Here we are…already in mid September. You may recall that September 14th was the one-year anniversary of Lehman Brothers’ collapse. One year ago, Lehman Brothers became the largest bankruptcy in history, tipping the financial system into crisis mode. While the drastic measures taken last fall and spring in response to the system-wide reaction to the firm’s demise averted Great Depression 2.0, by just looking at the major market averages today you would think that problems in our economy have mostly been solved. But the fact of the matter is the rebound in stocks owes its existence in large part to questionable accounting changes, unprecedented sums of cash being pumped into the system with no clear strategy to later remove those funds, and investors’ renewed appetite for risk.
This later point is particularly troubling. It appears that investors haven’t learned a lesson from 2008, or 2000 for that matter. Many of these investors seem eager to make up for their earlier losses and are throwing caution to the wind to achieve that goal. They’re buying lottery tickets such as Citigroup, Fannie Mae and Freddie Mac, which have risen three- to five-fold, despite being bankrupt and still in operation only by dint of the government’s intervention. With investor sentiment (always a good contrary indicator) now about as high as it gets, it’s hard to see stocks making much in the way of forward progress.
Several factors are at work right now that could easily derail stocks: rising commodity prices, the weak U.S. dollar, a deteriorating employment picture and indications that the economy isn’t going to rebound swiftly could all do the trick. The bond market is signally loud and clear that these are very real risks not to be dismissed. But for now, given the momentum, the bubble that equities are in could continue. I can’t say with any certainty when this cosmic rise will end; it has definitely gone on far longer and carried stocks far higher than logic would dictate. But when it does end, watch out. You’re going to see a big stampede for the door.
Gold hasn’t sold off as it has the previous two times it briefly crossed the $1,000 mark. While a modest retreat wouldn’t be surprising here, the action in the metal shows there’s plenty of interest at current levels and it suggests prices could climb higher still. Adding to the bullish tone of the market, Barrick Gold, one of the most conservatively run gold companies last week announced last week that it’s closing its hedge book. The company issued more stock, (diluting existing shareholders in the process) and will take a stiff write-off in its earnings to pay for the move. I doubt management would take such steps if they didn’t think gold prices were headed much higher.
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Wednesday, September 16, 2009
Saturday, September 12, 2009
September Market Heading South
The first week after Labor Day is traditionally a time for investors to reassess the financial markets. Unfortunately, that has often meant trouble, as indicated by the fact that September historically has been the worst month for stocks, by a wide margin.
Fear and trepidation have been running much higher than usual concerning a possible swoon this month, particularly in the wake of both the 2008 disaster and the strong market advance of the last six months.
As usual, the markets are confounding expectations and predictions so far. Stocks worldwide have risen steadily if modestly all four days so far this week. What's more, U.S. stocks as well as many foreign equity markets are now trading at 2009 highs.
I've been more optimistic than most about the markets. Yet how could we not be surprised and impressed by the market's refusal to take a well-deserved rest?
Of course, it's way too soon to declare victory for September 2009. October presents challenges too.
Even so, I continue to believe that the huge amount of cash available to invest, sitting on the sidelines generating extremely low income, is a primary factor in global financial markets today. Here in the U.S., money-market funds currently hold almost $3.6 trillion. This is well above the abnormally high level of $2.9 trillion when stocks peaked in October 2007. It's also down less than you might expect from $3.9 trillion in January of this year. So there's an abundance of fuel.
Over time, though, we need more than money burning a hole in our pockets or purses. Last week, the improving corporate earnings likely are necessary for stocks to go much higher from here. I think it will be difficult for earnings to meet current expectations. The major obstacle is the struggling American consumer. Our economy, more than others, depends on consumer spending—70 percent of the total. By either necessity or choice, we're spending less and saving more.
Word came this week that Americans' consumer borrowing in July plunged by a record $21.6 billion from June, the largest monthly decline on record. It was the sixth consecutive month of declining consumer credit. Shrinking credit dampens consumption, which pressures economic growth.
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Fear and trepidation have been running much higher than usual concerning a possible swoon this month, particularly in the wake of both the 2008 disaster and the strong market advance of the last six months.
As usual, the markets are confounding expectations and predictions so far. Stocks worldwide have risen steadily if modestly all four days so far this week. What's more, U.S. stocks as well as many foreign equity markets are now trading at 2009 highs.
I've been more optimistic than most about the markets. Yet how could we not be surprised and impressed by the market's refusal to take a well-deserved rest?
Of course, it's way too soon to declare victory for September 2009. October presents challenges too.
Even so, I continue to believe that the huge amount of cash available to invest, sitting on the sidelines generating extremely low income, is a primary factor in global financial markets today. Here in the U.S., money-market funds currently hold almost $3.6 trillion. This is well above the abnormally high level of $2.9 trillion when stocks peaked in October 2007. It's also down less than you might expect from $3.9 trillion in January of this year. So there's an abundance of fuel.
Over time, though, we need more than money burning a hole in our pockets or purses. Last week, the improving corporate earnings likely are necessary for stocks to go much higher from here. I think it will be difficult for earnings to meet current expectations. The major obstacle is the struggling American consumer. Our economy, more than others, depends on consumer spending—70 percent of the total. By either necessity or choice, we're spending less and saving more.
Word came this week that Americans' consumer borrowing in July plunged by a record $21.6 billion from June, the largest monthly decline on record. It was the sixth consecutive month of declining consumer credit. Shrinking credit dampens consumption, which pressures economic growth.
________________________________
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Friday, September 11, 2009
The falling dollar
The U.S. dollar tumbled to its lowest level in nearly a year this week. Several important trends explain and stem from the greenback's weakness.
First, the dollar decline represents a continued reversal of the flight to safety that occurred during the peak of the financial/economic crisis—September 2008 to March 2009. The perception is increasing, slowly yet steadily, that the global economy is improving. This encourages investors to sell dollars and invest in riskier assets in other currencies.
Second, positive economic news from Asia and, to a lesser extent, Europe, suggests that much of the rest of the world is on a faster recovery pace than the U.S. If so, many other nations will raise interest rates before the U.S. in order to prevent their economies from overheating. Stronger economies and higher interest rates tend to strengthen currencies.
Third, the U.S. government's massive stimulus program creates a flood of dollars, boosting the supply of greenbacks. It also raises the risk of higher inflation in the future.
Fourth, concerns have increased about the dollar's status as the world's reserve currency. While the greenback's preeminence is not immediately in doubt, it's likely that the rest of the world increasingly will seek other alternatives, perhaps eventually leading to a more internationally based currency system. For example, China is on track to become the first investor in a new series of notes issued by the International Monetary Fund.
Fifth, the dollar's value is declining not only against foreign currencies, but also against gold, oil and other commodities, which investors increasingly view as a store of value and hedge against a depreciating greenback. Gold crossed $1,000 per ounce this week for the first time since February.
The dollar is now trading where it was before the collapse of Lehman Brothers almost a year ago, accelerating global financial markets' downward spiral and fueling the rush into the U.S. currency as a safe haven.
In 2009, the dollar has declined 4 percent against the euro, but much more against the currencies of commodity-rich Brazil (20 percent), Australia (17 percent) and Canada (11 percent).
All of this is why I continue to maintain significant exposure to foreign equities, including the emerging markets, to benefit from both faster growth abroad and the long-term decline of the U.S. dollar.
________________________________
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First, the dollar decline represents a continued reversal of the flight to safety that occurred during the peak of the financial/economic crisis—September 2008 to March 2009. The perception is increasing, slowly yet steadily, that the global economy is improving. This encourages investors to sell dollars and invest in riskier assets in other currencies.
Second, positive economic news from Asia and, to a lesser extent, Europe, suggests that much of the rest of the world is on a faster recovery pace than the U.S. If so, many other nations will raise interest rates before the U.S. in order to prevent their economies from overheating. Stronger economies and higher interest rates tend to strengthen currencies.
Third, the U.S. government's massive stimulus program creates a flood of dollars, boosting the supply of greenbacks. It also raises the risk of higher inflation in the future.
Fourth, concerns have increased about the dollar's status as the world's reserve currency. While the greenback's preeminence is not immediately in doubt, it's likely that the rest of the world increasingly will seek other alternatives, perhaps eventually leading to a more internationally based currency system. For example, China is on track to become the first investor in a new series of notes issued by the International Monetary Fund.
Fifth, the dollar's value is declining not only against foreign currencies, but also against gold, oil and other commodities, which investors increasingly view as a store of value and hedge against a depreciating greenback. Gold crossed $1,000 per ounce this week for the first time since February.
The dollar is now trading where it was before the collapse of Lehman Brothers almost a year ago, accelerating global financial markets' downward spiral and fueling the rush into the U.S. currency as a safe haven.
In 2009, the dollar has declined 4 percent against the euro, but much more against the currencies of commodity-rich Brazil (20 percent), Australia (17 percent) and Canada (11 percent).
All of this is why I continue to maintain significant exposure to foreign equities, including the emerging markets, to benefit from both faster growth abroad and the long-term decline of the U.S. dollar.
________________________________
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Friday, September 4, 2009
Watch out below
It’s amazing that stocks have held up they way they have. Ostensibly, the market’s advance has occurred in anticipation of the economy recovering, but for all the talk of “green shoots” a few months back, the evidence that the economy is indeed improving remains decidedly thin.
Yes, there may be signs of life in the economy here in the later part of the third quarter and the early going of the fourth quarter thanks to massive government spending and some inventory rebuilding, but we fear this will prove fleeting. This week’s ISM manufacturing index reading was good, for instance. I’ll remind you that this has been a credit-driven recession, however. Recoveries following such recessions tend to be slow drawn out affairs.
The credit market, which dwarfs the stock market, is unequivocally pointing to continued economic weakness. U.S. Treasury bills fell to their lowest level the other day in the 50 plus years records have been kept. Long-term yields, likewise, have failed to move higher as is normally the case coming out of recession.
Banks aren’t lending, period, which is why the money supply isn’t growing. And consumers are is such bad shape they aren’t likely to lend a meaningful hand with the recovery anytime soon. Early indications point to the back-to-school shopping season tuning into a bust. Credit card defaults ticked down ever so slightly in July, after five months of record highs, prompting some to see signs of hope. But while things appear not to be getting any worse for now, defaults typically track unemployment which is set to rise further in the coming months. The U.S. dollar continues to trade near its lows for the year. The buck appears to be marking time before heading lower. And the only thing likely to cause a temporary reversal would be a big selloff in equities which would bring about a resumption of the safety trade.
Rising commodities, and in particular oil, is another threat to the recovery. While some event is likely to be seen as the trigger for a setback in equities, keep in mind the market may simply collapse under its own weight. Valuations are quite steep, trading at an extremely high multiple of 2010 profits—profits that will require GDP growth of 5 percent or more to achieve. Keep in mind that profits have fallen short of expectations by a wide margin in five of the last eight quarters, so I see little reason for Wall Street to get things right in the coming year.
Wall Street isn’t alone in its (misguided) enthusiasm. Measures of investor sentiment have surpassed the levels that prevailed at the market’s top in October, 2007. Taken as a group, small investors are typically far too bullish at tops and overly bearish at bottoms. Corporate insiders, meanwhile, can’t sell their company stock fast enough. According to the tracking service Trim Tabs, insiders have been net sellers of a record $105.2 billion is shares during the past four months. Perhaps they know something about their companies’ prospects that the little guy has missed. I can’t pinpoint when the selloff will occur: It may get underway at any time, or stocks may hang in there for a couple of weeks before retreating. I am confident, however, in predicting that it will be a spectacular rout. So watch out below...
________________________________
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Yes, there may be signs of life in the economy here in the later part of the third quarter and the early going of the fourth quarter thanks to massive government spending and some inventory rebuilding, but we fear this will prove fleeting. This week’s ISM manufacturing index reading was good, for instance. I’ll remind you that this has been a credit-driven recession, however. Recoveries following such recessions tend to be slow drawn out affairs.
The credit market, which dwarfs the stock market, is unequivocally pointing to continued economic weakness. U.S. Treasury bills fell to their lowest level the other day in the 50 plus years records have been kept. Long-term yields, likewise, have failed to move higher as is normally the case coming out of recession.
Banks aren’t lending, period, which is why the money supply isn’t growing. And consumers are is such bad shape they aren’t likely to lend a meaningful hand with the recovery anytime soon. Early indications point to the back-to-school shopping season tuning into a bust. Credit card defaults ticked down ever so slightly in July, after five months of record highs, prompting some to see signs of hope. But while things appear not to be getting any worse for now, defaults typically track unemployment which is set to rise further in the coming months. The U.S. dollar continues to trade near its lows for the year. The buck appears to be marking time before heading lower. And the only thing likely to cause a temporary reversal would be a big selloff in equities which would bring about a resumption of the safety trade.
Rising commodities, and in particular oil, is another threat to the recovery. While some event is likely to be seen as the trigger for a setback in equities, keep in mind the market may simply collapse under its own weight. Valuations are quite steep, trading at an extremely high multiple of 2010 profits—profits that will require GDP growth of 5 percent or more to achieve. Keep in mind that profits have fallen short of expectations by a wide margin in five of the last eight quarters, so I see little reason for Wall Street to get things right in the coming year.
Wall Street isn’t alone in its (misguided) enthusiasm. Measures of investor sentiment have surpassed the levels that prevailed at the market’s top in October, 2007. Taken as a group, small investors are typically far too bullish at tops and overly bearish at bottoms. Corporate insiders, meanwhile, can’t sell their company stock fast enough. According to the tracking service Trim Tabs, insiders have been net sellers of a record $105.2 billion is shares during the past four months. Perhaps they know something about their companies’ prospects that the little guy has missed. I can’t pinpoint when the selloff will occur: It may get underway at any time, or stocks may hang in there for a couple of weeks before retreating. I am confident, however, in predicting that it will be a spectacular rout. So watch out below...
________________________________
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