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Stocks Bear Market Has Not Seen Its Bottom Yet

Stock-Markets / Stocks Bear Market Mar 27, 2009 - 05:47 AM GMT

By: PaddyPowerTrader

Stock-Markets Best Financial Markets Analysis ArticleAs things stand, US equities are on course to complete the biggest monthly gain since 1987, with the S&P 500 closing up 2.3% yesterday. Big tech starred, with Intel up 5.9% and HP jumping 7.1%, pushing the Nasdaq to back to flat for the YTD - fairly remarkable. Sentiment continues to be boosted by an economic dataflow that is no longer weaker than expectations. Indeed some houses (Barclays for example) are squinting hard, thinking we have seen the trough and are even seeing the green shoots of recovery in the US. And I think that a better 7-year Treasury note auction (which went off at close to market expectations) helped too.

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Today's Market Moving Stories

  • My worry is that comments from various Fed regional presidents over the last couple of days do not support the equity rally. Mid-week saw Yellen warning on the risks still posed by the commercial property sector. Yesterday saw Fisher warn that Q1's GDP will be as bad as Q2 and that there'll be negative growth throughout the year. Stern said the US recession will last until at least mid-year and then the recovery will be only subdued. Lacker said the major stimulus provided by the Fed at its last meeting reflected its concern over the extent of the economic weakening. Plosser described the outlook as ‘pretty ugly'.
  • The absence of proper policy in Japan is showing up in the details of the economy. Deflation is looming large with February CPI showing up flat yoy . Moreover, retail sales were down 5.8% yoy (a seven year low) despite heavy discounting, as consumers cut purchasing of discretionary items.
  • German March CPI figures due today may generate a little excitement. Data already released by the state of North Rhine Westphalia showed inflation at 0.3% yoy , a ten year low, on the back of lower oil prices. This should be reflected in the pan-German figure released later today. Such a big decline in inflation should set the seal on next week's expected 50bp rate cut. The spectre of deflation within the Eurozone would open the door for the ECB to be more forthright on unconventional policy measures. Indeed, ECB Vice President Papademos conceded yesterday that the Bank could buy private sector bonds in a bid to boost liquidity in the face of a feared “vicious circle” of negative effects.
  • Good news for online gaming stocks? The European Commission draft report published yesterday has concluded that the US Justice Department crackdown on European online gambling companies violates US commitments under the World Trade Organization. The commission said that it would seek a negotiated solution with the US rather than file a complaint at the WTO. Recall that European online gambling firms lost billions of euros in market value after Congress passed legislation in 2006 making it illegal for banks and credit card companies to make payments to online gambling sites.
  • The world has been treated to the full force of Brazilian President Lula's intellectual might. His detailed analysis of the current economic problems has concluded that it is all caused by blue eyed white people .
  • According to UBS, institutional investors are ploughing back into equities .
  • Some South Park video clips that are bailout comedy gold .

Corporate Profits Slump In 2008, More To Come
The entrails of yesterdays US GDP numbers show that corporate profits sank 16.5% in Q4 2008, the largest quarterly drop in 55 years. Non-financial companies did not escape. Their profits dropped 8.9% in 2008, far less than financials, but this year's expected economic contraction will cause their profits to fall faster. US companies with global operations did the best, as rest of world profits fell only 6% in 2008. These profits accounted for 31% of total profits, double their historic contribution. Total profits have fallen in 8 of the past 9 quarters and 26.2% in all, well above the average cycle loss of 15.5%. More losses are in store for 2009.

Stock Market Has Not Seen Its Bottom Yet
Baby BullThe rally that we have seen since the lows of 9th March has been primarily driven by financials, which have been buoyed by the Treasury's latest plans to deal with “legacy” assets. While the bounce in financials could run on, the broader economy is still in the doldrums and unlikely to turn the corner any time soon. As such, I think the prospects for non-financials remain far from rosy. Indeed, all sectors are trading on significantly higher earnings multiples than they did in the deep recession of the early 1980s. Overall, I'm skeptical that the bounce in equities will last and continue to expect the S&P 500 to head back down towards 650 in coming months.

It was perhaps only a matter of time before we saw some sort of rebound in US banking stocks. After all, the cyclically-adjusted price/earnings ratio for the US financial sector (using 5-year trailing average earnings) had fallen to around 4 in early March, way below its 15.9 average since the late 1970s. Clearly a lot now rests on the success of the Treasury's latest plan to help banks dispose of “legacy” assets. I won't be convinced that the rally in financials has more legs until we get a clearer handle on the price investors are prepared to pay for banks' unwanted loans and securities.

In the meantime, I still think it is too soon to call the turn for the broader equity market. In the Bearwake of its recent bounce, the S&P 500 is now trading on a cyclically-adjusted P/E ratio of a little over 14. That is a little below its long-run arithmetic average of 16.55 since 1900, but well above the troughs hit during past deep recessions. At the market's low point in August 1982, for example, the cyclically-adjusted P/E ratio was also just 8. What's more, history suggests that stock markets typically only tend to recover around six months before a turning point in the business cycle has been reached. For these reasons, I think the current rally could be a false dawn.

Equities Briefs

  • Barclays are up over 4% this morning on a story that an FSA stress test has shown that they don't need anymore more funds.
  • Air France is off about 5% on a profit warning which is also dragging down other airline stocks (BA etc).
  • IBM is planning to lay off roughly 5,000 U.S. workers and outsource many of their jobs to India. The cuts fit a recent pattern for IBM of sending more work overseas and are aimed at the firm's global business-services division.
  • Élan saw it share price jump as much as 15% yesterday on news that Denmark's Lundbeck is preparing a bid at €8 a share. Both Élan and Lundbeck refused to comment on the speculation which was originally flagged in early January. Lundbeck has repeatedly said it is looking for deals to boost pipeline, as its biggest drug Cipralex sees its patent run out in 2012. The deal at the speculated price would value Élan at $3.8bn which may be too costly for Lundbeck who currently have a market cap $3.5bn and $2bn of debt.
  • The Irish Takeover Panel has set an April 20th deadline for a bid by Moonduster for ICG. If none is forthcoming, Moonduster will be unable to make a fresh offer for at least 12 months.
  • Bank of Ireland are holding an EGM in the Savoy cinema today to seek shareholder approval for the proposed €3.5bn government sponsored recap of the bank which will give them a 25% stake. AIB's shareholders are due to vote on May 13th.

Dogbert The CEO

And Finally… Gremlins Have Some Good Investment Advice

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.

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