Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
South Korea Coronavirus Outbreak Data Analysis Warning Rate of Infection is Exponential! - 26th Feb 20
Gold Price Long-term Trend Analysis Forecast 2020 - 26th Feb 20
Fake Markets Are on Collision Course with Reality - 26th Feb 20
Microsoft is Crushing the S&P 500, Secret Trait Of Stocks That Soar 1,000%+ - 26th Feb 20
Europe's Best Ski Resorts For The Ultimate Adventure - 26th Feb 20
Samsung Galaxy S20+ vs Galaxy S10+ Which One to Buy? - 26th Feb 20
Gold Is Taking on $1,700 amid Rising Coronavirus Fears - 26th Feb 20
Is This What Falling Through the Floor Looks Like in Stocks? - 26th Feb 20
Gold Minsky Moment Coming - 26th Feb 20
Why Every Student Should Study Economics - 26th Feb 20
Stock Market Correction Over? - 26th Feb 20
US Bond Market Yield Curve Patterns – What To Expect In 2020 - 25th Feb 20
Has Stock Market Waterfall Event Started Or A Buying Opportunity? - 25th Feb 20
Coronavirus IN Sheffield! Royal Hallamshire Hospital treating 2 infected Patients, UK - 25th Feb 20
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Another Yo-Yo Day For Stock Markets

Stock-Markets / Financial Markets 2009 May 13, 2009 - 04:12 AM GMT

By: PaddyPowerTrader


Best Financial Markets Analysis ArticleA lacklustre, see-saw day of modest gains for the blue chip Dow, while the Nasdaq felt some pain. A near term sell-off back to the mid-low 800s for the S&P 500 is still very much on my mind, but while this is very tradable, I do not think that it is the start of a big sell-off to fresh lows; that will come when the data turns and there are no signs of that yet. This, I feel, is about a month away.

Today’s Market Moving Stories

  • The U.S. dollar fell to a four-month low on Wednesday, as optimism about a global recovery and concerns about U.S. fiscal health reduced its safe haven appeal, while oil held near $60 a barrel on hopes for more energy demand as inventories tighten.
  • Japan’s opposition party says it would refuse to buy American government bonds denominated in US dollars, if elected. EUR/USD is testing recent highs on this news reaching 1.3720 overnight.
  • The FT suggests Germany will today announce a ‘bad bank’ plan to remove toxic assets from bank balance sheets. The paper also carries a story suggesting the US is at risk of losing its AAA status.
  • Unidentified Fed officials tell Bloomberg that the Fed views the increase in Treasury yields as a sign of the better economic outlook rather than an indication it needs to step up purchases, adding that the goal is to stimulate private lending rather than targeting government bond yields. I think this is a very dangerous laissez faire strategy that could seriously backfire.
  • Other press report that a bi-partisan group of lawmakers in the US will revive a bill that could raise tariffs on Chinese goods, in order to punish the country for currency manipulation. This is unlikely to become law, but highlights the fact that protectionist risks persist.
  • It seems that China are gobbling up the black stuff again in huge quantities.
  • The median price of a home fell 14% in the first quarter, the National Association of Realtors says. The national median price of a single-family home fell to $169,000 in the first quarter from a year ago. That was a bigger decline than the fourth quarter of 2008, when the median price fell 6.2%. Moreover, the report said, prices fell in 134 of the 152 metropolitan areas the NAR surveys cover, which is about nine out of 10 U.S. cities.
  • General Motors shares slump to a 76-year low on bankruptcy worries. Six GM executives revealed after the bell on Monday that they dumped direct holdings in the company, shedding $315,000 in common stock. And it that wasn’t enough woe for the stock, it also seems to be is inching its way off the Dow. The head of the index’s oversight committee said it was looking increasingly likely that GM would be replaced. “The chain of events involving GM and Citi seem to be marching in a certain direction,” said John Prestbo, executive director of Dow Jones Indexes and the chairman of the DJI oversight committee.
  • Tech stocks may get a boost on Wednesday from Intel Paul Ottolini, who told investors today that the chip giant’s business in the second quarter was “a little better than expected.”Intel did not offer a formal outlook for the second quarter, but said it expects revenue to be roughly flat to the first quarter. The shares were up 3.8% after hours to $15.79, after they had fallen 1% to $15.21 in regular trading.
  • Kerry Group has reaffirmed it guidance at 160-65 EPS. A strong uplift in trading margins, driven by efficiency measures and lower raw material costs, is allowing Kerry to remain on track for full-year guidance despite what remain tough trading conditions. The key messages from the IMS statement are that sales momentum is improving in ingredients after a slow start to 2009 and that the like-for-like (lfl) sales decline in consumer foods is being offset by the margin uplift.
  • Elan has appointed Richard D. Pilnik as a non-executive director, adding commercial and marketing experience to both the Board and specifically to the Commercial Committee of the Board. The latter is tasked with supporting Elan’s ambition to maximise its commercial opportunities in Tysabri and its late-stage development pipeline. Pilnik served at Eli Lilly for 25 years.
  • A financial psalm.
  • Reasons to be fearful! Look who has turned bullish…

Potential Policy Hot-Potatoes
Main overnight story is on Bloomberg, which quotes John Taylor (the former Fed official who devised the rate-setting Taylor Rule) as saying the Fed will need to raise rates soon to combat future inflation caused by the recent stimuli. Though, of course, the timing of any exit strategy from the policy of ZIRP & QE is going to be tricky, this is the kind of black swan policy mistake that could totally derail any recovery methinks.

Sticking with financial policies, Finance minister Brian Lenihan is setting off for a tour in Europe. He’ll aiming to explain how the Irish bad bank, the National Asset Management Agency (NAMA), will operate. The FT writes that minister’s main task will be to convince sceptics the agency will be free of favouritism and political interference.

Ireland has just gone through 10 years of judicial tribunals that exposed a culture of corruption in planning and development. People are worried that developers may use Nama to walk away from their debts, leaving the taxpayer to pick up the tab. It is vital for Nama to demonstrate its independence and its capacity to manage and protect taxpayers’ money.

So What’s My problem With Stock Valuations?
While the world may be less nervous than it was, it’s important not to forget that the world is still in recession and profits are still going down, not up. It’s a well-worn truism, of course, that stock markets move ahead of the real economy, but it’s unclear to us whether we’ll see either a huge rebound in growth or, at some point, a sustainable surge in corporate profits. And all that is hugely important, because a world that has been stabilized but is merely limping along and where profits are far harder to come by is a world in which equities are likely to struggle over the longer term.

Why aren’t equities a screaming buy? Well, one reason of course is that multiples aren’t, in fact, that low by historical standards, because profits have fallen so much. The S&P’s trailing PE, even on operating profits, is a hardly low 18x. On an as-reported basis, it’s, ahem, 62x. Ah, comes the reply, but multiples rise in advance of a recovery and having been hammered so much, profits should rebound strongly since costs have been cut so much. Multiples, then, will be a lot more comfortable.

One way to strip this effect out is to compare current equity prices with ten-year average profits, à la Graham and Dodd, since this will tend to fall even though, as is the case now, the trailing multiple rises very strongly indeed. To put this a slightly different way, a G&D type methodology allows you to strip out the effects of the economic cycle on corporate profits. But even this doesn’t make equities very cheap.

As we’ve said before, the S&P 500 valuation has often bottomed on a G&D valuation of 10x, and in the early 1930s it bottomed at 5x. It’s now 18x. So stocks are a lot cheaper than they were, but not even by the wildest stretch could they be called arrestingly cheap.

There are 2 central flaws in most equity valuation models at the moment.

Firstly, they are distorted by the risk-free rate which they use i.e., the 10 year government bond yield rate being so historically low. Secondly, they assume that the developed world will return to its medium term “trend” growth rate relatively seamlessly when, as was the case with Japan in the 1990’s, the potential rate of growth actually may have declined. This may well now happen again due to huge fiscal deficits, higher taxes, increased household and corporate saving and greater government intervention in the financial system. Recall that the Nikkei is still 70% below its 1989 level.

The Day Ahead
US import prices, Apr (12:30 GMT): Prices should be up 0.6%, which is another modest gain after prices collapsed late last year.

US retail sales, Apr (12:30 GMT): March sales were disappointing after healthy reports for January and February. Sales should dip by 0.1% in April, up 0.1% excluding motor vehicles.

And Finally, “Oh Obama”

Disclosures = None

By The Mole

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.

© 2009 Copyright PaddyPowerTrader - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

PaddyPowerTrader Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules