Good Evening: With so many institutional investors straining to see a bottom, and with so many individual investors looking for some reassuring advice, T.V. sets across America were tuned into CNBC this morning in the hopes of hearing Warren Buffett offer up constructive views on either subject (and preferably both). But, despite an appeal for financial patriotism, the “Oracle of Omaha” disappointed investors both big and small when he allowed that the U.S. economy “has fallen off a cliff”. Likewise, Mr. Buffett offered no reassurance as to when or where a bottom might make an appearance. After three hours on stage, neither his folksy insights (which included his own mea culpas about certain investment mistakes) nor his appeal to unite behind President Obama had as much impact as did his dour economic outlook. Not even the re-emergence of large scale merger and acquisitions news could help stocks by day’s end, and investors went home every bit as uncertain as when they woke up.
Prior to Mr. Buffett’s pre-dawn interview, U.S. stock index futures were under pressure for at least two reasons. First, aside from some optimistic articles in Barron’s, the weekend press here and in Europe was a cascade of either negative stories or conflicting prescriptions about how policy makers should respond. Second, Friday’s late rally no doubt included some short-covering ahead of any possible weekend policy bombshells from the Obama administration. When it became obvious that Warren Buffett’s plea that we should all unite behind our Commander in Chief as he prosecutes this “economic war” was all we were going to hear on the subject, the shorts felt quite comfortable replacing what they covered on Friday. It should also be noted that stocks overseas, especially those in Asian markets, were under pressure.
With no economic news scheduled for release this morning, market participants decided to focus on the next best thing — M&A activity. Merck offered a sum north of $40 billion for rival, Schering Plough, and whispers abounded that Dow would go ahead with its previously announced tender for Rohm and Haas (the latter was confirmed late in the session — see both stories below). Many who have previously been mystified that the huge sell off in equity prices hasn’t sparked more takeover activity welcomed today’s news as a positive sign for equities going forward. The real mystery, at least to me, is why so many have been expecting big mergers when the two forms of currency used to pay for them (company stock or debt) have themselves been sinking as fast as the stock prices of possible targets. Toss in the uncertainty surrounding not only the economy but also the threatened regulatory changes governing corporations going forward, and the big wonder is how any CEO feels comfortable subjecting his Board and shareholders to a potentially distracting merger or acquisition. Dow, to cite just one example being discussed in executive suites across various time zones, may “win” ROH, but even Warren Buffett thinks Dow’s victory will be of the pyrrhic variety.
After digesting the above information, stocks opened to the downside this morning by 1% or so. This dip was immediately bought when Friday’s lows weren’t threatened and the major averages were soon up by as much as they had been down. Unfortunately, the indexes also couldn’t take out Friday’s highs, and equities spent the rest of the day chopping their way lower. Closing near their lows for the day, the averages finished with declines ranging from 1% (S&P 500) to 2.2% (Russell 2000). Treasurys might have rallied into these new lows for the equity indexes, but the large auctions looming on this week’s calendar dampened the interest for government securities. It probably doesn’t help the case for Treasurys that companies like GE and Bank of America are also trying to place what amounts to quasi-government paper in the form of FDIC-backed debt issuance. After an early decline, Treasurys managed to rally and finished mixed. The dollar (up 0.7%) was firm, but commodities gave away an early rally. Despite a 3.5% pop in crude oil, weaker prices in both the agricultural and metals sectors caused the CRB index to be nicked for a 0.5% loss.
“Uncertainty reigns,” said David Sowerby, who helps oversee about $100 billion at Loomis Sayles & Co. in Bloomfield Hills, Michigan. “What’s the floor on the S&P? It’s never ending.” (source: Bloomberg article below)
Mr. Sowerby’s evident frustration with the seemingly daily declines in stock prices is shared by many investors, professionals and amateurs alike. Everyone, it seems, from former bears like Robert Prechter, Steve Leuthold and Marc Faber, is looking for at least a temporary bottom somewhere in this vicinity, as are the many who nightly tune in Jim Cramer. Even BAC-MER’s David Rosenberg feels the need to comment on the price action (see below). Mr. Rosenberg’s target low for this bear market has long been an ominous “666” in the S&P 500 (touched, with macabre precision, on Friday), and he now feels that this once-ridiculed forecast will ultimately prove to be too high. Eschewing the career advice handed down by generations of prognosticators that it is wise to predict either price or timing, but never both, Mr. Rosenberg now sees the S&P 500 hitting 600 during the month of October. Whether this doubly specific forecast holds true is a very open question, but it should be noted that Mr. Rosenberg among the few who can claim the distinction of being both early and right about this ongoing and brutal unwinding of the late, great bubble in credit.
As for my own prediction of a bottom in stock prices, I will refer back to 2005. After I had sent out one of my almost nightly rants about the dangers posed by the then-expanding housing bubble, a reader asked me whether the ensuing comeuppance would be one of fire (a crash, as in 1987) or ice (as in the Chinese water torture bear market of 1973-74). Cheekily, I answered “both”. “The first phase will see dramatically lower stock prices, though I don’t know if I will reach the intensity seen in 1987”, I wrote. I had no idea that, without swift government intervention, the post-Lehman decline in 2008 would have been worse than the luge run in 1987 “Later”, to continue with what I said back in 2005,, “after a period of recovery, the market will settle into a broad and slow decline as investors realize that it will take years to recover from this debacle”. I stand by this forecast, especially given the weakness and brevity of the rally off the November 2008 lows. Though a 20% to 30% rally could erupt at any time, I will not provide readers with a Rosenberg-style update it by predicting a specific time or price for the ultimate low in the S&P. “Not yet”, and “lower” is the best I can do until we receive more clarity from the Obama administration. Until then, uncertainty certainly reigns.
— Jack McHugh
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