China’s economy bad, inflation worse, markets miserable… what it means for U.S. investors
Are stocks cheap? Three market metrics provide a historic answer
Credit freeze thaws, markets rejoice… why it’s happening, and how far we’ve got to go
Dollar booms… why global investors are racing to I.O.U.S.A.’s fabled currency
Byron King with an “imminent” problem no one’s talking about
First, a nasty earthquake … then, a forced slowdown for the Beijing Games. And of course, there’s this:
Now the Chinese are facing a slowdown from an “uncertain and volatile” international climate, their government warned over the weekend while dispersing the latest GDP numbers. The poor Chinese — they’ve slowed to a measly 9% growth — a five-year low. Inflation is at 7% annually… food prices alone have gone up 17%.
“As China slows,” notes Chris Mayer, “that will have a big impact on commodity markets. And it may also be a bellwether for the rest of the emerging markets. It’s a development we’ll watch closely when our businesses report earnings over the next month. We have several companies whose international operations were a big part of the appeal and were growing much faster than the rest of the company.
“I still believe overseas markets will grow faster than the more mature Western markets and that we’ll be glad we have exposure to these markets over the long haul.”
Back here in I.O.U.S.A., approximately one-third of the S&P 500 will report third-quarter earnings in the next five days. Of course, it’ll be interesting to see how your favorite companies have weathered the storm. But generally speaking, stocks are getting cheap.
This morning, the broad U.S. market trades at an average 11 times the earnings over the last 12 months. That’s a 44% discount to the average multiple in the last 20 years.
And of the 2,000 stocks Morningstar tracks, the average trades at 72% of its “fair value” estimate. That’s the cheapest they’ve been since Morningstar starting keeping track in 2001.
“Stocks are now at the same valuations that existed at the 1990 bear market low,” suggests John Hussman of the Hussman Funds. Looking at “price-to-peak earnings ratios”, Hussman asserts the S&P 500 is trading for 10.7 times earnings right now — well below the historic average of 14 and the lowest since the early 1980s.
Hussman has been arguing since the late 1990s — with a short breather in 2002-2003 — that stocks were overpriced and likely to disappoint over the long term. Today he’s singing a different tune.
“Investors will berate themselves for the panic they are now exhibiting. My impression is that investors who abandon properly diversified and carefully planned investments here, with the stock market already down by nearly half, will regret it as the emotionally panicked decision that wrecked their retirement prospects.”
“Buyer beware”, however, we would still caution. This is still a historic sell-off. And during the ’70s — when Buffett felt like an “oversexed guy in a whorehouse” — the average price-to-peak multiple was 7 times earnings. There may be some room on the downside yet. “Better to miss the first 20% of a bull market,” the old-timers say, “than try to time the bottom.”
Still, the glowing endorsement from Warren Buffett on Friday helped U.S. equities end the week on a positive note. Despite record-breaking swings, the Dow ended up 4.8% — its best week since 2003. The S&P 500 fared equally well. The Nasdaq managed to rise 3.6%.
The S&P 500 has moved up or down at least 1% in 10 of October’s 13 trading sessions. Should it keep this up, it’ll be the most volatile month since 1929.
The London Interbank Offered Rate (Libor) continued to ease this morning. The overnight rate has fallen 16 basis points since Friday, to 1.51%. That’s a world better than the record 6.88% rate banks were charging each other for immediate cash on Oct. 3.
You’ll notice that’s right at the Fed’s target, as well, the first time that’s happened in over a month. But the frozen credit market is far from thawed. Three-month Libor, despite dropping 36 bps over the last week, is still at 4%.
Nevertheless, the credit market is improving, and the Dow jumped up 150 points at the open this morning in celebration.
During the “crisis,” the American IPO market has completely dried up. Not one company has successfully listed over the last 10 weeks. That’s the longest streak since at least 1980, when Thomson Reuters started keeping track.
Only three of the 27 IPOs that have floated in 2008 closed Friday above their initial listing price. Ironically, Visa — the largest IPO ever — is one of the three
We’ve got a few more massive government interventions to report this morning:
Mega-bank ING got a $13 billion boost from the Dutch government. Dutch leaders will get shares in return, with a nice 8.5% coupon. If ING ever wants them back, it’ll have to be at 150% of the government purchase price.
South Korea launched a huge bailout measure of its own. The government announced over the weekend it will guarantee $100 billion in banking debts and dedicate another $30 billion to stabilize markets. For South Korea’s mere $970 billion economy, that’s a ton of money.
The South Koreans are injecting U.S. dollars, not won. The South Korean currency is down 30% versus the dollar this year — 9% on Friday alone.
The dollar index shot up a full point, to 82.7, on word of the ING bailout and other credit stress in the eurozone.
Before you get too jazzed about your paper currency, consider this from Warren Buffett’s Op-Ed piece in The New York Times on Friday:
“Today, people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.”
Gold rebounded from its slump Friday and rose $20 over the weekend. But this morning, dollar strength is pushing it back to last week’s lows, now around $790 an ounce.
Light sweet crude rose over the weekend, too. It’s back up to $74 from Friday’s low of $69.
OPEC ministers from Algeria, Libya, Iran and Venezuela have already called for drastic production cuts when OPEC meets this Thursday. Most pundits predict at least a 1-million-barrel-per-day production cut, or a little over 1%.
The world’s friendliest cartel currently controls about 40% of the world’s oil.
Last, our Byron King offers this bold forecast regarding what may be “one major issue within the next 24 months.”
“The headlines will scream,” Byron begins, “‘Power Failures, Price Spikes Plague Northeast U.S.'” And the same thing will also hit the Western U.S. And the Southeast U.S. And parts of the Midwest.
“Do you remember the power failure of Aug. 14, 2003? Almost the entire Northeast U.S. went dark, except it occurred in the middle of the day. The effects were immediate on over 50 million people in the U.S. and Canada.
“Looking back, the utility companies got the power back up and running, right? And the experts investigated the origins of the problem, right? The people who know all about power grids fixed the problem, right? It could not happen again, right? The U.S. power grid has ample electricity-generating capacity, right? And there’s plenty of transmission to move power from one region to another, right?
“Few utilities or their executives want to take political, regulatory, technical or financial risks. Hence, the entire long-range planning cycle has broken down. It’s almost impossible to decide what to build, and at what scale. Costs are exploding, particularly for new construction. It’s safe to say that most power plant construction cost projections have doubled within the past 18 months. The prospect of fast-changing environmental regulations also adds to the uncertainty. No one wants to build a power plant and learn in five or 10 years or so that environmental regulations are going to shut it down.
“So you might not see it in your daily life — not yet, anyhow — but the power industry is currently paralyzed by the uncertainty of lopsided risks. And as old power plants age and go off stream, there will be less and less reserve power. Costs are going to rise. And reliability will fall. It’s inevitable.”
In the inbox today… Has there been an asylum escape we didn’t hear about?
“Thanks to your greedy hedge fund friends,” writes a reader, “and the stupidity of SEC Commissioner Mr. Cox, many good companies are being destroyed. This is costing thousands their jobs, as well as their retirements. In fact, this will inevitably destroy our capitalistic society and replace it with one totally controlled by government.
“I personally wish those hedge funds responsible the same destiny they have cast for many thousands of innocent families. If I were those managers, I think I would be very careful and watch over my family closely. When you destroy so many companies, homes, and families, someone is sure to take it personally.”
“Buffett is pandering to the public,” suggests another, “to save his investment in Goldman Sachs… a true charlatan at his age and his supposed reputation… how disgusting.”
“Old people, their old-people funds,” writes a third, “foreigners worldwide, etc. etc., etc., are all rushing to lend money to the U.S. Treasury, even at subzero real interest. The Treasury — so it seems to me — is getting lent more money than it knows what to do with. It seems to me that the Treasury is almost the only entity right now that can easily borrow money.
“The Treasury says, in effect: ‘We can lower rates all we want; people will still come along, regardless, and push their money into our face.'”
“What is the economic effect of this Treasury-bond-buying stampede? Does it represent savings — so needed to quell the credit crisis? Or does it represent more civilian money thrown down a rathole in a useless effort to expand credit?”
Cheers… we think,
The 5 Min. Forecast
P.S. Addison is making his way back from the New Hampshire Film Fest this morning.I.O.U.S.A. won the Best Documentary Award there. We’ll have a full report from the man tomorrow. In the meantime, here’s an article from the local paper describing the scene in Portsmouth. Apparently,
P.P.S. Don’t forget, tomorrow morning at 11 a.m. EST, we’ll be broadcasting the first free event in our virtual seminar, the Free Emergency Retirement Recovery Series. You don’t need any special equipment or software… just a spot of free time and a desire to plan your way through these turbulent markets. It’s free… sign up here.