Daily Investment Interpretations

January 7, 2009

2009-1-7:   The markets swan-dived today. The ADP private-sector jobs report showed a decline of 693,000 jobs in December--well above the 500,000 that had been expected. The full employment report comes out on Friday. Also, the Congressional Budget Office forecasts a $1.19 trillion deficit for Fiscal Year 2009, not including the incoming administration's fiscal stimulus package. (Presumably, the fiscal stimulus package isn't included because it doesn't yet have official status, and hasn't yet been finalized.) Overall, this exceed $1.5 trillion, and would be more than three times greater than any previous federal budget deficit. Meanwhile, analysts warned that Alcoa may have to cut further, and further reductions in earnings estimates continued to appear among other industries.
     The NASDAQ plunged
53.23 (-3.23%) to close at 1,599, the Dow tumbled 245.40 points (-2.72%) to close at 8,770 and the S&P 500 tacked on 28.05 about (-3%) to land at at 907. Oil ended the day down $5.95 to end at $42.81 a barrel, and gold rose $8.20 to $841.70 an ounce. The VIX jumped nearly 5 points to 43.39.   
   
Dr. Krugman notes today that the planned economic stimulus package, to be delivered over a two-year time frame, will deliver, at 3% of GDP, a 3% boost, against the Congressional Budget Office' projected 8%-or-greater shortfall in GDP over the next few years: Permanent Link to More stimulus notes. (See also Lots of Buck, not Much Bang.) 
   
Mark Hulbert warns that Too many newsletters have decided that the bear market is over. He thinks that the investment advisors he tracks have been too quick to move to a fairly strong bullish perspective on the markets.
    One corporate investment expert interviewed today argued that in this recession, companies have been much, much quicker to lay off employees in order to stay ahead of the recession than they have in past recessions. As a result, when the economy bottoms in the second quarter, it will be followed by a very rapid  V-shaped recovery, as companies hire back as rapidly as they've laid off. 
    So let's see... If the economy is going to bottom in the second quarter, then there's no need for a fiscal stimulus package or other Keynesian measures to re-energize the economy. It will take at least until February and maybe longer before Congress passes a fiscal-stimulus bill. Then at least a few more months will pass before the first of that money actually gets into the economy, with the remainder spread out over the next two years. No more than half the fiscal stimulus will reach the economy before the end of 2009. But the stock markets are telling us that (or so goes this story) within a few months, the economy is projected to recover on its own. This investment advisor says that there will be a lot more gloomy news during the first quarter as earnings reports come out, but that the markets have already discounted this bad news, and will gradually rise even as the economy continues to fall. (Since the stock market predicts economic bottoms by an average of six months, then if we think that the stock market hit a cyclical bear market low last November 21, we might see this recession start to mend by late April, 2009, although it could also be May or June of this year.)
    Obviously, there's a disconnect between what these swamis are saying and what most economists are opinng about the advisability of a quickly enacted, multi-year, massive fiscal stimulus package.
David Callaway: Bear rally over, the great dying begins in corporate America
    This article doesn't contain exactly, for me, what its title seems to imply. Mr. Callaway begins with the observation that the "The freight train of job cuts, plunging earnings and massive spending cutbacks set to hit the economy was, thankfully, pushed back a few weeks" during the holidays, giving us a much needed respite to catch our collective breaths. Now, though, many small-to-medium-sized firms will go out of business. Mr. Callaway suggests that the economy will bottom and turn up again after the worst of the quarterly earnings season is over... in other words, sometime in the first quarter, or at least sometime during the second. The title seems to me to be implying that we're in a bear market rally, but if the economy is going to turn around within the next few months, then our current rally isn't a bear rally but (it would seem to me) the beginning of the next cyclical bull market.
    Here are a few articles that might complement those above.
    Todd Harrison: Swami of the Street's a tough gig this year  
    One notable quotation: "My sense for 2009 is that—all else being equal—we’ll see wild movements and a wide range, perhaps with S&P 600 as a nadir and one (if not two) 20% bear market rallies filled with false hope and empty promises."
    In another article, The Ultimate Bull Trap?, Bennet Sedacca summarizes the current consensus of the investment crowd (the crowd that "is usually wrong at the extremes"):

Five Things You Need to Know: From Generation Boom to Generation Sav-A-Lot
Op-Ed: Default on Social Security Bonds
Five Things You Need to Know: Get Out Now!
Prieur Perspective: The Calm After the Storm?
A Protracted Bear Market?
Survival of the Weakest
No V-Shaped Recovery
Five Things You Need to Know: "Economists" Embrace Government Spending