- Financial Crises -

Transcription

1 Are financial crises bullish? They frequently have been in the past as long as they don t cause a recession. They ve been bullish because they often mark the end of Fed tightening and the beginning of an easing phase in monetary policy Figure 1. S&P 5 & CRISES (ratio scale) 1962 Cuban Missile 197 Penn Central 1973 Oil Embargo 1974 Franklin National 192 Drysdale Securities & Mexico Default 19 Silver Bubble 194 Continental Illinois 199 S&L 199 Persian Gulf 197 Stock Market Crash 1994 Mexican Peso 199 LTCM/Russian Default 1997 Pacific Rim Accounting Scandals 1 WTC Attack Lehman Collapse Dec 7 Subprime Mortgage Meltdown Source: Standard & Poor s Corporation. Figure 2. FEDERAL FUNDS RATE & CRISES (percent) - Financial Crises Penn Central 1974 Franklin National 19 Silver Bubble 192 Drysdale Securities & Mexico Default 194 Continental Illinois 199 S&L 1994 Mexican Peso 1997 Pacific Rim 199 LTCM/Russian Default 1 WTC Attack 7 Subprime Mortgage Meltdown Lehman Collapse Dec Source: Federal Reserve Board. Page 4 / January, 9 / Half Full: Charts for Optimists www.

2 The Fed has injected a great deal of liquidity into financial markets by agreeing to accept collateral from banks and nonbanks in exchange for its Treasuries on a short-term basis Fiscal & Monetary Policies - Figure 3. RESERVE BANK CREDIT OUTSTANDING (billions of dollars) Reserve Bank Credit Reserve Bank Credit Less Repurchase Agreements Treasury Securities Held Outright / Figure 4. REAL PERSONAL CONSUMPTION EXPENDITURES (quarterly percent change, saar) Tax rebates provided a big boost to Q4-1 consumer spending. "Economic stimulus payments" likely to boost Q2- and Q I II III IV I II III IV I II III IV 1 2 * Shaded area indicates 1 tax rebates. Source: US Department of Commerce, Bureau of Economic Analysis. Page 5 / January, 9 / Half Full: Charts for Optimists www.

3 7 - Liquid Assets - Figure 5. 9 LIQUID ASSETS* 12/29 (billion dollars, sa, ratio scale) Liquid assets at record high of $7.3 trillion, up $1.2 trillion y/y, led by MMMF held by institutions * Total savings deposits (including money market deposit accounts and small time deposits) plus total money market mutual funds held by individuals & institutions. Source: Board of Governors of the Federal Reserve System. Figure 6. LIQUID ASSETS (billion dollars, sa) Savings Deposits* Small Time Deposits Money Market Mutual Fund Shares Held by Individuals Money Market Mutual Fund Shares Held by Institutions 12/ * Including money market deposit accounts. Source: Board of Governors of the Federal Reserve System. Page 6 / January, 9 / Half Full: Charts for Optimists www.

4 - Credit Quality & Financials - Credit quality bond yield spreads may have peaked in mid-march Figure 7. BOND SPREADS (basis points) Moody s Seasoned Aaa-Rated Corporate Bond Yield Less 1-Year Treasury Yield Moody s Seasoned Baa-Rated Corporate Bond Yield Less 1-Year Treasury Yield AAA Municipal 3-Year Bond Yield Less 3-Year Treasury Yield 1/ Source: Board of Governors of the Federal Reserve System Figure. S&P 5 FINANCIALS (ratio scale) Financials may be bottoming / Source: Standard & Poor s Corporation. Page 7 / January, 9 / Half Full: Charts for Optimists www.

5 Relative to personal income, home prices are back to normal Figure 9. - Home Prices & Wealth - S&P CASE-SHILLER NATIONAL HOME PRICE INDEX RELATIVE TO NATIONAL PERSONAL INCOME (both indexed to 1 in ) The vertical line is the average for the period shown in the chart. Source: Bureau of Economic Analysis and S&P Case Shiller Q Figure 1. ASSETS OF HOUSEHOLDS (trillion dollars outstanding) US households have a diversified portfolio of assets Corporate Equities: Directly Held Owners Equity in Household Real Estate Equity in Noncorporate Business Mutual Fund Shares Pension Fund Reserves Q Source: Federal Reserve Board Flow of Funds Accounts. Page / January, 9 / Half Full: Charts for Optimists www.

6 Forward earnings holding up remarkably well for MidCap and SmallCaps. Weakness in S&P 5 forward earnings mostly due to Financials Figure Earnings & Valuation - S&P FORWARD EARNINGS PER SHARE (weekly, Jan 1999=1) Forward Earnings* S&P 5 LargeCap S&P 4 MidCap S&P 6 SmallCap / * 52-week forward consensus expected operating earnings per share. Time-weighted average of the current year s and next year s consensus forecast. Source: Thomson Financial. Forward P/Es are relatively low Figure 12. P/E RATIOS FOR S&P INDEXES* (weekly) S&P 5 LargeCap S&P 4 MidCap S&P 6 SmallCap / * Price divided by 52-week forward consensus expected operating earnings per share. Source: Thomson Financial. Page 9 / January, 9 / Half Full: Charts for Optimists www.

7 6 4 Figure 13. TOTAL FORWARD EARNINGS (ratio scale, billion dollars) - Earnings Excluding Financials, S&P 5 forward earnings remains on uptrend. Dec S&P 5 Financials S&P 5 ex-financials * Using consensus 12-month forward earnings forecasts. Source: Thomson Financial Figure 14. CORPORATE PROFITS FROM THE REST OF THE WORLD* (as a percent of corporate profits) Q Profits from overseas accounting for greater share of total profits. 3 Receipts Source: US Department of Commerce, Bureau of Economic Analysis. Page 1 / January, 9 / Half Full: Charts for Optimists www.

8 Figure. - Global - GLOBAL INDUSTRIAL PRODUCTION EXCLUDING CONSTRUCTION & LEADING INDICATORS Sep Global industrial production growing rapidly Total OECD OECD Plus Major 6 Non-Members* OECD Leading Indicators (trend restored) Sep Oct * Includes 3 OECD countries plus Brazil, China, India, Indonesia, Russia, and South Africa. Source: OECD Figure 16. WORLD EXPORTS vs. NONGOLD INTERNATIONAL RESERVES (trillion dollars) Sep World exports and international reserves growing rapidly. World Exports (annualized) Nongold Reserves FRODOR* Oct Dec * Data from 1952 to 1996 are foreign official assets held at the Fed in US Treasuries. From 1997 to the present, data are marketable US Treasury securities held by the Fed for foreign and international accounts. Data from onward include Federal agency securities. Source: International Monetary Fund and Board of Governers of the Federal Reserve System. Page 11 / January, 9 / Half Full: Charts for Optimists www.

9 Copyright (c) 9. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. This report and the others posted on www. are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company s stock. Predictions, forecasts, estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed on any Yardeni Research, Inc. product, service, report, or website are proprietary to and constitute valuable intellectual property. No material from any part of www. may be downloaded, transmitted, broadcast, transferred, assigned, reproduced or in any other way used or otherwise disseminated in any form to any person or entity, without the explicit written consent of All unauthorized reproduction or other use of material from shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights. The recipient should check any and any attachments for the presence of viruses. accepts no liability for any damage caused by any virus transmitted by this company s s or website. Additional information available on request.