World Leaders Winning Back Investor Confidence
The Fortigent Investment Research Team
April 6, 2009
Economic & Market Update: April 6, 2009
“World Leaders Winning Back Investor Confidence”
The Fortigent Investment Research Team
Last Week’s Highlights:
Home Price Index: -19.0% – as expected, prices are plummeting
Construction Spending: -0.9% – better than expected, supporting notion of a bottom
Nonfarm Payrolls: -663K – over 5 million jobs lost since start of recession
Unemployment Rate: 8.5% – highest since 1983
Stocks: 842 – stocks show no sign of slowing down
Bonds: 2.9% – Fed loses more ground
Oil: $52 – strength in dollar hurts attractiveness of commodities
Dollar/Euro: $1.35 – moderate strength for euro following G20
Economics This Week:
Date Item Est. Comment
4/7 Consumer Credit: -$1.5B Consumers continue the cutback
4/8 Wholesale Inventories: -0.6% Wholesalers still tentative
4/9 Trade Balance: -36.5B Higher oil prices may be a drag
Renewed Optimism is Sweeping the Globe
Equity markets started out the week on a sour note following the ousting of General Motor’s CEO Rick Wagoner and the realization that both Chrysler and GM may be forced into pre-packaged bankruptcies. General Motors was given 60 days to further cut costs and reduce debt, while Chrysler has 30 days to complete an alliance with Italy’s Fiat or risk bankruptcy.
In the event these companies are unable to “right the ship,” the notion that the bankruptcies will be “quick and surgical” is laughable. Consider that GM alone has $27.5 billion (with a “b”) in bond debt outstanding plus an additional $20.4 billion that it owes to a union-run healthcare fund. Ensuring that employees (both existing and retired), creditors, suppliers, and dealers are on the same page will be an arduous process.
By mid-week stocks were propelled by optimism from the G20 meeting – mostly stemming from the fact that no notable harm was done by this global confab of politicians – coupled with a relaxation by the Financial Accounting Standards Board (FASB) of mark-to-market rules. This relaxation will not necessarily improve the liquidity of the mortgages and other collateral-backed securities that continue to clog up credit markets. Not being forced to mark down the value of these securities, however, should benefit the capital ratios and balance sheets of banks, which may improve overall credit conditions.
The IMF was the primary beneficiary of this year’s G20 meeting, with the announcement of an additional $750 billion in funding for lending, as well as the deployment of $250 billion in Special Drawing Rights, a move aimed at the creation of a global money supply. We truly have entered a new era of finance when $1 trillion – that is, $1,000,000,000 – of new commitment to a non-government organization with a track record that is spotty, at best, is greeted positively by the global markets.
The equity markets were apparently impressed by the coordinated action coming from London. Last week marked the fourth consecutive positive week for the S&P 500 index, bringing the cumulative gain over that period to 23.3%. Oddly enough, the last four-week rally greater than 10% occurred in October and November of 2002, the beginning of a five year bull market that ended in late 2007.
As we see in the chart below, there have been numerous four-week rallies greater than 10% since 1927, but very few above 20%. This rally marks the third strongest rally in that period, with the other two occurring in 1932 and 1933. The age old adage holds true – buying begets more buying and, in this case, the average gain over the subsequent four weeks has historically registered at 1.87%. Even more intriguing, in the previous two cases where the market was up more than 20%, the following four weeks saw gains that were equally as significant.. One could argue, though, that 1932 and 1933 were even more anomalous periods than we are living through right now, and so may not be good indicators of future performance.
Source: Bespoke Investment Group
This week looks to be a quiet one as the markets take a break for Good Friday. News on the economic front looks to be light, but investors will surely be paying close attention on Tuesday when Alcoa becomes the first company out of the gate to release earnings for the first quarter. Additionally, the SEC is set to reconsider proposals surrounding the uptick rule on Wednesday in an effort to eliminate abusive short selling. We think the uptick rule – which was in place in the US from 1938 until its elimination in July of 2007 and which dictated that a stock could only be sold short following an “uptick”, or positive price movement – was a prudent safeguard to orderly markets and we hope it is reinstated in some form.
The (Un) Employment Picture
Headline employment numbers were roughly as expected, with unemployment reaching 8.5% as an additional 663k jobs were lost in the month of March. As we begin peeling back the layers, it’s clear that the employment picture in the US is generally getting worse. It’s important to point out that employment numbers are a lagging economic indicator – companies slash jobs in anticipation of sluggish growth and only rehire as the economic picture stabilizes. Put a different way, companies will still be cutting jobs long after the economy has started to rebound.
Since the start of the recession in December 2007, the economy has now lost more than 5 million jobs, with more than 3 million of those jobs lost in just the last 5 months. The losses have been amazingly broad based, with every industry suffering. January payroll numbers were also revised downward from 655k to 741k. With the change, January will now go down in the annals of history as the worst month for job losses since 1949.
What makes these numbers difficult to swallow is that the recently released budget is based on assumptions that were noticeably more optimistic than what we are actually seeing in the economy. This is creating artificially low deficit and debt projections and causing some within Congress and the Administration to call for another round of stimulus packages.
A quick review of the budget and deficit plans of the Obama administration show assumed projections for a baseline unemployment rate of 8.1% for the duration of 2009 before a retraction to 7.9% in 2010. In the recently released analysis of the President’s budget, the Congressional Budget Office uses unemployment assumptions of 8.8% and 9.0% for 2009 and 2010, respectively. A survey of economists reveals an even less optimistic picture.
The issue, of course, is the federal deficit. If unemployment and economic growth are worse than projected by the Administration, we potentially face federal deficits even larger than the massive ones already anticipated. This will, in turn, impact Congressional – and voter – willingness to consider/approve future stimulus and spending programs.
Recession Approaching a Depression? Not Quite
As this recession enters its 16th month, we thought it would be an appropriate time to see how things stack up, historically. While clearly in the midst of an above-average recession, we are probably not on par with the worst the country has witnessed.
As you can see from the chart below, we’ve already surpassed the average length of a recession since 1900. Also note that the five longest recessions occurred prior to 1930 and the two longest since post-WWII were equal in length to the current recession.
On the flip side, the broader economic picture remains considerably milder relative to the Great Depression. GDP, Employment, and Consumer Prices have all seen unusually large declines, but nowhere near the same scale that we saw during the depression.
Source: Michael Panzner
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