Tower Private Advisors
- Stocks decline
- Employment increases…barely
Capital Markets Recap
Stocks fell this week.
I did some crunching of numbers today, as I wanted to see how previous drops like yesterday’s have tended to play out. In short, there’s no need to be in a hurry to jump into stocks. It’s true that some of the rebounds can be huge. In the post-WW II period, stocks have rallied as much as 19% in the five days after a drop greater than 4%….but just one time. That has to be considered in light of the worst drop over the subsequent five days…-18.3%. I looked at multiple rebound time frames, including 2, 5, 7, 10, and 15 days, along with 1, 2, and 3 months. Each time period includes one very nasty drop, ranging from -17% to -26%–but just one each. A decidedly positive skew begins to show up after 15 days, although the 5-day results after fairly good, too.
Our two key services took the week’s action differently–at least, at first. One struck a decidedly bearish tone, declaring that the bill for all of our profligacy and fiscal sins of the past had come due. Another declared that bull market was still intact. Later, and upon further reflection, both came to the same conclusion: batten down the sector-allocation hatches (e.g. buy health care stocks, ditch consumer cyclicals), but don’t make any big-picture rash moves.
It’s obvious now that uncertainty over the debt ceiling wasn’t the real issue hanging over the market. After the Sunday congressional machinations, S & P 500 index futures jumped by 23 points in Sunday evening trading. As is not uncommon, the gains moderated by a few points before Monday morning trading. Then, when the clock struck 10:00 AM, Monday, the markets fell out of bed. 10:00 is when the ISM Manufacturing report was released. It showed a sharp 10% drop, to 50.9–taking economists by surprise, which is not uncommon–and the drop was similar across all the ISM components. (The ISM index is a diffusion index meaning that, amongst other things, a reading above 50 indicates an expanding manufacturing sector; below 50, contracting.) By the end of Monday’s trading, the decline–from overnight high to late-afternoon low–totaled 43.32 points. From Friday’s close to Monday’s close, however, the drop was only 52.3 points. Even from Friday’s close to Monday’s low, the drop was only 17.79 points.
The debt ceiling was clearly not the market’s preoccupation; it was just disguising the real issue. That leads me to reveal what I think will be a revolutionary tool to help sort such things out. I’m taking a real chance by putting this out for all to see, before I’ve had a chance to copyright it, but here goes…the unveiling of the Issue-o-Meter–sorta rhymes with kilometer.
It’s very easy to use. Once an issue’s been resolved, look at the market’s reaction. If it rallies solidly, you know the issue’s been fixed; if not, it hasn’t. It’ll help you sort out so many things. For example, this morning I skipped breakfast. Once I’d had something to eat and the market hadn’t rallied sustainably, I knew, for certain, that my not having had breakfast was not the reason for the market’s struggling. Right now, I’m thinking the issue might be that 5:00 won’t get here fast enough, but I’m not sure that’s the market’s preoccupation. I’ll simply be able to look at the after-hours trading today to know for certain.
All kidding–yes, I was kidding–aside, two big issues are overhanging the markets right now. One is the apparent weakness in the U.S. economy–and probably other’s, but we’re still the world’s powerhouse. The other is the troubles in Europe, where Spanish and Italian bond yields are rising and Credit Default Swap spreads are rising, meaning that the cost to insure against Spanish and Italian defaults is rising. Yesterday, the European Central Bank stepped into action by “restarting its bond-purchase program…following a four-month hiatus.” Unfortunately, the action was reminiscent of the Keystone Cops. Instead of buying Spanish and Italian bonds–it’s the second “I” (the first is Ireland) and the “S” of PIGS that have to be the last to go–the ECB bought bonds of Portugal and Greece, which are already on their way to the sovereign morgue.
Bloomberg’s Top Europe stories today included a quote by Holger Schmieding–could we ask for a better European name?–maybe Fritz?–chief economist at Joh. Berenbertenschlauber–or something like that.
“Would the [European Central Bank] please get serious?” He said it was reminiscent of, “a fire brigade that responds to a major emergency but then drives to the wrong place and refuses to turn around and douse the real fire.”
What’s more, it seems that all the European chiefs–France’s chief Sarkozi, Germany’s Merkel–the EU’s Economic and Monetary Commissioner–are on–as they say, holiday, this week. Oh, but they (Merkel and Sarkozy) “plan to speak by phone later today,” according to their offices, according to Bloomberg.
In the same way that mechanics can talk about Svetzer Valves and Kinnefer Pins (sp?) all day long and know what each other’s talking about, so, too, can we in the world of high finance–where we’re firmly ensconced here–throw around terms like credit default swaps, along with actions like “instead of buying Spanish bonds.” So here’s what’s going on. When there is increased buying of bonds–all else equal–prices tend to rise. To be fair, for every buy there is a sell, so there’s never–as the old wire-house explanation for rising prices goes–more buyers than sellers, but buyers can predominate the action. Anyway, as bond prices rise, their yields fall. For countries running budget deficits that can’t be financed by internal savings*, and where bonds have to be rolled over, bond yields are the cost of keeping the country afloat, so it’s in the interest of the authorities to try to keep yields low. Unfortunately, in Italy and Spain, yields have been rising. Tack onto that heavy debt levels, and it becomes a real problem, which is what we’re seeing in the PIIGS now.
Here’s a look at Debt:Gross Domestic Product levels for the PIIGS, along with the increases in their government bond yields. As one can see, Italian 10-year yields have gone up by 22% over the last month, and the country is heavily indebted. Its on-balance-sheet debt is basically 120% of its annual output.
As some have pointed out, the U.S. isn’t far from PIIGS membership; our debt:GDP level, at 58.9%, is just shy of Spain’s 63.4%. The difference is that the U.S. dollar serves as the world’s primary reserve currency, and we have a printing press and other means by which we can somewhat change the value of our currency. Spain–and all of the swine–are tethered to the fate of the Euro.As
As to that unaddressed asterisk a few paragraphs back…countries with a long tradition of a frugal citizenry–take Japan, for example–often do not have to depend on the kindness of strangers, as their own citizens fund their government’s spending. That’s referred to as internal savings.
Today was the big Payrolls Friday. Out of the gates, the markets seemed to cheer the less-than-terrible news that 117,000 jobs had been added. Economists had expected an increase of just 85,000. What’s more the June figure was revised up from 18,000 to 54,000. At first glance, all appeared to be well.
- Private Payrolls grew more than expected
- Manufacturing Payrolls did, too
- Average Hourly Earnings were up
- The Unemployment Rate fell to 9.1%, from 9.2%
Not that it mattered–the market quickly resumed its nasty ways–but it was the case that the unemployment rate fell because of a decline in the labor force. That’s not the way one wants to see the unemployment rate go down. At least one economist type commented along the lines of, it’s a sorry state of affairs when jobs increase by [a pitiful amount] and the market rallies. Indeed, the rally was short live.
In the words of the Guess Who, “got, got, got, got, got no time . . . ”
There is time for a laugh, however, Gather the family around–I’m not kidding–turn up the volume and enjoy this.