The equity market rally still has has some room to extend its gains, but not a great deal.
As I indicated in my weekend report before this bear market rally began, the equity market's prior oversold condition, some 32% below the 200-day trailing price average, indicated a rise back to that downtrend line. For example, the S%P 500 stock index hit a low of 666, which indicated a 32% potential rise back to the area of 875 to return the index back to its 200-day average price downtrend. As of this Friday, the S%P 500 stock index closed at 814, after a Friday decline of 17 points. While a bear market rally can overshoot on the high side, it can also undershoot.
Based on the tendency of the market to return to its 200-day moving average (after moving more than 30% above or below that average), there are only some 60 points or some 9% comfortably left in the bear market rally before the overwhelming risk of a renewal of the cyclical decline swamps the market's new-found bullishness. Can I be wrong? Of course. But, the broad array of market and economic evidence suggests otherwise.
Among the most serious risks to the sustained extension of the rally is the prospect of a continued deepening of the recession. The very few positive economic signs of late are highly suspect. That is certainly true of retail sales, home sales and durable goods orders, which are either the product of inflated seasonal adjustments far beyond those appropriate or unsustainable, temporary aberrations. The continuing decline in the economy is reflected in the decline in consumer confidence, personal income, both nonresidential and residential investment,industrial production, the capacity utilization rate, as well as the high level of initial claims for unemployment benefits. Real GDP plunged 6.3% in the fourth quarter, with declines as large or larger virtually assured in both the first and second quarters. Coming reports will create strong headwinds for the rally. The March employment report to be released next Friday is likely to include a drop in nonfarm payrolls as large or larger than the 651,000 February decline and a rise in the unemployment rate to an horrendous 8.5% or higher from 8.1%.
Perhaps even a greater threat to the equity market rally is the prospect of disappointing first quarter corporate earnings reports. Expect surprise declines in earnings from a number of key companies that will force dividend reductions and an erosion of stock prices.
The volitility index, the VIX, remains above the danger level of 40, suggesting equity market vulnerability. And while market sentiment was overwhemingly bearish before the rally began, a contrarian market positive, much of that bearishness has since been replaced with optmism, a contrarian market negative.
The equity market has already priced in a number of potential market positives that are anticipated to begin in April. These include the expected reintroduction of a form of the uptick rule and a modification of the mark-to-market requirement, giving institutions with losses the opportunity to substitute an alternative to extreme distress prices on problem assets. Thus, the announcement of those changes is unlikely to be a spur to buying.
There are unlikely to be any further Federal government announcements ahead that match the stock market positives of the details of the stimulus program, the various efforts to bail out the financial system, the Fed purchase of Treasuries and the consequent reduction of mortgage rates. These are all already in the market. Unfortunately, even with all these efforts and proposed spending, it remains an open question as to whether these efforts will be effective in stemming the recession and the credit crunch any time soon.
The equity market has benefited both from the covering of short positions (leaving a smaller underpinning of shorts still to be covered)and a shift from the bond market.That has not prevented an improvement in the bond market, in Treasuries as well as corporates. For example, Moody's cut the rating on GE Capital bonds to Aa2 from Aaa, a two grade ratings reduction, versus S&P's one grade reduction to AA+ from AAA. But, the rating reductions had been previouly reflected in the exceptionally wide quality yield spreads from Treasuries. That helps explain
why even with the ratings cut and the shift to equities, the yields on long term GE bonds have been declining from a high of 9.5% just a few weeks back to 8.125% currently. This and other distressed corporate bonds remain attractive buys with a view to declines in the excessive default risk reflected in their yields at the first realistic sign of eventual economic recovery.
A growing positive for the bond market, especially distressed credits, is a growing recognition that the rise in the price of credit default swaps, the insurance against debt default, has been partially manipulated higher by short sellers with an eye to driving equity and bond prices lower. It requires only a relatively modest cost to drive the price of a credit default swap higher, thereby creating an exaggerated impression that there is substanially more risk in that company's bonds and stocks than warranted.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email Address: philipbraverman@Gmail.com
To access this and earlier reports go to internet explorer and type in the following: philipbraverman.blogspot.com
Friday, March 27, 2009
Friday, March 20, 2009
Fed steps up efforts to spur economy
The Fed plan to buy at least $300 billion in Treasury bonds (forecast in earlier blogs)and its increased support for the mortgage market, along with the wide array of Federal government stimulus efforts, will eventually soften the economic and financial pain. But, unfortunately, not for some time. The recession will probably not end until next year or even 2011. The recession is still worsening faster than government efforts to buoy the economy.
The Fed induced decline in Treasury bond yields will help bring mortgage rates down, thereby shortening the length of the housing recession. But there is no end to any aspect of the recession in sight.
Even the new three part Federal program now reportedly being prepared for announcement to buy bank toxic assets in conjunction with the private sector is not likely to be sufficient to turn the tide of progressive recession and financial strain. The new plan presumably will involve an FDIC backed fund to invest in a portfolio of loans along with public-private partnerships. The major problem in buying toxic assets from financial institutions remains deciding on their price. Too low a price that may be sufficient to eventually generate a profit for the new entity would create a loss for the selling institution that would reduce their capital and even put their survival in jeopardy. Too high a price that insures survival of the selling instution would produce losses for the new Federal buying institution. Mortgage-backed debts are threatened by the continuing and prospective decline in home prices. The rising unemployment rate, destined to top 10% or even 11%will create more housing distress, and much lower home prices, as will the continuing rise in foreclosures and huge overhang of unsold and unoccupied homes.
Until the plunge in home prices is arrested, there will be no end to the pronounced financial distress. The primary answer to the decline home prices is to find new buyers for the available overhang of unsold homes. A Federal program to buy vacant the homes, refurbish them and make them available on favorable terms to would be home buyers would help. Offering fast track citizenship to foreign investors who purchase homes would also help stabilize the housing plunge. These approaches would add new home buyers. A moritorium on foreclosures and an end to required bank sales of foreclosed properties would slow the rise in the inventory of unsold homes. As if the continuing residential real estate crisis were not enough, there is a rapidly deepening problem developing in commercial real estate, both in offices and retailing, that together with increasing credit card delinquencies and defaults, will significantly worsen and widen the credit crunch.
Despite the harsh economic and financial reality, the bear-market equity rally still has further to go. But it is not the beginning of a cyclical rise in equity prices. The recession is still deepening, inevitably bringing with it more reductions in earnings, more losses, and more cuts in dividends than the market expects.
Though stock market prices retreated on Friday, they still rose marginally for the week, not only keeping their strong prior week rally intact, but slightly adding to it. The equity market has been up for six of the past nine days. It is not surprising that the market gave up ground on Friday. There is always the risk of adverse market surprises over the weekend, which still far exceeds the potential for surprise gains. However, the market should add to its temporary rise over coming weeks,reversing its still oversold and excessively bearish extremes. But, once it returns to its 200-day moving average, with its decided downward slope, the rally is likely to end amid continuing negative market, economic and financial news. While individual investors put money into the equity market the past two weeks,it is a decided market negative that there is no parallel rise in companies buying their own stock.
The rise in near-term inflation concerns related to the broadening Federal deficit (stemming from the Federal stimulus)and Fed expansion is grossly overblown. Even with a US Federal budget deficit currently estimated at an astronomical 13.7% of 2009GDP and expected to rise further (versus 11.3% for the UK, 3.6% for China and 5.6% for Japan),the major near-term US and global threat is deflation. Inflation will eventially return as an over-riding concern. But not for a number of years. Timing in investment is everything. Despite bouts of inflation concerns, US Treasury bond yields will stay low for years to come. Though it is not sufficient, it is a necessary prerequisite to economic recovery. Thus, it is far too early to expect a recovery in commodities, the main focus and benefit of rising inflation concerns. There is a massive overhang of excess global productive capacity and labor that precludes it.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports at the following internet explorer address:
philipbraverman.blogspot.com
The Fed induced decline in Treasury bond yields will help bring mortgage rates down, thereby shortening the length of the housing recession. But there is no end to any aspect of the recession in sight.
Even the new three part Federal program now reportedly being prepared for announcement to buy bank toxic assets in conjunction with the private sector is not likely to be sufficient to turn the tide of progressive recession and financial strain. The new plan presumably will involve an FDIC backed fund to invest in a portfolio of loans along with public-private partnerships. The major problem in buying toxic assets from financial institutions remains deciding on their price. Too low a price that may be sufficient to eventually generate a profit for the new entity would create a loss for the selling institution that would reduce their capital and even put their survival in jeopardy. Too high a price that insures survival of the selling instution would produce losses for the new Federal buying institution. Mortgage-backed debts are threatened by the continuing and prospective decline in home prices. The rising unemployment rate, destined to top 10% or even 11%will create more housing distress, and much lower home prices, as will the continuing rise in foreclosures and huge overhang of unsold and unoccupied homes.
Until the plunge in home prices is arrested, there will be no end to the pronounced financial distress. The primary answer to the decline home prices is to find new buyers for the available overhang of unsold homes. A Federal program to buy vacant the homes, refurbish them and make them available on favorable terms to would be home buyers would help. Offering fast track citizenship to foreign investors who purchase homes would also help stabilize the housing plunge. These approaches would add new home buyers. A moritorium on foreclosures and an end to required bank sales of foreclosed properties would slow the rise in the inventory of unsold homes. As if the continuing residential real estate crisis were not enough, there is a rapidly deepening problem developing in commercial real estate, both in offices and retailing, that together with increasing credit card delinquencies and defaults, will significantly worsen and widen the credit crunch.
Despite the harsh economic and financial reality, the bear-market equity rally still has further to go. But it is not the beginning of a cyclical rise in equity prices. The recession is still deepening, inevitably bringing with it more reductions in earnings, more losses, and more cuts in dividends than the market expects.
Though stock market prices retreated on Friday, they still rose marginally for the week, not only keeping their strong prior week rally intact, but slightly adding to it. The equity market has been up for six of the past nine days. It is not surprising that the market gave up ground on Friday. There is always the risk of adverse market surprises over the weekend, which still far exceeds the potential for surprise gains. However, the market should add to its temporary rise over coming weeks,reversing its still oversold and excessively bearish extremes. But, once it returns to its 200-day moving average, with its decided downward slope, the rally is likely to end amid continuing negative market, economic and financial news. While individual investors put money into the equity market the past two weeks,it is a decided market negative that there is no parallel rise in companies buying their own stock.
The rise in near-term inflation concerns related to the broadening Federal deficit (stemming from the Federal stimulus)and Fed expansion is grossly overblown. Even with a US Federal budget deficit currently estimated at an astronomical 13.7% of 2009GDP and expected to rise further (versus 11.3% for the UK, 3.6% for China and 5.6% for Japan),the major near-term US and global threat is deflation. Inflation will eventially return as an over-riding concern. But not for a number of years. Timing in investment is everything. Despite bouts of inflation concerns, US Treasury bond yields will stay low for years to come. Though it is not sufficient, it is a necessary prerequisite to economic recovery. Thus, it is far too early to expect a recovery in commodities, the main focus and benefit of rising inflation concerns. There is a massive overhang of excess global productive capacity and labor that precludes it.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
Email address: philipbraverman@Gmail.com
Access this and earlier reports at the following internet explorer address:
philipbraverman.blogspot.com
Friday, March 13, 2009
The current bear market rally in equities has much further to run
The aggressive bear market rally in equities, that I predicted would begin last week, has substantially further to run. That prospect reflects a number temporary, but powerful forces.
The equity market still has a sizable underpinning of short positions that serve as the tinder for an explosive extension of the rally. Those short positions are made increasingly vulnerable by a continued rally. Accordingly, those shorts will be increasingly pressured into covering, which as many of you know involves buying back the borrowed stock previously sold "short". The consequence, is of course a run-up in market prices. Though the data is lagged, the market's short positions were still rising at the end of February.
Prior to last week's rally, the market sell-off had carried market pessimsm to unsustainable extremes. When an index of market participants with bullish sentiment, for example, falls below 20% out of a hundred, and pessimistic sentiment rises above 80%, at least a temporary reversal of that one-sided market trend and sentiment typically ensues. The same type of clear contrarian market buy signal message was conveyed by stock index levels that fell more than 30% below their 200-day moving average. A complete reversal of that excess sell-off suggests the potential for as much as a 30% price retracement in this bear-market rally, while still maintaing its bear market status. The Dow, after hitting a new 12-year low on Monday, rose 9% over the past four days. Thus, another up to 20% plus rise remains possible before the cyclical Dow price downtrend line is reached. This is not a cyclical market rise.
Recent and prospective key market developments add increased buying confidence to this temporary rally's potential. Perhaps chief among these was a report that the uptick rule, which puts a road block in place before a stock can be sold short, is reportedly scheduled to be reintroduced in April. That rule will prevent a continuous price decline based on short sales. Instead, under the uptick rule, the price of a stock has to rise from the prior sale before a short sale can take place.
Also adding to equity market confidence is a reported official review of the current mark-to-market accounting rule requirement. This unreasonable requirement requires financial companies in particular, to write down the value of their assets, whether they intend to sell the asset or not, if there has only been a sale of that asset by some other company at distressed prices or worse still there is no active market. That accounting write-down is required even for mortgage-related assets which are current (on which mortgage payments are up to date). Such write-downs require charge-offs of the institution's capital, even if that process pushes them to the point of technical bankruptcy. There is an unrealistic hope that this pernicious accounting rule will be permanently cancelled or at least temporarily suspended. Those expectations appear unrealistic. While there continues to be unwarranted support for a continuation of the mark-to market rule by the SEC and other Federal regulatory agencies, there is a willingness to at least soften the burden imposed by mark-to-market requirement. A compromise that is being suggested would give the institutions the latitude to substitute a model based estimate of ultimate value. Even that compromise would be a major improvement.
Other equity market positives include a report by Citibank that it was profitable thus far this year (which does not include end of quarter losses due to write-downs of assets. There was similar reassurance of profits for J. P. Morgan Chase and Bank of America. Also a plus for the market, were comments by President Obama and other US government officials that reaffirmed the Administration's intent to maintain the capitalist system and avoid a permanent nationalization of the banking system, thereby reassuring many with concerns to the contrary.
After this bear maeket rally inevitably runs its course, the downtrend in equity prices will reassert itself. That will reflect the continued global economic contraction,which will likely persist into next year. That will bring with it more intense domestic and international competition. As a consequence, expect declining corporate earnings, further reductions in dividends, outright deflation, and the consequent loss of business's ability to raise prices without a pronounced loss of market share for their product or services.
In a probable continuing trend for many beleagered credits, this week GE's credit rating was reduced. As was widely expected and more than fully reflected in its market yields, General Electic debts were downgraded one step to the top AA rating from triple A by Standard & Poor's. In addition, the rating agency charaterized the rating as stable. Though it is unclear what Moody's, which still has a Aaa rating on GE, will do, GE bond prices rallied this week. After briefly exceeding 9.5% for some long term GE capital bonds, market yields receded to roughly 8.7% and below as considerable buying demand surfaced. The still wide quality yield spread from comparable maturity Treasury yields reflects the percieved but exaggerated risk of default. Treasury bond yields will decline anew as deflation takes holds. And the yield spread from Treasuries to lesser credits, including GE capital, will also narrow as the economy eventually shows signs of recovery and the risk of default evaporates.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northpot, New York 11731
Email address: philipbraverman@Gmail.com
The equity market still has a sizable underpinning of short positions that serve as the tinder for an explosive extension of the rally. Those short positions are made increasingly vulnerable by a continued rally. Accordingly, those shorts will be increasingly pressured into covering, which as many of you know involves buying back the borrowed stock previously sold "short". The consequence, is of course a run-up in market prices. Though the data is lagged, the market's short positions were still rising at the end of February.
Prior to last week's rally, the market sell-off had carried market pessimsm to unsustainable extremes. When an index of market participants with bullish sentiment, for example, falls below 20% out of a hundred, and pessimistic sentiment rises above 80%, at least a temporary reversal of that one-sided market trend and sentiment typically ensues. The same type of clear contrarian market buy signal message was conveyed by stock index levels that fell more than 30% below their 200-day moving average. A complete reversal of that excess sell-off suggests the potential for as much as a 30% price retracement in this bear-market rally, while still maintaing its bear market status. The Dow, after hitting a new 12-year low on Monday, rose 9% over the past four days. Thus, another up to 20% plus rise remains possible before the cyclical Dow price downtrend line is reached. This is not a cyclical market rise.
Recent and prospective key market developments add increased buying confidence to this temporary rally's potential. Perhaps chief among these was a report that the uptick rule, which puts a road block in place before a stock can be sold short, is reportedly scheduled to be reintroduced in April. That rule will prevent a continuous price decline based on short sales. Instead, under the uptick rule, the price of a stock has to rise from the prior sale before a short sale can take place.
Also adding to equity market confidence is a reported official review of the current mark-to-market accounting rule requirement. This unreasonable requirement requires financial companies in particular, to write down the value of their assets, whether they intend to sell the asset or not, if there has only been a sale of that asset by some other company at distressed prices or worse still there is no active market. That accounting write-down is required even for mortgage-related assets which are current (on which mortgage payments are up to date). Such write-downs require charge-offs of the institution's capital, even if that process pushes them to the point of technical bankruptcy. There is an unrealistic hope that this pernicious accounting rule will be permanently cancelled or at least temporarily suspended. Those expectations appear unrealistic. While there continues to be unwarranted support for a continuation of the mark-to market rule by the SEC and other Federal regulatory agencies, there is a willingness to at least soften the burden imposed by mark-to-market requirement. A compromise that is being suggested would give the institutions the latitude to substitute a model based estimate of ultimate value. Even that compromise would be a major improvement.
Other equity market positives include a report by Citibank that it was profitable thus far this year (which does not include end of quarter losses due to write-downs of assets. There was similar reassurance of profits for J. P. Morgan Chase and Bank of America. Also a plus for the market, were comments by President Obama and other US government officials that reaffirmed the Administration's intent to maintain the capitalist system and avoid a permanent nationalization of the banking system, thereby reassuring many with concerns to the contrary.
After this bear maeket rally inevitably runs its course, the downtrend in equity prices will reassert itself. That will reflect the continued global economic contraction,which will likely persist into next year. That will bring with it more intense domestic and international competition. As a consequence, expect declining corporate earnings, further reductions in dividends, outright deflation, and the consequent loss of business's ability to raise prices without a pronounced loss of market share for their product or services.
In a probable continuing trend for many beleagered credits, this week GE's credit rating was reduced. As was widely expected and more than fully reflected in its market yields, General Electic debts were downgraded one step to the top AA rating from triple A by Standard & Poor's. In addition, the rating agency charaterized the rating as stable. Though it is unclear what Moody's, which still has a Aaa rating on GE, will do, GE bond prices rallied this week. After briefly exceeding 9.5% for some long term GE capital bonds, market yields receded to roughly 8.7% and below as considerable buying demand surfaced. The still wide quality yield spread from comparable maturity Treasury yields reflects the percieved but exaggerated risk of default. Treasury bond yields will decline anew as deflation takes holds. And the yield spread from Treasuries to lesser credits, including GE capital, will also narrow as the economy eventually shows signs of recovery and the risk of default evaporates.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northpot, New York 11731
Email address: philipbraverman@Gmail.com
Friday, March 6, 2009
The 8.1% February unemployment rate is still far from its coming double-digit peak
The economic outlook is turning even more pessimistic. Expect real GDP in the first quarter to decline even more steeply than the 6.2% fourth quarter plunge, perhaps reaching 7%. Even an 8% first quarter real GDP decline cannot be ruled out. That is the inference of the 0.7% decline in the index of aggregate hours worked in February, following a 0.6% January drop. This series, released with the employment report and utilized to predict real GDP, fell at a 2.1% rate thus far in the first quarter. That is a worrisome acceleration from a 1.9% fourth quarter pace. This is just the latest indication that the US and global economic and financial distress continues to deepen. Nevertheless, there is potential for an aggressive bear market rally. More about that later.
The official Bureau of Labor Statistics February unemployment rate soared to 8.1% from 7.6% in January. Before the cyclical rise in the unemployment rate tops out this recession, probably in 2010, the unemployment rate is likely to exceed the previous post World War 11 recession peak of 10.8% in 1982. Indeed, the 10% level is likely to be reached before this year is out.
The number of those currently counted as unemployed in the Household survey, from which the unemployment rate is derived. now totals 12.5 million, up 851,000 from January and up 1.4 million from December 2008. Since the recession began in December 2007, job losses total 4.4 million,including 2.6 million,or more than half, in just the past four months alone. Thus, it is clear that the pace of job loss is accelerating rapidly.
Though the official unemployment rate is bad enough, it nevertheless understates the severity of the problem. The unemployment rate does not count those who have been forced by the adverse economy to accept part-time work, temporary work, positions far below levels for which their training qualifies them or who have become so discouraged by the absence of suitable employment opportunities that they are no longer activly seeking employment. The u-6 unemployment rate, which attempts to reflect some of these problems, reached 14.8% in February. This is the highest level in the 15 year history of this series.
Nonfarm payrolls fell 651,000 in February in the more familiar establishment survey, extending the steep 655,000 downward revised January decline. This series also significantly understates the actual nonfarm payroll job loss. This is because the reported February decline comes after deducting an unrealistic estimated 134,000 rise in payroll employment at new firms that are not being sampled. After removing this phantom employment gain, the February nonfarm payroll drop increases to 789,000. Judging by recent related reports, the March declines in employment will be at least as severe as in February and more likely larger.
The equity market is overdue for a temporary bear market rally. Indeed, I am surprised that one has not begun recently. President Obama has weighed in with a recommendation that equities should be purchased. The value in his comment does not lie in the merit of his analysis, but in the importance he appears to be placing on the equity market. That helps mitigate market concerns that he is anti-capitalist. A number of noted technical and fundamental equity market analysts have lent support to the notion that the equity market is primed for at least a bear market rally. From a contrarian point of view it is bullish that pessimism and short positions have reached extremes that often serve as the catalysts for a market bounce. For example, the Dow and other equity indicies are at extremes below their 200 day moving averages from which even dead cat bear-market bounces typically ensue. Considering the market broke to new cyclical lows and still managed to end the week on a positive note despite the horrendous employment report should also be viewed as a short-term market positive.
Despite the potential for a near-term stock market bounce, longer-term equity market prospects still appear bearish. That seems merely realistic considering the negative outlook for the US and global economy and financial system. The stimulus package and other efforts to preserve the financial system here and abroad may well prevent the recession from turning into a depression, but they do not appear likely to significantly shorten what is destined to prove to be a very deep and prolonged recession. Expect no recovery this year. While an economic recovery next year is possible, it is by means assured. And when it comes it is likely to be feeble. That suggests continued weak business sales and investment, deflation, a persistant erosion of corporate profits, and further pronounced cuts in dividends. Despite the sharp decline in equity prices already experienced, the broad array of market negatives points to eventual new lows in equity prices, as well as continued low Treasury yields fueled by consumer savings, and a persistent credit crunch reflecting pronounced lending caution.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
The official Bureau of Labor Statistics February unemployment rate soared to 8.1% from 7.6% in January. Before the cyclical rise in the unemployment rate tops out this recession, probably in 2010, the unemployment rate is likely to exceed the previous post World War 11 recession peak of 10.8% in 1982. Indeed, the 10% level is likely to be reached before this year is out.
The number of those currently counted as unemployed in the Household survey, from which the unemployment rate is derived. now totals 12.5 million, up 851,000 from January and up 1.4 million from December 2008. Since the recession began in December 2007, job losses total 4.4 million,including 2.6 million,or more than half, in just the past four months alone. Thus, it is clear that the pace of job loss is accelerating rapidly.
Though the official unemployment rate is bad enough, it nevertheless understates the severity of the problem. The unemployment rate does not count those who have been forced by the adverse economy to accept part-time work, temporary work, positions far below levels for which their training qualifies them or who have become so discouraged by the absence of suitable employment opportunities that they are no longer activly seeking employment. The u-6 unemployment rate, which attempts to reflect some of these problems, reached 14.8% in February. This is the highest level in the 15 year history of this series.
Nonfarm payrolls fell 651,000 in February in the more familiar establishment survey, extending the steep 655,000 downward revised January decline. This series also significantly understates the actual nonfarm payroll job loss. This is because the reported February decline comes after deducting an unrealistic estimated 134,000 rise in payroll employment at new firms that are not being sampled. After removing this phantom employment gain, the February nonfarm payroll drop increases to 789,000. Judging by recent related reports, the March declines in employment will be at least as severe as in February and more likely larger.
The equity market is overdue for a temporary bear market rally. Indeed, I am surprised that one has not begun recently. President Obama has weighed in with a recommendation that equities should be purchased. The value in his comment does not lie in the merit of his analysis, but in the importance he appears to be placing on the equity market. That helps mitigate market concerns that he is anti-capitalist. A number of noted technical and fundamental equity market analysts have lent support to the notion that the equity market is primed for at least a bear market rally. From a contrarian point of view it is bullish that pessimism and short positions have reached extremes that often serve as the catalysts for a market bounce. For example, the Dow and other equity indicies are at extremes below their 200 day moving averages from which even dead cat bear-market bounces typically ensue. Considering the market broke to new cyclical lows and still managed to end the week on a positive note despite the horrendous employment report should also be viewed as a short-term market positive.
Despite the potential for a near-term stock market bounce, longer-term equity market prospects still appear bearish. That seems merely realistic considering the negative outlook for the US and global economy and financial system. The stimulus package and other efforts to preserve the financial system here and abroad may well prevent the recession from turning into a depression, but they do not appear likely to significantly shorten what is destined to prove to be a very deep and prolonged recession. Expect no recovery this year. While an economic recovery next year is possible, it is by means assured. And when it comes it is likely to be feeble. That suggests continued weak business sales and investment, deflation, a persistant erosion of corporate profits, and further pronounced cuts in dividends. Despite the sharp decline in equity prices already experienced, the broad array of market negatives points to eventual new lows in equity prices, as well as continued low Treasury yields fueled by consumer savings, and a persistent credit crunch reflecting pronounced lending caution.
Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731
E-mail address: philipbraverman@Gmail.com
Subscribe to:
Posts (Atom)