Daily Investment Interpretations

December 4, 2008

2008-12-4:  The markets fell today on news of 30,000 additional layoffs (in one day) including 4,600 layoffs at Dupont, considered to be a bellwether company for the economy as a whole, and also because of worse-than-expected retail sales numbers for every company except Walmart. (Even Target's sales were down 10% and Costco's sales were down 5%!) The NASDAQ Composite was down 46.82 (-3.14%) to 1,446, the Dow was off 215.45 (-2.51%) at 8,376.24, and the S&P 500 shed 25.52 (-2.93%) to close at 845.22. Oil, at $43.94, ended the day at a four-year low. Gold fell $5.00 to close at $765.50. Predictably, the VIX rose to 63.64.
    The government is expected to report tomorrow (Friday) that this has been the worst November for job losses in 30 years, with an unemployment rate of 6.8%. So what's holding up this market? Given all the hedge and mutual fund liquidations that are supposed to be taking place, how come the market indices aren't flat-lining? There are a couple of possible clues. One is that the markets aren't going to do what most investors expect them to do. Another is that the efforts by the world's governments may taking hold The only question is: will the efforts be sufficient? The following article, Credit Crisis Watch: LIBOR Eases Whilst UK Spread Soars on Sovereign Debt Risks The Market Oracle Financial Markets Analysis & Forecasting Free Website, written by Dr. Prieur du Plessis, observes that the Libor, after easing sharply from 4.82% to 2.13%, has recently risen slightly to 2.18%, as has the Treasury-Eurodollar spread, TED. This has led to a major improvement in the credit situation, but it still isn't normal. Another interesting development is a drop in mortgage rates: Price slide in focus  Average 30-year mortgage rate at lowest level since January   Fed stokes mortgage apps  U.S. homes now undervalued?  followed by a  surge in mortgage applications in response to an effort to halt the real estate implosion. This brings us face-to-face with the hair-raising layoff rate and the vicious circle it generates in the real economy. I've been led to believe that the antidote to this is fiscal stimulus, especially in the form of programs that generate real wealth. Theoretically, this will happen after Barack Obama is inaugurated, but in practice, it might occur sooner. As the outlook darkens, additional efforts are being made to correct the situation. There is talk now that Secretary Paulson may request the remaining $350 billion in TARP money.
    And, of course, the markets never go straight up or straight down. They always undulate their way wherever they're going.
    You might want to take a gander at Paul Krugman's latest thoughts on the future of the economy. Dr.Krugman muses that there only a few tens of billions of dollars worth of infrastructure tasks that are "shovel ready". Tax incentives may have little effect, and it may take the better part of a year to get a coherent jobs creation program underway. By that time, unemployment rates could reach double-digit levels (particularly given the acceleration we're seeing in monthly layoff numbers, and the negative feedback loops that must inevitably ensue as people lose their jobs and their incomes).
    Eventually, the downward spiral should level out, but it would seem to me that we probably had quite a bit of potential slack in our economy when this downturn began. If an additional 10% of the workforce were laid off, that would entail a 15% unemployment rate....
    Although it seems as though the stock market is marking time, when you look at the 10-year chart o the S&P 500 below, it's stunning how fast the market has fallen this past few months.
    Rationally, you would expect a Big-Three automakers bailout tomorrow, followed by a market rally. We'll see what actually happens.
    Here are two more articles that might be of interest.
Impact of Deflation and Death of the Economic Decoupling Theory
Stock Market Deflationary Trend Scenario Into 2013