WRFest 27Apr08(Market): Three Steps to Two Views
Here's our update for the market outlook and situation with the readings (after the break) divided into three sections. One on the nature of the recent rally, then on whether or not the "crisis is over and the third on analysts outlooks. Each of these touch on topics we've explore in depth before so each section has prior posts also included for your review and refresh. The bottomline, IOHO, is that the "Market" appears to think the worst is over and the upcoming/current mild recession is already fully priced into valuations and outlooks. On whether that's true or not rests the largest gap we can remember between the Street and the rest of the world of informed observers we've ever seen. On the state of the Finance Industry and whether it's over please see the prior post listed below. On whether or not we've seen the worst of the economy please...please recall the prior post WRFest 26Apr(Economy): Between the Gust Front and the Storm. To the extraordinarily distinguished list of economists and observers who think that a) we're just headed into the real beginnings of the down cycle as of this monring you can add Warren Buffett. The key point here is the one El-Arrian made....now we're just seeing the real economy turn over and it'll take the financial economy with it. Think about it.
For how that's playing out, the debate between the two diametrically opposed views, consider the chart which shows the SP500 on two views. One is the 2 Steps and Jump view we've been exploring for some time where each time the market looked like it was "bottoming" some other unanticipated surprise popped up to take it down. Until this last time when the April Fool's surprise of a massive UBS write-down and re-capitalization led insiders to conclude that things were hunky dory. Our minds our boggled (in the prior post you might want to look at the excerpts on UBS's internal report - gross incompetence is the best summary of their own words. One has to think they aren't alone). The second sub-chart shows how the debate is playing out with what we've argued is the lull before the real storm with the emergence of a sideways trading range. With this week's momentus economic data upcoming this'll get really interesting indeed.
To complement that we've update our Key Factors Table which looks at the Structural, Fundamental, Technical and Sentiment Outlook situation. Since it's been a while from the last update the prior observations are included for comparison as well as the current ones. The delay was from more than laziness since until recently most of our assessments were holding up well. Now the only real change is further deterioration in the real world drivers combined with an improvment in Sentiment. Go figure ! :) But feel free to violently disagree with all of these observations - but we suggest doing it systematically (and disagreeing with, for example, Jim Jubak, et.al.).
Also please note that for each major Factor we show last month's entry above this month's update, with key changes and/or issues highlighted in BOLD. But what we see is hidden risk factors mounting, being ignored and short-term optimism triumphing yet again over underlying deep factors.
Markets Readings
Don't trust this market rally Although stocks' recent movement has been up, they're trading in a fairly narrow range. Now that they're near the top of it, expect them to head down again. We're still in a bear market. How, you ask, can that be when the stock market has rallied so strongly from its March 10 closing low? As of the April 23 close, the Standard & Poor's 500 Index ($INX) was up 8% from its 1,273 close of March 10. Hey, stocks even climbed above the Jan. 22 low of 1,311 in this rally. Because, as reassuring as this rally may have been, and as profitable as it was for investors who were on board, it hasn't been strong enough to reverse the downward momentum that's been in charge since the S&P 500 topped out at 1,563 on Oct. 9. This rally has failed to break through resistance at 1,400 on the S&P 500 several times this year: on Feb. 1, Feb. 26, April 7 and April 18. The same thing happened Thursday, April 24, as the S&P hit 1,397 at 3:05 p.m. ET, then pulled back to close at 1,389. That's not what happens in a trend reversal from a bear-market decline to a bull-market upswing. Until we see a move strong enough to take the market decisively above that level on the S&P 500 -- and through comparable levels on the other major indexes -- all we have is a rally in a longer bear-market trend.
China Stocks Are a `Sell,' Analysts at Morgan Stanley, Credit Suisse Say China's shares are a ``sell'' even after the government stepped in to support the world's fourth- biggest stock market, according to Morgan Stanley and Credit Suisse Group. Corporate earnings growth this year may disappoint…The 17-year-old Shanghai Composite Index fell 0.7 percent today. It surged 9.3 percent yesterday, the most since Oct. 23, 2001, after the government lowered the tax on stock trading in the latest action to stem a market slump that wiped out $1.7 trillion of market value. ``Given earnings deceleration, we do not think such a rally can last,'' Morgan Stanley's Lou and Gui wrote. ``The government's cut of the stamp duty seems to suggest that it is running out of silver bullets.'' The benchmark CSI 300 Index plunged as much as 39 percent this year to become the world's second-worst performer amid speculation government steps to quell inflation would hurt corporate profits. The Shanghai Composite tumbled as much as 41 percent in that time. The slump sparked official moves to bolster equities. China in December tripled to $30 billion the amount overseas institutions can invest in yuan-denominated stocks and bonds. Two months later, regulators ended a five-month freeze on the sale of new mutual funds.
- ·Jubak’s Journal: Trouble in China Stocks in Shanghai are in the grip of the bear with prices down 50% from their high. New rules haven’t calmed investors as they worry about a big jump in the supply of shares.
Crisis Continued
Stock Market `Fire Sale' Burns Investors as Debt Costs Rise to Decade High A stock market fire sale at the cheapest prices in 13 years is burning investors as companies turn away from the highest credit costs in more than a decade. Corporations in the U.S. and Europe must repay $1 trillion in debt maturing this year, the most since 2000, data compiled by New York-based Citigroup Inc. show. As the cost of borrowing for investment-grade companies climbed to 2.35 percentage points above government debt in the past year, firms such as Wachovia Corp., Wesfarmers Ltd. and Imperial Energy Plc are selling shares for an average 14.7 times profit, Bloomberg data show. That's the lowest since at least 1995. Today, companies from National City Corp. and Royal Bank of Scotland Group Plc to non-financial firms such as Eaton Corp. and Diamyd Medical AB announced offerings or said they may sell shares. The cost of borrowing for companies with credit ratings between AAA and BBB- at Standard & Poor's, which averaged 0.86 percentage point above government debt during the last five years, has since surged to the highest since at least 1997, data compiled by Merrill Lynch & Co. show. The credit-market collapse that triggered $290 billion in banks' losses and extinguished demand for everything from commercial paper to securitized debt precipitated the jump. Businesses have sacrificed shareholders as the cost of paying dividends decreased to a six-year low versus interest on bonds. The difference between the extra yield investors demand to buy investment-grade bonds from companies tracked by New York- based Merrill and the dividend yield of stocks in the MSCI World Index narrowed to 0.4 percentage point this month, from 1.42 points a year ago. The last time paying dividends cost the same as bond interest was in December 2000, preceding an increase in new shares issued in the following 12 months, Bloomberg data show. The same increase now would put almost $800 billion of new equity in global markets in the next 12 months as cash-strapped companies tap investors to repay debt and fund operations. The potential fundraising would exceed the amount companies have raised in each calendar year via share sales since at least 1999, according to Bloomberg data. Financing with Debt Gets More Costly for Companies
Trichet Says Financial-Market Correction Is `Not Over' as Lending Stalls European Central Bank President Jean-Claude Trichet said the financial-market crisis is not over as banks remain reluctant to lend, while he indicated policy makers are still intent on keeping inflation in check. The ``present significant market correction is not over,'' Trichet said in the foreword to the ECB's 2007 annual report published in Frankfurt today. While overnight interest rates have been successfully returned to ``stable levels,'' Trichet said ``tensions remain'' at longer maturities in the money market.
Lending to all but the safest borrowers has declined as the world's largest banks and securities firms, buffeted by the collapse of the U.S. subprime mortgage market, have reported $290 billion in credit losses and asset writedowns since the start of last year.
U.S. Treasury's Steel Says It's Premature to Say Credit Crisis Is Ending Treasury Undersecretary Robert Steel said it's premature to say that financial market turmoil stemming from tightening credit conditions is near an end. ``This is going to take a while to work through, and the improvement from here won't be in a continual line,'' Steel said in an interview on Bloomberg Television's ``Political Capital with Al Hunt,'' to be aired today. While progress is being made, he added, ``there will be some bumps and fallbacks.'' Falling house prices and rising mortgage delinquencies have slowed U.S. growth, disrupted credit markets and led to $309 billion in credit losses and asset writedowns by the world's biggest banks and securities firms since the start of last year.
- Econo Smackdown Discussing the rise in CDO Defaults rates, with CNBCs Steve Liesman and Rick Santelli
- Center of the Storm Some research on derivative losses and which banks are holding the bag, with CNBCs Steve Liesman
- Why won’t the financial crisis end? It turns out the bankers who bought derivatives based on mortgages didn’t read the fine print, says MSN Money’s Jim Jubak. Now they’re learning that the senior investors who bought the safest pieces of the deals can grab all the cash flow and force other investors to sell.
Readings (Finance): It's Over, It's Over...Yeah Right
Analysis Schmalysis
What's an Analyst Worth? Not Even a Penny a Share as Estimates Prove False This earnings season may expose how much Wall Street analysts rely on guidance in making estimates, as the credit crunch and weakening economy make it harder for companies to meet or beat the numbers. At least 27 companies have matched or topped Wall Street estimates in every quarter since 2000, including Coach Inc. and Starbucks Corp., according to data compiled by Bloomberg. General Electric Co. ended a 32-period winning streak on April 11. Goldman Sachs Group Inc. called GE and other early misses ``a sign of things to come,'' saying it expects more companies to fall short of first-quarter estimates. In good times, companies often use the flexibility of accounting rules to choose when they book revenue and costs, creating an impression of predictable earnings, said Thomas Russo, a partner at Gardner Russo & Gardner. The economy's decline and the freeze in credit markets are making that harder.
- Schwab Asks Who Needs Analysts After Biggest Flub When Wall Street's almost 1,800 equity analysts figured U.S. earnings growth for the third quarter of 2007, they were 8.2 percentage points too high. Forecasts for the fourth quarter were wrong, too, overestimating profits by 33.5 percentage points, the biggest miss ever. It's no wonder investors don't trust analysts, says Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion for clients. Merrill Lynch & Co., Bank of America Corp. and the rest of the securities industry aren't losing credibility because of anything sinister. The problem is they didn't get their math right after credit markets froze nine months ago.
- And now, for research that you can trust ... As earnings seasons go, this is one to be forgotten. There has been almost no good news, from an investor perspective, yet the markets have surged and swooned as if banks and brokerages were sinking into or emerging from the mortgage massacre. If you were hoping that analysts would put it in perspective, good luck. Followers of Wall Street are treated to a pattern of earnings previews, the earnings reports themselves, the management's spin in a conference call and then analysts' interpretations. In other words, a cycle of disinformation, sifting through the confusion, new B.S. and then trying to figure out what just happened. Citigroup Inc.'s recent results fit the mold. Expectations were exceedingly low. Citigroup basically met them, and then warned that it could get worse. Chief Executive Vikram Pandit said layoffs and more losses were on tap. Analysts appeared completely baffled. S&P Equity Research spoke for the research community when it lowered its estimates, again, and affirmed its hold rating. There didn't seem to be a shred of good news in the report, and yet the market reacted positively every step of the way.This process has made two ideas clear: First, no one knows when all this will end. And second, wouldn't it be nice if some institution reported a profit or loss and we just moved on?
Readings (Earnings): The Real Earnings Realities that Ain't...YET
- Business Performance II (Readings): Performance, Pain and Prospects