Market Matters…
A Brief Recap… Remember in March 2008 when the Bear Stearns “acquisition” by JP Morgan-Chase (JPM, Financial) seemed like over-reaching government assistance? Or when inflation fears ruled the day as oil prices surged to $147/barrel in July and Goldman Sachs (GS, Financial) made that bold prediction of $200 and beyond? Or last September when investors said goodbye to Merrill and Lehman and the government decided it was better equipped to run the country’s largest insurer AIG (AIG, Financial) and mortgage giants Fannie (FNM, Financial) /Freddie (FRE, Financial)? The credit markets dried up; world equities plunged; widespread panic spread across the globe. As the 4 th quarter began, Congress passed the Troubled Asset Relief Program (TARP) and some “experts” believed the nation’s (and world’s) severe financial woes would soon be ending to the tune of a $700 billion government bailout. After all, a couple of pretty smart fellows (Bernanke and Paulson) were behind the master plan. What could go wrong?
Welcome to the 4 th … Needless to say, TARP’s implementation has not gone very smoothly at all. Banks tapped into the program, but the anticipated lending never materialized; non-banks like American Express (AXP, Financial) applied for bank charters merely to access funds; domestic automakers came to Congress with their hands out as well (who could blame them?) only to be redirected to TARP for about $20 billion in bailout moneys (GMAC included); the rules changed overnight as plans were scrapped for the Treasury to buy underwater assets to improve ailing banks’ balance sheets; oversight boards determined that TARP accountability was non-existent and no one understood how the bailout funds were being used. With each passing day, investors lost more confidence in the plan, the implementers (you’re doing a heckuva job, Hank), and its prospects for success. More band-aids were thrown on the crisis as the Fed agreed to purchase up to $500 billion in mortgage-related securities and lowered the funds rates all the way to 0%. The FDIC expanded its insurance program and central bankers in Europe and Asia offered similar coordinated efforts.
As for the Markets… Investors had no idea how to react and markets remained highly volatile throughout the quarter. Oil dropped over $100/barrel from July as traders feared demand for commodities would dry up in a global recession. Four of the Dow Jones’ worst percentage decline days occurred during the past few months. In October, the index enjoyed two of its biggest (percentage) gains in its 113-year history, only to move to lower lows just days later. Each time Paulson (or Bush) spoke, investors seemed to throw in their towels (without digesting the message). To make matters worse, a trusted market icon named Madoff swindled his upper-crust clients out of $50 billion in the biggest ponzi scheme the SEC ever failed to detect (Coxie, you’re doing a heckuva job). Investors flocked to the safe-haven of short-treasuries (disregarding the non-existent yields) and shied away from even the highest quality corporate and municipal bonds. Stocks suffered their worst declines since the Great Depression, wiping out almost $7 trillion in market wealth as all 10 S&P sectors recorded sizable losses. Foreign markets fared no better ( Brazil -55%, Japan -42%, China -65%, Germany -40%, Britain -31%). U.S. voters decided that change was needed (and more over-reaching government assistance may help jumpstart the economy and restore confidence to the markets). Welcome to office and Godspeed, Mr. Obama.
Economically Speaking…
* Reflects changes in interest rates over various time frames.
That was Then… “The downside risks to growth appear to have diminished somewhat, while the upside risks to inflation and inflation expectations have increased.” Just a few short quarters ago, the Fed seemed more concerned with runaway inflation (i.e. skyrocketing oil and other commodities) than recession and the next move was expected to be a rate INCREASE. This is Now… "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability ." How quickly Fed sentiment can shift. The National Bureau of Economic Research declared that the country had been mired in recession since December 2007 and talks of the dreaded “D” words (deflation, depression) began creeping into many water cooler discussions. In addition to other creative stimulus moves, Bernanke and friends set the funds rate target at 0% to 0.25% during its recent policy meeting to help encourage consumer and corporate borrowing. As the Obama team began negotiating a package valued at upwards of $1 trillion, foreign governments and central banks have been implementing similar moves (rate cuts, stimulus plans) aimed at halting the global downturn.
While the average post-World War II recession has lasted 11-months, the current one shows no signs of letting up any time soon. Overall: GDP fell in the 3 rd quarter by 0.5% and many economists predict a far more substantial decline (about 5%) in the 4 th quarter. Labor: Over 1.2 million jobs were lost from the economy from September to November; the labor market has contracted for 11 consecutive months, while the jobless rate soared to 6.7 percent. Housing: Many economists believe that the sector that initiated the downtown will ultimately be responsible for the rebound. Unfortunately, that rebound does not seem imminent as home sales, construction activity, and median prices continue to decline (plummet may be more appropriate) with each passing month. Manufacturing: The auto sector and overall weak economy have put a damper on factory output as orders for durable goods have fallen each of the past four months. Retail: While economists have grown accustomed to retailers’ crying “doom and gloom” for the holidays, this year’s tears were more than justified. While discounter Wal-Mart remained about the sole exception to the rule, most analysts believe that sales declined over 1% in December and more retailers will be headed along the course of bankruptcy and liquidation, a fate that befell Linens ‘N Things and Mervyns earlier in the year. Inflation: A 29% drop in retail gasoline prices in November helped provide a nice (non-governmental) stimulus package at the pumps; however, eternal pessimists believe that lower overall prices will lead to deflation and keep the economy in the doldrums as consumers hold off on major purchases for the foreseeable future.
On the Horizon...A $1 trillion-ish stimulus package complete with significant tax cuts (to get Republicans on board) could go a long waytoward generating economic activity (dare we say, growth) by the 2 nd half of 2009. However, the easy money (and ballooning US debt) could lead to considerable inflation down the road (one worry at a time). Bear in mind, stocks are typically leading indicators and lots of cash remain on the sidelines. Should investors believe that a rebound is forthcoming over the next few quarters, the bulls may jump back in sooner than later to beat the herd mentality that is sure to follow. Wishful thinking, perhaps? Happy New Year!!!
Source: Brounes & Associates (email: [email protected])
| Market/Index | 2007 Close | 2008 Close | 1 st Qtr Return | 2 nd Qtr Return | 3 rd Qtr Return | 4 th Qtr Return | 2008 Return |
| Dow Jones Industrial | 13,264.82 | 8,776.39 | -7.55% | -7.44% | -4.40% | -19.12% | -33.84% |
| NASDAQ | 2,652.28 | 1,577.03 | -14.07% | 0.61% | -8.77% | -24.61% | -40.54% |
| S&P 500 | 1,468.36 | 903.25 | -9.92% | -3.23% | -9.00% | -22.45% | -38.49% |
| Russell 2000 | 766.03 | 499.45 | -10.19% | 0.25% | -1.46% | -26.51% | -34.80% |
| Fed Funds | 4.25% | 0.25% | -200 bps | -25 bps | 0 bps | -175 bps | -400 bps |
| 10 yr Treasury (Yield) | 4.04% | 2.24% | -61 bps | 55 bps | -15 bps | -159 bps | -180 bps |
A Brief Recap… Remember in March 2008 when the Bear Stearns “acquisition” by JP Morgan-Chase (JPM, Financial) seemed like over-reaching government assistance? Or when inflation fears ruled the day as oil prices surged to $147/barrel in July and Goldman Sachs (GS, Financial) made that bold prediction of $200 and beyond? Or last September when investors said goodbye to Merrill and Lehman and the government decided it was better equipped to run the country’s largest insurer AIG (AIG, Financial) and mortgage giants Fannie (FNM, Financial) /Freddie (FRE, Financial)? The credit markets dried up; world equities plunged; widespread panic spread across the globe. As the 4 th quarter began, Congress passed the Troubled Asset Relief Program (TARP) and some “experts” believed the nation’s (and world’s) severe financial woes would soon be ending to the tune of a $700 billion government bailout. After all, a couple of pretty smart fellows (Bernanke and Paulson) were behind the master plan. What could go wrong?
Welcome to the 4 th … Needless to say, TARP’s implementation has not gone very smoothly at all. Banks tapped into the program, but the anticipated lending never materialized; non-banks like American Express (AXP, Financial) applied for bank charters merely to access funds; domestic automakers came to Congress with their hands out as well (who could blame them?) only to be redirected to TARP for about $20 billion in bailout moneys (GMAC included); the rules changed overnight as plans were scrapped for the Treasury to buy underwater assets to improve ailing banks’ balance sheets; oversight boards determined that TARP accountability was non-existent and no one understood how the bailout funds were being used. With each passing day, investors lost more confidence in the plan, the implementers (you’re doing a heckuva job, Hank), and its prospects for success. More band-aids were thrown on the crisis as the Fed agreed to purchase up to $500 billion in mortgage-related securities and lowered the funds rates all the way to 0%. The FDIC expanded its insurance program and central bankers in Europe and Asia offered similar coordinated efforts.
As for the Markets… Investors had no idea how to react and markets remained highly volatile throughout the quarter. Oil dropped over $100/barrel from July as traders feared demand for commodities would dry up in a global recession. Four of the Dow Jones’ worst percentage decline days occurred during the past few months. In October, the index enjoyed two of its biggest (percentage) gains in its 113-year history, only to move to lower lows just days later. Each time Paulson (or Bush) spoke, investors seemed to throw in their towels (without digesting the message). To make matters worse, a trusted market icon named Madoff swindled his upper-crust clients out of $50 billion in the biggest ponzi scheme the SEC ever failed to detect (Coxie, you’re doing a heckuva job). Investors flocked to the safe-haven of short-treasuries (disregarding the non-existent yields) and shied away from even the highest quality corporate and municipal bonds. Stocks suffered their worst declines since the Great Depression, wiping out almost $7 trillion in market wealth as all 10 S&P sectors recorded sizable losses. Foreign markets fared no better ( Brazil -55%, Japan -42%, China -65%, Germany -40%, Britain -31%). U.S. voters decided that change was needed (and more over-reaching government assistance may help jumpstart the economy and restore confidence to the markets). Welcome to office and Godspeed, Mr. Obama.
Economically Speaking…
* Reflects changes in interest rates over various time frames.
That was Then… “The downside risks to growth appear to have diminished somewhat, while the upside risks to inflation and inflation expectations have increased.” Just a few short quarters ago, the Fed seemed more concerned with runaway inflation (i.e. skyrocketing oil and other commodities) than recession and the next move was expected to be a rate INCREASE. This is Now… "The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability ." How quickly Fed sentiment can shift. The National Bureau of Economic Research declared that the country had been mired in recession since December 2007 and talks of the dreaded “D” words (deflation, depression) began creeping into many water cooler discussions. In addition to other creative stimulus moves, Bernanke and friends set the funds rate target at 0% to 0.25% during its recent policy meeting to help encourage consumer and corporate borrowing. As the Obama team began negotiating a package valued at upwards of $1 trillion, foreign governments and central banks have been implementing similar moves (rate cuts, stimulus plans) aimed at halting the global downturn.
While the average post-World War II recession has lasted 11-months, the current one shows no signs of letting up any time soon. Overall: GDP fell in the 3 rd quarter by 0.5% and many economists predict a far more substantial decline (about 5%) in the 4 th quarter. Labor: Over 1.2 million jobs were lost from the economy from September to November; the labor market has contracted for 11 consecutive months, while the jobless rate soared to 6.7 percent. Housing: Many economists believe that the sector that initiated the downtown will ultimately be responsible for the rebound. Unfortunately, that rebound does not seem imminent as home sales, construction activity, and median prices continue to decline (plummet may be more appropriate) with each passing month. Manufacturing: The auto sector and overall weak economy have put a damper on factory output as orders for durable goods have fallen each of the past four months. Retail: While economists have grown accustomed to retailers’ crying “doom and gloom” for the holidays, this year’s tears were more than justified. While discounter Wal-Mart remained about the sole exception to the rule, most analysts believe that sales declined over 1% in December and more retailers will be headed along the course of bankruptcy and liquidation, a fate that befell Linens ‘N Things and Mervyns earlier in the year. Inflation: A 29% drop in retail gasoline prices in November helped provide a nice (non-governmental) stimulus package at the pumps; however, eternal pessimists believe that lower overall prices will lead to deflation and keep the economy in the doldrums as consumers hold off on major purchases for the foreseeable future.
On the Horizon...A $1 trillion-ish stimulus package complete with significant tax cuts (to get Republicans on board) could go a long waytoward generating economic activity (dare we say, growth) by the 2 nd half of 2009. However, the easy money (and ballooning US debt) could lead to considerable inflation down the road (one worry at a time). Bear in mind, stocks are typically leading indicators and lots of cash remain on the sidelines. Should investors believe that a rebound is forthcoming over the next few quarters, the bulls may jump back in sooner than later to beat the herd mentality that is sure to follow. Wishful thinking, perhaps? Happy New Year!!!
Source: Brounes & Associates (email: [email protected])
