RSSFundamentals and the Stumbling Economy
By Jim Farrish | October 15, 2008 | 2:08 PM | 0 Comments
The Asian and European markets traded down today on "worries about growth". Is this really a surprise? This was the theme heading into the global banking bailout over the last week. The challenge remains the housing market. The global markets are trailing the US on this front. They are likely at the beginning, where as the US was making improvements. The last three weeks have been like a commercial during your favorite TV show. We are now getting back to the program. So, if we can rewind back to what was taking place prior to this commercial from the financial sector, we would see the economy in the US was improving somewhat and inflation was declining, giving some hope to future growth in the fourth quarter. That may have gotten lost in the transition and with the spending by the government, it has likely postponed the growth until late next year. We now need to look at the economy again and get our bearing set to what is on the horizon.
For those who are concerned about the fundamentals the data isn't going to be pretty. There is a consumer led recession in play. The banking crisis isn't helping the situation nor is the unemployment concerns on the horizon as part of this slowdown. The reality of this is hitting the investor again as the markets give back some of the one day gains. Yesterday, I posted a piece, Don't forget the fundamentals, concerning the earnings from three key players in three different sectors. That is the reality of what drives the stock market. Earnings and there are plenty on tap. The banks bared some today. JP Morgan showed a profit of 11 cents a share versus 97 cents a year ago. The wrote down $3.6 billion and took $640 million in losses against the Washington Mutual acquisition/takeover. The numbers were better than expected with the stock basically flat on the day. Wells Fargo reported a decline in earnings and a rise in revenue. Almost the opposite of expectations. The big write down came from the $650 million from Fannie Mae preferred stock. The Wachovia acquisition will impact next quarters balance sheet. Charles Schwab earnings were down 80%, but in line with expectations. So far, so good for the financials. The sector was down more than 5% on the backs of the brokers down 8.5%.
The economy is a concern today as we have Inflation and retail sales data out today. Do we really expect anything positive? PPI (Producer Price Index) as expected declined again down 0.9% with the core up 0.2%. There were no expected surprises with inflation. The CPI (Consumer Price Index) is due out tomorrow with a rise of 0.1% and the core to rise 0.2%. If there is an upside spike to inflation the markets will not accept it very well. In addition we have retail sales for September. They were expected to decline 1.5% and the number was 1.2%. The consumer is out of gas, so to speak. There is nothing to give them confidence as this juncture other than gasoline prices falling below $3 per gallon. Prior to the last three weeks news, that would have been huge looking forward. To put more than $1 per gallon in consumers' pockets would have resulted in more money than the last stimulus checks sent out. Per household the estimated saving would be nearly $150 per month. If we take that times 150 million households that would be $225 billion. The stimulus package was only $140 billion. Even with this the mindset is to hold cash and consumer are on the sideline.
Redemptions are in play as well for this market. The data available is from the mutual fund sector, but you can project it to the hedge funds as well. On Friday $8.8 billion was take from funds. October, at the current pace will be $56 billion. Retail investors are taking their money out of the market. They are throwing in the towel and running for safety. This could be the apocalypse or it could be the beginning of the bottom being formed. The key point is mutual funds are being forced to sell positions in many cases to meet redemptions. When the cash flow is negative (more withdrawals than deposits) the end result is selling the underlying assets to meet redemptions. Market moving activity.
We have to refocus ourselves on looking forward again. It's the economy and things aren't looking good from where I sit. That's why all the blathering about the bottom doesn't have me running out to buy stocks in bulk. Bottom's are formed not made. We are in the process of forming the bottom - maybe.
| 
|
