| TSG Weekly Market Watch July 24, 2009 |
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| Written by Matt Blackman | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sunday, 26 July 2009 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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TSG Stock Market LetterWeek Ending July 24, 2009Topics Discussed This Week:
Best 2 weeks since 2003? Market at a glance Earnings unchanged, PEs rise Existing home sales on the upswing Another look at Treasury international capital flows Looking back and thoughts on where we’re headed
Last Week
Quote of the week “TARP has evolved into a program of unprecedented scope, scale and complexity. Treasury’s default position should always be to require more disclosure rather than less and to provide the investors in TARP -- the American taxpayers -- as much information about what is being done with their money as possible.” Neil Barofsky, TARP Special Inspector General in testimony this week. Best 2 weeks for Dow since 2003? Earnings expectations with the odd upside surprise kept investors’ hopes alive that the good times will continue to roll as stocks moved up again strongly on the week. This has been the best two week period for the Dow Industrials since March 2003 when the last rally was getting underway. But the market is climbing one heck of a wall of worry and it is clear that investors aren’t watching the growing debt, deficit and stimulus balance sheets. We have and what you’ll see is enough to wipe the smile off the face of even the most jubilant bull. Market at a Glance Instead of describing what happened in various markets each week, we have put them in a table. In the last column, the trend is marked in green if positive for the market, red if negative and black if neutral. For example, LIBOR heading lower is a negative (-) trend but positive for the economy.
* 52-Week High / Low †LIBOR is the benchmark for $900 billion in subprime mortgage loans which typically adjust to it every six months. Corporations around the world have the interest rates on roughly $9 trillion in debt pegged to LIBOR and rates on more than $380 trillion in derivative interest rate swaps also are based on LIBOR. About 6 million U.S. mortgages, including the vast majority of subprime home loans as well as 41% of prime ARMs are linked to LIBOR. Earnings steady, but PEs still rising This week, earnings for the 8,011 US stocks of the VectorVest Composite Index (VVC) held steady again at an average $0.16/share from $0.13/share three weeks ago. Rising stock prices lifted the VVC average PE to 130.97 from 125.4 last week and 118.42 two weeks ago. Earnings growth, which tells us how fast earnings are appreciating, remained stuck on the floor at 1% again this week, which is the lowest growth rate in at least 15 years. June 5, 2009 proved the all-time high water market for average PEs at 155.58 for the VVC Index with average earnings of $0.13/share. On the positive side, the VVC decisively broke above the 50-week moving average (purple line in next chart) last week for the first time since the rally began and headed higher this week. These recent all-time highs compare to the previous peak PE of 60.51 in mid-May 2003 during the last recovery. But the difference is that during that period, earnings growth remained much healthier at 8% and earnings had begun improving nearly a year prior after hitting a low of 3%. Looking back to the price peaks in March 2000, average PEs were 32 and earnings growth was 11%. Meanwhile average earnings for the 2,969 stocks in the Canadian Toronto Stock Exchange (TSX) tracked by VectorVest held again at -$0.01 up from -$0.03/share three weeks ago and earnings growth was steady at 3% down from 4% during the week of July 10. Earnings for the nearly 3,000 stocks of the VectorVest Canadian Index (VVC/CA) peaked at an average $0.73 per share in September 2005 and have steadily fallen since. By the week of March 6, 2009 they had fallen to $0.16/share and on June 12 to -$0.02/share during a period in which the TSX exchange index rose more than 40%.
Figure 2 – Chart showing weekly prices, average Price/Earnings ratios (blue), earnings per share (black) and earnings growth (GRT in red) for 8,011 US stocks tracked by VectorVest showing the average PE for the broad range of publicly trading companies. The purple line is the 50-week moving average (MA). Chart courtesy of VectorVest.com Economic Reports Existing home sales on the upswing Not much on the economic reports front this week, at least not much of interest to investors and traders. We did learn Thursday that from the National Association of Realtors that existing home sales improved 3.6% in June from May to an annual sales rate of 4.89 million, which is very near the sales rate a year ago. Although median prices have rebounded in the last few months, they are still 15.4% below a year ago at $181,800 and the inventory of unsold homes slipped to 9.4 months.
However, things are less positive on the mortgage front. We learned last week that residential mortgages hit another new high in June and this week, we received similar news about commercial mortgage failures which are at a 20-year high with loan losses projected to hit $30 billion by year-end 2009. The commercial property market is valued at $6.7 trillion (I wonder if that is a mark-to-market estimate?) and represents 13% of US GDP according to the Wall Street Journal report. In 2006, the total residential property market was valued at $21 trillion. Next we see the Robert Shiller’s historic home price chart adjusted for inflation together with population, building costs and interest rates showing how home prices more or less kept up with inflation between 1890 and 2000 (notice that inflation-adjusted home prices were pretty much the same in 1895, 1980, 1990 and 2000). But then in 2000 something fundamental changed and prices took off. As we see, they have dropped back below the long-term linear regression trend-line (dashed black line) and are back to previous inflation-adjusted peak levels (magenta horizontal dashed line). Robert Shiller’s Inflation-Adjusted Home Price Index
We also modified our U.S. Treasury International Capital Flows chart from last week but this time showing the year-over-year changes in the monthly federal government deficit together with changes in foreign capital flows into US Treasuries which more accurately depicts the gap. According to the latest White House data, the government must sell more than $164.8 billion in bonds each month just to pay the projected 2009 deficit up from $53.5 billion in 2008.  We learn how new home sales and prices have been doing first thing Monday morning and get the Case-Shiller perspective on existing home prices Tuesday. SYNOPSIS Looking back to where we’ve been… thoughts on where we’re headed The latest rally in U.S. stocks has been interesting in 2 respects. First, the amount prices have rallied and second the speed at which they have done so. And this is not an isolated case. As we see from the next chart, there has been similar movement in the Baltic Dry Index which bottomed in mid-December nearly three months before U.S. stocks and has rallied more than 400% since.
In his daily Breakfast with Dave, Gluskin, Sheff economist David Rosenberg observed that Chinese stocks have been leading a number of markets. The benchmark Shanghai Composite “peaked in 2007 ahead of the pack and then bottomed in late 2008 a full four months ahead of the U.S. trough. In addition, the Shanghai index leads the CRB by two months and with an 80%+ historical correlation,” according to Rosenberg. We pulled up a chart comparing the Shanghai Composite Index (SSE) with the S&P500 and CRB Index. This next chart shows the SSE peaking the week before the SPX and months before the CRB. Since bottoming in the first week of November, the SSE has posted an impressive 102% compared to 46% for the SPX and 27% for the CRB from their respective bottoms. According to Rosenberg, the volume of credit that has flowed into the Chinese economy this year (so far) equals one-third of GDP and the number of stock brokerage accounts opened last week in China is the most since January 2008 and five times the number opened in January 2009 – convincing evidence that speculative fervor is back.
Weekly chart courtesy of www.GenesisFT.com Although this is by no means statistically significant evidence, we heard two interesting stories this week from Phoenix demonstrating this speculative fervor in the real estate market. In one case, the buyers put in a bid for a foreclosed property listed at $45,000 that attracted 12 offers. Their bid of $61,000 cash lost out. A second purchaser made a bid on a house in Phoenix just under asking price and was told to “buzz off” by the realtor who’d received two dozen offers, eight of which were cash. Taken together with the other data we are seeing, there is clear evidence of a number of echo bubbles building driven I believe thanks to trillions in stimulus being pumped into global economies and markets. But the biggest bubble of all and one that has the potential to pop every other bubble abroad and that is the debt bubble building in the U.S.
Commentators have referenced total U.S. federal government debt which is projected to surpass $12 trillion in fiscal year 2009. But this is just 23% of the problem. As of Q1-2009 total credit market debt (debt at all levels of the economy) is more than $52.9 trillion or more than 375% of GDP and TCMD has grown 35% faster than the economy since 2000. As in every other similar situation, the outcome will be the same but the devil will be in knowing when these latest bubbles have run their course. In all likelihood the current debt bubble will end when the demand for money pushes interest rates higher, ultimately bringing the other bubbles built on the cheap cost of money to a swift and painful conclusion. Forewarned is forearmed! In our Special Elliott Wave Bulletins last week, Elliott Wave trader Ananth Acharya was looking for the Dow Industrials to peak and a correction to follow the rally to 9100. “The rally had all the characterestics of a blowoff. The count at this stage is pointing to a DZ pattern ending at 9090 which should see a very sharp fall in the markets. The DJIA should not rally above 9097 else we will need to revisit the count again. If my count is correct, then the DJIA is heading to test the lows of 8100 and then 6470. We shall look at the counts as the markets unfold.”
On the lighter side… More market definitions… BROKER — What my broker has made me. STANDARD & POOR — Your life in a nutshell. STOCK ANALYST — Idiot who just downgraded your stock. Stories of interest this week… U.S. Rescue May Reach $23.7 Billion, Barofsky Says http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aF8hQpLE0vF4 Lawmakers Say Treasury Keeping Taxpayers in Dark on Bank Rescue http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3ko7H2PxiCM Tightening Credit Becomes Bernanke Bind in Bond Purchase Unwind http://www.bloomberg.com/apps/news?pid=20601109&sid=aslHyTzIJx_s Soak the rich - Congress's new health-care plan http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=14031450 Taxpayers Inferior to Shareholders with Obama Bonds http://www.bloomberg.com/apps/news?pid=20601109&sid=al9CWhaCvT2E Tightening Credit Becomes Bernanke Bind in Bond Purchase Unwind http://www.bloomberg.com/apps/news?pid=20601109&sid=aslHyTzIJx_s Dropping a brick - Where equities go, is property sure to follow? http://www.economist.com/businessfinance/displaystory.cfm?story_id=14034857 Economist Shiller Sees 'Bad Recession,' Stocks Could Drop Again Commercial mortgage failure at 20-year high in U.S.: report http://www.reuters.com/article/ousiv/idUSTRE56J1A120090720 Lennar Signals Fleeting Builder Rally as Buyers Flee http://www.bloomberg.com/apps/news?pid=20601109&sid=aqJxfnOv5tIA Paris Derivatives Jobs Burn as Market Rues BNP, SocGen Exotics http://www.bloomberg.com/apps/news?pid=20601109&sid=ac0HKVeHr6AY Fiat Paper Money: The History and Evolution of our Currency by Ralph Foster
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