Monday, December 8, 2008

Insight: A Rocky Road To 2010

Insight: A Rocky Road To 2010

By Aline Van Duyn, | 3 December 2008

A look at banks’ marketing slogans— no doubt chosen with great care and sincerity not so long ago— is extremely uncomfortable. "Where vision gets built," was how now-bankrupt Lehman Brothers defined itself. "When your money is safe everything is too," Dexia proclaimed, before receiving a $9bn capital infusion from various European governments in September. "Live richly," said Citibank, in the not-so-distant days when it wanted people to borrow money even if they did not need it. Such exhortations now have an extremely hollow ring to them.

And the much-needed return of confidence to the financial markets together with the amelioration of the collapse of many parts of the banking system remains elusive. The hits to the real economy— in the US, Europe and even China— are severe and continue to get worse. There are no signs that lending will do anything other than shrink in the coming months, putting a further squeeze on both companies and consumers.

The sheer scale of what has happened to financial markets is taking a psychological toll and affecting how investors and others approach the markets. Here’s just one small example of the frenzy: Mary Miller, head of Fixed Income at T Rowe Price, a fund management group with more than $340bn of assets, told me that organisers of the company’s annual conference looking to the year ahead want her slides two weeks in advance. That has never been a problem before, but this year she felt her comments would not stand up for that long. In the end, she submitted them one day in advance.

Ms Miller, who has been covering financial markets for decades and stresses that she has seen plenty of downturns, talks of the "fatigue and disbelief" experienced by investors such as herself. This is shared by many of the bankers and policymakers I speak to. One of the biggest strains has come from trying to absorb the "never ending patchwork of solutions" devised by governments. Anyone tracking the many market intervention plans by the Fed and the Treasury knows the list is dizzyingly long, and that details are still in many cases sketchy [[at best! : normxxx]].

The many moves to inject liquidity into financial markets are clearly going to last longer than had been thought a few weeks ago. Just this week, the Fed added another three months of life to three liquidity facilities. These will now run until at least the end of next April.

Jeffrey Rosenberg, head of credit strategy at Bank of America, says this is an acknowledgement that the "period of adjustment" in financial markets will take longer than initially anticipated. Understanding how government’s new role has changed markets and investment opportunities is key. Bill Gross of Pimco highlighted that change this week.

"We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with OPM— Other People’s Money," he wrote in his monthly investment outlook. His advice to stock investors is to embrace the "sheepish" rather than "brave" new world and get used to lower earnings, growth and reduced "animal spirits". In such a cautious environment, risk-taking remains largely absent and often unwise.

Indeed, Ms Miller says the focus for investors is to just get through to the end of the year, and then hope for some stability in 2009. One bank slogan has proved to be prescient. "Here today, where tomorrow?" was how Fortis, the embattled Belgian-French insurance giant and financial services firm, marketed itself, complete with question mark. This could well be a slogan for current sentiment throughout the financial markets.

A few months ago, 2009 was predicted to be a turnround year. Now many investors are hoping for stability at best [[a reduced VIX?: normxxx]], as the question of "where tomorrow?" remains so hard to answer. Real improvements and growth? Maybe in 2010, but that is the view of the optimists.


Fed Extends Its Emergency Lending

By | 3 December 2008

Ben Bernanke, the Fed chairman, said the economy remained under "considerable stress" and made clear that policymakers would use unconventional central banking tools to support it, such as buying long-term government bonds, in addition to the more 'normal' short term interest rate cuts.[[Not so normal with ST rates already at a 'nominal' 1% and 'effective' rates close to zero.: normxxx]]

The 'lending facilities' provide loans to bond dealers, lend to banks buying asset-backed commercial paper from mutual funds, and auction loans of Treasury securities. They will now last a further three months until the end of April. The extension brings these facilities into line with other central bank initiatives to combat the credit crisis, the Fed said.

However, the announcement only added to growing fears about the US economy, which has already been in recession for nearly a year, according to the National Bureau of Economic Research, the leading independent economic authority. The NBER— which defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months"— said on Monday that a 73-month economic expansion that started in November 2001 had ended in December 2007.

Moreover, the 'lending facilities' have not [[had the effect of : normxxx]]reducing the benchmark floating rate, three-month dollar Libor, used for floating rate mortgages and loans, in line with the Fed's current target rate of 1 per cent. Three-month Libor remains highly elevated at 2.2 per cent.

The question for many economists now is how long and severe the recession will be. A growing body of gloomy economic data and indicators, including the increasing strains felt by manufacturing companies, is raising fears that the downturn in the US— and globally— is getting worse. Still, there is "no comparison in terms of severity" between the current downturn and the Great Depression, according to Mr Bernanke.

Others are more doubtful. "If this is a normal recession, demand should be about to turn higher, if it has not done so already unbeknown to most observers," said Stephen Lewis, chief economist at Monument Securities. He added: "First, if the US economy is [just] entering a depression, it is far too soon, even for an equity market that tries to discount conditions six months or a year ahead, to be looking for economic recovery. Second, the very fact that, at a point in the cycle when the downswing in a normal recession would be bottoming out, the economy seems to be plunging [instead], suggests this is not a normal recession. It looks more like the kind of slump that leads into a depression."

Ed Yardeni, president of Yardeni Research, said: "The average post-war recession lasted 10 months, So maybe this one is almost over." But given the latest raft of figures, he and his chief economist are forecasting the recession will not end until June 2009, which means it could last 18 months. "If it continues into the second half of next year, we'll all agree that it's a depression," he said.


U.S. May Be In For ‘Great Recession,’ Longest Postwar

By Steve Matthews and Timothy R. Homan | 2 December 2008

Dec. 2 (Bloomberg)— The U.S. economy, now officially in recession, may be in the midst of the longest slump in the post— World War II era as job losses mount and credit dries up. The jobs report has been negative every month since January and the decline has been accelerating.

The last time the U.S. was in a recession was from March through November 2001, according to NBER.

"We’re looking at some pretty severe numbers for the fourth quarter, and the first quarter of 2009 will be pretty bad as well," said Stephen Stanley, chief U.S. economist at RBS Greenwich Capital in Greenwich, Connecticut. "The economy isn’t going to turn around definitively until the credit markets unclog." Norbert Ore, chairman of the Institute for Supply Management’s factory survey, said, "This may be referred to as a 'Great Recession', because of its length'. It looked like we were headed for a shallow recession earlier in the year because of higher energy prices. With the meltdown in the financial sector, it has become something more serious".

But, the NBER designation means the U.S. was likely the first country to have slipped into a contraction. While definitions differ, the economies of both the euro area and Japan probably fell into a slump in the second quarter of this year, making it the first simultaneous recession in the three regions in the postwar era. The longest economic slumps since 1945 were the 16-month downturns that ended in March 1975 and November 1982. The Great Depression lasted 43 months, from August 1929 to March 1933.

Manufacturing Slump

American manufacturing contracted in November at the steepest rate in 26 years, the ISM said yesterday. The Tempe, Arizona-based group’s report came as factory indexes in China, the U.K., euro area, and Russia all fell to record lows. Federal Reserve Chairman Ben S. Bernanke, a former member of the NBER panel, said yesterday the economy "will probably remain weak for a time" and the Fed may use unconventional methods, such as buying Treasury securities, to spur growth.

"We have gone through in the last year a remarkable set of events, ranging from housing market to credit market to financial market shocks," James Poterba, president of the NBER and an economics professor at the Massachusetts Institute of Technology, said in an interview. "The collection of shocks is a very rare coincidence. It is not terribly surprising you might get a longer-than-average downturn."

Job Losses

The loss of [more than 2.7 million jobs since December] was the biggest factor in determining the starting point of the U.S. recession, the NBER said. By that measure, the contraction substantially deepened last month. Payroll employment fell by [533,000] in November, the most [of any month since 1974], according to the Labor Department report of Dec. 5. The jobless rate [increased to 6.7 percent], the highest level since 1993.

[ Normxxx Here:  November's
drop in payroll employment (the 11th consecutive decline) followed declines of 403,000 in September and
320,000 in October, as revised (BLS). Job losses were large and widespread
across the major industry sectors in November.

"[This recession] is clearly not going to end in a few months," Jeffrey Frankel, a member of the NBER committee and a professor at Harvard University, said in an interview. "We would be lucky to get done with it in the middle of next year." Of all 11 NBER-called recessions since 1947, only two others involved no two consecutive quarters of negative real growth before the call. The one in 2001 and the recession of April 1960 to February 1961. However, that latter recession involved one quarter with significant negative growth, -5.1% annualized, and a cumulative -1.0% growth for a whole year.

[[Sounds like the NBER is adjusting for our flaky inflation figures!: normxxx]]

Second Bush Slump

The contraction is the second under President George W. Bush‘s watch, making him the first U.S. leader since Richard Nixon to preside over two recessions. Lawrence Summers, President-elect Barack Obama’s pick for White House economic adviser, said the economy is getting worse and requires more legislative action. "Recent economic evidence suggests that the pace of this downturn is accelerating," Summers said in a statement. He said Obama wants to enact a recovery package "soon after taking office".

Although a recession is popularly defined as two quarters of successive contraction in real gross domestic product, the private committee doesn’t require supporting GDP data to make a recession call. Its members focus on month-to-month changes in the economy as a whole. The NBER committee defines a recession as a "significant" decrease in activity over a sustained period of time.

The decline would be visible in gross domestic product, payrolls, industrial production, sales and incomes. The U.S. economy shrank at a 0.5 percent pace in the third quarter after expanding 2.8 percent in the previous three months. Economists at Goldman Sachs Group Inc. and Morgan Stanley in New York are among those projecting the economy will contract at a 5 percent pace this quarter.

"The recession is likely to last at least into the summer of 2009," said Conrad DeQuadros, a founding partner at RDQ Economics in New York. "Even as the economy begins to recover, it’s likely to still feel like a recession, and the unemployment rate is still likely to rise."


Recession Is 'Official:' Is It Time To Look Forward?
Click here for a link to complete article:

By Kent Thune, TheFinancialPhilosopher | 1 December 2008

"It' easy to see— hard to foresee." ~ Benjamin Franklin

Now that we are "officially" in a Recession, what does that mean for stocks going forward?

Of course, no one really knows the answer to that question, and I certainly will not attempt to answer it here. What some of you may not know, however, is that, once the "recession call" is made, stocks have historically been quite close to a significant march upward. The reason for this is that, traditionally, economists look backward and investors look forward.

The stock market is often referred to as a "discounting mechanism." Discounting, in reference to stocks, is essentially a means of pricing the value of stocks today based upon their expected value in the future, typically six to nine months in time— a "crystal ball," if you will, reflecting forward expectations of economic health. In other words, much like a barometer that measures the general business and consumer confidence of our economy, stock prices today [is supposed to] reflect our nation's general economic health six months from now. For this reason, the stock market, as measured by the S&P 500, is a component of the economic Index of Leading Indicators.

"You cannot see the mountain near." ~ Ralph Waldo Emerson

Now for some perspective: From the high mark on October 9, 2007, to the recent low mark put in on November 20, 2008, the price of the S&P 500 declined 51.93%. Of course, we will not attempt to "call a bottom" or make any predictions here. But a few observations are in order with specific reference to data (and following table) taken from Fidelity's Market Analysis, Research & Education (MARE):

Here are the prime points, in reference to the table above, from the November 26, 2008, MARE article, "US Stocks Often Rebound During Recessions:"

  • The average U.S. economic recession— defined as a period of significant decline in economic activity— has lasted about 11 months.

  • Investors historically have begun anticipating a recovery in the economy and in corporate earnings prior to the end of a recession.

  • On average, the stock market has begun to recover about halfway through a recession, with the typical rebound being about 25% in magnitude (from market low point to end of recession).

  • Bear markets that have occurred during past recessions also have tended to end during those recessions (73% of the time, 8 out of 11 instances).

"Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof." ~ John Kenneth Galbraith

While it is true, as Keynes said, that "the market can remain irrational far longer than you or I can remain solvent," it is also true that 'irrational' investors eventually grow tired of their exhausting behavior; the excesses of the market are diminished or removed [[including its volatility: normxxx]]; and the pendulum finally begins to swing in the opposite direction— the direction of the 'rational' investor...



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The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

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