Fundmastery Blog

Kurt Brouwer October 31st, 2008

This is the sixth serious stock market decline I’ve been through, but for many this is quite a new phenomenon.  So, I thought this chart would be useful as it illustrates how this decline compares to big ones over the past few decades.  What makes this downturn different and more difficult is that it combines the very steep and quick decline of the 1987 crash with the depth of the 1973-74 or 2000-2002 declines.

One other difference is that stock valuations were extremely high in 2000 and so a serious decline made some sense as a normal market function.  However, stock market valuations were not at stratospheric levels a year ago.  Therefore, this decline was driven by other factors, such as the drop in real estate prices, the deleveraging of almost all financial institutions and the failures of many (Fannie Mae, Freddie Mac, Lehman, Bear Stearns, WAMU, Wachovia and so on).  Those failures led to widespread fear and outright panic at times.  As that panic spread throughout the world, individuals and companies began cutting back their spending and investment and that has pushed the economy into a contraction or recession.  And, worries about declining corporate earnings due to the recession have helped drive stocks even lower.

As the chart indicates, this stock market decline has almost been as deep as the two other big ones, but this decline has been compressed into a much shorter time than those declines.

Source: Calculated Risk

• Economy , Investing , Money
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Kurt Brouwer October 28th, 2008

Normally, this kind of day would be astonishing, but the level of volatility in the past month or so has been so high that we are getting used to wild up and down days.  This report from Bloomberg [emphasis added] indicates just how big this day was:

Stocks Rally, Dow Jones Industrials Climbs 889 Points (Bloomberg, October 28, 2008, Lynn Thomasson and Eric Martin)

Stocks rallied and the Dow Jones Industrial Average posted its second-best point gain ever as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing.

Alcoa Inc. jumped 19 percent, leading the Dow to an almost 900-point advance, after the shares slid to their lowest price-to-earnings ratio on record. General Electric Co., the largest issuer of commercial paper, jumped 9.9 percent after sales of longer-term debt soared 10-fold yesterday as the Federal Reserve entered the market for corporate IOUs. Citigroup Inc. and Bank of America Corp. rose more than 12 percent as traders boosted bets the Fed will cut interest rates tomorrow.

The Standard & Poor’s 500 Index gained 91.56 points, or 11 percent, to 940.48 after sliding to the lowest level since March 2003 yesterday. The Dow climbed 889.35 points, or 11 percent, to 9,065.12. Hong Kong’s benchmark index added 14 percent, its best advance in 11 years, while Germany’s climbed 11 percent and Brazil’s jumped 13 percent.

“Anyone who has a long-term view and looks at earnings multiples and inflation will say it’s a cheap moment to buy stocks,” said Linda Duessel, equity market strategist at Pittsburgh-based Federated Investors Inc., which manages more than $333 billion.

The S&P 500 was valued at 10.7 times estimated profit when trading opened today, the cheapest compared with the multiple using trailing profit since 1985. The MSCI World Index traded near the cheapest relative to earnings since at least 1995.

The Dow’s only larger point gain was on Oct. 13, when the 30-stock gauge jumped 936 points on the government’s plan to buy stakes in banks…

Quite a day.

• Economy , Investing , Money , Mutual Funds , Personal Finance , Retirement
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Kurt Brouwer October 25th, 2008

The dollar continues its strength versus most currencies (other than the Japanese yen) as investors seek the safety and stability of U.S. dollar-denominated securities.  This represents a remarkable turnaround for the dollar, which was was not receiving much love as recently as June.  Now, that has changed in dramatic fashion as this Bloomberg piece [emphasis added] indicates:

Dollar Gains Most Since 1992 On Concern Global Slump Deepening (Bloomberg, October 25, 2008, Ye Xie)

The dollar gained the most in 16 years against the currencies of six major U.S. trading partners as a global economic slowdown spurred demand for the greenback as a haven from losses in emerging markets.

“The foreign-exchange market is basically saying we are in a global recession and perhaps a very, very deep one,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said in an interview on Bloomberg Radio.  “Any sense of rationality and fundamentals is thrown out the window.”

Japan’s yen also benefited as investors fled high-risk assets and used the proceeds to pay back low-cost loans taken out in the currency. The yen climbed to a 13-year high against the dollar this week and surged to its strongest level against the euro in six years. The pound fell below $1.53 in its biggest weekly drop since investor George Soros drove sterling out of Europe’s system of linked exchange rates in 1992.

The dollar appreciated 6 percent to $1.2623 per euro this week, from $1.3410 on Oct. 17. The currency touched $1.2497 per euro yesterday, the strongest since October 2006. The yen rallied 7.8 percent to 94.32 per dollar from 101.69, and touched 90.93 yesterday, its highest level since August 1995. Against the euro, the yen climbed 12.7 percent to 118.96 from 136.21. It touched 113.81 yesterday, the strongest since May 2002.

This week’s decline in the euro was its biggest against the dollar and the yen since the 15-nation currency’s inception in January 1999. The yen’s gain versus the dollar was the biggest since October 1998.

…”We are in a financial crisis,” said Richard Clarida, a global strategist at Newport Beach, California-based Pacific Investment Management Co., which oversees $830 billion in assets, including the world’s biggest bond fund. “The flight to quality is boosting the dollar and the yen.”

Emerging-market currencies tumbled as Argentina seized private pension funds, and Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the International Monetary Fund. Brazil’s real dropped 8.2 percent to 2.3075 against the dollar, the South African rand decreased 10.4 percent to 11.18 and the Russian ruble fell 3.2 percent to 27.1991…

One of the most fascinating aspects of this financial crunch is how rapidly changes are occurring.  It takes $1.25 to buy one Euro now and it was not long ago that it took $1.60.  This rapid rise in the dollar will probably begin hurting U.S. exports, but it should help make the cost of imported goods much more affordable for U.S. consumers.  For more on this, please see Dollar Soars Versus Euro and Dollar Rallies Against Euro — Flight to Quality.

• Business , Economy , Geopolitics , Money
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Kurt Brouwer October 22nd, 2008

Source:  Carpe Diem

Not much positive news in the financial press this week, but one bright spot is the U.S. dollar which has steadily strengthened versus the Euro and other major currencies.

Why is this happening?  In my opinion, investors all over the world are seeing good value in dollar-denominated investments such as U.S. Treasuries and other government-backed bonds (see Bonds Markets Pricing In Armageddon).

U.S. stocks also look pretty cheap (Warren Buffett: I May Soon Be 100% Invested In U.S. Stocks), not to mention real estate particularly in states such as Florida and California that have been hit hard.

• Economy , Geopolitics , Money
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Kurt Brouwer October 20th, 2008

‘Armageddon Prices Fail To Lure Buyers Amid Selling (Bloomberg, October 17, 2008, Pierre Paulden and Caroline Salas)

Credit markets have fallen so far that they are providing a “once in a lifetime opportunity,” and investors are still selling.

Prices of loans rated below investment grade declined to a record low 66.1 cents on the dollar, virtually guaranteeing investors get their money back, based on historical recovery rates, according to data compiled by Standard & Poor’s. Yields on corporate bonds show investors expect 5.6 percent of the market to go bust, the highest default rate since the Great Depression, according to Christopher Garman, chief executive officer of debt research firm Garman Research LLC in Orinda, California.

While central banks injected $3 trillion into the global economy, credit markets are tumbling because banks are clamping down on lending, forcing investors to unload assets they bought with borrowed money. The Federal Reserve said Aug. 11 that its quarterly survey shows most “domestic institutions reported having tightened their lending standards and terms.”

“There has been widespread liquidation of assets that has nothing to do with fundamentals,” said Scott D’Orsi, a partner at Boston-based Feingold O’Keeffe Capital, a hedge fund which has $1.3 billion in assets. “Investors in bank debt are being presented with a vast number of extraordinary opportunities; opportunities that I would characterize as once in a lifetime.”

The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG…

Most of the gloom in the financial markets has focused on either real estate or stocks, both of which have fallen sharply this year.  But, the bond markets have suffered considerably as well.  Other than U.S. Treasury securities, pretty much all bonds and other fixed income securities are under severe selling pressure right now. This decline in real estate, stocks and bonds is one very important reason why this downturn feels so much worse than many previous downturns.

• Economy , Geopolitics , Hedge Funds , Investing , Mutual Funds , Personal Finance
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