Quite a Day: Prescience, Schadenfreude, Luck or Toolkit ?
Just in case you hadn't noticed the markets got slammed pretty badly today - look up the states
anywhere you look. In a spirit of Schadenfreude we could of course try variations on "told 'em so, told 'em so" but that might be a working definition of hubris and brings back memories of old Greek sayings (whom the Gods wouldst destroy...and so forth) so we won't. On the other hand given several of the immediate prior posts (Technology Industry: HPQ/EDS, PCs and Prospects,Markets: Fear, Loathing, Schadenfreude and Cusps on Wall St.,Crime, Punishment, (Profits) and Outlooks: High Noon at the Street ?) which reflected long-running themes of ours a certain level of Prescience might be claimed. That's vulnerable to the same hubris charge though. And to tell the truth we were actually very surprised - probably as much as anyone. While we expected the bear rally to fade we didn't expect it this soon or this much - and who knows what happens tomorrow or next week, after all ? BtW the accompanying graphic is drawn from a composite of two different time periods using StockCharts.com's "Market Carpet" tool. It captures 10-days from early May to the most recent two weeks. Kinda speaks for itself.
So, if we're surprised, was it all luck ? The next graphic is a chart of the SP500 that was one of our amateurish efforts at Technical analysis. The color coded price levels id'd various barriers that had to be reached/breached for the market, which we argued was in a bear rally and was going to top out, had to go thru to settle the issue one way or another. And discussed in this post. So we might be forgiven the argument that it wasn't entirely a matter of luck, though today's surprises certainly are.
What we think is going on are three important things. First off there was widespread mis-readings of the states of the credit markets and of the economy, as well as the consequences that would be working themselves out. Second - our primary point from the "Fear and Loathing" post - is that a major (and we do mean major) re-thinking of the outlook is going on by Mr. Market and all his assorted minions. Bob Pisani captured it perfectly this morning commenting from the trading floors rather early in the day - "the Traders aren't waiting for the analysts or economists to call a recession....they've decided the whole second half outlook is wrong". And the Lord spaketh and the scales fell from mine eyes and lo, I could SEE !
Setting aside the extent of our surprise, and that nobody should be pontificating about a short-term random process where the Gods can here you, after we net all that out there's the matter of a little work. Specifically building and exercising a collection of tools, toolkits and habits of thought for trying to look beneath the headlines. After the break we go a little more in history and review a few of them. The primary goal is to provide a shopping list for you to explore and possibly use. Our real goal here is to present this stuff in such a way that you can go out and independently verify it and apply it yourselves. So we're always happy to be learning and refreshing the tools.
Bookend Headlines |
| Bruised by profit news, oil Stocks hit by a confluence of negative factors, including oil-price headwinds, weak outlooks from two tech bellwethers and a research note casting brokerages in a buyer-beware light.
Markets & Economy Insight on GM and Citi downgrades impacting the markets, with Henry Smith, Equities Haverford Investments; CNBC's Bill Seidman & Bob Pisani
Citigroup at 10-Year Low, Goldman Urges Short Sale AIG Shares Tumble to 11-Year Low GM Drops to 53-Year Low, Goldman Urges "Sell" BofA to Cut 7,500 Jobs After Countrywide Deal Closes Shorting Stocks Could Be Way to Play This Market
Dow Tumbles 350 Pts to 2008 Low Amid Downgrades, Oil Spike Wall Street plunged Thursday as oil prices jumped and downgrades of brokerage and automotive stocks gave investors little incentive to buy. Analyst comments on GM sent automaker's shares to their lowest level in more than 50 years, while Citigroup fell to a 10-year low after an analyst placed a "sell" rating on the stock. |
But it might behoove you to read on thru and check it out for yourself. You'll find four things: 1) our Market key factors summary from late April (btw again - just to peak your interest one of the conclusions there was to sell into the rally and position for a downturn, circa Apr29 or so. Somebody might have made some money that way), 2) the most current version of the Market Factors summary from last Sa. which all of a sudden seems to hold up reasonably well, 3) a Macro Risk Factors chart which summaries the major economic barriers we see/saw which is also holding up reasonably too. And 4) a bit of a review on the current Business Cycle and its' major components with particular attention to Capex vs Consumer Spending. The reason being that the two primary triggers of today's catastrophe were the sudden change in perspective on the Financials and on Technology. Now frankly we think the latter is overdone and ahead of itself given the lags between consumer slowdowns and capex declines but we'll take it. And the former is over-due now that everybody's downgrading everybody else because, guess what, a slowing economy means trouble in Financial City and more write-downs, etc. etc. The table kinda bookends the day starting and ending with the AP, "OMG" stories intersperced with the key headlines plus the URL for the CNBC vidclip with Pisani. After all the cheerleading we especially love the "short stocks" notion from CNBC of all people !
Market Assessment Summary: April08
The graphic is a summary of how we saw the major factors playing out back then. As a technical sidebar you have to click on the graphic to expand it - and may have to click again. But then it may be worth reading somewhat carefully (each row btw has the current and previous assessments for comparison). Hopefully it's readable and makes sense. The Table looks at Structure, Fundamentals, Technicals and Sentiment and for each it summarizes the Situation, provides a ranking grade to Evaluate things and lists some major surprises that need to be watched for. We'll point out that many of the surprises are coming to pass - in other words paying attention to deep currents in Structure and Fundamentals has some merit. We also point out the short, throw-away in Technicals about "selling into the rally". Space is at a premium obviously.
Market Assessment Summary: June08 
Here's the most recent summary almost literally hot off the press. In case you're curious or want to dig into the notions and approaches some more discussion is in Models, Metaphors, Musical Chairs and Market Outlook , which lays out our thinking and sources. And first seriously exercised here: WRfest 11Nov07: SEE changes and Cusp Points(Markets). So that gives you several samples to do the compare and contrast on and decide if we're smoking something funny - and if you want any.
Bigger Picture: Economy, Markets, Consumers, Business
Those market assessments in turn point back to a deeper look at how the economy is playing out and what the risk factors are there and then specifically how Consumers and Businesses are likely to be impacted. And to impact back on the economy in their turns. The E/M/C/B assessment equivalent is summarized in another table and, IOHO, seems to be holding up fairly well. The related discussions and explanations are in Filterring the Non-Linearities: Sorting the Risk Factors
GDP and the Business Cycle
You can check the key postings tables or economy archives for the history of discussions on GDP and business cycles but we built a new composite chart to link up some key factors to point to the next level down in this toolkit building and assembly process. The top sub-chart shows GDP, Consumption(PCE) and Industrial Production. Notice that PCE has taken a sudden sharp downturn. The middle sub-chart links PCE to Employment and the sum of changes in Wages + Employment - the primary determinant of future consumer demand. Notice what's happening to Employment. The final sub-chart links GDP and Investment broken out into Residential, Structures and Soft/Equip (Capex). Notice that only Structures are doing well and RI is cliff-diving. Now the key question is what happen to Capex.
GDP Component Analysis
Which gets to this next set of charts which breaks out the key components of GDP in Consumption and Investment in an unusual way and makes for another busy little chart that might be extremely valuable to you after a bit of study. The top sub-chart shows the YoY delta between Q107 and Q108 for each component. Notice how far and fast major Consumption elements have been dropping. Now notice that Capex dropped as well - which given the lags in business cycles is a warning sign and brings us full circle back to the NDXisater today, believe it or not. The middle sub-chart shows the % contribution of each component to the YoY change in GDP. So for example Consumer Durables contributed only 2% to GDP growth, a far cry from normal. What does that say about the outlook for consumer related industries and their stocks ? The third sub-chart is even more interesting because it shows the cumulative contribution %, i.e. we add up each component to get a running total. Normally Consumption increases much more than overall GDP - notice how fast it's dropping. Now what about Capex ? We think the handwriting is on the wall, frankly. Finally, notice that Net Xports contributed 46% of the Q1 increase in GDP - partly resulting from a weak dollar and partly from declining domestic demand for imports (oil excepted of course). What happens if/when the $ strengthens ? Or we get a serious slowing in foreign economies as is incresingly visible ? The last prop gets kicked out from under ?
And there you have it - a soup-to-nuts journey thru the analysis toolkit so you can look at the charts and make your own decisions. But we would suggest stepping back from today's surprise factor and asking two key questions:
1) Given what these charts and tables are telling us how much of a surprise should any of this have been ? But conversely clearly a lot of folks were surprised who shouldn't be because doing this work is their job - for which they are handsomely compensated indeed. Hmmm..
2) So, using the charts and your own judgment what do you think looks like the general trend of things ? And wherever you come out with your judgments who's sitting in what other chairs in this musical ? How many of them are going to be surprised by things that should be perfectly visible ?
BtW - a final note. If you'd like to see our faint-hearted attempt at an investment strategy built off this stuff try this:This One's for Jay: Investing Strategies for a Dicey Market