Last Friday (September 23), The Wall Street Journal (WSJ) headline was “Markets Swoon on Recession Fears.” The subtitle was “Global Distress Rises Over Government, Central Bank Futility.” We think the WSJ headline got it about right. Investors are concerned that economic growth is slowing—or going negative—and the governments and central banks of the world are unable to prevent it. The headline referred to equity market actions on Thursday when the DJIA lost 3.5%, the Hang Seng lost 4.8%, and the Euro Stoxx 50 lost 4.9 percent. The selloff wasn’t limited to equity markets; commodities got hammered as well, including precious metals. The subtitle refers to the increasingly popular assessment that governments and central banks are unable to create economic growth despite significant and sometimes unprecedented efforts. The latest effort by a central bank is the extension of the average maturity of the holdings of the U.S. Federal Reserve by selling short duration Treasuries and buying longer dated ones. The market selloff began immediately after the Fed announcement Wednesday afternoon. The Purchasing Manager Index (PMI) data for the Eurozone and China released Wednesday evening indicated economic contraction in both regions. This new data added to investors’ growth concerns which manifested themselves in the market on Thursday.
Over the last month or so we’ve stated that there are three major concerns influencing the markets: European debt and banking problems, the possibility of a U.S. recession, and the possibility of a slowdown of growth or actual recession in China.
During the first half of September, headlines out of Europe drove the markets. Last week, growth in the U.S. and China was added. In our view, the data still isn’t definitive, but there are enough signs of a possible slowdown in the U.S., China, and Europe that we have sold nearly all of our “cyclical” holdings. We benefitted from that action last Thursday as most of our companies held up better than the market indices. We have previously written that we believe the U.S. Federal Reserve is unable to spur economic activity using its monetary tools, and we think the WSJ subtitle from last week indicates that more folks are coming to a similar conclusion.
There have been some interesting developments in Europe in the last couple of weeks, not all of which have made the headlines; most of the pre-existing problems remain. As near as we can tell, the squeeze on European banks is getting tighter, and the mechanisms may not be in place to save them if they fail.
So, the big three concerns (the possibility of a U.S. recession, the possibility of a Chinese recession, and the possibility of a European banking crisis) continue to drive the markets, and the news got incrementally worse last week, and then better this week. The DJIA has been bouncing back and forth (often violently) between about 10,700 and 11,600 since early August. Could things get worse from here? Yes. A U.S. recession isn’t fully priced into the market, a Chinese recession isn’t either, and a European banking collapse could trigger the forced selling of assets like we saw in the U.S. in 2008-2009.
Could things get better from here? They could, but ‘muddle through’ is more likely. U.S. political change is unlikely to come for 14 months, and a complete resolution of Europe’s woes isn’t in sight (but further delaying and holding actions are very possible). The most likely concern to resolve itself in the near term is when China stops squeezing its money supply and growth picks up again. Whether that will be enough to break the DJIA out of its current range is unknown.
So we continue to hold more cash than we normally do, watch developments carefully for signs of impending crises, and invest our money carefully in companies with solid balance sheets and excellent cash flows.
We have been asked why we’re concerned about Europe and Asia (China) to a degree we’ve never expressed before. This will be covered during our seminar/webcast on November 7, 2011.
Link to original:
http://www.muhlenkamp.com/upload/pdf/MarketCommentary_20110927.pdf
Over the last month or so we’ve stated that there are three major concerns influencing the markets: European debt and banking problems, the possibility of a U.S. recession, and the possibility of a slowdown of growth or actual recession in China.
During the first half of September, headlines out of Europe drove the markets. Last week, growth in the U.S. and China was added. In our view, the data still isn’t definitive, but there are enough signs of a possible slowdown in the U.S., China, and Europe that we have sold nearly all of our “cyclical” holdings. We benefitted from that action last Thursday as most of our companies held up better than the market indices. We have previously written that we believe the U.S. Federal Reserve is unable to spur economic activity using its monetary tools, and we think the WSJ subtitle from last week indicates that more folks are coming to a similar conclusion.
There have been some interesting developments in Europe in the last couple of weeks, not all of which have made the headlines; most of the pre-existing problems remain. As near as we can tell, the squeeze on European banks is getting tighter, and the mechanisms may not be in place to save them if they fail.
So, the big three concerns (the possibility of a U.S. recession, the possibility of a Chinese recession, and the possibility of a European banking crisis) continue to drive the markets, and the news got incrementally worse last week, and then better this week. The DJIA has been bouncing back and forth (often violently) between about 10,700 and 11,600 since early August. Could things get worse from here? Yes. A U.S. recession isn’t fully priced into the market, a Chinese recession isn’t either, and a European banking collapse could trigger the forced selling of assets like we saw in the U.S. in 2008-2009.
Could things get better from here? They could, but ‘muddle through’ is more likely. U.S. political change is unlikely to come for 14 months, and a complete resolution of Europe’s woes isn’t in sight (but further delaying and holding actions are very possible). The most likely concern to resolve itself in the near term is when China stops squeezing its money supply and growth picks up again. Whether that will be enough to break the DJIA out of its current range is unknown.
So we continue to hold more cash than we normally do, watch developments carefully for signs of impending crises, and invest our money carefully in companies with solid balance sheets and excellent cash flows.
We have been asked why we’re concerned about Europe and Asia (China) to a degree we’ve never expressed before. This will be covered during our seminar/webcast on November 7, 2011.
Link to original:
http://www.muhlenkamp.com/upload/pdf/MarketCommentary_20110927.pdf
