Capital Markets Recap . . . abbreviated
March 27, 2009 . . . performance figures as of 11:18
- Abbreviated but still indispensable
- Stocks running on fumes?
- Jobs, jobs, jobs–and not Steve
This week, the Dow 30 rose by 140.26 points, or 1.80%, to 7,916.44. The S & P 500 (SPX) rose by 12.39 points, or 1.52%, to close at 828.33. The NASDAQ Composite rose by 50.90 points, or 3.29%, to 1,596.10. The S & P Mid-cap index rose by 12.94 points, or 2.59%, to close at 511.77. The Russell 2000 small-cap index rose by 16.06 points, or 3.74%, to close at 445.06. Finally, the Morgan Stanley EAFE (Europe Australasia & Far East) index rose by 22.20 points, or 3.75%, to close at 614.70.
It seems to me that stocks are due for a breather, a correction of sorts. Stock markets have had a slew of things fall in place in the last two weeks. First, a calendar quarter just ended. That’s always a time for so-called window dressing, where investment managers can make their portfolios look perfectly positioned. In a rising market, like March turned out to be, it can lead to buying. Then a new quarter starts, and investment managers feel like they’ve got time for things to work out. That, too, can lead to buying in a rising market. Second, the economic news has turned from getting worse to not getting worse. Because most investors make money when stock prices rise that leads to a tendency to see all things as bullish, just as a carpenter with only a hammer for a tool sees everything as a nail. Thus, the economic news, while still pitiful on a year-over-year basis, is transmogrified into something positive. Third, as you’ll read below, mark to market accounting has been substantially changed, potentially taking one source of pressure off the banks and other financial institutions. Fourth, the dollar continued its decline. Put it all together and you have the makings of a dandy rally. Since March 6, Armageddon Day, the S & P 500 is up a cool 25%. Trouble is, now we’re running out of catalysts. Now, we need a string of good news to coax more of the cash off the sidelines, and the fundamental backdrop is not good, making the likelihood of good news rather slim, and against that lousy backdrop we’re about to enter the first quarter earnings reporting season.
On a technical basis, the market has rallied to key resistance. The S & P 500, for example, is sitting just below its 117-day moving average as you can see in the chart below (click to enlarge). Technicians talk about markets being overbought and oversold. A look at the Relative Strength Index shows that the S & P 500 is at an important juncture there, too, signifying modestly overbought conditions. On the other hand–there’s always another one in this business–if the S & P 500 can close above, say, 842, it might have a quick and easy run to 876, where it ran into trouble in January and February. From there, overhead resistance comes into play in the 935 neighborhood, and then it’s a run for 1,000, where the 200-day moving average sits. If we do get a severe correction, watch for 734 on the S & P 500 and ~7,100 on the Dow to serve as support. Game plan: buy stocks if the S & P 500 closes above 842; buy stocks in the 734 neighborhood if we get a correction. Recall that we had thrown around, in seminars and here, 650 as a target for the S & P 500. It got down as low as 666, which is close enough to 650 for our business.
The Dow looks similar, and that’s positive from the standpoint of confirmation, an important technical consideration that refers to markets moving in sync. Corresponding resistance levels for the Dow are 8,150 (117-day MA), 8,378 (key January, February levels), and 9,300 (200-day MA).
If you’re beginning to get those bullish feelings, wondering if the coast might be clearing, dust off that wish list of investments, the list of well-run companies selling at bargain basement prices that you want to acquire. I’ve created a Shopping List page/link on the right-hand side of the blog. Check that out from time to time for stocks that look cheap. When we get the green light for stocks from some of the services we follow, namely Ned Davis Research and BCA Research, we’ll post a note on the blog.
The 10-year note fell by 0.01% to a yield 0f 2.75%. The 30-year bond fell by 0.06% to 3.61%.
West Texas Intermediate Crude Oil (aka light, sweet crude) futures rose this week, but just barely. The front month contract rose by $0.26, or 0.50%, to $52.64. Natural Gas rose too, by $0.04, or 1.20%, to $3.78.
Gold futures retreated this week, falling by $14.30, or 1.550%, to $908.90/ounce. Finally, the U.S. Dollar Index lost ground again, dropping by $0.68, or 0.80%, to $84.43. The fall in the greenback relative to a trade-weighted basket of currencies is not due to comments from senior Chinese officials or Medvedev’s comments to the G20 about replacing it as the global reserve currency. Nope. It reflects a lowered risk aversion. It has followed the general trend in the CBOE’s Volatility Index.
The biggest story of the week had to be the modification of the Federal Accounting Standards Board‘s (FASB, pronounced fas-bee) mark-to-market(M2M) accounting rules. Briefly, M2M requires companies to mark their assets to market prices, however illiquid the market. Many have claimed that M2M accounting has put undue pressure on firms–especially of the finance type; we agree. Others have said that M2M is necessary for transparency, to keep companies from papering over troubles; we agree . . . but only when the markets are providing liquidity and efficiency. Post-Lehman Brothers, that hasn’t been the case, and banks and others have had capital problems because of such write-downs. On March 17, FASB released its proposed FASB Staff Position (FSP) for public comment with a deadline of April 1. In its board meeting of yesterday, the FASB modified its FSP slightly. It clearly gives firms more flexibility in marking their assets. For example, FASB said that “when the market for an asset is not active” the asset should be marked to the price that sellers would be expected to receive “in an orderly transaction.” The drawback to this is that companies will be able to, in effect, rely on internal valuation models, but FASB requires that companies “disclose a change in valuation technique.”
The G20 summit wrapped up last night. The 20 is really a few more than 20 nations as it includes the 19 largest economies plus the European Union. Here’s the gist of the meeting. First, we need stricter regulationon all of the scoundrels who used loopholes and other means to fleece the world’s brilliant central bankers and savviest investors. Never mind that the epicenter of the current crisis is housing around the globe, and that in the U.S. the housing bubble was aided and abetted by those now calling for stricter regulations, namely the Executive branch and the Federal Reserve.. Here’s an excerpt from a September 30, 1999, New York Times article (entire article available by clicking here):
Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
Second, we need to spend a lot more money to pull the global economy out of the doldrums*. Price tag: $1.1 trillion, with $750 billion going to the IMF, $100 billion to the World Bank, and $250 billion going to finance global trade.
* What are “doldrums” any way? I’m glad you asked. It’s another nautical term–like last week’s “by and large”–for areas in the ocean where the winds can suddenly go slack, making sailing difficult. Here’s what Wikipedia says about it:
The Doldrums (often capitalized when referring to the geographic region) is an area of the Atlantic Ocean, the Pacific Ocean and the Indian Ocean affected by the Intertropical Convergence Zone, a low-pressure area around the equator where the prevailing winds are calm. The low pressure is caused by the heat at the equator, which makes the air rise and travel north and south high in the atmosphere, until it subsides again in the horse latitudes . Some of that air returns to the Doldrums through the trade winds. This process can lead to light or variable winds and more severe weather, in the form of heavy squalls, thunderstorms and hurricanes.
Some bullet points of other stories of note, each lifted directly from Bloomberg’s Top Stories . . .
- BlackBerry maker RIM’s profit forecast tops analyst estimates; shares jump
- GM’s Volt said to remain in production plan as government seeks cost cuts Hold everything! Did you catch that? The government seeks costs cuts?! Since when does the government meddle in the affairs of companies? (Well, to be fair, all the time, but play along). Welcome to Socialism Lite. Last Sunday, GM’s CEO was essentially fired by his new boss, the Federal government. Now the newboss is looking for other ways to cut costs. President Richard Nixon coined the phrase “We are all Keynesians now,” even though no one seemed to know what that meant. Let me coin another phrase: we are all socialists now. And, no, I don’t know what that means either, it just sounded apropos.
- Ireland loses top S & P rating as crisis boosts debt costs, swells deficit
- Chrysler, Fiat agree to alliance to prevent bankruptcy by U.S. automaker Haven’t we seen this movie before?
- Deutsche Bank’s top risk officer says global credit crisis ‘far from over’
The economic news continues the trend of less bad or no worse. If we turn the progression of the economy into a letter and find our position on the letter, the bulls would say it’s a “U” and we’re approaching its nadir (some whack job somewhere might argue it’s a “V”.) The fear among many is that the correct letter is an “L.” Others probably worry that its one of these “ξ” (xi).
This week’s top economic news–at least my version of it–was all about jobs. On Wednesday, the human resources firm Challenger, Gray & Christmas released its Layoffs Announcement index for March. It showed that announced layoffs had jumped by 150,000 in March, which was down from February’s 186,000. This data series parallels that of the weekly Initial Jobless Claims, as the chart below (click for larger version) shows. Jobless claims reached a record high level this past week of 669,000, above the consensus estimate of 655,000.
One thing the media outlets tend to leave out, as it makes for less sensational headlines, is context. In this, the context is that, as a % of the labor force, initial jobless claims don’t look so bad, as the chart below shows (yep, click for a larger version). That chart shows that, when compared to the ever increasing labor force, Insured Unemployment (aka Continuing Claims), in the bottom plot, has a ways to go before reaching 1980 levels, whereas outright weekly jobless claims are much closer to 1980 levels. Didn’t I promise a multimedia festival?
The first week of every month relegates all economic reports to the sidelines. That’s because the first Friday of every month brings the monthly Nonfarm Payrolls report. Since ADP began to release its Employment Survey, however, the Payrolls report gets a bit upstaged, and it especially did this week as the ADP report predicted a job loss of 742,000, which would have been well above the Payrolls consensus of 650,000. For several months, the ADP report had underestimated the payrolls report, and if this release was to be an underestimate, too . . . yikes! Instead, Nonfarm Payrolls rolled out at -663,000, which wasn’t far from the consensus estimate of -650,000. Interestingly, there was no revision to the February data. Since the end of 2007, every nonfarm payrolls release has been revised downward (worse) the following month. We’ve pointed out here before that, with employment data, since it’s a lagging indicator, the key thing to watch is the revision. It’s far too soon to say whether this is a turning of the tide, but it needs to be noted. Not surprisingly, the largest job losses were in Construction and Durable Goods Manufacturing. Temporary Help, which will help signal a turn in employment, fell, too. The chart below compares the ADP report to the nonfarm payrolls report. (You know what to do with it.) The top plot shows the two plotted side by side, both evincing the same trend. The bottom plot shows the ADP figure lessthe nonfarms payrolls figure, showing the swing from under- to overestimating.
Included in the Payrolls release is the Unemployment Rate, which needs no context, since it’s expressed as a percentage. It’s at 8.5%. In terms of past records, the unemployment rate in 1975 reached 9.0%–after the recession was declared over–and 10.8% in 1982–again, after the recession was later declared over. Employment is a trailing indicator. It will continue to worsen after the economy has begun to improve. It’s high time–at this point in the cycle–we look at it as somewhat meaningless, unless, of course, you’re one of the wrong statistics, in which case it’s quite meaningful.
Running out of time . . . conveniently, there’s not much on next week’s calendar (less chance for a catalyst?). The FOMC releases the minutes from its March 17-18 meeting. I peg that as the most important release of the week.
Graig Stettner, CFA, CMT
Investment Management Services
Tower Private Advisors
This e-mail, its cynical style, ignorance of punctuation convention, and a host of other aspects, assuredly do not represent the views of Tower Bank or Tower Private Advisors. In fact, there are folks here who likely cringe upon receipt of it. If anything you have read here has offended your sensibilities, well, tough. Also, if there are typographical, grammatical, or stylistic errors above, you can see why we don’t teach English Composition. The passive tense, where used, is regretted. If you have suggestions for improvement, keep them to yourself. Just kidding . . . really; send ‘em in.