lunch last week with former Tennessee Congressman Harold Ford, Jr. Mr. Ford provided great insight into the ongoing political struggle faced by the new administration. Mr. Ford feels the new team really needs to get more on its game in coming weeks, since they have been “called for delay of game twice without leaving the huddle” so far. Let’s hope Mr. Obama can get things going now that he has his recently approved stimulus package in hand.
A good start would be keeping Mr. Geithner away from the microphone.
Bailout in Pictures
The chart below, from Bloomberg and the NY Times, was recently posted by Barry Ritholtz. I’m not sure it needs much explanation.
The Empire Manufacturing index was down 34.7 vs. a -23.8 estimate and set the market into a tailspin Tuesday morning. This is the lowest level of manufacturing in New York since this measure began in 2001.
Capacity utilization (shown below) came in at 72%, roughly in line with consensus. As you can see from the chart, capacity utilization is down near the lowest levels of the past 40 years. Idle manufacturing capacity typically coincides with excess workforce capacity and layoffs. I consider this to be a lagging indicator.
Producer prices climbed 0.8% (0.4% ex food and energy) vs. expectations of 0.3% (0.1%) in January, following a 1.9% drop in December. Autos, communications gear, and pharmaceuticals showed priced increases in the face of slumping sales. The year over year change was a decline of 1% vs. an expectation of -2.4%. The core (ex food and energy) year over year change was an increase of 4.2% vs. the 3.8% expectation.
CPI was flat year over year vs. an expectation of -.1%, and was up 1.7% ex food and energy vs. expectations of 1.5%.
First time jobless claims of 627K we basically in line with expectations of 620K, however, continuing claims are now nearly 5 million.
The Leading Economic Indicators (see chart below) increased 0.4% vs. expectation of 0.1%. This January figure is the second straight increase, although November and December were revised down this week. The second half of 2008 declined at a 3.7% annual rate. Once again the largest contributor was the growth in money supply (see last week’s M2 chart, http://weeklymarketnotes.blogspot.com), then interest rate spreads, consumer expectations, manufacturers new orders for capital goods, and new orders for consumer goods. The negative contributors were unemployment claims, building permits, average weekly manufacturing hours, stock prices, and supplier deliveries. The index would have dropped without the increase in money supply.
Roughly 80% of companies in the S&P 500 have reported earnings so far this quarter, and profits on average are down 33% over a year ago. According to Bloomberg, this will be the sixth straight quarter of decreasing profits, the longest streak ever.
The auto makers were back in the spotlight this week as Chrysler and GM went back to Capital Hill in an effort to get more funding from the government. In a rare act of contrition for a politician, former President Clinton said “Has the union made mistakes? Of course. But also the world changed, and frankly the political system kept ratifying the status quo for them. And I’m not pointing fingers. I was a part, we all have been.”
I have seen estimates as high as $100 billion to keep these two going.
The long awaited cutover to digital TV from analog finally occurred and, as expected, not one of my TV’s worked after the cutover, and they are all digital. The cable guy, who was obviously an inspiration for Jim Carrey’s role several years ago, informed me the timing of the failure had nothing to do with the cutover to digital, but instead was a result of my electrician installing the wrong amplifier. I felt like a college kid on an illegal substance when my coffee spewed out of my nose while I tried not to laugh uncontrollably. After I regained my composure and control of my coffee-soaked sinuses, I started looking in his tool bag for a hidden camera. You can’t make this stuff up.
We couldn’t call this a recession without a Trump entity filing for bankruptcy, and right on cue Trump Entertainment filed bankruptcy this week, four years after the predecessor company did the same. The Donald wasn’t around for this filing, having quit the board a few days before the filing.
While the government reassures us that printing billions of dollars, taking on trillions in new obligations, and allowing the deficit to soar with a new stimulus package are in no way inflationary, the market seems to be ignoring this reassurance. The price of gold has risen 48% off its October low. Readers who have been with me since the fall will recall that one of my long running suggestions (along with high quality stocks) has been a healthy allocation to gold to protect against what I feel is an inevitable inflation and/or debasement of the dollar. The chart below is the GLD ETF, which corresponds to 1/10th the price of an ounce of gold.
From Kevin Depew at Minnyanville.com:
“In the U.S., as bailouts and "economic stimulus packages" continue, and ultimately fail, inevitably the question will arise as to why it makes sense for, say, the citizens of one state to subsidize via federal tax payments foreclosure relief for citizens in other states, or banks located hundreds of miles from them, or auto companies, or the airline industry. The list goes on and on. There are individual counties in the state of CA right now asking that very question about the state government right now.”
Smoking & Taxes
Cigarettes may suffer the biggest drop in usage ever due to higher federal and state taxes on smokes. No one tries to stop cigarette taxes from being raised anymore; however, SCHIP (State Children’s Health Insurance Program) expansion will raise the federal tax by $.62 to over $1 per pack. This would push the cost of a pack of cigarettes to over $5. In a microeconomic test of the Laffer Curve, usage should drop enough to threaten $37 billion in municipal bonds now being backed by those taxes.
It has been shown that consumption declines 5% for every 10% increase in cigarette prices. George H. Bush would call that voodoo economics. Is this a government conspiracy to extend life spans so they can tax us longer in an effort to balance the budget?
This is where I Draw the Line!!!
New York, Oregon and at least 16 other states are considering increasing the surcharge on beer, wine and liquor. Kentucky raised taxes on all store-bought beer, wine and spirits. If I were those politicians, I’d reconsider this strategy. While raising taxes on smokes might save lives, raising taxes on booze is going to result in a more sober public, something the pols can hardly afford to face in this economic environment.
Keeping the people stewed and pacified might be a better strategy than balancing the budget.
From a PM friend who is more bearish than me: “S&P futures this morning are indicating another sharp decline. Year to date, the stock market (using the S&P 500 as a proxy) is down over 13 percent and is approaching the low of 752 last November. I think it's likely the market breaks through this low and continues to slide.
I previously stated that I wouldn't buy into this market unless we saw stabilization in the economic outlook (not yet) or the S&P taking a big decline ... at least below the 750 level. At this point, "at least below the 750 level" means at least "way below." Remember that during period of severe economic stress, the stock market has dropped to below book value. Book value on the S&P 500 is 525, so there is plenty of room to fall. Earnings estimates are continuing to drop, so expectations still don't match reality.”
Even More Market
Miller Tabek put out some potential earnings estimates, price levels, and downside for the S&P 500, and I must admit they are quite scary. Input these into your planning models and try not to reach for the Zantac:
$60 x 11x = 660 -15.27%
$55 x 11x = 605 -22.33%
$50 x 11x = 550 -29.39%
$45 x 11x = 495 -36.45%
$40 x 11x = 440 -43.51%
LDS Applied Analytics is reporting that the delinquency rate of jumbo loans to prime borrowers written in 2008 has jumped to 2.6%. Jumbo loans are those bigger than what Freddie or Fannie back, $417K in most areas but as much as $729K in some areas. The average FICO score for jumbo loans written in 2008 was 762.
Merrill is reporting that home builders have finally aggressively cut their production of single-family homes to a pace “well below underlying demographic demand.” They feel we are finally in the last chapter of home price deflation, albeit a very long chapter.
I thought that this three minute video was a bright spot in an otherwise dreary week of news: http://www.youtube.com/watch?v=42E2fAWM6rA.
From the Mouths of Former Fed Chairmen
Paul Volcker said that the pace of global economic deterioration may be even faster than in great depression. Industrial production in most countries is going down faster than in the US. He also said that capitalism will survive this crisis, in most respects.
Bob Bronson (see link to his site at http://weeklymarketnotes.blogspot.com) said that 4th quarter 2008 dividend reductions in the S&P 500 were a record $15.9 billion. He states further that according to Standard & Poor’s, the record has been broken about halfway into the first quarter, with 26 companies cutting dividends by $16.6 billion. More cuts are on the way (see chart below).
I want to thank all the vendors, brokers, independent research providers and of course all the readers who are kind enough to continue sharing information with me to keep this weekly note going. Also, I appreciate everyone’s input, which has been invaluable in creating a knowledge base to share with other readers. Thank you!
I had an email from a reader last week asking why I don’t create a job listing spot on my website. I am happy to do so if there is enough interest. Let me know.
Good luck this week. As always, if you’d like to be removed from this list, just let me know. If you want to see older posts, they are available at http://weeklymarketnotes.blogspot.com.
All the best,
Ned W. Brines
O (562) 430-3232