Daily Investment Interpretations

October 29, 2008

2008-10-29: Today's market action looked like a subdued version of the "treading-water" market action on Tuesday, October 14th after the 900+ -point Dow run-up on Monday, October 13th. That price action was followed by a drop the next day (Wednesday, October 15th) that was as large as its 900+-point leap on October 13th. It now remains to be seen whether or not tomorrow (Thursday, October 30th) registers the same kind of plunge that we saw on Wednesday, October 15th.

    One interesting difference is that although we're bumping along the bottom, we still haven't penetrated the October 10th low. The S&P 500 yo-yoed up and down today, rising steeply 30 points to 970 twelve minutes before the markets closed, then falling 48 points in ten minutes, followed by an 8-point recovery in the last two minutes (playing out after the closing bell). Presumably, investors looking to dump stocks did so when the market rose just before the markets closed. Once this wave of selling ended, bargain hunters stepped in to bottom-fish.
    The NASDAQ Composite gained 7.74 points (0.47%%) to close at 1,657.21, the Dow dipped 74.16 (0.82%) to end at 8,990.96, and the S&P shed 10.42 (1.11%) to 930.09. The VIX rose 3 points from aboout 67 to about 70. Oil rose $2.18 a barrel to about $70, and gold rose $13.50 an ounce to $754.00
    Unless tomorrow changes the outlook, there's a generally downward bias, with the lows lower and the highs lower. More important, layoffs have accelerated dramatically. One article today, Shades of 1974, says, 
    "Jobs are being lost so fast unemployment could rise from 6.1% in September to 8% at the end of this year or early in 2009. With housing prices still falling at 15% to 20% compared with 2007, there is no buffer at all for the consumer, especially if the he loses his job. His lack of access to credit is both historic and remarkable."
    This quotation substantiates the sudden surge in layoff announcements that I've noticed within the past few weeks. Unemployment reached the 10% level during the 1981-1982 recession--the worst recession since the Depression (when unemployment hit 25%). But that was a recession brought on by high interest rates designed to wring inflation out of the economy. The current recession is accompanying an across-the-board deflation of all types of asset values from commodities through real estate to equities, as financial IOU's for several times the total value of all the real assets in the world are somehow discounted or repudiated or whatever it takes to bring the promises in line with what can really be delivered. Coupled with the need for banks to deleverage themselves from a 50-to-1 leverage ratio to a 10-to-1 leverage ratio and the risk that if they loan money to another bank, that bank may fail, anyway, is a deepening recession (Depression?) that threatens defaults on personal and business loans because of layoffs and bankruptcies. By comparison, the Fed, under its new Chairman, Alan Greenspan, had been raising interest rates in 1987 to cool the economy and preempt inflation. When the crash occurred, Chairman Greenspan promptly and wisely lowered interest rates, short-circuiting a recession/depression. This time, lowering interest rates is pushing a string, since the problem lies in banks' understandable unwillingness to risk lending no matter how cheaply they can borrow the money to lend. Fear is outweighing greed. The article concludes:
     "As Bernanke looks into the early part of next year, it should not be hard for him to imagine a jobless rate which moves over 10% and quarterly GDP drops of 3% or 4%. He has one last chance to slow the economy's momentum in that direction."
    Another article, No quick fix in the cards for Fed, includes,
    "This is big-time. The economic forecast is remarkably weak," said Brian Sack, a former Fed staffer who's now a Fed watcher with Macroeconomic Advisors.
    The article states,
    "The aggressive stance is needed because financial market conditions remain hostile to growth and the outlook for the economy grows darker by the day.", and it concludes,
    "The last Fed forecast was completed back in June -- at which time the central bankers were not even forecasting a downturn. Instead, their central tendency showed a period of "sluggish" growth and an unemployment rate topping out at 5.8%."
    I think this last statement is particularly telling. This is how fast the sky has darkened, and the storm clouds have piled to west in angry blue.
    Another excellent article is available at Minyanville.com,
Investing Strategy at the Crossroads, Part 1
Investing Strategy at the Crossroads, Part 2
    All of these articles underscore the need for extreme caution. Are we like pre-Columbian natives on a Caribbean isle watching the approach of their first (Category 5) hurricane?
    We're lucky we haven't had to cope (so far) with more-significant bear market rallies that really test our faith in lower lows. The plot below shows how the stock market tried investors' souls as it worked its way up-and-down, but generally down, over a three-year period.
    We'll see what tomorrow brings.