Happy Anniversary!
Or perhaps, not so happy . . . Markets digested some punk economic releases and disappointing earnings data, along with some ugly guidance. Blunt statements this week from Fed Chair Bernanke on Housing didn’t help; nor did his first mention of the weak dollar.
Markets did not like what they heard. By the numbers, the big winners were Crude Oil (5.9%), Gold (2%), Treasuries (1.6%) and Investment grade bonds (1.5%); Commodity futures also tacked on 1.3%.
The losers? Pretty much everything else: REITs got shellacked for 6.8% loss; They are now down 2% over the past 52 weeks. The Russell 2000 also got pasted, losing 5%. The Dow and the S&P500 gave up 4.18% and 3.9% respectively. The Nasdaq held up the best of the major US indices, sliding a mere 2.9% for the week — nearly about all of it on Friday, when it fell 2.65%.
Here’s something to chew over: The S&P and Dow Industrials have given back all of their gains since the 9/18 rate cut; the Nazz remains a few 100 points — about 4% — above its September 18 levels.
Barron’s Streetwise column noted:
"Pulling back to view the action in context, what’s most clear is that the indexes have pulled back a few percent after a straight-up, two-month rally whipped up too much frothy investor sentiment and got expectations too high for earnings season. This should nicely skim away a good deal of the short-term bullish froth that’s been noted here the past couple of weeks, while raising the adrenaline level of the recently frustrated bear camp. These are positives.
Earnings, simply, have not been good enough to offer continued excuses to buy stocks near all-time highs, given near-$90 oil and a Dow component, Caterpillar (CAT), invoking the possible onset of recession."
Enough sexy banter. Let’s get clicking:
INVESTING & TRADING
• Fears of Falloff In Profits Send Markets Lower: A slew of weak earnings reports stoked fears that profits in the next few quarters will fail to hit lofty expectations, sending the Dow Jones Industrial Average down 2.64% Friday. While investors have known for weeks that profits for the third quarter would suffer from turmoil in financial markets, many reassured themselves that a sharp turnaround would come in the current quarter, helped by a strong global economy. (Wall Street Journal)
• Gamma Gamma Hey! As we warned Tuesday, this week’s Options Expiration were likely to accelerate the move downwards if Monday’s Lows were breached; That’s pretty much what happened.
• The Blow-Up: How the financial engineers known as "quants" contributed to Wall Street’s summer of scary numbers (MIT Technology Review)
• Some terrific charts of the ’87 Crash from the WSJ: intraday, the full month of October, and quite a few other crashes. And a rather surprising look at how various Dow components have performed since 87 here (guess whats been the top performing stock? Wrong!).
• Margin Debt — and Risk — Is Growing Barron’s looks at the rising margin debt levels: EVEN AFTER A RECENT DROP,
margin debt remains within spitting distance of the all-time high it
hit in July, and 43% higher than it was a year ago. It’s become a
source of concern to some investors who worry that it makes the stock
market more vulnerable to a nasty tumble, particularly if equities’
resurgence continues. (if no Barron’s, go here)• What Fed Cut? One month and one day after the Fed cut the Fed Funds and Discount Rate by 50 bps, both the S&P 500 and the Dow are now below the levels they were trading at prior to the Fed’s September announcement. The Nasdaq however, remains over 4% above those pre-announcement levels.
• Companies That Make Buybacks Lag the Market
• Large Stock-Options Grants May Hurt Investors: A large stock option may motivate a chief executive officer to such
great risks that he ends up making decisions that can backfire for
shareholders. That’s the conclusion of two business school professors
in their paper published by the Academy of Management Journal:
“Swinging for the Fences: The Effects of CEO Stock Options on Company
Risk-Taking and Performance.” Wm. Gerard Sanders, the lead author,
teaches at Brigham Young University in Provo, Utah. Co-author Donald
Hambrick is at Pennsylvania State University in State College,
Pennsylvania, and a former professor at Columbia University’s Graduate
School of Business in New York. Their principal thesis is: Load up a
CEO’s pay package with too many options, and he will make risky
decisions that promise outsized rewards for shareholders and, of
course, for himself. (Bloomberg)• Slate’s Dan Gross goes off on Paulson: Protecting Paulson’s Pals: The subprime collapse didn’t bother the Bush administration, until Wall Street bankers started whimpering. The
subprime mess has been spreading like toxic mold since the housing
market peaked last year. So why did it take until now for the
government to decide it should do something about it? I have a theory.
When individual borrowers began to suffer, Federal Reserve Chairman Ben
Bernanke and Treasury Secretary Henry Paulson didn’t seem overly
concerned. The market would clear out the problem through the
foreclosure process. Loans would get written off; properties would
change hands and be resold. When upstart subprime mortgage lenders ran
into trouble, Bernanke and Paulson shrugged again. The market would
clear out the problem through the bankruptcy process. Subprime
companies like New Century Financial filed for Chapter 11, others
liquidated or restructured, and loans made to the lenders were written
down. Meanwhile, Paulson and Bernanke assured us that the subprime mess
was contained. (Slate)• Oil-Stock Drawdown Fuels Price Rise:
Amid the record run of oil prices lies a troubling trend: Western
nations, particularly in Europe, drew down their oil tanks during the
summer months — a time when they would normally build them up.That is
triggering fears that global stocks could dwindle to exceedingly low
levels this winter just as demand for fuel peaks — driving high crude
prices even higher. (Wall Street Journal)
• Questions arise about Goldman’s blowout quarter:
The glitter is already coming off Goldman Sachs’ golden quarter.
However, Goldman’s blow out quarter benefited from large gains in
hard-to-value financial instruments, and its trading results in the
period were particularly volatile, according to data contained in a
Goldman filing of quarterly financial results with the Securities and
Exchange Commission. (Fortune)
ECONOMY
The Wall of worry continues to build:
• GMAC, FMCC may suffer on auto loan delinquencies: Rising delinquencies by borrowers of prime auto loans may cut into profits at GMAC LLC and Ford Motor Credit Co (FMCC), and potentially hinder improvement in the credit spreads of the auto financing companies.The percent of borrowers of prime auto loans that are more than 30 days delinquent on the debt has risen to more than 2.5 percent, according to JPMorgan. (Reuters)
• Oil and food at record prices, and we get the smallest increase in Social Security COLAs in years: These are the Real World Consequences of Core Inflation Focus
• Since Monday’s announcement of the 2007 Nobel Prize winners in economics, Bloomberg put together a series of podcasts with Nobel Laureates Paul Samuelson of 1970, Kenneth Arrow of 1972, Amartya Sen of 1998, and Thomas Schelling of 2005.
WAR/MEDIA/POLITICS/ENERGY
• American Lawbreaking: the laws we are allowed to break in America and why.
• Ready or Not, Here Comes the Fox Business Network: One minute Fox was doing a segment that included a $1 million diamond;
the next it was giving tips on how to avoid foreclosure. It would home
in on the stock market and then report on the death of a teenager in
Virginia from a staph infection, reports that included several truly
silly efforts to frame the tragedy as a business story. On Tuesday
afternoon, while CNBC was dissecting Intel’s earnings, Fox was running
its “Happy Hour” show, which is set in a bar. A co-host named Cody, a
dude so hip he doesn’t tuck his shirt in, was interviewing a random
customer about his plans for Christmas spending. “Expensive
chocolates,” was the man’s reply. (New York Times) but see this less complimentary take from IHT: Fox Business channel more chatter than substance
• Fascinating and surprisingly intelligent debate in the comments about taxes : Global Taxes as a Percentage of GDP
• Is nuclear power’s comeback for real?:
As contestants are eliminated, it’s worth looking at the geezer in the
bunch: nuclear power. Last month, nearly 50 years after the
Shippingport Atomic Power Station in Pennsylvania became the first
commercial power plant to go online, the New Jersey-based utility NRG
filed papers seeking permission to build a nuclear power plant in
Texas. This represents the first such new application since 1979,
nuclear’s annus horribilis. Two weeks after the debut of the
fear-inducing nuclear-disaster flick The China Syndrome, life imitated
art, as the Three Mile Island nuclear plant in Pennsylvania suffered a
partial meltdown. That effectively forestalled the creation of new
nuclear power plants for a generation. The last reactor to come online
was the Watts Bar reactor in Tennessee, in May 1996. (Slate)
TECHNOLOGY & SCIENCE
• Apple vs. Everyone: Every media conglomerate wants to start its own online venture. Will iTunes survive? Since
the iTunes Store opened in 2003, Apple and the world’s top media
companies have happily shared the profits from consumers’ increasing
appetite for downloadable songs and videos. This summer, the four-year
honeymoon ended. In July, Universal Music Group announced that it would
be downgrading its licensing contract with iTunes. Universal then
revealed late last week that it has been in negotiations with other
major labels to launch a rival service. Two months ago, NBC announced
it would be pulling the network’s shows from iTunes and relocating to
Amazon Unbox. And in the last two weeks, Radiohead sidestepped both
iTunes and the major record labels by allowing fans to purchase its new
album online for whatever price they choose. Does all this mean that
Apple’s dominance of online media is coming to an end? (Slate)• Led Zeppelin saves the world
• Pogue’s Imponderables: Unanawered questions about technology.
• The Best Buy In Digital TV? Best Buy (BBY) announced Thursday morning it will no longer carry analog televisions in its stores. The electronics giant claimed that consumers are no longer buying analog products at the rate they once were, and have moved into the new, digital age. Best Buy will be the first electronics retailer to pull all analog televisions from its shelves and restock with more high-definition and flat-panel screens (Forbes)
MUSIC BOOKS MOVIES TV FUN!• Everything in the music industry is up! (except those plastic discs)
• Daily Show’ Archives Appear Online: Beginning today, eight years of episodes of “The Daily Show with Jon Stewart” are fully accessible on the show’s Web site. Videos of every skit, every joke and every guest are available for free, fully searchable on TheDailyShow.com. According to Comedy Central, 13,000 videos will be stored in the database.
That’s all from another gorgeous Fall weekend — beware of wet leaves!
~~~
Got a comment, suggestion, link idea? Or do you just have
something on your mind? The linkfest loves to get email! If you’ve got something to say, then by all means please do.
They say you get alot further with a gun and a smile than just a smile. The banks right now are playing a game of chicken, give us a bailout or else. Should be intersting.
Tidbit on John Daily’s 13,000 episodes and nuke power.
Data centers in the United States are consuming 5 million kilowatts
of energy per year, an amount equal to the power consumption of the
entire state of Mississippi.
http://www.technewsworld.com/story/55792.html
NetNeutrality is a real debate. Freedom of access vs. cost of access.
I for 1 want to be able to afford access.
Berr- Today was a beautiful fall day and no fall leaves yet.
A great song “Beautiful Fall: U2 >
What you don’t have you don’t need it now
What you don’t know you can feel it somehow
What you don’t have you don’t need it now
Don’t need it now
Was a beautiful day
Now, for the stock market and the Fed.
“Even businessmen, who rob and cheat and steal from people everyday, even they have to pay taxes.”
There is no darkness but ignorance.
William Shakespeare
Berry- Nuclear power is our only hope with global warming!!!!!!!!!!!!!!
the article on the quants is stunning. these guys seemingly are so smart, they have forgotten both common sense and humility. imagine that defaults on subprime mortgages could lead to problems in credit markets, negatively impact the economy and stock market! bill fleckenstein reviews jim chanos’ comments at grant’s conference where he detailed a probable anomaly courtesy of the quants: 2 closed end funds(i forget the names) comprised of plain vanilla blue chips trade for 50% premium over NAV. chanos feels this mispricing is due to quant behavior. this is but a small, glaring example of the distortion the quants have caused.
Hi Fred,
Regardless of what the article implies, I don’t believe quants contributed to subprime lending and the problems in August. At least, not the rank-and-file quant. Someone running a fund says “we’re going to trade X” to potential investors and hires math PhD’s to do their best *in* that market. Unfortunately, I’m not in the finance industry. But, if my own experiences in other industries have been instructive, some quants probably asked “how can we trust ratings are valid?” and were greeted with crickets. And, as long as they’re paying a mortgage, then “trade X” is what they’ll continue to do. (Until that stops working.)