I had planned to write a different article today but after the carnage yesterday, my plans changed. What can I say? It was an exceptionally bad day, coming near the end of a nasty month. There was not a lot of fresh news, but sometimes big drops can occur not when something major occurs, but when the drumbeat of bad does not let up.
The day started ominously: before the opening bell, the uber-geniuses at Goldman Sachs downgraded the entire brokerage sector to neutral from attractive, but saved special negative shout-outs for Citigroup and GM, which dropped 6.3% and 10.8% respectively on the day. And while it was purely coincidence, Goldman itself was downgraded to market perform by Wachovia (take that!) and its shares fell 4% on the day.
As if that were not enough, crude oil continued its ascent, settling $5.09 a barrel higher at $139.64, after futures touched $140.39, surpassing the previous intraday record of $139.89 reached on June 16. The newest cause for concern for oil is Libya, which threatened to cut output. In sympathy, metals skyrocketed. August gold futures soared $32.80, or 3.7% to $915.10, the biggest percentage gain for a most-active contract since June 30, 2006 and September silver expanded by 61.3 cents, or 3.7%, to $17.22 an ounce, the biggest gain since June 16.
If yesterday were an equation, it would look like this: crippled financials + battered autos + soaring energy = stock drubbing. The Dow Jones Industrial Average fell to new intraday and closing lows for 2008, losing 358.41, or 3%, to 11,453.42, its lowest since September 2006. The news was not much better for the other major indexes: the S&P 500 sank 38.82, or 2.9% percent, to 1,283.15, its biggest drop in three weeks, though still above its March close. The Nasdaq Composite Index tumbled 79.89, or 3.3%, to 2,321.37, its worst loss since January.
OK, so what really happened here? My guess is that investors started to absorb the Fed’s comments and determined that while the central bankers are talking a good game, they are not willing to raise interest rates to help stabilize the dollar and fight inflation with the economy in a frail state. That realization, combined with the fact that people are starting to comprehend that big financial companies are not going to be making money any time soon, was too much for the market to take. The Dow is currently down 9.4% this month, its worst June since an 18% thumping in 1930 during the Great Depression.
Where does this leave us? For some reason--call it denial, numbness or excellent coping mechanisms—I am not hearing panic from clients, radio callers or TV viewers. In fact, of the calls and e-mails that I fielded yesterday, most were asking mundane questions or wondering whether the action presented a buying opportunity.
That non-scientific experience matches the action in the volatility index (VIX), which measures investors' expectations for continued market turbulence. While the index recently increased by more than 13%, it remains roughly 25% shy of its peak reached in mid-March. Technically, that may indicate investor complacency that could yet lead to more declines in the market.
I could easily see a continued test of the March lows, but I am also pleased that my peeps—the long term investors, who are accumulating for future goals, seem a bit more hardened during this period. As I have said many times, part of being an investor is learning to accept the difficult times—without them, there can be no good times. Yes, it was a bad day and probably not the last one, but in a business where guarantees are impossible, I can guarantee that this will pass.
Friday, June 27, 2008
Thursday, June 26, 2008
Home Grown
You have got to hand it to the good ol’ US of A—when we do something, we do it BIG. Whether it’s our big cars or our big spending, we do it up right. That’s why I am not surprised by the extent of our housing collapse—it’s not just bad, it’s horrendous. Two pieces of data this week prove what we all know—the party is not just over for real estate, it has morphed into one heck of a hangover.
Yesterday, the Commerce Department reported that sales of new US single-family homes fell 2.5% in May to a seasonally-adjusted annual rate of 512,000. New-home sales were down over 40.3% compared with a year ago and the median sales price was $231,000, down 5.7% from a year earlier. The report came on the heels of a disappointing Case-Shiller home price index, which noted that US home prices in 20 of the largest markets are now back to where they were in the summer of 2004. (Now aren’t you glad you didn’t buy in 2005 when everyone else was?) The index showed that prices have dropped a record 15.3% in the past year and are now down 17.8% from the peak two years ago. Adding to this not-too rosy report is the knowledge that with so much inventory flooding the market and foreclosures rising, prices are likely to keep falling for a while.
For those who never counted the 2003-2006 house price surge of 52% and do not have to sell their homes any time soon, this may all be moot. But we all need to care about these numbers because the data is pushing lawmakers towards legislation for which we are all going to pay. It was reported this week that Congress is about to approve a massive housing bill, including a refinancing program aimed at rescuing hundreds of thousands of homeowners in danger of foreclosure. According to the New York Times, the legislation is “the most sweeping government overhaul of mortgage financing since the New Deal.” The rescue-refinancing plan would allow distressed borrowers and their lenders to stem losses by allowing qualified owners to refinance into more affordable, 30-year fixed-rate loans with a federal guarantee. (A note here—if the homeowners are so qualified, then why are they in trouble?)
I should probably feel happier about this because it will help the economy recover. The problem is that when you were among the many who did not indulge at the frat-house party, it is a bit annoying to have to take care of those who did and are experiencing the terrible headaches and spins. I am not passing judgment on the partiers—it must have been great fun—but I wish it was not my responsibility to chip in for the Tylenol!
Yesterday, the Commerce Department reported that sales of new US single-family homes fell 2.5% in May to a seasonally-adjusted annual rate of 512,000. New-home sales were down over 40.3% compared with a year ago and the median sales price was $231,000, down 5.7% from a year earlier. The report came on the heels of a disappointing Case-Shiller home price index, which noted that US home prices in 20 of the largest markets are now back to where they were in the summer of 2004. (Now aren’t you glad you didn’t buy in 2005 when everyone else was?) The index showed that prices have dropped a record 15.3% in the past year and are now down 17.8% from the peak two years ago. Adding to this not-too rosy report is the knowledge that with so much inventory flooding the market and foreclosures rising, prices are likely to keep falling for a while.
For those who never counted the 2003-2006 house price surge of 52% and do not have to sell their homes any time soon, this may all be moot. But we all need to care about these numbers because the data is pushing lawmakers towards legislation for which we are all going to pay. It was reported this week that Congress is about to approve a massive housing bill, including a refinancing program aimed at rescuing hundreds of thousands of homeowners in danger of foreclosure. According to the New York Times, the legislation is “the most sweeping government overhaul of mortgage financing since the New Deal.” The rescue-refinancing plan would allow distressed borrowers and their lenders to stem losses by allowing qualified owners to refinance into more affordable, 30-year fixed-rate loans with a federal guarantee. (A note here—if the homeowners are so qualified, then why are they in trouble?)
I should probably feel happier about this because it will help the economy recover. The problem is that when you were among the many who did not indulge at the frat-house party, it is a bit annoying to have to take care of those who did and are experiencing the terrible headaches and spins. I am not passing judgment on the partiers—it must have been great fun—but I wish it was not my responsibility to chip in for the Tylenol!
Wednesday, June 25, 2008
Fed Day Off for You
Here we go again-another Federal Open Market Committee meeting that the industry keeps saying is really important. It’s almost like we are begging you to pay attention, pleading, “No really, this time is different!” The good news today is that I am giving you permission to blow off this meeting and just tune out because I do not think that we are going to learn anything important from the Fed action, nor is there likely to be a big surprise on the accompanying statement.
Considering that the economy is in the tank, people are losing jobs, house prices are still falling and the price at the pump has crossed the $4 per gallon threshold, it is hard to believe that the Fed is about to raise short-term interest rates. The conventional wisdom from March through May was that the Fed was dealing with a rattled financial system and shaky economy first and would worry about inflation later. Then on June 3rd, Fed Chief Ben Bernanke implied that later may be now.
He said, “The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”
With that one paragraph, Bernanke shifted financial markets and investors’ perceptions about the Fed’s future intentions. After the June 3rd statement, the fed-funds futures market priced in at least three rate increases by year's end; stocks and bonds tumbled as fear of rate hikes knocked the wind out of the recovery; and in general, investors were thrown into a tizzy. Once cooler minds prevailed -- and an alleged tiny leak to the press by some Fed officials occurred, most agreed that a rate hike was not in the cards today, although futures markets continue to price-in a 43% chance of a ¼-point Fed rate hike at the August meeting.
While you relax and ignore the hullabaloo, we will parse the decision and the accompanying statement, but I really do not believe that the Fed sees inflation as a greater concern than the weak economy. I expect there will be a subtle shift to a neutral bias, allowing the central banks a bit of wiggle room as more data emerges before the next meeting in August. If something different occurs, I’ll let you know.
Considering that the economy is in the tank, people are losing jobs, house prices are still falling and the price at the pump has crossed the $4 per gallon threshold, it is hard to believe that the Fed is about to raise short-term interest rates. The conventional wisdom from March through May was that the Fed was dealing with a rattled financial system and shaky economy first and would worry about inflation later. Then on June 3rd, Fed Chief Ben Bernanke implied that later may be now.
He said, “The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation. We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”
With that one paragraph, Bernanke shifted financial markets and investors’ perceptions about the Fed’s future intentions. After the June 3rd statement, the fed-funds futures market priced in at least three rate increases by year's end; stocks and bonds tumbled as fear of rate hikes knocked the wind out of the recovery; and in general, investors were thrown into a tizzy. Once cooler minds prevailed -- and an alleged tiny leak to the press by some Fed officials occurred, most agreed that a rate hike was not in the cards today, although futures markets continue to price-in a 43% chance of a ¼-point Fed rate hike at the August meeting.
While you relax and ignore the hullabaloo, we will parse the decision and the accompanying statement, but I really do not believe that the Fed sees inflation as a greater concern than the weak economy. I expect there will be a subtle shift to a neutral bias, allowing the central banks a bit of wiggle room as more data emerges before the next meeting in August. If something different occurs, I’ll let you know.
Tuesday, June 24, 2008
Preparing for the Worst
Headlines announced “the latest sign of bloodletting on Wall Street,” as many financial companies started slashing their headcount. Citigroup, Goldman Sachs and Morgan Stanley are among the largest firms mentioned in the press, but in this environment, no employee should feel safe. Given the slowdown in the US economy, there are steps you should take right now to prepare for the worst, while hoping for the best.
Step 1: Accumulate a healthy cash account: I always recommended that people keep an emergency reserve fund that is invested in cash or cash equivalents. The amounts that are quoted in the industry are anywhere between 3-6 months of living expenses, but when the economy hits the skids, it would be preferable to keep a little extra money set aside, because if you were to lose your job, it may take longer to find a new one in a tight labor market.
Step 2: Always be networking: This may seem onerous to shy people, but the ability for you to create a network of professionals to whom you could turn is helpful if you were to suddenly find yourself jobless. Even if you do not need a job today, maintaining your connections may prove invaluable in the future. If you have created and nurtured these relationships when times were good, chances are that your calls will be returned when the economic tide turns.
Step 3: Work Hard: I was with a big mucky-muck from a large investment bank and here is a direct quote: “When I have to cut 20 people from my department, I start with those who don’t work so hard. You know -- the ones that think that working 9-5 is acceptable and that doing the job is the same thing as getting the job done.” He said that the best thing about a “RIF” (reduction in force) is that it allows employers to clean house. My takeaway is that now might not be the best time to skate along. When times are tough and managers have to make difficult decisions, they are apt to keep those employees who they value as good worker-bees.
Step 4: Loyalty is important…to a point: “John” was asked to interview for a new job a few years ago and felt guilty about doing so, noting that he did not want to seem disloyal. My friend and I convinced him to go on the interview, if only to understand his worth in the marketplace. After four meetings with the prospective employer, he said, “Here I was worried about loyalty to ABC firm, when XYZ is willing to pay me 40% more!” Not only did he take the new job, but a year after he left, his old company shut down his entire unit. How’s that for loyalty?
Step 1: Accumulate a healthy cash account: I always recommended that people keep an emergency reserve fund that is invested in cash or cash equivalents. The amounts that are quoted in the industry are anywhere between 3-6 months of living expenses, but when the economy hits the skids, it would be preferable to keep a little extra money set aside, because if you were to lose your job, it may take longer to find a new one in a tight labor market.
Step 2: Always be networking: This may seem onerous to shy people, but the ability for you to create a network of professionals to whom you could turn is helpful if you were to suddenly find yourself jobless. Even if you do not need a job today, maintaining your connections may prove invaluable in the future. If you have created and nurtured these relationships when times were good, chances are that your calls will be returned when the economic tide turns.
Step 3: Work Hard: I was with a big mucky-muck from a large investment bank and here is a direct quote: “When I have to cut 20 people from my department, I start with those who don’t work so hard. You know -- the ones that think that working 9-5 is acceptable and that doing the job is the same thing as getting the job done.” He said that the best thing about a “RIF” (reduction in force) is that it allows employers to clean house. My takeaway is that now might not be the best time to skate along. When times are tough and managers have to make difficult decisions, they are apt to keep those employees who they value as good worker-bees.
Step 4: Loyalty is important…to a point: “John” was asked to interview for a new job a few years ago and felt guilty about doing so, noting that he did not want to seem disloyal. My friend and I convinced him to go on the interview, if only to understand his worth in the marketplace. After four meetings with the prospective employer, he said, “Here I was worried about loyalty to ABC firm, when XYZ is willing to pay me 40% more!” Not only did he take the new job, but a year after he left, his old company shut down his entire unit. How’s that for loyalty?
Monday, June 23, 2008
Three months
Three months can feel like an eternity or can fly by in no time. For investors, the past ninety days started with extreme fear, followed by relief that the painful period had passed; to euphoria that maybe there would no need to feel the enormity of the March lows again; to resignation that in fact, most often markets revisit painful periods before moving forward.
Friday’s drubbing brought stocks around the globe back in time to March of this year, when Bear Sterns was nearing collapse. The Dow Jones Industrial Average settled at 11,842 on Friday, the first close under 12,000 since March 17th and perilously close to the March 10th low of 11,740. The Dow and the S&P 500 are now down over 10% year-to-date.
What brought about this test of the lows? To some extent, there has not been a lot of fresh news, but financial companies have continued to tell us that the unwinding of the credit crisis is claiming more victims. At first, it was the big investment banks, which culminated in the Bear Sterns sale to J.P. Morgan, while last week, there were worries about smaller regional banks that have extended credit to less-than-stellar borrowers. Stocks will have a hard time recovering until this confessional period is complete.
On top of the financial sector kiss-and-tell over the past three months, the period has also seen a renewed sense that inflation is on the move. Between oil and food spikes, it is understandable that consumers would come under pressure. But the big question with regard to inflation is what the world’s central banks intend to do about it. Thus far, the European Central Bank (ECB) has responded to headline inflation with tight policy—unlike the Fed which cut rates from 5.25% to 2%, the ECB has held its target rate at 4% since the credit crisis erupted last August, because of concerns about inflation.
Meanwhile, the US Fed has pursued an easy monetary policy because the economy is weak and the financial system is still in distress. The problem is that when the central bank's benchmark rate is well below the current inflation rate, it can be a recipe for disaster. The reason is that it encourages people to borrow today, invest in something that's going up in price, and pay back the loan in devalued dollars. Yet the Fed is not convinced that inflation is a long-term problem and will likely recede as demand falls. That’s why Fed bankers are left with the policy of talking about inflation, rather than doing anything about it.
To some extent, the outcome of this re-test period rests on the actions of central banks: if they tighten too much and are wrong about inflation, it could choke off economic recovery and things could get ugly. Conversely, if the Fed’s view is correct---that pervasive and widespread inflation is impossible when wages are stagnant, then inflation will moderate as financial companies complete their “’fessing up” on losses, allowing the system to recover from this unpleasant de-leveraging process. That would amount to stocks passing this current test and could resume the grind higher.
Friday’s drubbing brought stocks around the globe back in time to March of this year, when Bear Sterns was nearing collapse. The Dow Jones Industrial Average settled at 11,842 on Friday, the first close under 12,000 since March 17th and perilously close to the March 10th low of 11,740. The Dow and the S&P 500 are now down over 10% year-to-date.
What brought about this test of the lows? To some extent, there has not been a lot of fresh news, but financial companies have continued to tell us that the unwinding of the credit crisis is claiming more victims. At first, it was the big investment banks, which culminated in the Bear Sterns sale to J.P. Morgan, while last week, there were worries about smaller regional banks that have extended credit to less-than-stellar borrowers. Stocks will have a hard time recovering until this confessional period is complete.
On top of the financial sector kiss-and-tell over the past three months, the period has also seen a renewed sense that inflation is on the move. Between oil and food spikes, it is understandable that consumers would come under pressure. But the big question with regard to inflation is what the world’s central banks intend to do about it. Thus far, the European Central Bank (ECB) has responded to headline inflation with tight policy—unlike the Fed which cut rates from 5.25% to 2%, the ECB has held its target rate at 4% since the credit crisis erupted last August, because of concerns about inflation.
Meanwhile, the US Fed has pursued an easy monetary policy because the economy is weak and the financial system is still in distress. The problem is that when the central bank's benchmark rate is well below the current inflation rate, it can be a recipe for disaster. The reason is that it encourages people to borrow today, invest in something that's going up in price, and pay back the loan in devalued dollars. Yet the Fed is not convinced that inflation is a long-term problem and will likely recede as demand falls. That’s why Fed bankers are left with the policy of talking about inflation, rather than doing anything about it.
To some extent, the outcome of this re-test period rests on the actions of central banks: if they tighten too much and are wrong about inflation, it could choke off economic recovery and things could get ugly. Conversely, if the Fed’s view is correct---that pervasive and widespread inflation is impossible when wages are stagnant, then inflation will moderate as financial companies complete their “’fessing up” on losses, allowing the system to recover from this unpleasant de-leveraging process. That would amount to stocks passing this current test and could resume the grind higher.
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