"The Market - Panic is not the Right Response"
Sydney M. Williams
The first thing to remember about a day like yesterday is that no one has ever been able to accurately predict the market with any consistency. There have been many “one day wonders” and there are a few whose history is better than others, but there is no one on whose prognostications one would bet his fortune. As for the “why,” even on a Friday Monday morning quarterbacking is common. Explanations range from the absurd – the President placing the blame on the Japanese earthquake and the effect of the “Arab Spring” on Libyan oil exports – to the reasonable – Mohammed El-Erian, CEO of PIMCO, who suggested three explanations: QE 2, which raised asset prices, but did not regenerate the economy; the lack of confidence in the U.S. following the debt ceiling impasse, and the debt problems coursing through Western Europe. Additionally, there are concerns that the debt ceiling bill just signed, which includes a provision that if Congress cannot agree by November on $1.5 trillion in cuts automatic cuts will be made in areas like defense and health, may prove to be a paper tiger. Leon Panetta, newly appointed Secretary of Defense, has been making the rounds arguing in anticipation that any further cuts will imperil the country.
The more important question, however, for investors is how long will this slide last and what will turn it around. The truth is nobody knows. What we do know is that a turn will come and that its happening will go unpredicted by the majority. There are numerous possibilities, and even though some involve facts, they are all based on behavior – a characteristic notable for its difficulty to forecast – the most likely, in my opinion, would be an increase in the announcements of corporate buybacks.
There are marked differences between now and October 2008, the last time the market had this big a fall. For one, LIBOR had spiked sharply higher beginning in late 2007, peaking in October 2008. The TED spread, the difference between LIBOR and Three-month T-Bills and a measure of liquidity, was 314 basis points on September 30, 2008 (up from under 50 basis points in July 2007.) By year end 2008, the measurement had dropped to 131 basis points and this morning it is 25 basis points. Secondly bank liquidity has become ubiquitous, so that yesterday Bank of New York/Mellon said they would begin charging 0.13 percent on deposits over $50 million dollars, in part to help pay the 0.10 percent fee to the FDIC, but also because they, like other banks, are having trouble loaning out the cash they already have. Reasons lie in new regulatory hurdles bank lending must pass, combined with a lack of confidence among borrowers. A third major difference is the state of corporate earnings and balance sheets – they are far stronger in both categories, though there are concerns as to how long corporate profits can continue to surge.
On October 19 1987, the market went into free fall, losing 22% that day – a record collapse for a single day. The next morning appeared even bleaker, as there were no bids. But the market miraculously began to recover; the market that Tuesday and was up on the day. The year 1987 proved to be positive in terms of equity returns. One thing that did happen that Tuesday morning was that corporations began bidding for their own shares; sentiment changed and the market recovered.
Today, corporations are laden with cash and it is possible, as I mentioned above, that we might see a repeat of a number of corporate buybacks, or at least of announced buybacks. From most companies’ perspective there has been little change. Their balance sheets, other than any equity holdings, are the same as they were on Tuesday morning, as are their income statements. The business prospects for most remain the same as they had been.
Living through market corrections is no fun, unless one is an outright bear. Thus far the markets have corrected about eleven percent from their highs. Last year the market corrected sixteen percent from its high before bottoming in August. In retrospect, that collapse then seems mild to us today. Unless yesterday’s sharp sell off marks the beginning of a worldwide collapse, this too, a year from now, will only seem a blip. Daily and intra daily market movements are exaggerated by high frequency traders whose decisions are based often on momentum, not individual company analysis. For most of us, we are better off focusing on the fundamentals of companies. The world, while often seeming precarious, rarely feels secure.
The global problems we have of too much governmental debt and too slow economical growth will remain with us. Those problems were here before the recent collapse and they will be here when markets do recover. But, those issues have been discussed ad nauseum by me and others.
While stocks do not appear to be extraordinarily cheap, as they were in October 2002 or March 2009, they are no where near as expensive as they were in March 2000 or October 2007. That reality will at some point be recognized. If I had to venture an opinion, it would be that the market which normally anticipates events now appears to be reacting. That makes it unusual, but not unique. Panicking, at this moment, doesn’t seem a sensible course of action.
Thought of the Day
“The Market – Panic is not the Right Response”
August 5, 2011The first thing to remember about a day like yesterday is that no one has ever been able to accurately predict the market with any consistency. There have been many “one day wonders” and there are a few whose history is better than others, but there is no one on whose prognostications one would bet his fortune. As for the “why,” even on a Friday Monday morning quarterbacking is common. Explanations range from the absurd – the President placing the blame on the Japanese earthquake and the effect of the “Arab Spring” on Libyan oil exports – to the reasonable – Mohammed El-Erian, CEO of PIMCO, who suggested three explanations: QE 2, which raised asset prices, but did not regenerate the economy; the lack of confidence in the U.S. following the debt ceiling impasse, and the debt problems coursing through Western Europe. Additionally, there are concerns that the debt ceiling bill just signed, which includes a provision that if Congress cannot agree by November on $1.5 trillion in cuts automatic cuts will be made in areas like defense and health, may prove to be a paper tiger. Leon Panetta, newly appointed Secretary of Defense, has been making the rounds arguing in anticipation that any further cuts will imperil the country.
The more important question, however, for investors is how long will this slide last and what will turn it around. The truth is nobody knows. What we do know is that a turn will come and that its happening will go unpredicted by the majority. There are numerous possibilities, and even though some involve facts, they are all based on behavior – a characteristic notable for its difficulty to forecast – the most likely, in my opinion, would be an increase in the announcements of corporate buybacks.
There are marked differences between now and October 2008, the last time the market had this big a fall. For one, LIBOR had spiked sharply higher beginning in late 2007, peaking in October 2008. The TED spread, the difference between LIBOR and Three-month T-Bills and a measure of liquidity, was 314 basis points on September 30, 2008 (up from under 50 basis points in July 2007.) By year end 2008, the measurement had dropped to 131 basis points and this morning it is 25 basis points. Secondly bank liquidity has become ubiquitous, so that yesterday Bank of New York/Mellon said they would begin charging 0.13 percent on deposits over $50 million dollars, in part to help pay the 0.10 percent fee to the FDIC, but also because they, like other banks, are having trouble loaning out the cash they already have. Reasons lie in new regulatory hurdles bank lending must pass, combined with a lack of confidence among borrowers. A third major difference is the state of corporate earnings and balance sheets – they are far stronger in both categories, though there are concerns as to how long corporate profits can continue to surge.
On October 19 1987, the market went into free fall, losing 22% that day – a record collapse for a single day. The next morning appeared even bleaker, as there were no bids. But the market miraculously began to recover; the market that Tuesday and was up on the day. The year 1987 proved to be positive in terms of equity returns. One thing that did happen that Tuesday morning was that corporations began bidding for their own shares; sentiment changed and the market recovered.
Today, corporations are laden with cash and it is possible, as I mentioned above, that we might see a repeat of a number of corporate buybacks, or at least of announced buybacks. From most companies’ perspective there has been little change. Their balance sheets, other than any equity holdings, are the same as they were on Tuesday morning, as are their income statements. The business prospects for most remain the same as they had been.
Living through market corrections is no fun, unless one is an outright bear. Thus far the markets have corrected about eleven percent from their highs. Last year the market corrected sixteen percent from its high before bottoming in August. In retrospect, that collapse then seems mild to us today. Unless yesterday’s sharp sell off marks the beginning of a worldwide collapse, this too, a year from now, will only seem a blip. Daily and intra daily market movements are exaggerated by high frequency traders whose decisions are based often on momentum, not individual company analysis. For most of us, we are better off focusing on the fundamentals of companies. The world, while often seeming precarious, rarely feels secure.
The global problems we have of too much governmental debt and too slow economical growth will remain with us. Those problems were here before the recent collapse and they will be here when markets do recover. But, those issues have been discussed ad nauseum by me and others.
While stocks do not appear to be extraordinarily cheap, as they were in October 2002 or March 2009, they are no where near as expensive as they were in March 2000 or October 2007. That reality will at some point be recognized. If I had to venture an opinion, it would be that the market which normally anticipates events now appears to be reacting. That makes it unusual, but not unique. Panicking, at this moment, doesn’t seem a sensible course of action.
Labels: TOTD
posted by Thought of the Day @ 5:37 AM
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