Good Evening: Today’s action in the U.S. capital markets can only be described as brutal, and while the catalysts for the decline in the stock market were varied, the unifying theme was a growing worry that stock prices have not yet discounted the worsening economic environment. If, as more and more economists now expect, we see either a long or deep recession, then stocks have further to fall. Not only will the 2008 lows be at risk of breaking down, but the 2002 lows could be threatened as well.
Best Buy’s announcement this morning that it would have to downwardly revise its earnings outlook was the first shoe to drop, but it was Best Buy’s description of recent sales activity that shocked people. Best Buy noted a “seismic” slowdown in consumer spending patterns. Since BBY is widely considered the best retailer of electronic gadgets, a seismic shift in investors’ opinions about the U.S. economy soon followed. Unfortunately, Best Buy wasn’t alone in using superlatives to describe the fall off in business prospects. Qualcomm offered a sales outlook echoing the concerns of BBY management, saying it has seen a “dramatic” decline in customer orders for its chips (see below). Finally, JP Morgan CEO, Jamie Dimon, opined that the recession now underway “could be worse” than the credit crisis that preceded it (see below).
This flurry of downbeat economic outlooks was not helped by the other stories you see below. A Bloomberg survey of global economic sentiment remained near its gloomiest level ever, and its survey of U.S. economists can be summed up with a quote from a Morgan Stanley pundit, who said, “the economy fell off a cliff in October” (source: Bloomberg article below). Nor did Hank Paulson and various other G-men help the backdrop today. Proclaiming a change of heart and of strategy, the Treasury Secretary admitted that the TARP would no longer seek to purchase troubled mortgage assets. Lurching completely away from its stated mission, the TARP will now target consumer loans. Even if this move proves later to be wise, the immediate consequence was carnage in the market for structured mortgage products. The poster child casualty was ResCap and the oodles of debt backing the former high-flying subprime mortgage lender (see below). ResCap’s bonds dropped 50% on the news. And, in another surprise, GE somehow wriggled its way into receiving a form of FDIC support for its subordinated debt! AAA, eh GE? As for the unintended consequences of government “help”, today’s bizarre policy announcements are enough said.
Stocks opened 2% lower on the Best Buy news. The knee-jerk, small rally attempt failed, and the major averages began a slide that left them down 3% or so at lunchtime. Another small rally then tried to take hold, but it also crumbled. The indexes battled the body blows described above all day, but they were simply spent by the time the closing bell rang. Ringing up a 4.4% loss, the Dow Transports fared the best, while the Russell 2000’s 6.1% decline secured the booby prize. The superlatives and surveys forced market participants to consider what corporate earnings might look like if the U.S. really does experience the worst recession in the post WW II period. Hint: a lot lower. The potential for our economy to deliver a downside surprise in the months ahead was not lost on the bond market, however. Treasury prices rose and yields fell between 2 and 18 bps as the yield curve steepened. The dollar rose against most of its competitors (save the yen), and the U.S. dollar index gained 0.7%. Investors in commodities and commodity-linked products must be getting frustrated, since crude oil and its by-products once again set new lows. It will only take a few more days like today to see crude’s total decline from its July high to register a full $100/bbl. The CRB index was hit for a 2.5% loss and set a new, bear market low in the process.
Since I saw much of the fallout from the credit crisis of 2008 coming, I tried my best to prepare for it. For years. I carry no debt, other than a conventional mortgage on a house for which I put 40% down, and I’ve always tried to be a saver rather than a spender. As someone born at the tail end of the baby boom, I often felt out of step with others in my generation who took very different approaches to all things financial. And for years I’ve been writing about what the related bubbles in both housing and credit would one day bring, but I’ve mostly laid the blame at the doorstep of Alan Greenspan. I gave too little credit (pun intended) for the straits we’re now in to others in my generation and their profligate behavior of the past two decades. The final article below, “The Shallowest Generation”, is a fine rant that penetrates much further into the feelings I’ve just described. Sent to me by a friend (thanks, Todd), it’s a somewhat lengthy but worthy read. See if it doesn’t strike some chords within you, too.
-Jack McHugh
U.S. Stocks Fall on Treasury Strategy Shift, Best Buy Forecast
http://www.bloomberg.com/apps/news?pid=20601087&sid=aFBclIegeXQ4&
Paulson Shifts Focus of Rescue to Consumer Lending
http://www.bloomberg.com/apps/news?pid=20601087&sid=a44uLcFI7ubA&
ResCap Debt Sinks 53% on Scrapped Plan to Buy Mortgage Assets
http://www.bloomberg.com/apps/news?pid=20601087&sid=awvO1DoDJe88&
U.S. Slump May Be Longest in Decades as Growth Fell Off `Cliff’
http://www.bloomberg.com/apps/news?pid=20601109&sid=aCIytV1_Ii7M&
Dimon Says Recession May Be Worse Than Credit Crisis
http://www.bloomberg.com/apps/news?pid=20601087&sid=ayw4jtVYWg3s&
Qualcomm Shuts Down Hiring After `Dramatic’ Order Contraction
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_la.QKoM8PM&
Global Sentiment Stays Near Rock-Bottom, Bloomberg Survey Shows
http://www.bloomberg.com/apps/news?pid=20601087&sid=aks1bz4_xYPc&
The Shallowest Generation
http://seekingalpha.com/article/103202-the-shallowest-generation
What's been said:
Discussions found on the web: