The US Treasury now has a plan to recapitalize Fannie Mae and Freddie Mac. The US government is taking over both entities, and plans to add $15 billion each. The entities also had $20 billion of negative equity, so the cost to US taxpayers is $50 billion. New executives will be named to run the entities. This will sooth investors who have bought 1.4 trillion of Fannie and Freddie mortgaged backed paper. Many central banks and foreign institutional investors own that paper, so this news is calming to the market. Every investor believed the US would back that paper. It is good that Paulson arranged the bailout of these entities: they guarantee $6 trillion worth of mortgages in the US. Many Americans would not have homes without these entities guarantees of mortgage loans. So this was important to give confidence to investors in US securities, and calming to large US brokers and investors. I hope these entities will be better managed going forward.
The jobless rate increased to 6.1% in August from 5.7% in July and 5% at the end of 2007. Total job losses for 2008 have been 605,000 jobs. In prior downturns, the average monthly job losses have averaged 150,000 per month. So, we can be thankful that we are averaging about 75,000 per month, or less than half of normal job losses. That means that outside of housing, real estate, construction, retail, and some financial firms, we are not doing too badly. 6.1% was the peak jobless rate in September 2003, just before the market started going up again. Our jobless rate could be much worse.
US GDP grew 3.3% in Q2, after .9% in Q1. Our exports are driving the GDP growth. Without the drag from financials and real estate, our GDP would have grown 4%. In the first six months of this year, US export growth was up 23%, more than China’s at 17%. We can be very proud of our exports. The downside to our growth is that as the world economy slows, and it is slowing everywhere, including China, that our export growth will slow due to our trading partners growing slower.
As for companies, Bank of America announced it was settling with state and federal regulators over its sale of auction rate securities. It will be writing down assets in the 3rd quarter, probably at least a billion or so, due to these securities. Merrill Lynch was downgraded by Goldman Sachs, who believes Merrill will have to write off more than its $5 billion projection in the 3rd quarter. Google released its new browser Chrome, a competitive move against Microsoft. Retail sales were strong at Wal-mart in August, with same store sales growing 3%, while same store sales fell 2.1% at Target. Lehman Brothers is in negotiations with the South Korea sovereign wealth fund. They are disagreeing about the valuation of Lehman-but Lehman needs the money, and I think a deal will get done.
Economic worries pounded stocks. Last Thursday, the major indexes (S & P 500, Nasdaq Composite, and NYSE Composite, DJIA were all down 3%. The markets were recognizing most economies are growing very slowly, and weak retail sales were reported. The big four European economies have been showing weakness for some time. Germany reported that industrial production fell 1.8% in August, its fourth straight month of lower production.
Energy and Materials led the sell-off on Tuesday, falling 5% and 3% respectively. These sectors were the market leaders until June of this year. Now Medical and Consumer Staples (food, pharmacies, tobacco) are leading the market, but losing momentum. Financials and Consumer Discretionary (discretionary retail, homebuilding, high end retail) are starting to take over sector leadership. Technology was very weak last week. So what does this mean? It means that money is money out of energy, materials, medical, consumer staples, & technology, and moving into financials and consumer discretionary stocks. Sector leadership is very important, as the next bull market will be led by Financials, Consumer Discretionary, and small cap stocks. So this is a good start. We have more things to work through before we start a new bull market, but we are making progress.
YTD, the S & P is down 15.4%. Only the Dow Transports are up of the major US indexes, up 6.96%. So far in 2008, the NYSE Composite is down 17.5%, the NASDAQ Composite is down 14.9%.
In the past three months, medical and healthcare is up 5.2%, and an Investors Business Daily’s (IBDs) consumer
index is up 2.96%, and IBD?s bank index is up 4.01%.
The S & P 500 is down 8,7% in the past three months, the DJIA is down 8.1%. The Russell 2000, a small caps index, is down 2.91% in the past three months. So, on a relative performance basis, small caps are doing best.
Most international indexes are down. China?s two indexes are down 56.7% and 61.9% respectively, Hong Kong is down 26%, Brazil is down 16.2%. Morgan Stanley?s developed markets international index is down 17%, and their Emerging markets index is down 26.8%. In the past three months, international markets are falling faster than the US. Most people would benefit by decreasing their international allocations, as most markets have further to fall. (Economist)
Interesting facts: Firms are rethinking shipping costs and reducing those costs by redirecting freight from air to ship, and from truck to rail. Also, firms doing Just in Time inventory delivery are finding small shipments are expensive due to transportation costs, so they are now optimizing their inventories based on delivery (transportation costs). Some companies that have outsourced or off-shored manufacturing are rethinking their decisions. Dell is saying they see the global economy slowing down, as orders are slowing.
Conclusion: September and October will likely be volatile months, as was July. August received the benefit of lower commodity costs, which reduced margin pressures, and we saw very low volatility, with a reading of about 20 on the VIX. The VIX closed today at 22.64. I expect that the VIX will hit 30 in either September or October, and we will hit new lows in the S & P, in the 1200 range or below. I think it is time to reduce international exposure, and overall decrease equity allocations across the board. Once we have penetrated old lows, we should be on firm ground to start a new bull market. We will have to see what September and October brings.
Brent Johnson, CFA, CFP
Wealth Design Group
* Registered Representative and Financial Advisor of Park Avenue Securities LLC PAS.
Securities products/services and advisory services offered through PAS a registered broker-dealer and investment advisor.
Field Representative, The Guardian Life Insurance
Company of America (Guardian) New York, NY.
PAS is an indirect wholly owned subsidiary of Guardian. Wealth Design Group is not an affiliate or subsidiary of PAS or Guardian.
* PAS is a member FINRA, SIPC. Securities offered through Park Avenue Securities, LLC, Member FINRA/SIPC.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
*Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
*Investor?s Business Daily is the source for Recent News
* Stockcharts.com & Economist are the source of technical information on the market and international market indexes.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Consult your financial professional before making any investment decision.
* You cannot invest directly in an index.
* Past performance does not guarantee future results.
* Links to other sites are for your convenience in locating related information and services. This Agency, The Guardian Life Insurance Company of America (Guardian) and Park Avenue Securities, LLC (PAS) do not maintain these other sites and have no control over the organizations that maintain the sites or the information, products or services these organizations provide. Although this Agency, Guardian and PAS believe that the information from these organizations is reliable, we cannot guarantee its completeness or suitability for any purpose. Accordingly, this Agency, Guardian and PAS expressly disclaim any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. This Agency, Guardian and PAS do not recommend or endorse these organizations or their products or services in any way.