This is what happened last week…
Last Tuesday began what the world community views as a major event in US history, the inauguration of Barack H. Obama as its 44th President and its 1st Black American President.
Some of President Obama’s executive orders on his 1st day in office:
1. A freeze on salaries for White House staff earning $100,000 or more, about 100 people in all.
2. New Freedom of Information Act rules, making it harder to keep the workings of government secret.
3. Tighter ethics rules governing when administration officials can work on issues on which they previously lobbied governmental agencies, and banning them from lobbying the Obama administration after leaving government service.
The week in the markets, however, continued to be bathed in the glow of uncertainty within the financial sector and coupled with Qs about the timing of the economic recovery.
Couple that with headlines announcing that China’s Y 2008 Q 4 GDP contracted from 9% to 6.8%, the UK reporting a GDP decline of 1.5%, the largest since 1980, US housing starts fell to their lowest level on record, and initial jobless claims returned to Christmas levels, matching the 26 yr. high of 589,000 set in December 2008.
Though Microsoft disappointed, IBM and AAPL rang the bell with GOOG beating too, and coming in better than expected.
GE’s earnings were in line on lowered expectations, and hung on to its dividend; interestingly GE did not have much to say about the future. However, the action in the options is betting that GE will get hammered more in the coming weeks.
General Motors Corp reported an 11 percent drop in global sales in 2008, allowing rival Toyota Motor Corp to surpass it as the world’s largest automaker for the first time. GM held the title for 77 yrs.
What we are seeing is consolidation action following last year’s selloff, as the market absorbs the worst economic news since the Great Depression.
Some analysts are saying that this action is, “a good indication, as the market has reached the point where it has absorbed all the bad news or has anticipated it.”
On a positive note: swap spreads improved; the Q: a rally signal? The A: historically a leading indicator, yes. So, not bad action after all.
Stay tuned…
Technical Snapshot: Technicals on the week ended January 16, 2009
US stocks last Friday ended the week down, but with a positive bias in the air. The DJIA closed at 8281 + 68.73 pts on the day, but down 2.5% or 203 pts on the week, bringing its year to date losses to 7.9%. The NAS finished the week off 3.4% on the week, closing at 1477 for a year to date loss of 6.3%. The S&P 500 and the Russell 2000 closed the week down 2.1% and 4.7%, bringing their year to date losses to 7.9% and 11% respectively.
Market Fact: The S&P is on sale, and there are bargains among the S&P 500 lowest-priced issues (below US$10/shr), a group that currently numbers roughly 80 issues, or 16% of the index. Most are down more than 50% this year, amid the worst Bear Market in years.
Best Quotes of the Week
Best Technical Quote of the Week: “Gloom to positive. Not bad action (last week).” John Johnson
Best Scary Quote of the Week: “U.S. banks and broker dealers are estimated to incur about half of these losses, or US$1.8 trillion (US$1-1.1 trillion loan losses and US$600-700bn. in securities write downs) as 40% of securitizations are assumed to be held abroad. The $1.8 trillion figure compares to banks and broker dealer’s capital of US$1.4 trillion as of Q-3 of 2008, leaving the banking system borderline insolvent even if write downs on securitizations are excluded.” Professor Nouriel Roubini, RGE Monitor (www.rgemonitor.com)
Best Quote on the Stock Market: “The world changed a lot since October. It’s been a very steep and dramatic change … ” Alex Vanselow, CFO BHP
2nd best Quote on the Stock Market: “The past year has seen markets move into uncharted territory, at least for the post war period. In the US, the fall in the equity market has been the most severe since the 1930s, volatility has also been the highest since the Depression, and the market has fallen to the extent that the average dividend yield is higher than the 10 year US Treasury bond yield, for the first time since the 1950s.” Binky Chadha, US market strategist.
3rd Best Quote on the Stock Market: “THE WORST MARKET IN MORE THAN 75 YEARS HAS BEEN pretty good”, Julie Lang Kirkpatick whose managed accounts were up smartly in 2008, with many hitting double-digits on her short-the-market strategy.
Best quote on Technology: “The users and the technology will always move faster than the industry by definition,” Boxee founder Avner Ronen noting that Boxee is giving consumers something they have long asked for: true access to Internet-style breadth and depth of content from their living room sofas.
Best Quotes on the state of the economy: “If you spent six or seven years and hundreds of thousands of dollars getting a graduate degree and you end up doing this, that is not a happy thought. But it is steady work.” James Jacobs, president of Macomb Community College in Michigan, on the part time jobs his college is offering many teachers.
2nd Best Quote on the state of the economy: “We need to move quickly to build a stronger, more resilient system now, with much greater protections for consumers and investors, with much stronger tools to prevent and respond to future crises,” Timothy F. Geithner, proposed Secretary of the US Treasury.
Best Political Quote of the Week: “The way to make government responsible is to hold it accountable,” President Barack Obama
Best Quote on Risk: “In the long run we’re all dead,” John Maynard Keynes, economist
Best Optimistic Quote of the Week: “Creativity is a process, and although sometimes tedious, it comes up with some amazing results. You should try it. It’s fun.” D. M. Booth, artist.
The Best Gold Quote: “I am modestly bullish on the Gold market, but not because of inflationary concerns. It’s more that I think gold has quietly moved up the ladder of reservable assets, a reservable asset being one that central banks are willing to keep on their balance sheets, all things being equal. Dollars are still the world’s dominant reservable asset. The Euro is next and gold is probably the third.” Dennis Gartman, The Gartman Letter, in an interview last Friday with The Gold Report.
2nd Best Gold Quote: Argentum et aurum comparenda sunt (Gold and Silver must be bought).
- Franklin Sanders, The Moneychanger
Best Overall Quote of the Week: “…if a bank won’t give you money, you can always get some love from friends and family, and that is where the real value lies.” –John Mauldin
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My pal Wally Stein’s (Historic) Words of Wisdom
“The time to buy is when there is blood in the streets… even if it’s your own.” — attributed to Nathan Rothschild, the quintessential capitalist.
This is what that’s was all about. Nathan Rothschild was an 18th Century British nobleman and member of French banking Rothschild family, who had access to a legendary network of information sources all over Europe, consisting of an effective combination of messengers, carrier pigeons and regional couriers. This news network was regarded as being more accurate, faster and of a higher-quality than the official government sources of the time.
The story goes this way; many London traders watched Rothschild and his agents begin to liquidate their holdings on June 19, 1815, a day after the Battle of Waterloo. They naturally assumed Wellington had lost and that England was doomed. So those same traders began dumping shares as fast as they could on the assumption that Rothschild knew something they did not, causing a terrible stock market crash.
What Nathan Rothschild knew were three things that the other traders did not:
1. Wellington had defeated Napoleon and England was secure
2. Prices would rise once official news of England’s victory became known and confidence returned to the markets
3. Rothschild was actually buying heavily at or near the bottom that he created.
Nathan Rothschild later boasted that during his 17 years in England beginning in 1798, he turned his initial investment of £20,000 sterling into £50 million sterling, which would equal a staggering £33.5 billion today.
The situation investors and traders find themselves in today about the same as it was in June, 1815, when all seemed lost.
Icon companies were hammered to pulp. Some of that was due to Rothschild’s manipulation, but a good deal of that stemmed from the basest of human emotions… panic.
This Week’s 10 11 Big Stories +
1. IBM issued a 2009 profit outlook that blew past Wall Street expectations, underscoring the ability of the world’s top technology services firm to weather the global downturn and boosting its shares 4 %. The Q-4 earnings of International Business Machines Corp also trumped analysts’ expectations last Tuesday, presenting a rare bright spot for the tech industry, which has been hit by profit warnings and sweeping job cuts as companies and consumers reduce spending. Although IBM’s Q-4 revenue came in a bit short of expectations, falling 6.4 % from a year ago, the company also managed to cut costs by 3-4 %. A lower tax rate also helped.
2. Fiat has formed a strategic partnership with Chrysler LLC that could lead to the Italian car maker taking a stake in its U.S. peer, an industry publication said, citing people familiar with the matter. Fiat could give Chrysler access to platforms, engines and transmissions to help the U.S. car maker overcome its problems, Automotive News Europe said last Monday. Fiat Chief Executive Sergio Marchionne told an industry publication in December that Fiat needed a partner to survive the crisis. Apart from Ferrari and Maserati, Fiat does not sell cars in the United States.
3. Treasury Secretary-nominee Timothy Geithner requested Congress to pass a robust stimulus plan to revive the economy and pledged to “reform” the government’s US$700B rescue program.
“The ultimate costs of this crisis will be greater if we do not act with sufficient strength now. In a crisis of this magnitude, the most prudent course is the most forceful course.” Geithner said in his opening statement that, if confirmed, he would refocus the Troubled Asset Relief Program (TARP) to help small businesses and families that are losing their homes and jobs, according to the agency, which obtained a copy of his testimony, he also called for “comprehensive” regulatory changes to help ensure that an economic crisis of this magnitude does not happen again, the agency said.
4. General Motors Corp reported an 11% drop in global sales in 2008, allowing rival Toyota Motor Corp to surpass it as the world’s largest automaker for the first time. GM, now struggling to restructure under a $13.4 billion U.S. government bailout, had held the title as the global auto industry leader for 77 yrs and used the line for marketing, but for 2008. Detroit-based GM said sales tumbled to 8.35 million vehicles, pressured by tightening credit and a slowdown that began in the United States and spread to emerging markets where GM has been stronger.
5. There’s an upside to the economy being down in the dumps: Less trash. Consumers are eating fewer meals away from home, reducing food waste, the # 1 space hog at landfills. Contractors are building fewer homes and tossing aside less drywall, lumber and other heavy debris. Pack rats who cannot afford to move are postponing cleaning out their closets, landfill operators say. “There always have been three givens in life: death, taxes and garbage,” said Evan Edgar, a civil engineer and a regulatory advocate for the California Refuse Recycling Council. “Since the 1970s, that’s been a mantra in our industry. But what this recession has shown is that we will have death and taxes, but garbage is no longer recession-proof.”
Southern Californians confirm that concerns about layoffs and unstable gasoline prices are prompting them to buy little except necessities. And it shows in the makeup of their trash.
6. U.S. congressional Republicans predicted last week that legislation to boost the sagging economy would pass by mid-February, but pressed President Barack Obama support more tax cuts in the plan. Republicans complain that US$550B of the Democrats’ US$825B stimulus package was government spending, with only US$275B in tax cuts, which they say would better spur job growth and pull the economy out of a yearlong recession. Both sides said they expected to get a stimulus package for Obama to sign by his mid-February deadline. But they continued to disagree on details, with Republicans saying their attempts to make changes have been thwarted.”Everybody believes that government’s action is necessary,” Senate Minority Leader Mitch McConnell said in a speech to the National Press Club. “It will happen and I think it will happen before the anticipated week off in February.”
7. Walt Disney Co (DIS) announced last week that it sent voluntary buyout offers to 600 executives at its domestic theme parks to cut costs amid an economic meltdown that has depressed attendance and prompted the company to deeply discount Walt Disney World stays.
Disney said if the buyout offer, which expires February 6, does not produce enough reductions, the company will consider layoffs. The buyout offers come about six weeks after Disney said its hotel bookings had started to rebound as a result of the discounts. The move appears to be part of significant costs savings the company promised investors late last year.
8. US home builder sentiment sank to a new low in January as concerns about the faltering economy and reluctant home buyers hurt confidence in the market for newly built single-family homes, an industry group said last Wednesday. The National Association of Home Builders said its preliminary NAHB/Wells Fargo Housing Market Index was 8 in January, down from 9 in December. That is the lowest level on record since the gauge was launched in January 1985.
Readings below 50 indicate more builders view market conditions as poor than favorable. The January index was below expectations of 9, based on a Reuters survey of economists.
Eric Belsky, executive director at Harvard University’s Joint Center for Housing Studies, said home builders are facing competition from a flood of homes in foreclosure as well as struggling under sinking demand and the credit crisis. “Even though we have lower mortgage rates, people are staying sidelined out of fear over further home price drops, anxiety about the economy, their income and their job,” Belsky said.
9. The rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea’s National Pension Service, the country’s biggest investor, said. US government efforts to combat the recession will prompt the Federal Reserve to raise interest rates this year, said Kim Heeseok who oversees US$160B as head of global investments for the service in Seoul. The decline would snap a surge that sent the securities up 14 percent last year, according to Merrill Lynch & Co.’s US Treasury Master index, as investors sought the relative safety of debt. “It’s time to sell US Treasuries,” said Kim, who took over as head of investments at the start of the year. “The stimulus plan may cause inflation. The U.S. will raise the benchmark interest rate.” US government securities headed for their first monthly loss since October after President-elect Barack Obama, who took office last Tuesday said he will do “whatever it takes” to battle what he called the biggest economic crisis since the Great Depression. Obama is planning an US$850B stimulus plan, on top of US$700B approved by former US President George W. Bush.
10. Sony Corp announced last week that it would post a record US$2.9B annual operating loss due to sliding demand and a stronger yen, and unveiled fresh restructuring steps to revive its ailing electronics operations. The operating loss will be Sony’s first in 14 years, underscoring deepening troubles for a company that has fallen behind Apple Inc.’s iPod in portable music, Nintendo Co. in videogames, and is losing money on flat TVs. Sony plans to keep investing aggressively in strategic fields such as the development of auto-use batteries, a promising area as the use of hybrid and electric vehicles grows. “While these are extremely challenging times, we must be fully prepared to embrace the opportunities that await us once these dark economic clouds begin to part,” Sony Chief Executive Howard Stringer told a news conference last Thursday. Last month Sony outlined a restructuring plan that included curbing investment, closing five to six plants and cutting a total of 16,000 regular and contract jobs globally to save 100 billion yen a year in costs.
11. Diversified US manufacturing giant United Technologies Corp (UTX) said profit rose 8%, as growth in its jet engine and helicopter businesses offset weakness in its air conditioner and elevator arms. Q-4 earnings came to US$1.15B, or US$1.23 per diluted share, compared with US$1.1B, or US$1.08 per share, a year earlier. The result matched analysts’ average forecast of US$1.23 per share, according to Reuters Estimates. The company maintained its 2009 profit forecast of US$4.65 to US$5.15 per share, ranging from a 5 % decline to a 5 %rise from a year earlier. “UTC had a solid close to 2008 in spite of deteriorating end markets and currency headwinds,” said Louis Chenevert, president and chief executive, in a statement. “We saw the impact of difficult economic conditions on our order rates.”
This week’s big story: Stock market guru Warren Buffett made some bad bets and got caught in the financial Bear Market. In a story in this week’s Barron’s, highlighting the investment problems of Buffett’s Berkshire Hathaway. It notes that WB is deep into financials, and that three of Berkshire’s biggest holdings are the common shares of Wells Fargo (WFC), American Express (AXP) and U.S. Bancorp (USB), all down sharply from a year ago and from the end of 2008. Berkshire also owns Bank of America (BAC), the Buffalo, NY, bank, M&T Bank (MTB), Moody’s (MCO) and Suntrust Banks (STI), according to its latest disclosure statements. Buffett also made substantial losing investments last year in the preferred shares of two other big financials General Electric (GE) and Goldman Sachs (GS). Finally, Berkshire itself is a big insurance company putting it really deep in the market’s weakest sector, financials. The bottom line is that the US$41B in cash that Berkshire had a year ago most likely is depleted, according to Barron’s.
Really Big Story: KPMG, in a senior executive report last week said the US$1.4T will not be enough, and that even more investment is needed. Although US$2T will be spent on global infrastructure annually for the next seven years, 77% of the CEOs and other top brass surveyed claimed that amount would be “insufficient.” Other than investing more in transportation and electric infrastructure, the study also revealed that executives believe governments should partner with the private sector to “finance and administer major infrastructure projects.” This indicates that as the money starts to flow, investors will be flocking to infrastructure stocks with a global presence.
Big Breaking Story: BofA had role in Merrill bonuses (The Financial Times) The Bank of America played a role in Merrill’s controversial decision to pay US$4B in bonuses in December just as mounting losses were threatening to derail BofA’s takeover of the beleagured Wall Street firm, according to people close to the situation. BofA has said that the payment of US$4B in compensation in Y 2008 Q-4 where Merrill racked up US$15B in losses was sanctioned by John Thain, Merrill’s CEO. Ken Lewis, BofA’s embattled CEO, ousted Mr Thain last Thursday after news of the bonus payments appeared in the Financial Times. BofA told the FT last week that Mr Thain had made the decision to pay bonuses in December instead of January and it had been “informed” of the move. The bank said Merrill was an independent company until the deal closed on January 1, 2009. However, a person familiar with Mr Thain’s actions said the ousted chief had at least two conversations with BofA’s chief administrative officer, J. Steele Alphin, one of the bank’s most senior executives, before a December 8 board meeting at which Merrill’s bonus payments were approved.
This person said Mr Alphin recommended, and Mr Thain accepted, a proposal to change Merrill’s incentive compensation mix, 60% cash and 40%, to conform with BofA’s system of 70 % cash and 30 % stock. The stock portion of the payouts was made January 2, the day after the deal closed, in BofA stock.
On the World Scene: Global property investors see surge in spending. Foreign investors in real estate expect to spend much more in 2009 than they did in 2008, according to an annual report tracking institutional investor interest. Both foreign lenders and equity investors plan to increase investment globally and in the United States, their favored international investment target, report members of the Association of Foreign Investors in Real Estate (AFIRE). Lenders expect to boost investment by 54% globally and by 58% in the United States, while equity investors see increases of 40% globally and 73% in the United States. The United States has more appeal this year, even after the economic tumult of 2008, and despite the painful impact of the global credit crunch on commercial real estate, said Jim Fetgatter, AFIRE’s chief executive. US commercial property sales are down 73% to US$139.43B in 2008 compared with 2007, according to research firm Real Capital Analytics. The shares of U.S. real estate investment trusts, or REITs, are off about 62% from their highs in February 2007, as measured by the benchmark MSCI US REIT Index .RMZ. But investors’ appetite for US real estate has only sharpened in the face of these difficulties because the problems are a global phenomenon. The United States remains the world’s largest, and to AFIRE’s members, the safest real estate market, Fetgatter said. “If you are going to be an international investor, you’ll want a significant part of your portfolio in the largest market (the USA)”, he added.
At the Movies: ‘Paul Blart’ tops b.o. for a second week. Underworld’ lands at No. 2 with strong debut
Results at the domestic box office offered split-frame viewing this weekend, with commerce and art showing up in equal evidence.
Sony comedy “Paul Blart: Mall Cop” repeated at No. 1 with an estimated US$21.5MM, while Sony Screen Gems’ 3quel “Underworld: Rise of the Lycans” and Warner Bros.’ fantasy “Inkheart” mounted second- and 7th place bows of US$20.7MMand US$7.7MM, respectively.
Much of the focus was on several Oscar-nominated films, including 5 best pic candidates.
Fox Searchlight broadened Danny Boyle’s Indian drama “Slumdog Millionaire” into 1,411 theaters after 10 frames in mostly limited release, reaping an upbeat US$7.5K per venue and US$55.9MM cume. The 5th place performance by “Slumdog” — which copped the Producers Guild of America’s feature film award Saturday topped the tallies for best pic nominees, but others also saw decent business.
Paramount’s literary adaptation “The Curious Case of Benjamin Button,” starring Brad Pitt and Cate Blanchett, finished 9th with a US$6MM session and US$111MM cume.
‘Slumdog’ takes top SAG nod The Screen Actors Guild offered one more endorsement to “Slumdog Millionaire” on Sunday night, handing it the prize for outstanding movie cast. It was a clean sweep for NBC’s “30 Rock” and HBO’s “John Adams” in the comedy series and long form categories, and a top drama series honor went to AMC’s “Mad Men.”
Focus on Hollywood
RR Opinion: Economic meltdown; Hollywood is sitting on a storytelling Goldmine; not likely.
A host of film projects in the indie and studio worlds are gaining momentum as the biggest economic crisis in decades boils and bubbles the stories of economic woe are in development.
“I wouldn’t say it’s a feeding frenzy just yet,” one agent said. “But some development people I’ve talked to have let it be known that, if you do have these ideas, they will rise to the top of the pile.”
Unlike the television world, where plot elements can go from conception to the screen in the film world takes much longer to see stories through, but that hasn’t stopped companies from pushing forward.
The word is that Fox has restarted long-rumored talk of a “Wall Street” sequel, more than two decades after the era-defining original, though Oliver Stone’s picture was set in and released into a world still in a bubble of economic prosperity. The studio has hired Allan Loeb to write a new draft and sees the picture as a social comment of sorts: Gordon Gekko entering a world too cutthroat even for him.
“Australia” director Baz Luhrmann, meanwhile, is moving ahead with a “Gatsby” story he feels will be a parable of our times, and Participant Prods., always up for a socially relevant tale, is developing “Minimum Wage,” about a corrupt executive sentenced to live on the low wages of the people his greed exploited.
Many of the projects are in development partly as an insurance policy; when a story is so culturally dominant, executives feel a related project or two on the slate does not hurt, even if they do not intend to green-light it anytime soon.
We all are aware that the studios’ records for developing projects with a timely theme are mixed. While crises can give rise to great works, think “All the President’s Men” and Watergate, those examples are rare, and happen after the public has had several years to digest the events.
Experts say that while a zeitgeist can affect viewing habits, Hollywood can be too literal about trying to capitalize on it. “One of the most popular genres during the Depression was the gangster movie because people felt powerless and wanted a solution outside the system,” Syracuse University’s Robert Thompson said. “Good art packages and processes; it doesn’t copy, which is why it’s hard to develop stories about current events.”
Some producers and filmmakers are hoping that, in the right context, these tales can work.
“If you wanted to show a mirror to people that says ‘You’ve been drunk on money,’ they’re not going to want to see it,” said Luhrmann, who says he wants to move quickly on “Gatsby.” “But if you reflected it on another time, I think they’d be willing to.”
Studio Suits are saying that while they realize that the American public might not want to be reminded of troubled times as they’re overwhelmed by them, they also might want the onscreen catharsis of seeing executives brought low.
There may be a financial reason some of these projects could get fast-tracked: Some of the potential financiers are more interested in these stories because these are the stories close to their heart.
Still, observers and savvy execs like Michael Selsman, CEO of Archer Entertainment, (www.archeremc.com) says that any project banking on audiences abandoning their usual tastes are misguided, and that aspirational entertainment has a role to play even in the toughest times. Nobody will be fascinated with shows that showcase the trials and tribulations of the foreclosed homeowner,” he said.
John Mauldin is back this week with his keen insight in his Thoughts from the Frontline Weekly Newsletter.
Here Comes TARP 3 and 4
by John Mauldin
January 23, 2009
In this issue:
Stocks for the Long Run and Other Myths
Mister Softee is Only Worth 136 Dow Points
Nash-Kelvinator, Studebaker, and Other US Giants
TARP 3 and 4 Are on the Way
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
This Week’s Economic Data
Monday, January 26
December Existing Home Sales (10:00): 4.40M expected, 4.49M past
Leading Economic Indicators, December (10:00): -0.3% expected, -0.4% past
Tuesday, January 27
January Consumer Confidence (9:00): 38.0 expected, 38.0 past
Wednesday, January 28
Crude Oil inventories (10:40): 6.1M past
FOMC policy decision (2:15)
Thursday, January 29
December Durable Orders (8:30): -1.8% expected, -1.5% past
Initial Jobless Claims, 01/24 (8:30): 589K past
New Home Sales, December (10:00): 400K expected, 407K past
Friday, January 30
Q-4 chain Deflator-Adv. (8:30): 0.5% expected, 3.9% past
GDP- Adv Q-4 (8:30): -5.2% expected, -0.5% prior
Chicago PMI, January (9:45): 34.2 expected, 35.1 past
Michigan Sentiment Revised., January (9:55): 61.9 expected, 61.9 past
Employment Cost index, Q-4 (10:00): 0.7% expected, 0.7% past
Keith K. Hatanaka’s POV on Japan’s Economy
Last week, Toyota Motors ended General Motors Corp.’s 77-year reign as the world’s largest automaker. And as Toyota looks ahead in terms of management, it just named the grandson of the company’s founder as president.
At the same time, Toyota is forecasting its first operating loss in 71 years. It’s on the frontline of an economic plunge that might push Japan into what many of us call another “Lost Decade.”
Let’s explore that real possibility. The economic data coming out of Tokyo have been atrocious. Exports slid 35 % in December from a year earlier, and the sharpest decline since 1980, there are no comparable data prior. Exports were the main driver of the recovery that has died.
With nothing self-reinforcing about Japan’s expansion, Asia’s biggest economy seemed to go from 120 kilometers (75 miles) per hour to zero in a week; now it is driving in reverse, as global demand for cars and electronics is drying up fast.
It was announced last week that Toyota, Sony Corp. and Honda Motor Co. are shedding thousands of workers and closing production lines as profits and sales sink. This is just the beginning, as the US and EU sink too.
This global crisis surprised most Japanese executives and politicians. Much of the talk in 2008 was about how Japan’s cash rich banks would play a White Knight role for a Wall Street in turmoil. Mitsubishi UFJ Financial Group Inc.’s US$9B investment in Morgan Stanley was seen as the first of many such deals.
As 2009 unfolds, the folly of that view will come into sharper focus. It is true that Japan’s government has the resources and borrowing potential to forestall a meltdown. The roughly US$15T of household savings is a comforting counterpoint to press reports of rising Japanese poverty and homelessness.
With the US and Europe in deep recessions, all that’s left is domestic stimulus. That goes for Asia, too. Singapore may contract a record 5% this year. In South Korea, industrial production fell by the most on record in November. Officials in Indonesia, Malaysia, the Philippines, Taiwan and Thailand are struggling to boost slowing economic growth. However, no serious economist thinks Japan is going to crash. Yet the odds of another 1990’s-like period of negligible growth and deflation are increasing as economies such as the US risk a similar fate.
Minimal household savings, sliding home prices and dwindling retirement accounts leave Americans with one option: thrift.
The specter of Americans consuming less is prompting a rapid reassessment of Japan’s prospects.
“We’d better get ready for a three-year recession,” says Hiroshi Yoshikawa, head of the government committee that charts economic cycles. The decline “will be very severe, not only in terms of duration but also depth.”
Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo, headlined a Jan. 20 report: “Panic on Jobs.” Yesterday’s was called “Unprecedented Contraction,” arguing that the speed of declines in exports and production “is more than twice as fast as anything on record.”
These trends are pointing to gloom envisioned by market seers such as Professor Nouriel Roubini. The views of the chairman of Roubini Global Economics LLC in New York are certainly worth considering now. That goes both for what he’s saying now: 1) that Japan is in for a severe recession, and 2) more of a recession than a decade ago.
Back in November of 1996, Roubini delivered a speech in Tokyo titled Japan’s Economic Crisis. When re-reading Roubini’s remarks from back then is how, with a few changes here and there, many of them are just as relevant as they are in January 2009.
“The different social culture and history of Japan suggest that Japan will not and should not follow the brutal ‘Wild-West’ American model of restructuring and reform,” Roubini said. “However, there is need in Japan for major structural reforms and economic deregulation in order to foster entrepreneurship, risk-taking, innovation and long-run growth.” Roubini added that “delaying these reforms will not help because short-run reduction of the pain might lead to more serious problems in the long-run.”
Because Japan delayed the much-needed economic changes, it’s now in a very bad way. The Bank of Japan has failed to boost growth by cutting interest rates to zero. Japan has already tried, and failed, to create a thriving domestic economy with massive public spending.
Rest assured that now the BOJ and the government will pull out all the stops to keep a recession from becoming a depression.
Wealthy Japan is far better positioned to stay out of the abyss than peers in Asia. Yet Japan will not be making the changes needed to prepare for a rapidly aging population and/or help it to thrive in a region in which its standard of living is too high to compete.
Unless officials in Tokyo act fast and furiously, Japan risks another lost decade or perhaps something even worse. God Bless–Keith
Snap Shot of the Major US Market Indices
DJIA: The DJIA tested the lows on the week and rebounded to the Green, holding over the October 2008 intraday low but just below the October 2008 closing low.
Stats: -45.24 pts (-0.56%) close 8077.56
Volume: 370MM Friday vs 420MM Thursday.
S&P 500: The S&P 500 came back to flat on the day last Friday, as it held above 800. There was no break over 849 the October 2008 closing low. The chart looks bearish in the near term. A test of the 741 low not out of the question because the financials are a drag on the index.
Stats: +4.45 pts (+0.54%) close 831.95
NYSE Volume: 1.42B (-8.64%). Volume last Friday was below average after a week of above average volume.
NAS: The Techs are having a rough time in here and near term it remains the same, rough.
Stats: +11.8 pts (+0.81%) close 1477.29
Volume: 2.16B (-6.56%).
The Charts*
DJIA Chart: http://stockcharts.com/h-sc/ui?s=djia
The S&P 500 Chart: http://stockcharts.com/h-sc/ui?s=sp500
The NAS Charts: http://stockcharts.com/h-sc/ui?s=NAS
Stock Chart School: http://stockcharts.com/school/doku.php?id=chart_school
Stock Charts Glossary: http://stockcharts.com/school/doku.php?id=chart_school:glossary_s
*Charts from www.Stockcharts.com
MARKET SENTIMENT
The Sentiment Indicators: These indicators are psychological indicators that attempt to measure the degree of bullishness or bearishness in a market. These are contrary indicators and are used in much the same fashion as overbought or oversold oscillators. Their greatest value is when they reach upper or lower extremes.
1. VIX: 47.27; -0.02
2. VXN: 46.6; +0.77
3. VXO: 45.63; -1.36
4. Put/Call Ratio (CBOE): 0.77; -0.11
Note: Watch the VIX, it will tell us when we are moving back to a more rational market.
*The Market Volatility Index (VIX) measures the volatility of the market. A recent news story described it as “the options market’s gauge of investor fear.” Traders use VIX as a general inverse indicator of market volatility and sentiment. High numbers mean that there’s excess bearishness, and low numbers indicate excess bullishness. The VIX is updated intraday by the Chicago Board Options Exchange (CBOE), using Standard & Poor’s 500 Index (SPX) bid/ask quotes. It was created in 1993.
**The CBOE NAS Volatility Index (VXN) employs the same formula used to calculate $VIX, which is based on the implied volatility of S&P 500 index options. This formula is derived from a basket of put and call options. Some are out of the money, some in the money, and some at the money. The resulting $VXN represents the implied volatility of a hypothetical 30-day option that is at the money.
***The VXO is the ticker created to track the “original VIX” that was calculated using the prices of S&P 100 options. The new VIX uses the ticker $VIX and is calculated using the prices of S&P 500 options. The fundamental nature of the VXO is the same as the VIX, but it is less robust and not as simple as the VIX.
Bulls vs. Bears:
Bulls: are in at 38.7% down from 43.0%, they are still above 35% the level below which is considered bullish, this does not mean the current action is bearish. That level is up at 55%. The Bulls bottomed on this leg lower at 21.3% in November 2008.
For your reference: The Bulls bottomed in the summer of 2006, the last major round of selling ahead of this 2007 high, near 36%; 35% is considered Bullish.
Bears: the Bears growled again coming in at 37.6% up from 34.4% after declining over the past two weeks. Now they are back above 35% the level considered Bullish.
For your reference: Last October’s extreme move over 50 took bearish sentiment to its highest level since 1995. 35% is the level that historically indicates excessive pessimism
What to expect this week, and down the line…
Tomorrow is the beginning of the Chinese New Year celebration, The Year of the Ox (Bull), so it is fitting that I give you a special Chinese New Year’s Greeting: Open your windows and doors and let in the Sun.
Also, this week, on Tuesday, the Swiss hamlet Davos plays host to the World Economic Forum, and the word is that the ranks of the Masters of the Universe has shrunk and that pols not titans, will be the big draw this year, signaling the shift of power away from the free market to governments that are working to shore up their shrinking economies.
Last year the Hot Topic was trading fraud, it set the tone for they entire year. This year the Hot Topic will be economic rescue and recitation.
And of course we will have a full five days of trading action this week as we come into the full swing of the earnings season and tons of economic data. A good friend of mine last Friday said that there is so much information to digest it gives her heartburn. Me, well, I get dizzy trying to figure it out.
This week starts with lots of earnings reports and the analysts will be looking for good stocks that can move North. There are plenty of them too, I believe, as the old guard has died off and bright new companies are poised to fill in the void.
This is the way of business; many, if not most of the leaders in US business when I was a boy have gone the way of the dinosaurs. That is a cycle and we are witnessing it now as Icons of the past slide into oblivion form the leading investment sectors. The strong will survive; the weak and vulnerable will perish.
The S&P 500 is set up to test the November 2008 low in here as the consolidation continues. That means continuing opportunity not death and destruction.
Chartists plot your points
(Resistance/Support on the DJIA, S&P 500 & the NAS)
DJIA: Close 8077.56
Resistance:
8141 early December 2008 low
8175 October 2008 closing low. Key
8197 2nd October 2008 low
8263 10 day EMA
8419 late December 2008 closing low
8451 early October 2008 closing low
8506 50 day SMA
8521 interim high March 2003
8626 December 2002
8659 50 day EMA
8829 late November 2008 high
8934 December 2008 closing high
8985 closing low in the mid-2003 consolidation
9012 90 day SMA
9200 July 2003 high
9323 June 2003 high
9575 September 2003
9654 November 2008 high
Support:
7965 mid November 2008 intraday low.
7882 early October 2008 low. Key.
7702 iJuly 2002 low
7524 March 2002 low
7449 November 2008 low
7282 October 2002 low
S&P 500: Close 831.95
Resistance:
839 early October 2008 low
847 10 day EMA
848 October 2008 closing low
853 July 2002 low
857 December 2008 consolidation low
860 18 day EMA
866 2nd October 2008 low
889 interim 2002 high
893 50 day EMA
896 late November 2008 high
899 early October 2008 closing low
919 early December 2008 high
940 90 day SMA
965 2003 consolidation low
995 June 2003 consolidation high
1008 November 2008 high
Support:
818 November 2008 low
815 early December 2008 low
804 January 2009 selloff low
800 March 2003 post bottom low
768 2002 Bear Market low
741 November 2008 low
NAS: Close1477.29
Resistance:
1493 October 2008 low and late December 2008 consolidation low.
1499. 2008 closing low
1507 10 day EMA
1521 late 2002 high
1521 50 day SMA
1524 18 day EMA
1536 late November 2008 high
1542 early October 2008 low
1565 2nd October 2008 low
1576 50 day EMA
1603 December 2008 high
1620 early 2001 low
1644 August 2003
1662 90 day SMA
1752 from 2004
1782 August 2004
1786 November 2008 high. Key.
1948 early October 2008 gap open down
Support:
1440.86 low on this sell off
1428 November 2008 low
1398 early December 2008 low
1387 the 2001 low
1295 November 2008 low
Market Insights on Crude Oil, Gold and Silver, and Currencies
Crude Oil falls, ending rally on economic outlook, and the US$
Crude Oil slid early today, cutting into a 14% three-day gain as traders set aside the latest evidence of OPEC’s production cuts to focus on forecasts for a deepening global economic downturn and the stronger dollar.
Activity in Asia was muted by holidays that shut most of the region’s big trading centers except Japan.
US light crude for March delivery fell 74 cents to US$45.73 bbll by 0134 GMT (8:34 P.M. EST). The contract rose US$2.80, or 6.41%, to US$46.47 bbl last Friday, capping a rebound in the front month contract from below US$33 bbl a week ago.
London Brent crude fell US$1.02 to US$47.35.
“There is some profit-taking after the strong gains last Friday. The fundamentals for the oil market are still quite pessimistic and today’s fall may be due investors pulling out of oil to put money into gold to gain more certainty,” said Tetsu Emori, fund manager at Astmax Co Ltd.
Analysts said oil was also again trading inversely against the U.S. dollar, which rose nearly 1 percent against the euro to stand near the six-week high it hit on Friday as weak UK and euro zone data led investors to take refuge in the greenback.
The main driver of oil’s sharp $2 rally on Friday was the latest evidence of OPEC making good on most of its pledged 2.2 million barrel a day (bpd) production cut this month, with oil consultant Petrologistics estimating OPEC output would fall by 1.55 million barrels per day in January.
Worries about the health of the global economy and its impact on world energy demand short circuited the rally in Crude Oil.
Gold rallied 5% last Friday
Gold rallied 5 percent on Friday, briefly breaking above the US$900oz level as volatile currency markets and solid investment demand spurred bullion buying. The precious metal reached record highs in both sterling and euro terms, signaling bullion’s strength against not only the US$ but also currencies across the board. Spot Gold rose as high as US$902.50 oz, which was the highest price since October 10, 2008. It rose to an all-time high of 700.37 in euro terms, and a record 659.71 GBPs when priced in sterling. “I think that people are coming to the new year realizing that the financial crisis is going to last longer than they had expected,” said Caesar Bryan, portfolio manager of GAMCO Gold Fund. Bryan, who manages US$350MM in fund assets, said that more nervous investors were turning to gold because of high volatility in the foreign exchange market. “There is ongoing nervousness in the market about the banking sector,” said Tom Kendall, precious metals strategist at Mitsubishi. “If you are looking to park your cash…there are not many options around and gold is one option.” Demand for investment products such as coins and bars and physically backed vehicles such as exchange-traded funds has been strong this week. “Investors are getting out of currencies and getting into gold,” said Simon Weeks, director of precious metals at the Bank of Nova Scotia. While strength in the dollar against the euro tends to weigh on gold, which is often bought as a hedge against weakness in the U.S. currency, this correlation was trumped by interest in bullion as a safe haven.
FOREX Currency Trading
EUR/USD Outlook
EUR/USD fell further to as low as 1.2764 last week. From a short term angle, initial bias remains on the downside as long as 1.3085 minor resistance holds. As discussed before, correction from 1.2329 has possibly completed at 1.4719 already. Current decline from 1.4719 is expected to extend to retest 1.2329 low. On the upside, above 1.3085 minor resistance will bring more consolidation, but short term outlook will remain bearish as long as 1.3385 resistance holds.
However, note that break of 1.3385 will indicate that fall from 1.4719 has completed. This will argue that such decline is merely part of the consolidation that started at 1.2329, which is indeed still in progress. In such case, stronger rebound could be seen, targeting 1.4719 high.
In the bigger picture, a medium term bottom in place at 1.2329 and fall from 1.6038 should have completed. Whether such fall is impulsive or corrective in nature is debatable. But after all, in either case, as long as 1.4867 resistance holds, such decline is still in favor to resume and should target 1.1639 medium term support next. Though, some larger scale consolidation could be seen first. However, above 1.4867 will dampen the bearish view and argue that stronger rally would be seen to retest 1.6038 record high.
In the long term picture, outlook is rather unclear for the moment. While 1.6038 is no doubt an important long term top, there is no clear answer on whether subsequent price actions from 1.6038 are unfolding as sideway consolidation, deep correction, or a reversal in trend. Nevertheless, note that another fall is still in favor as long as 1.4867 resistance holds and in such case, EUR/USD should at least have a test of 1.1639 long term support.
Red Roadmaster’s Market Insights and some Rules to play by…
Buy Low Sell High, that’s the Idea
The year 2008 gave us all the worst Bear Market in a very long time, for some the worst in their lifetime, but the odds are good that 2009 will bring on a Bull Market.
These are some of the reasons: 1. the sentiment is bad, more than bad, it is terrible. Even folks that are excited about the potential changes and rescues that are being put on the table by President Obama think that a US and world recovery will take a long time. So from experience, I know that when everyone thinks one way, it is wise to think 180 degrees different, 2. The market always looks six to nine months ahead. Sure, there is more bad news ahead as the market has and is telling us now, but it is likely that the second half of 2009 will show us real economic progress, and that will begin to appear in the market in the months ahead, and 3. the best stocks are already acting better, that was not the case at the end of October and early November. If you were buying then you were not smart, it was pure gambling. You would have has more fun at Hollywood Park and Santa Anita.
Now it is becoming clear that institutional investors are coming back into the market and what are they doing? They are Buying Low and building positions as they do at the Bull gets ready to charge again.
Having said that, if you can buck the sentiment, and start early to buy low like the institutional investors you will have learned another one of investing Top Secrets; buy good stocks when they are undervalued. This crisis is handing out opportunities that may never be seen again. Again, rest assured, stocks in good companies will turn back up, the Bull will charge again, and perhaps this is the best investing scenario since the early 80’s. It is happening now and savvy traders and investors are positioning for the run.
Again, rest assured, stocks in good companies will turn back up, the Bull will charge again, and perhaps this is the best investing scenario since the early 80’s. It is happening now and savvy traders and investors are positioning for the run.
And do not forget to always include some small, mini and micro cap (pennies and juniors) issues in your sights; they can give you explosive percentage returns like no others.
During this coming year I will be looking for Little Gems in growing markets, as I analyze and determine each one’s potential for growth I will alert you by profiling and presenting them in this section.
Have a great week, and stay tuned.
All the best in 2009,
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