Daily Investment Interpretations

December 10, 2008

2008-12-10:  The markets shifted into forward gear again today. The NASDAQ Composite swelled 18.14 points (1.17%) to 1,565, the Dow tacked on 70.09 points (0.81%) to close at 8,761, and the S&P 500 added 10.57 points (1.19%) to end at 899. Oil closed essentially unchanged at $43.81, while gold rocketed $34.60 to end the day at $808.80. The VIX parted with 3.18 to end at 55.73.
    The critical question is: is this a bear-market bounce or the beginning of a new bull market? Bull markets are born at times of extreme pessimism. The stock markets turn up while the economy is still moving downward, six months or so before the economy hits bottom. Is that happening now? Obviously, a lot of money is betting that it is, or the indices wouldn't be moving up. Wells CEO says housing may be bottoming, jobs now issue. But it's also true that in order to have a bear market rally, a lot of money has to wielded optimistically, or at least optimistically enough to trade the bear-market rally, Here's what Todd Harrison has said today about this in  Random Thoughts": Heady Headlines:
    "As a card carrying contrarian, I'm schooled to believe that news is always best at a top and worst at a bottom. [But] The flashing red asterisk here--and something that we've discussed for some time--is that , in many ways, the cancer is bigger than the economic patient. That point was driven home with a hammer yesterday when the yield on 3-month Treasury Bills traded negative for the first time in post-war history.
    "OK, so here's the situation--it's bad. Real bad. And it's gonna take years before this mess is cleaned up. Time, and price. Unemployment will dive deep into double digits, societal acrimony will shift to social unrest and perhaps, geopolitical conflict. Fortunes will be lost and friendships will be sacrificed.
    "It's [This is] the other side of the trade, the inevitable and cumulative consequences of an Attention Deficit Disorder, immediate gratification, conspicuous consumption society. Yes, it's a mouthful but it's where we are and pretending it doesn't exist won't make it go away. Indeed, the fact that it's front page news may be one of the more constructive elements currently in play."
   
The words in square brackets are mine, to restate this warning the way I would write it to emphasize its meaning. 
Bottom line: Things are going to get worse, and the stock market is going to go lower than it's been so far.
    Dr. Prieur du Plessis presents, in another excellent, fact-based article (Credit Crisis Watch: December 9, 2008), an assessment of the credit crisis that concludes that although there has been enough easing of the credit crisis since October that credit isn't completely frozen, with the credit premiums (over Treasuries?) falling from a bit over 4% in October to a bit over 2% today, the credit markets are still a long way from a normal credit premium of about 0.3%. In an interview with Morningstar's Eric Jacobson, Peyson Swaffield, the fixed-income Chief Information Officer at Eaton Vance, observes that investment capital is very hard to get and available only to outstandingly solvent companies, and then only at what would have been, two years ago, junk bond interest rates. Even the strongest corporations are all but unable unable to borrow money. (The banks are keeping their money under their mattresses:-) The longer this  severe capital drought lasts, the more corporations it will bring to their knees.
    As a sign of the times, After hours: Sprint debt cut to junk.
    World Bank says historic commodity price boom has ended.
    Another possible wicked surprise could be the allegedly overly optimistic earnings estimates for this year and next. Of course, since I'm aware of this, so is everyone else. The markets may already have priced in the anticipated earnings shocks for the first quarter of 2009.
    As I've mentioned previously, I don't remember anything in previous recessions remotely like the current round of corporate failures and lightning-fast layoffs. In 1982, there was the (successful) bailout of Chrysler. But it was an isolated situation. And, of course, all the previous recessions since the Great Depression were "inflationary recessions" responsive to the lowering of interest rates, unlike the present-day "deflationary recession".