Daily Investment Interpretations

January 12, 2009

2009-1-12:   Today was a -1.26% to -2.26% down day..  The S&P 500 dropped the most, at 20.29 points (-2.26%) to end the day at 870. the Dow fell the least, at 125.13 points (-1.46%) to close at 8,474 and the NASDAQ split the difference, losing 32.8 (-2.09%) to lend at 1,500. Oil fell to $37.72 a barrel, and gold fell $34 to $821 an ounce. The VIX rose to 46. The immediate cause for this was gloomy earnings forecasts... something that had already been anticipated, but that, in the heat of the moment, sparked a wave of selling.
    One question that suggests itself: given the bad news, why hasn't the stock market tanked already? The investors who are buying are certainly aware that the current Obama stimulus package will only replace about one-third of the anticipated GDP shortfall. What do they know that I don't know? I've wondered if possibly these investors are depending upon the actions of the Fed to supplement a weak fiscal stimulus package. 
Late Update:  Word has just emerged that the Obama team may up the amount it's requesting. Maybe this is why bulls are optimistic.
    Three Minyanville articles address the outlook. One of these, The Stimulus Effect, predicts a recession through at least the end of 2009. The author points out that, on the wings of growing indebtedness, the world built overcapacity. For example, the world is equipped to produce about 92,000,000 cars a year, whereas sales will probably be around 60,000,000. As the author, John Mauldin, explains, "Capacity utilization has been dropping for some time and is down below 75% for all industries, but in many industries, is close to 70%. The clear trend, when looking at ISM manufacturing statistics, is that it has a lot further to fall." -- "Consumer spending could easily drop 7% as the saving rate heads back up to 5% (or even more). It’s estimated that over 70,000 retail stores will go out of business in the next 6 months. That would be in line with the 140,000 that closed doors last year."
    Kevin Depew  characterizes this as, "a structural deflationary debt unwind compounded by a lack of savings and a glut of production and inventory." "What Are bond bears Missing? Simple: a structural deflationary debt unwind."  Prof. Depew discusses the fact that bond experts expect inflation to rear its ugly head within the next year or two, causing the prices of currently issued U. S. Treasury bonds that offer virtually zero interest to fall. Prov. Depew argues that these bonds are actually (and correctly) predicting little or no inflation over the next few years..
    The third article examines both the bull and bear cases: A Tale of Two Market Opinions.
    I would reiterate: high as are the costs of the bailout measures, they probably cost a lot less than 10 years of Japanese-style stagnation. And unlike the Japanese, who entered their "lost decade" with a high savings rate, and with a national debt owed only to themselves, we're entering this deflationary period with almost no savings  and owing our money to foreign investors.