After record-breaking rally, U.S. stocks sell off… Chris Mayer finds value amid the ruins
Another stunning record low for bond yields… when will the madness end?
Just how expensive is the credit crisis bailout… a quick tally of inconceivable proportions
A huge gold call from an unlikely source… Citigroup bets on $2,000?
Plus, an overtime article for your enjoyment… finding the bear market bottom
So… over the holiday, stocks had their best week in 75 years… during the worst bear market of our lifetime. What else would you expect?
The market kicked off December with a classic maneuver from the credit crisis playbook; Sell, sell and then, at the last minute, sell some more. The Dow finished down 7.7%, the 12th biggest percentage loss in the index’s history.
The S&P 500 and Nasdaq got pummeled even worse.
This time, it’s different.
“The stock jockeys didn’t fall all over themselves on the news of an ‘official’ U.S. recession,” notes Chuck Butler, who was anticipating a stock market rally on the National Bureau of Economic Research news. “Most times in the past, by the time the NBER gets around to calling a recession, the recession is either over… or about to be over. So knowing this, I figured the stock jockeys would be seeing the light at the end of the tunnel and rallying. They didn’t.
“Unfortunately, not all recession calls by the NBER have signaled the end of the recession. The recession that started in July 1981 was announced in January 1982 and ended 10 months later, in November 1982. That’s the scenario I’m afraid that we are going to revisit this time.
“I believe fourth-quarter GDP will show a negative 5% figure, so that’s right now, and there’s no way the economy rebounds from a negative 5% drop in a heartbeat… this is going to be a long, protracted recession.”
“Whatever cheer the market enjoyed last week is over,” commented Chris Mayer late in the afternoon yesterday. But we’ve got a long way to go, we suspect. The old-timers will tell you a bear market of this magnitude will end only in “capitulation” — when nobody thinks stocks are a good way to get rich anymore. A rally like last week proves we aren’t even close to that point yet.
“By definition, the bottom of a bear market has to be the point of maximum bearishness,” Barton Biggs wrote yesterday, trying desperately to conjure up a bullish feeling. “Sentiment becomes a crucial indicator.”
Biggs makes some interesting observations, so rather than slow The 5 Min. timer down here, we’ve pasted his short article at the end of today’s 5 Min. Forecast.
In the meantime, we seek value.
“Some of the more astounding values out there right now are in the energy sector,” Mayer continued. “Oil at around $50 a barrel is too cheap. Not many new investments in oil assets make sense at that price. This, at a time when 80% of global production comes from fields discovered before 1970. And those fields are in decline.
“New oil production is expensive. Total, the big French company, says its heavy oil projects in Canada need $90 oil just to deliver a 12.5% return. Its deep-water projects off the coast of Angola require $70. Total’s estimates are not atypical. These kinds of projects — deep-water and heavy oil — are important in staving off stiff decline rates of 9% globally (per the IEA’s estimates). With oil prices where they are, there is no incentive to pursue such projects, and supply will contract surprising quickly.
“Long term, there will be some mega winners in simple oil and gas companies. A few years from now, it would not surprise me at all to see some of the smaller producers and service companies trading at 10 times the prices they are at now — if they can survive this downturn and if they can maintain their independence.”
Oil dropped below $50 a barrel yesterday. It’s now $49 a pop. Funny how crossing the $50 mark in this direction isn’t nearly as gratifying as it was going the other way a few years ago.
Another stunning low today: bond yields. Yields on the 2-, 10- and 30-year U.S. Treasury securities all achieved new record lows yesterday. At one point, “investors” were willing to take a measly 2.6% return to lend the government money for 10 years.
Investors, to an even greater degree than before the holiday, prefer a certain pathetic gain, rather than an uncertain potential mega-loss.
"The likely duration of the financial turmoil is difficult to judge,” said Ben Bernanke yesterday, adding to the stock sell-off and bond-buying spree, “and thus the uncertainty surrounding the economic outlook is unusually large."
Bernanke went on to say the U.S. economy would “probably remain weak for a time.” To combat this weakness — Lord knows the market can’t fix itself — Bernanke said the Fed could buy Treasuries in the open market. And of course, “further reductions from the current federal funds rate… are certainly feasible.”
After Bernanke’s speech in Texas, traders in Chicago gave a 68% chance the Fed will lower its rates by 50 basis points by the end of the year.
In case the turkey and mashed potatoes are still gumming up the works in the office of the chairman of the Federal Reserve, we’ve reproduced this table of inflation-adjusted expense the Fed has thrown at this crisis already:
We wonder how long before Americans storm the Fed, demanding Bernanke’s resignation. Think it can’t happen? Check out Iceland today:
Angry Icelanders outside their central bank in Reykjavik
Further across the Atlantic, the euro unemployment rate shot up to 7.7% in October , said Eurostat. That’s worse than analysts expected and its highest level in two years. Some 12 million souls were jobless last month in the 15 nations that use the euro.
And like I.O.U.S.A., the unemployment scene in the EU will get worse before it gets better. The EU’s executive Commission forecasts an 8.4% unemployment rate for 2009… an additional 2 million euros without a job. And if you’re looking for work, you might want to put Spain at the bottom of the list. Unemployment there is 12.8%, the highest in the eurozone.
The U.S. Labor Dept. will print its latest jobs report this Friday. The consensus expects our unemployment rate to bump up to 6.7-6.8%. As with every other data point over the last month, we are bracing for worse.
Take yesterday’s ISM manufacturing index: Manufacturing activity in the U.S. fell to a 26-year low in November, the group reported, worse than the consensus forecast. The ISM’s index fell from 38.9 to 36.2 during the month, far greater than the one point drop anticipated by the Street and the worst level since 1982.
Like similar indexes, a score below 50 on the ISM’s manufacturing index signifies contraction. Thus, a score of 36 puts U.S. manufacturing in the… ummm… crapper.
One other interesting note from the ISM: Its gauge of prices for raw materials paid by manufacturers plummeted 11.2 points, to 25.5, its lowest score since 1949. It’s this kind of data that makes Ben Bernanke think cutting rates to 0.25% is a “feasible” option.
But stocks are desperately trying to rebound today, thanks in part to GE. The mother of all blue chips issued a bold forecast today, calling for a return to double-digit earnings growth by 2010 and reiterating its promise to keep its dividend unchanged through 2009. While GE issued more cautious guidance for the short term, traders pumped up GE shares 3% pre-market.
And since GE makes, uhh, everything, the rest of the market seems to be taking comfort in its anticipated stability. The Dow managed to open up 150 points this morning.
Per usual, the dollar has risen while equities have fallen. The dollar index popped about half a point during yesterday’s session, to a high of 87.2.
But we’re starting to see these greenback rallies quickly mired by increasingly dismal economic data. The dollar index has already given back yesterday’s gains, for example, and goes for 86.6 as we write.
Despite dollar strength, gold could rise as high as $2,000 an ounce next year, a report issued by the always reliable Citigroup said today.
“The world is not going back to normal after the magnitude of what [central banks] have done. When the dust settles, this will either work, and the money they have pushed into the system will feed though into an inflation shock.
“Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop.”
“As a consequence we remain of the view that gold will continue to perform well and will do particularly well as the consensus grows as to how we will come out of this mess (or not). Compared to just about every other asset class in the last five-seven years, holders of gold likely look mellow… it is the holders of other assets that are looking a bit ‘yellow.’”
Coupled with the dollar’s fall this morning, the report has gold stocks shooting through the roof today. The spot price is up about $20 from yesterday’s low, and if you agree with Citi’s call, an ounce of the shiny stuff can be yours for just $780.
“If Citigroup is the ultimate global bank,” writes a reader, “and globalization is where it’s at — how come it’s a bigger basket case than anyone left standing? Was business globalization as big a bunch of malarkey as our homes turning into gold mines?
“And after all, if many of its branches and employees are located outside the U.S. and not even paying U.S. taxes like the rest of us — how come we’re bailing it out? Isn’t most of this $20 billion and whatever in guarantee$ just going to benefit some bank manager in Osaka or Rio? I thought the Detroit thing was the ultimate in financial foolery and ripping off taxpayers?
“So we’re going to bail the whole financial world out with soon-to-be-useless U.S. dollars, huh? At this rate, Obama’s inauguration is going to look like the beginning of the end.”
The 5: As Biggs points out below, “The so-called authorities have learned from the policy errors of the past, and the response this time, while not perfect, has been faster and far bigger. The effects are just beginning to be felt. In fact the stimulus has been unprecedented and there is almost sure to be more on the way beginning with the new Obama Administration. The authorities seem to understand that they have to risk overkill.”
We’ve put our best analysts on the case. And as we speak, we’re researching and developing a “special report” detailing what we expect will be The Great Currency Collapse of 2009…and what you should do to protect your money when it arrives. Look for it soon.
The 5 Min. Forecast
P.S. Last year, we reviewed Biggs’ book Hedgehogging before it went to press. He’s a cranky old dude, and we don’t agree with everything he says, but his article below is worth reviewing for one simple fact: He makes a bullish case for stocks… then explains why he’s not a buyer yet.
Insight: We are in for the mother of all bear market rallies
By Barton Biggs
Before we all are swept away into total despair, let’s take a step back and imagine what could get stocks around the world going up for a while. Bear in mind that I am hedge fund manager, have been wrong on the severity and duration of this panic, and that at this moment I am close to shore. In other words – I have little risk on.
First, let me point out that by definition the bottom of a bear market has to be the point of maximum bearishness. Thus sentiment becomes a crucial indicator.
The systematic work that we do on measuring sentiment (and we monitor about twenty indicators for the US and a dozen or so for other equity markets) show very extreme and in many cases record levels of bearishness. Obviously not every indicator is at an all-time high, and in some the history is short, but the message is powerful. Furthermore there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash.
I am chastened by the fact that all the data we look at are from the last forty years which was really just one great magnificent secular bull market of wealth creation marked by periodic bears that were buying opportunities. No one knows what levels of pessimism were necessary to spawn the 40 per cent 1929 rally during a massive secular bear market. Nevertheless I’ve never seen capitulation and despair like this. We must be pretty close to maximum bearishness.
Second, valuations are cheap. There’s no point in going into an elaborate dissertation; it’s an inexact science. Using the best historic measures, normalised earnings, book value, and free cash flow, stocks around the world are very cheap, but not as cheap in absolute terms or versus interest rates as they were in the 1930s or at the 1974 bottom. Nevertheless, the 4 per cent dividend return on the S&P 500 exceeds the yield on the ten and thirty year Treasury bonds for the first time in fifty years. If emerging market equities, where the growth is, at six to eight times earnings are not cheap I don’t know what is.
Third, stock markets have been obliterated and are deeply oversold. Even dead cats bounce. The Dow has had the steepest decline since the 1930s, and the spread between the price and the 200 day moving average at 34 per cent is the greatest since July 19, 1932. The US market is down almost 50 per cent from its highs, Europe is off 55 per cent, and emerging markets, 65 per cent with some unfortunates like Russia off 70 per cent. History shows that even in enduring, secular bear markets there are not just 20 per cent bounces but usually one 30 to 50 per cent rally. We should be due.
As far as the economic fundamentals are concerned, investor and consumer confidence have been ravaged by the sudden violence of the global recession. It is going to be deep and it may be long lasting. The bears say at best it will be like Japan’s on-going slow death. At worst, it will be a replay of the 1930s.
I think both these outcomes are highly unlikely. The so-called authorities have learned from the policy errors of the past, and the response this time, while not perfect, has been faster and far bigger. The effects are just beginning to be felt. In fact the stimulus has been unprecedented and there is almost sure to be more on the way beginning with the new Obama Administration. The authorities seem to understand that they have to risk overkill.
And the fabric for economic healing is developing. In the US average hourly earnings are rising at a 3 per cent annual rate and the CPI is probably declining at a 5 per cent rate thanks to the fall in gasoline, fuel, and food prices, so real average hourly earnings are rising at an 8 per cent pace. The savings rate is rising. The sharp collapse in the price of oil while hurtful to parts of the world, is very beneficial to the US, Europe, and Asia. The consumer spending collapse we are experiencing may be short-lived but that doesn’t mean a boom is coming either.
Finally, my guess, and it’s nothing more than a guess, is that the deleveraging that has caused such heavy selling is two thirds done. In listed equities it may be 80 per cent finished. Hedge fund redemptions are substantial and will continue into next year, but hedge fund liquidity is at a record high and hedge funds’ gross exposure and net long is at a record low. Conversely investor liquidity is at a record high. All good contrary indicators.
If I’m bullish why aren’t I in there now? Because I would like to see the credit markets unclog and spreads come in more. At the bottom of a panic, the news doesn’t have to be good for stocks to rally, it just has to be less bad than what has already been discounted. I want the markets to stop going down on bad corporate and macro-economic news. The fact that it still does shows the bad news has not yet been fully discounted. I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.
Barton Biggs is managing partner at Traxis Partners, a New York-based hedge fund, and the author of Hedgehogging.