Daily State of the Markets
Tuesday Morning – October 4, 2011
Good morning. I don’t know about you, but I am growing weary of the non-stop comparisons of the current market to the 2008 edition. It seems that I can’t get through a single day without one guy or gal on T.V. assuring me in an unequivocal tone that “this is 2008 revisited” while the next so-called expert says (in an equally overconfident manner) that the market is “nothing like 2008.” So I ask you, what is the deal with the fixation on the 2008/09 debacle? Does anyone out there really think that a market event will repeat itself?
One thought is that since most everybody except John Paulson got their clocks cleaned during the 2008-09 bear market, nobody wants to get caught leaning the wrong direction again – ever again. My guess is that market professionals of all colours, shapes, and sizes have spent endless hours reviewing their actions during the devastating bear market and now know exactly what they should have done. As such, today’s traders are now fully prepared to fight the last war.
The problem is that unless we are talking about Gulf Wars I and II, history rarely repeats. Sure, this crisis is about banks, but not in the same way that the 2008 crisis was. In 2008, the debacle began with the alphabet soup of non-registered derivative securities blowing up. There was no recession at the time and nobody cared about debt. Heck, debt was considered a good thing and a great way to enhance investment returns – right up until the time it wasn’t.
From my perch, the key thing to understand about the current market environment is that unlike the 2008 Credit Crisis bear, we have two issues to deal with at the same time. First, there is the little problem in Europe, which by all counts has no easy fix. While everybody knows that a default in Greece will likely trigger a “credit event” and that nobody is really sure how that will play out, the big problem is that Greece is most likely going to default – it’s just a question of when.
The bulls argue that banks and government officials have had plenty of time to prepare for such a “big bad event.” Therefore, it is reasonable to assume that the banks have had time to hedge their exposure to Greece. So, by itself, the Greek situation shouldn’t pose a threat to the global banking system. However, the sticky wicket here is the problem of contagion. Once Greece falls, will Portugal be far behind? And so it goes, and goes, and goes, with no easy fix to be found.
The second and likely much larger problem is the issue of the global economy. Prior to the Credit Crisis of 2008, the economies of the globe were humming along nicely. In fact, it was the shock to the system that actually launched the Great Recession, which was the worst period of economic contraction in a generation. However, today things are oh-so different.
Today, we are faced with a global economic slowdown, which would generally be enough on its own to cause a bear market in stocks. Whether or not the global economy winds up simply slowing its pace of growth or actually contracts remains to be seen. However, the key is that debt loads becomes even heavier when incomes are cut due to an economic slowdown. This is exactly what Greece is facing today. And in a world where debt is suddenly a four-letter word again, there doesn’t seem to be an easy fix to the problem.
My point this morning is that the problems of this particular market are very different from those seen in 2008 (oops, now I’m even doing it!) This appears to be a fundamental, if not elementary, problem of too much debt and not enough income. Until either economic growth can produce the income needed for countries to reduce their debt burden or countries cut costs enough to make debt payments manageable, governments will be unable to contribute to GDP growth.
However, perhaps the powers-that-be can find a solution to Greece in the coming days. As my bovine buddies in the bull camp tell me, this would create a big pop in the stock market and boost morale in an exponential fashion. I’m told this could eliminate the overly negative vibe engulfing consumers today and get them back to the malls where they belong! So, perhaps there is a quick and easy way out after all, no?
Turning to this morning… With Greece pushing back the deadline for a new cash infusion, euro zone finance ministers have cancelled the October 13 meeting to make a decision on the next tranche of bailout funds. Recall that Greece announced yesterday that it will miss its debt-to-GDP targets. This morning there is word that troubled French-Belgian bank Dexia may need to be nationalized (is this the first of many?). And finally, Goldman Sachs lowered its targets for global growth and said the France and Germany would enter a recession. Stock futures are lower in the early going.
On the Economic front… We’ll get the report on Factory Orders at 10:00 am eastern.
In addition, Fed Chairman Ben Bernanke will give his semi-annual testimony on monetary policy to a Joint Committee of Congress at 10:00 am eastern.
Thought for the day… Why not do something nice for someone today for no reason at all…
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: -0.63% Shanghai: -0.26% Hong Kong: -3.40% Japan: -1.05% France: -3.35% Germany: -3.93% Italy: -3.20% Spain: -2.96% London: -3.33%
- Australia: -0.63%
- Shanghai: -0.26%
- Hong Kong: -3.40%
- Japan: -1.05%
- France: -3.35%
- Germany: -3.93%
- Italy: -3.20%
- Spain: -2.96%
- London: -3.33%
- Crude Oil Futures: -$2.36 to $75.25
- Gold: -$4.0 to $1653.70
- Dollar: lower against the Yen and Euro, higher vs Pound
- 10-Year Bond Yield: Currently trading at 1.744%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -17.43 Dow Jones Industrial Average: -147 NASDAQ Composite: -29.19
- S&P 500: -17.43
- Dow Jones Industrial Average: -147
- NASDAQ Composite: -29.19
Wall Street Research Summary
- Polycom (PLCM) – Barclays
- Forest Oil (FST) – Canaccord Genuity
- Alumina (AWC) – Citi
- Masimo (MASI) – Citi
- Exelon (EXC) – Citi
- Post Properties (PPS) – Citi
- Equity Residential (EQR) – Citi
- Agnico-Eagle Mines (AEM) – Credit Suisse
- Soda Stream (SODA) – Deutsche Bank
- Beam (BEAM) – Goldman Sachs
- Kinder Morgan (KMI) – Goldman Sachs
- Wynn Resorts (WYNN) – Nomura
- Expedia (EXPE) – Susquehanna
- Mack-Cali Realty (CLLI) – BofA/Merrill
- AGCO (AGCO) – BofA/Merrill
- Riverbed Technology (RVBD) – Barclays
- Coca-Cola (KO) – Target cut at Bernstein
- PepsiCo (PEP) – Target cut at Bernstein
- PPD Inc (PPDI) – Citi, Goldman Sachs
- Goodrich (GR) – Deutsche Bank
- Lorillard (LO) – Goldman Sachs
- American Express (AXP) – Jefferies
- Bed Bath & Beyond (BBBY) – Nomura
Long positions in stocks mentioned: AXP
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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