Wednesday, April 9, 2008

Stock Market Alert: Three Reasons to be Worried

Well it was another red day in the markets as the Dow lost another 49 points. What concerned me more today was the news. I will link the three articles below with a quote from each and then give you my take:

1. UPS misses earnings and cuts outlook.

"UPS pared its per-share profitforecast yesterday to as low as 86 cents from 94 cents to 98 cents as fuel costs rose and a sagging economy weighed on premium-priced air shipments to consumers.

Consumer spending, which accounts for more than two-thirds of the economy, will rise at an average annual pace of 0.5 percent in the first half of the year, the survey showed. That would be the smallest two-quarter gain since it dropped in the six months that ended March 1991."


2. Libor continues to rise as banks refuse to lend to each other.

"Money markets in the US and Europe are signalling renewed fears about the financial strength of banks, with key confidence barometers almost returning to the levels that preceded the collapse of Bear Stearns.

In the US on Wednesday, that spread rose rose 2bp to 77.5bp. The difference had climbed above 80bp on concerns about Bear, then fell back to 60bp in mid-March after the investment bank was sold to JPMorgan Chase."

3. Wall St.'s Banks may have to cut 35% of jobs.

"April 9 (Bloomberg) -- Kenneth Moelis, the former president of UBS AG's investment bank, said Wall Street firms may have to eliminate as much as 35 percent of employees as leveraged lending dwindles and the pace of mergers and acquisitions slows.
``The Street got staffed up to support what was a slight bubble in M&A,'' Moelis, 49, said in an interview on Bloomberg Television today. ``You're going to see a significant retrenchment.''

My take:

Lets start with UPS. This is pretty simple. UPS is a bell weather for looking at how the consumer is doing. When people buy UPS has more packages to ship. Its a pretty direct correlation. As you can see the expectations is .5 growth over the first 6 months which would be the worst since 1991! This is 70% of the economy! The UPS news took its toll on the consumer companies like retailers today. If the consumer continues to struggle then this economy is going nowhere and the stock market will nosedive.

The Libor story. This is the overnight lending rate that banks use to lend to each other. Its back up to where it was before Bear Stearns got bailed out. The banks continue to not to lend to each other because they don't trust each other's balance sheets and they are not confident they will get paid back. The banks are basically scared ***less right now.

This fear will eventually will get passed on to us in the form of higher mortgage rates. RIGHT NOW, THE BANKS HAVE ZERO DESIRE TO LEND MUCH MONEY BECAUSE OF INSOLVENCY ISSUES. They are broke and CANNOT lend like they did during the housing bubble. This will eventually crush the housing market.

So far the Fed rate cuts have kept interest rates at decent levels which has allowed us to avoid the credit crunch for the most part. However, as this fear among the banks continues to rise, it will eventually push mortgage rates through the roof. They have to pass this pressure on to us at some point by rising rates. If you think housing prices are falling fast now, wait until rates are at 7-8%!!!

This is where we are heading. Remember the 13% interest rates on mortgages in the early 80's?? Don't think it can't happen again.

The third story gives you an idea of how difficult things will be for the investment banks going forward. I think I have been hard enough on them today. This story confirms what I discussed this morning.

Overall:

Take financials and the consumer out of the economy and you will have a stock market at much lower levels. We are far from the bottom and I see no end in sight right now. Continue to stay defensive and do not be surprised if there is a market event in the next few weeks. The market will eventually cave from all of these combined pressures.

6 comments:

Anonymous said...

keep up the good work. Another consideration is the motivation to keep large sums of cash in baks: there simply isn't one. low interest rates along with the threat to any bank of going under leaves one to pull their cash out and stash it.

Jeff said...

Anon

Thanks. I agree with you. I got quoted 2% on a CD yesterday. If it wasn't FDIC insured that money would be here in my house.

I do plan on hitting the ATM several times over the next few weeks just to have some cash on hand in case the banks freeze up.

We are seeing some crazy times in the economy aren't we?

Avl said...

Good post, jeff.
Jeff, I think we're going to see the DJIA, and to a lesser degree the S&P 500, become unusually lagging as trailing indicators of the economy. Not 'news' to you, I know. There's just too much investor psychology inertia to overcome for it to be a good indicator at this point, thanks to a new strain/variant of ‘Irrational Exuberance', called ‘denialitis’ and ‘V-shape-recession-Hopeitis’. I'm chucking market watching in favor of tracking default rates on 8 categories of personal loans. I'm looking more at FT payrolls and salaries/wages, and less at 'official unemployment' figures. More lenders are choosing not to foreclose and not to let houses become REOs, when borrowers are more than 90 days behind, but they’re not re-negotiating the terms either. This is an old lender’s trick and it will compromise national foreclosure data just as not counting the ‘idle jobless’, the under-employed and 1099 workers skews unemployment data.
Commercial vacancies are worth tracking. Condo & home sales data is worthless, only data on completed closings matters. People are still signing sales contracts only to find they can’t get a mortgage.

Jeff said...

avl

I agree wages are flat and inflation is rising which is causing all sorts of problems for the consumer.

I agree, the foreclosure data is not accurate at all as you so well described.

I think however that as these banks face capital issues and insolvency, they are going to start getting more aggresive at getting those those REO's off their books because they need the cash.

The squatters might be back in rentals sonner rather then later. This is such a mess. I think this is going to take years to clean up.

Avl said...

Another good thing about your blog is how you address options for actions by readers, as well as an analysis of what we're observing.
It's a matter of time b4 the stocks devalue accordingly. Due to the banks' fuzzy reporting, etc, it will get harder to learn ‘real time’ how bad parts of our local RE market are. Figuring how the metastasizing credit crisis may effect our own city government (muni bonds), favorite retailer, closest strip mall & mega-mall, our HELOC, and our employer, are now new territories for us consumers & homeowners.
You rightly emphasize the importance of ‘duration’. Here’s a link to an archived 2000 column by Brian Trumbore on Wall Street’s history sketching how the Crash of 29 was set-up, and dragged out weekly, monthly, and ultimately didn’t hit the lowest trough until July 1932. Scroll past the excellent narrative/storytelling to 22 data points (1929-1932) that chart all the gut-wrenching head-fakes, many post-Oct '29, and how market psychology may have responded. Anything sound familiar?

www.buyandhold.com/bh/en/education/history/2000/102299.html

I'm also reading his accounts of on 1973-75 and 1979-1982, and how investors, business leaders, fed chiefs, and economists thought things were unfolding for them.

Jeff said...

Avl

I finally have some time to get on here. Been a busy day.

I agree that all of the fuzzy math and excesses could take years to workout.

I think the market will drop follwed by a period of stagflation ala the 1970's that you just noted.

Duration is a good possibility here. there have been a few 20 year bear markets this century. 1929 until the late 1940's after the war and 1960-1982 when Volker finally killed inflation.

Thanks for the link.