Ah 1997…it seems like only yesterday when Jewel was on the Billboard charts, Frasier dominated network television, the movie Titanic swept the Academy Awards and the dot-com bubble had not yet fully inflated. 1997 was also the last time that stocks were at these horrifying low levels. Yesterday investors continued to sell stocks as fears mounted that commercial real estate would be the next shoe to drop as the economic outlook darkens.
The S&P 500 plunged to its lowest level since 1997, sliding 6.7% to 752.44, under the low point of 776.76 reached during the bear market nadir in October, 2002. The index extended its 2008 year to date loss to 49% and is poised for the worst annual decline in its 80-year history. The Dow Jones Industrial Average sank 444.99 points, or 5.6%, to 7,552.29. The Nasdaq Composite decreased 5.1% to 1,316.12. Financial companies led the way again, with Citigroup down another 26% to $4.71 (yes, that’s Citi under a fin!), JPMorgan Chase lost 18% to $23.38, Bank of America tumbled 13.86% to $11.25 and Morgan Stanley was off 10.24% to $9.20.
Yesterday’s catalyst was more of the same—data that indicated that we are in a bruising recession. Weekly jobless claims approached the highest level since 1982; the index of leading economic indicators fell for a third time in four months; and the Federal Reserve said manufacturing in the Philadelphia area shrank at the fastest pace in 18 years. As investors rushed for the exits, they poured money into US Treasuries, driving prices to historic highs. The yield on the two-year note fell below 1% for the first time, while ten year yields fell to 3%...my friends, you can now lend the US government money for ten years and earn a whopping 3% for your troubles!
A client asked me, “How do you know when to just get out?” My answer is that when fear is shaking you to the core and it feels like all confidence is lost is usually when long term investors should be dipping their toes into the water. I am not suggesting that you sell the farm (how much could you actually get anyway?) and jump into stocks, but there are some compelling values out there. It is likely to remain pretty messy in this period, but that does not mean that you should throw in the towel on capitalism. Gather your thoughts, chug a little Pepto Bismol and don’t run for cover just yet.
Friday, November 21, 2008
Thursday, November 20, 2008
Slip-Sliding Away
Remember when we thought the financial system was on the precipice of disaster? Well, fears of widespread systemic failure may have passed, but investors are now worried about the economy—big time. It seems that all of the TARPs, EESAs, rate reductions and bailout plans have left us exactly where we were a month ago—at the depths of market lows with little confidence that relief is coming.
Despite massive government interventions, stock prices fell to 5 1/2 year lows yesterday as fears of a deep recession plague the investment horizon. The Dow plummeted 427.47 points, or 5.1%, to 7997.28, the lowest close since March 31, 2003; the S&P fell 6.1% to end at 806.58, well-below this year’s previous low of 840 and on pace for its worst year since 1931; the NASDAQ was tumbled 6.5% at 1386.42; and the small-stock Russell 2000 fell 7.8% to 412.38. I don’t know how many days that I have written “ouch” in response to these types of numbers. Suffice to say that the pain is actually becoming less acute and more chronic, as we all get used to these massive sell-offs.
Some said deflation was the catalyst for the selling—the Consumer Price Index fell by 1% in October, the biggest one-day drop in the 61-year history of the index. I don’t buy the deflation explanation as the reason for the fall. I think that investors are realizing that things will not turn around any time quickly and as a result, many are throwing in the towel and waiting it out. Maybe that’s why Henry Paulson essentially took a mulligan on the TARP and will let the next administration play out the round.
It’s probably a safe bet that the government wishes that it could go back in time and save Lehman Brothers – indeed, it was that company’s failure that sparked the massive slide. Since then, the Dow has plunged 30%. Yesterday, selling in the financial sector once again led the way. Citigroup in particular ran into a brick wall, falling 23.4% to $6.40, a 13-year low, after announcing that it will purchase the final $17.4 billion of assets still in structured investment vehicles; Bank of America dropped $2.13, or 14%, to $13.06; and Goldman Sachs fell $6.85, or 11%, to $55.18, the lowest close since the company's initial public offering in 1999.
Additionally, there was selling pressure in some of the larger insurers, many of which are busy buying banks so that they can tap the TARP. Lincoln National plunged 40%, the steepest decline in the S&P 500, to $7.31, after saying that it expects a charge of as much as $300 million because of declining equity markets last month; Hartford Financial dropped 24%; and good ol’ AIG fell 15%. Adding market woes is the uncertain fate of the automakers -- GM fell 9.7% to its lowest price since the 1940s, while Ford lost 25%.
Here is what I think is going on: everyone is waiting for some good news and it’s just not there. Every time we turn around, there is more disappointing data about housing or retail sales or confidence. At some point, people are going to examine the valuations of companies and realize that not every single one of them should be tossed aside. Until then, we are slip-sliding away.
Despite massive government interventions, stock prices fell to 5 1/2 year lows yesterday as fears of a deep recession plague the investment horizon. The Dow plummeted 427.47 points, or 5.1%, to 7997.28, the lowest close since March 31, 2003; the S&P fell 6.1% to end at 806.58, well-below this year’s previous low of 840 and on pace for its worst year since 1931; the NASDAQ was tumbled 6.5% at 1386.42; and the small-stock Russell 2000 fell 7.8% to 412.38. I don’t know how many days that I have written “ouch” in response to these types of numbers. Suffice to say that the pain is actually becoming less acute and more chronic, as we all get used to these massive sell-offs.
Some said deflation was the catalyst for the selling—the Consumer Price Index fell by 1% in October, the biggest one-day drop in the 61-year history of the index. I don’t buy the deflation explanation as the reason for the fall. I think that investors are realizing that things will not turn around any time quickly and as a result, many are throwing in the towel and waiting it out. Maybe that’s why Henry Paulson essentially took a mulligan on the TARP and will let the next administration play out the round.
It’s probably a safe bet that the government wishes that it could go back in time and save Lehman Brothers – indeed, it was that company’s failure that sparked the massive slide. Since then, the Dow has plunged 30%. Yesterday, selling in the financial sector once again led the way. Citigroup in particular ran into a brick wall, falling 23.4% to $6.40, a 13-year low, after announcing that it will purchase the final $17.4 billion of assets still in structured investment vehicles; Bank of America dropped $2.13, or 14%, to $13.06; and Goldman Sachs fell $6.85, or 11%, to $55.18, the lowest close since the company's initial public offering in 1999.
Additionally, there was selling pressure in some of the larger insurers, many of which are busy buying banks so that they can tap the TARP. Lincoln National plunged 40%, the steepest decline in the S&P 500, to $7.31, after saying that it expects a charge of as much as $300 million because of declining equity markets last month; Hartford Financial dropped 24%; and good ol’ AIG fell 15%. Adding market woes is the uncertain fate of the automakers -- GM fell 9.7% to its lowest price since the 1940s, while Ford lost 25%.
Here is what I think is going on: everyone is waiting for some good news and it’s just not there. Every time we turn around, there is more disappointing data about housing or retail sales or confidence. At some point, people are going to examine the valuations of companies and realize that not every single one of them should be tossed aside. Until then, we are slip-sliding away.
Wednesday, November 19, 2008
Three Blind Mice
There they were yesterday, testifying before a Senate panel -- Ford's Alan Mulally, Chrysler's Robert Nardelli and GM's Richard Wagoner. They were on bent knees, arguing that without $25 billion, the US auto industry would die forever. As I watched them in their natty suits, crying the blues, I thought that they are our own version of “Three Blind Mice,” the leaders of an industry that seemed blind to improving innovation and the challenges of globalization.
Two of our mice say that their companies, GM and Chrysler, are on the brink of disaster and without government handouts, they will fail. Perhaps you are sick of hearing about corporate failures and their disastrous effect on the broader economy—I know that I am, but this is where we are -- no amount of wishing it weren’t so will get us out of this mess, so let’s talk about what we can do now.
The first question to ask is whether a bankruptcy might help the auto industry get its act together after 25 years of fighting the larger trends of globalization (which created enormous competition, especially in the form of cheaper labor) and fuel efficiency/smaller cars. The pro-bankruptcy camp cites the ability of the airline industry to file, reorganize and renegotiate long-term contracts (slashing pension plans and health benefits for the large union employee base). Many airlines successfully re-emerged from bankruptcy stronger and better able to compete. The bankruptcy advocates note that handing over $25 billion to the Three Blind Mice would lead to the same conclusion—bankruptcy, but in the bailout scenario, taxpayers lose $25 billion for the same outcome.
Those who support helping the automakers with government aid note that the industry is vital to the national interest as both an employer and as the base of the nation’s manufacturing sector. GM Chairman and Chief Executive Richard Wagoner said that "This is about much more than just Detroit, it's about saving the U.S. economy from a catastrophic collapse."
On this point, it is important to understand where we are in the economic cycle. In more normal circumstances (i.e. if we were simply experiencing a mild recession), I would probably be in the “let them fail” crowd, but these are not normal circumstances. The economy is fragile from the effects of the housing and credit busts and after already losing 1.2 million non-farm jobs this year, my concern is that the failure of GM and Chrysler (it looks like Ford is going to survive) may simply be too much for the economy and perhaps of greater importance, the national psyche, to handle.
It seems reasonable to help the Three Blind Mice see their way through for another couple of quarters, so that they can restructure accordingly. This may mean a government-orchestrated bankruptcy down the line, whereby the companies can reorganize and potentially survive. This middle ground might mitigate some of the obvious near-term economic ripple effects, while allowing the Three Blind Mice to see their way through the crisis.
Two of our mice say that their companies, GM and Chrysler, are on the brink of disaster and without government handouts, they will fail. Perhaps you are sick of hearing about corporate failures and their disastrous effect on the broader economy—I know that I am, but this is where we are -- no amount of wishing it weren’t so will get us out of this mess, so let’s talk about what we can do now.
The first question to ask is whether a bankruptcy might help the auto industry get its act together after 25 years of fighting the larger trends of globalization (which created enormous competition, especially in the form of cheaper labor) and fuel efficiency/smaller cars. The pro-bankruptcy camp cites the ability of the airline industry to file, reorganize and renegotiate long-term contracts (slashing pension plans and health benefits for the large union employee base). Many airlines successfully re-emerged from bankruptcy stronger and better able to compete. The bankruptcy advocates note that handing over $25 billion to the Three Blind Mice would lead to the same conclusion—bankruptcy, but in the bailout scenario, taxpayers lose $25 billion for the same outcome.
Those who support helping the automakers with government aid note that the industry is vital to the national interest as both an employer and as the base of the nation’s manufacturing sector. GM Chairman and Chief Executive Richard Wagoner said that "This is about much more than just Detroit, it's about saving the U.S. economy from a catastrophic collapse."
On this point, it is important to understand where we are in the economic cycle. In more normal circumstances (i.e. if we were simply experiencing a mild recession), I would probably be in the “let them fail” crowd, but these are not normal circumstances. The economy is fragile from the effects of the housing and credit busts and after already losing 1.2 million non-farm jobs this year, my concern is that the failure of GM and Chrysler (it looks like Ford is going to survive) may simply be too much for the economy and perhaps of greater importance, the national psyche, to handle.
It seems reasonable to help the Three Blind Mice see their way through for another couple of quarters, so that they can restructure accordingly. This may mean a government-orchestrated bankruptcy down the line, whereby the companies can reorganize and potentially survive. This middle ground might mitigate some of the obvious near-term economic ripple effects, while allowing the Three Blind Mice to see their way through the crisis.
Tuesday, November 18, 2008
Adios Carrie Bradshaw
Watching re-runs of “Sex and the City” seems so retro amid the financial melt-down of 2008. The program that debuted in 1998 and concluded in 2004, followed the lives of four single women in New York City, as they obsessed about men (well, that’s actually not retro, that is thoroughly now) and spent hundreds of dollars on shoes. The program that put shoemakers Manolo Blahnik and Jimmy Choo on the map (see Season 6, Episode 9: A Woman's Right to Shoes, original air date 8/17/03) now seems positively passé as Americans alter their spending patterns to meet the new reality of a recession.
Last week, the Commerce Department reported that retail sales fell by 2.8% in October, surpassing the old mark of a 2.65% drop in November 2001 in the wake of the terrorist attacks. It was the largest drop on record and the fourth consecutive monthly decline. The weakness in retail sales was led by a 5.5% plunge in autos, the biggest drop since August 2005. Carmakers said that last month was the worst in 17 years as potential buyers were spooked by the financial crisis and tightening credit conditions. Even without cars, sales of everything from furniture to clothing dropped off a cliff. Excluding autos, retail sales fell by 2.2%, also a record decline, underscoring the widespread weakness. Sales at general merchandise stores like Wal-Mart and large department stores fell by 0.4%, while sales at specialty clothing stores (the kinds that the women in “Sex and the City” used to frequent) were down a bigger 1.4%.
There were only slight glimmers in all of the gloomy data: mega-discounter Wal-Mart has fared better than most as its massive size allows it to pressure vendors for even cheaper prices. According to the International Council of Shopping Centers, for every dollar spent on goods other than cars in the US over the last twelve months, 8.2 cents went to Wal-Mart or its warehouse sister store, Sam’s Club. That is a staggering market share, but it’s certainly not surprising that with house prices in the toilet, the stock market down 40% and 1.2 million jobs lost in 2008, that consumers are in full-fledged retreat. These folks are seeking the cheapest possible alternatives and thus far, they are finding those values at Wal-Mart.
Here is another glimmer of hope: the data confirms that consumers have woken up from their drunken stupor and have FINALLY stopped spending. With all due respect to the characters on Sex and the City, one has to wonder how a struggling freelance writer like Carrie Bradshaw could afford the $495 pair of shoes. If Carrie were with us today, she would be paying down debt and saving money to rebuild her balance sheet. Of course that is not the stuff of a particularly entertaining series, but it would help curb the excesses of the past two decades and allow our start to take control over her financial destiny. The never-to-be-produced sequel to “Sex and the City” would be “Parsimony across America”…not too catchy, but indeed, the bitter medicine that will help cure the nation’s economy. Adios Carrie Bradshaw!
Last week, the Commerce Department reported that retail sales fell by 2.8% in October, surpassing the old mark of a 2.65% drop in November 2001 in the wake of the terrorist attacks. It was the largest drop on record and the fourth consecutive monthly decline. The weakness in retail sales was led by a 5.5% plunge in autos, the biggest drop since August 2005. Carmakers said that last month was the worst in 17 years as potential buyers were spooked by the financial crisis and tightening credit conditions. Even without cars, sales of everything from furniture to clothing dropped off a cliff. Excluding autos, retail sales fell by 2.2%, also a record decline, underscoring the widespread weakness. Sales at general merchandise stores like Wal-Mart and large department stores fell by 0.4%, while sales at specialty clothing stores (the kinds that the women in “Sex and the City” used to frequent) were down a bigger 1.4%.
There were only slight glimmers in all of the gloomy data: mega-discounter Wal-Mart has fared better than most as its massive size allows it to pressure vendors for even cheaper prices. According to the International Council of Shopping Centers, for every dollar spent on goods other than cars in the US over the last twelve months, 8.2 cents went to Wal-Mart or its warehouse sister store, Sam’s Club. That is a staggering market share, but it’s certainly not surprising that with house prices in the toilet, the stock market down 40% and 1.2 million jobs lost in 2008, that consumers are in full-fledged retreat. These folks are seeking the cheapest possible alternatives and thus far, they are finding those values at Wal-Mart.
Here is another glimmer of hope: the data confirms that consumers have woken up from their drunken stupor and have FINALLY stopped spending. With all due respect to the characters on Sex and the City, one has to wonder how a struggling freelance writer like Carrie Bradshaw could afford the $495 pair of shoes. If Carrie were with us today, she would be paying down debt and saving money to rebuild her balance sheet. Of course that is not the stuff of a particularly entertaining series, but it would help curb the excesses of the past two decades and allow our start to take control over her financial destiny. The never-to-be-produced sequel to “Sex and the City” would be “Parsimony across America”…not too catchy, but indeed, the bitter medicine that will help cure the nation’s economy. Adios Carrie Bradshaw!
Monday, November 17, 2008
Priority Number One
As the global recession gathers steam, pundits are opining how the Obama administration will address priority number one, the economy. Clearly over the next sixty-plus days before the inauguration, President-elect Obama and his advisors will be busying themselves with analyzing the economic options that lie ahead for the nation.
Some of Obama’s team from President Clinton’s tenure may be noting something that I have considered: perhaps in retrospect, the US economy has been in a bear market for over ten years, starting with the 1997 Asian crisis and exacerbated by a deflationary spiral. Considering that bear markets often have strong bull spikes along the way, this would not be a crazy notion. If so, then the 2008 credit crunch and asset sell-off does not constitute the beginning of the process, but the final salvo that puts an end to global deflation and asset bubbles. Additionally, it would also argue for a continuation of the unprecedented global government intervention that is occurring under President Bush.
Regardless of where we have been, one thing is clear: the American people want action, but what form might that take? It looks like a centrist tone will prevail as the new administration faces the giant hurdles of a rapidly deteriorating economy and the overwhelming effect of the previous administration’s actions on the nation’s balance sheet. The effect of both of these factors should focus the President-elect’s attention on addressing economic concerns and could impede or postpone progress on addressing other long-term goals, like education and health care.
If the revival of the US growth engine is numero uno, then we should expect a significant stimulus plan immediately. Some are talking about $200 billion set aside to satisfy Mr. Obama’s desire to provide the middle class with tax cuts. For high wage earners, expect that the top tax bracket will increase to 39.6% and that capital gains and dividend rates will return to 20% from the current 15% level. The additional revenue raised from these increases is likely to help cover Alternative Minimum tax relief. On the good news side of the ledger for wealthier individuals, the plan would also extend the 2009 rates for estate taxation ($3.5 million indexed per spouse exemption and a 45% top rate). Many are also proposing infrastructure investment and direct grants to states for foreclosure mitigation.
What’s all of this going to cost? Estimates are for deficits to run from $1.5-$2 trillion next year, or at least 10% of the nation’s GDP. For deficit hawks, some of whom are among Mr. Obama’s closest advisors, this number is staggering. The rationalization for the massive spending is that government issuance of debt to help recapitalize the shaky financial foundation, is not spending, but should be seen as a necessary and massive re-fi. That does not mean that longer term interest rates will react as such—expect them to rise in reaction to these kinds of deficits. In the economic triage that is occurring, there is not much time to worry about those issues right now as we muddle through this unchartered territory. Bottom line: be prepared for the economy to be the number one issue for quite some time.
Some of Obama’s team from President Clinton’s tenure may be noting something that I have considered: perhaps in retrospect, the US economy has been in a bear market for over ten years, starting with the 1997 Asian crisis and exacerbated by a deflationary spiral. Considering that bear markets often have strong bull spikes along the way, this would not be a crazy notion. If so, then the 2008 credit crunch and asset sell-off does not constitute the beginning of the process, but the final salvo that puts an end to global deflation and asset bubbles. Additionally, it would also argue for a continuation of the unprecedented global government intervention that is occurring under President Bush.
Regardless of where we have been, one thing is clear: the American people want action, but what form might that take? It looks like a centrist tone will prevail as the new administration faces the giant hurdles of a rapidly deteriorating economy and the overwhelming effect of the previous administration’s actions on the nation’s balance sheet. The effect of both of these factors should focus the President-elect’s attention on addressing economic concerns and could impede or postpone progress on addressing other long-term goals, like education and health care.
If the revival of the US growth engine is numero uno, then we should expect a significant stimulus plan immediately. Some are talking about $200 billion set aside to satisfy Mr. Obama’s desire to provide the middle class with tax cuts. For high wage earners, expect that the top tax bracket will increase to 39.6% and that capital gains and dividend rates will return to 20% from the current 15% level. The additional revenue raised from these increases is likely to help cover Alternative Minimum tax relief. On the good news side of the ledger for wealthier individuals, the plan would also extend the 2009 rates for estate taxation ($3.5 million indexed per spouse exemption and a 45% top rate). Many are also proposing infrastructure investment and direct grants to states for foreclosure mitigation.
What’s all of this going to cost? Estimates are for deficits to run from $1.5-$2 trillion next year, or at least 10% of the nation’s GDP. For deficit hawks, some of whom are among Mr. Obama’s closest advisors, this number is staggering. The rationalization for the massive spending is that government issuance of debt to help recapitalize the shaky financial foundation, is not spending, but should be seen as a necessary and massive re-fi. That does not mean that longer term interest rates will react as such—expect them to rise in reaction to these kinds of deficits. In the economic triage that is occurring, there is not much time to worry about those issues right now as we muddle through this unchartered territory. Bottom line: be prepared for the economy to be the number one issue for quite some time.
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