Archive for October, 2008

Americans Save More — Economy Hardest Hit

Kurt Brouwer October 31st, 2008

Economists and many other financial commentators have long decried the low rate of savings in America.  When you read laments about our ‘low’ savings rate, you should bear in mind that this is a statistical item rather than a commonsense use of the term savings.

The U.S. Commerce Department’s Bureau of Economic Analysis (BEA) compiles statistics on savings, but their calculations have little application in the real world in which we live because the BEA’s methodology of calculating savings does not include certain critical components that most of us think of as savings. For example, the BEA’s calculations of income and savings do not include capital gains even though capital gains on stocks, real estate, businesses and other investments are a significant part of what we would consider our savings or wealth. Also, the value of someone’s home equity and retirement plan holdings are also not fully-factored into this calculation of savings, so the published reports of national savings significantly understate the true savings that Americans are making.

Nonetheless, the savings rate as defined by the BEA has fallen for years, but now that may be changing.  In fact, it looks as though Americans are saving more due to concerns over economic and financial uncertainty.   So, that’s good isn’t it?  Apparently, not according to this post from the Real Time Economics blog [emphasis added]:

Good News for Stability, Bad News for Growth (Wall Street Journal-Real Time Economics, October 31, 2020, Phil Izzo)

Part of the reason that consumer cut back on spending in September is that Americans were putting more of their money into savings. That may not be good news for GDP growth in the short-term, but it’s a positive sign for the long-term stability of the economy.

In September, personal saving - disposable personal income less spending - was $140.3 billion, compared with $82.5 billion in August. That raised the savings rate to 1.3% from 0.8% in the previous month. The savings rate spiked from May to July on the back of the government’s stimulus payments, but averaged below 1% for a number of years. It was just 0.2% in April before the stimulus payments went out, and has been nearly flat for years, not rising more than 1.5% in any month since 2004. The rate was in double digits in the 1970s and early 80s, but began a steady decline to the historic lows reached in recent years.

Many experts wrote off the decline, saying that the measures of savings only looked at income, and didn’t include assets such as a house or capital gains. Justin Fox recently recounted some of the history on his Curious Capitalist blog. Now it appears to be a warning sign that went largely ignored.

…It’s also worth noting that even as job losses intensified, home prices declined and other economic concerns stressed household balance sheets last month, consumers managed to put sock more money away than the previous month.

…It’s a bit early to say so, but the American consumer may have finally learned a lesson and is moving toward a more sustainable level of spending. However much this move may benefit individuals, it could prove difficult for the economy…

What I take away from this piece is that individuals are acting rationally at a time of financial crisis — cutting expenses and saving more cash.  These actions make sense in a given economic environment for an individual, but they may not result in a positive outcome in the event that millions of Americans immediately change their behavior by spending less and saving more.  In other words, if you save a bit more money and spend less, that’s probably a good move.  But, if everyone does it, then economic activity slows down considerably, which means more unemployment and so on.

So, the American consumer may have to ride into the breach once more by shopping hard as part of a noble effort to save the economy…or something like that.

Epic Stock Market Declines — Chart of the Day

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

Dow Surges To Second Best Day Ever

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, 2020, 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.

Hedge Fund Withdrawals Roil Markets

Kurt Brouwer October 25th, 2008

Hedge funds are suffering withdrawals as investors rush to the sidelines.  For some hedge funds this is particularly troublesome since they used borrowed money to leverage their portfolios and redemptions force them to unwind massive positions that were purchased with borrowed money.  This Bloomberg piece gives the details [emphasis added]:

Hedge Fund Withdrawals Stress Market (Bloomberg, October 25, 2020, Saijel Kishan and Katherine Burton)

Hedge funds are aggravating the worst market selloff in 50 years as they dump assets to meet investor redemptions and keep lenders at bay.

U.S. hedge-fund managers may lose 15 percent of assets to withdrawals by year-end while their European rivals shed as much as 25 percent, Huw van Steenis, a Morgan Stanley analyst in London, wrote yesterday in a report to clients. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June.

With the average hedge fund down 18 percent this year, as measured by the HFRX Global Index, managers are selling assets to repay departing investors and meet demands from lenders for more collateral. Others including Paulson & Co. and Winton Capital Management LLC are hoarding cash to soothe nervous clients and wait for signs the worst is over. When stocks rally, hedge funds take advantage to unload what they can.

“I have never seen a market as full of panic as I’ve seen in the last seven or eight weeks,” Kenneth Griffin, founder of Citadel Investment Group LLC, a Chicago-based hedge-fund firm, said yesterday.

…Griffin, 40, who started Citadel in 1990, has posted the biggest losses of his career in 2008 after increasing wagers on loans and bonds before the markets plunged.

…The HFRX Global Index fell 7.76 percent this month through Oct. 22, according to Hedge Fund Research Inc. in Chicago. Hedge funds lost 5.4 percent last month, the most since the implosion of hedge fund Long-Term Capital Management LP a decade ago.

Passport Management LLC’s Global Strategy fund fell 27 percent this month through Oct. 15, and 34 percent for the year, as investments in commodity stocks slumped, according to an investor letter. The $4.5 billion hedge-fund firm is run by John Burbank III in San Francisco.

…Platinum Asset Management LP, a Rye Brook, New York-based firm, lost as much as 29 percent this month through Oct. 15, bringing its year-to-date decline to 38 percent, according to investors.

Investors withdrew a record $43 billion from hedge funds last month, according to TrimTabs Investment Research in Sausalito, California…

The financial markets have been pummeled with waves of selling in the aftermath of the Lehman bankruptcy and now this selling by hedge funds.  I don’t know when the selling trend will be exhausted, but eventually sellers will have done all the dumping they plan to do.  When that happens, the markets should stabilize.

The Dollar Is Winning Converts Again

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, 2020, 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.

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