Daily Investment Interpretations

January 29, 2009
2009-1-29:     The U. S stock markets fell today as much as they soared yesterday. Part of the reason was that initial jobless claims hit 588,000, up 63% from a year ago, with continuing claims at a new all-time record of 4.78 million, up 71% from a year ago: Record number standing in unemployment lines. "Initial claims represent job destruction, while the level of continuing claims indicates how hard or easy it is for displaced workers to find new employment. The claims data show that businesses are laying off workers at a rapid pace and that finding a replacement job is proving ever harder for those who've lost work." It should be noted, though, that initial jobless claims rose by only 3,000 from last week, or about 1,000 below the 26-year high for initial claims set a month ago. It should also be noted that these  numbers are absolute rather than percentages... i. e., they aren't adjusted for population increases. The four-week average for new claims rose by 24,250 to 542,000.
    The
NASDAQ Composite declined
50.5 (-3.24%) to 1,508, the Dow lost 226.44 (-2.7%) to end at 8.149, and the S&P 500 fell 28.95 (-3.31%) to 845. Oil was essentially unchanged at $41.75, while gold added $16.50 to close at $906.50. The VIX rose 2.97 to 42.63.
   
In the meantime, Stovall says bull market may have begun. When I read this, I scratched my head. "How could anyone be forecasting an upturn by summer in the face of all this dismal financial news?", I asked myself. But when I began thinking about it, I began to understand how this could possibly be right. In a downturn like the present recession, the economy's performance, and the news, is like an upside-down bell curve. As the recession begins, the outlook is getting worse and worse faster and faster. (The upside-down bell curve curvature is negative.) But eventually, there comes a point (the inflection point) at which things shift from getting worse faster and faster to things getting worse slower and slower. (The curvature has turned positive.) The economy is still declining but its rate of decline is decreasing, until finally, it reaches the bottom (minimum) of the upside-down bell curve, flattens out, and begins to climb faster and faster. But what professional investors are looking for is the inflection point well before the economy bottoms that signals that the economy is beginning to improve. One crucial indicator is earnings. At the beginnings of recessions, earnings estimates are invariably overoptimistic. This leads to unpleasant surprises and stock price declines. But eventually, companies and analysts readjust their forward-earnings forecasts until they approximately match what really happens, signaling the inflection point. From then on, earnings gradually begin to match their forecasts, and the economy levels out and hits its minimum. Then when corporate earnings, on average, begin to exceed their gloomy, now-pessimistic forecast values, the economy begins to rise again. So what we're seeking is that inflection point when the rate at which the economy falls begins to shrink. Corporate earnings aren't coming in quite as bad as forecast, so this is a bullish sign for professional investors.
    Sam Stovall mentions previous recessions and how they compare with this one. Of course, this treats the present malaise as just another recession rather than something unique that has us in a "liquidity trap". But is he right? That's the big question.
    Fortunately, at 835, the S&P 500 is still down 47% from its October, 2007, intra-day high of 1,575, so the markets have plenty of headroom to rise. 
    Paul Krugman's commentaries are (1) Permanent Link to Bad, in which he refers to the second phase of the Troubled Assets relief Program as "Hankie-Pankie II", and cites the Soviet joke, "Capitalism is the exploitation of man by man. Socialism is the reverse." and (2) Permanent Link to The Sorrow and the Pity (wonkish), in which he shakes his head over another economist's statement of the economic facts. His Friday editorial, Health Care Now, argues that with massive layoffs (conservatively estimated to hit 8% this year and to remain above 6% until 2012), the Obama Administration needs to make good on its health care campaign promises and push through health care legislation while the iron is hot. If they wait until the financial crisis has passed, they'll have lost the head of steam that would make a health care safety net politically compelling.
    In Wall Street's Socialist Jet-Setters, Maureen Dowd mentions the $50 million Dassault Falcon 7X. She also describes Citigroup CEO John Thain's $87,000 pair of chairs, $28,000 curtains, an antique commode "on legs" for $35,000, Regency chairs for $24,000, fabric for a "Roman shade" for $11,000, a $13,000 chandelier in the private dining room, and a "custom coffee table" for $16,000 at a time when Citigroup was laying people off and cutting salaries. She points out, "This guy could well have been Treasury Secretary if John McCain had won." She asks, "How are these ruthless, careless ghouls who murdered the economy still walking around (not to mention that sociopathic sadist Bernie Madoff?) and not as perps?"