Monthly Chartbook April 1, 2009 20 Reasons We Think the World is Not Ending Copyright 2003-2009 All rights reserved.
The market had priced in the worst possible scenario that of a second Great Depression. While there were scary moments, we re really nowhere close to that.
Industrial Production Industrial production is still a great indicator for the economy, but our year-over-year change does not come close to the precipitous declines from the 1930 s.
2 year US Treasury
TED spread This was scary!
More measures of systemic risk aversion The VIX (volatility index) hit an uncharted high just below 90, and is now under 45. The US 3 month Treasury bill offered tremendously low yields near the end of December and has improved significantly since then.
Copper Copper is a very useful economic indicator, and it bottomed in November / December.
Baltic Dry index The Baltic Dry index offers the cost of shipping a commodities freight overseas and is a good indicator of international trade.
Yield curve An upwardly sloping yield curve indicates the market anticipates economic growth.
Credit spreads Credit spreads are still high, but their contraction is yet another sign of the abatement of risk aversion. Source: Merrill Lynch
Institute of Supply Management Manufacturing report Institute of Supply Management Manufacturing Report Biz 40% 1 Yr. 3 Yr. 30% 20% 10% 0% -10% -20% -30% -40% 9/1/1986 9/1/1988 9/1/1990 9/1/1992 9/1/1994 9/1/1996 9/1/1998 9/1/2000 9/1/2002 9/1/2004 9/1/2006 9/1/2008 Again, in November and December, it was ugly. But much of this was a reaction to the de-leveraging in October.
Corporate profits Corporate Profits as % of GDP 14.00% 13.00% Current Data 10 Year Average 12.00% 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 03/01/85 06/01/86 09/01/87 12/01/88 03/01/90 06/01/91 09/01/92 12/01/93 03/01/95 06/01/96 09/01/97 12/01/98 03/01/00 06/01/01 09/01/02 12/01/03 03/01/05 06/01/06 09/01/07 12/01/08 The recent period above trend-line is an artifact of financial profits and is problematic. The goal is to retain growth in corporate profits, but to more equitably distribute them not out of altruism, but to ensure the continued functioning of capitalism.
Apr-08 Oct-08 Personal savings rate Personal Savings Rate 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 - Personal savings has rapidly moved from less than 1% to over 4%. This is dramatic. Oct-06 Apr-07 Oct-07 Oct-88 Apr-89 Oct-89 Apr-90 Oct-90 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06
Retail sales Retail Sales as a % of Personal Income 40.00% 39.00% 38.00% 37.00% 36.00% 35.00% Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 As indicated in the previous chart, consumers have re-calibrated their personal balance sheets (and done so quickly).
Paul Kanjorski D, PA a member of the House Financial Services committee who understood the threat that mark-to-market accounting was posing to the system.
San Diego home prices CS Home Price Indices 40.00% 30.00% National San Diego 20.00% 10.00% 0.00% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09-10.00% -20.00% -30.00% May be leading us out
National home prices Case Shiller is the most thorough of the data series, but the others are showing positive change. That is something that must be considered.
The opportunity Historically, S&P banks 500 borrowed Market Cap/Nominal money from savers GDP and lent it out using 10:1 leverage. Interest Rate Adjusted They would set aside 1% of capital for loan loss reserves and earn 1% return on assets. This 1% return on assets would become a 10% return on equity (due to the leverage factor). Half of the return would be used for bank operating expenses and half would be returned to shareholders. Still, though, it is not out-of-line to refer to banks (even under this model) as leveraged hedge funds. Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
The opportunity, part II Appreciation Potential for Value Line Stocks for coming 3 5 Years.
S & P 500 Earnings Price Earnings Ratio S & P Close S & P PE EST EPS 1,800 100 1,600 90 1,400 80 1,200 70 1,000 60 50 800 40 600 30 400 20 200 10 0 0 Dec-97 May-98 Oct-98 Mar-99 Aug-99 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Earnings have collapsed, but much of that is due to the negative earnings reported by a small number of institutions. PE on an ex-negative basis is around 11 or 12.
S & P 500 PE vs. Inflation S & P PE vs. Inflation S & P PE Annual CPI 70 16 60 14 12 50 10 40 8 30 6 20 4 2 10 0 0 (2) Jul-56 Mar-58 Nov-59 Jul-61 Mar-63 Nov-64 Jul-66 Mar-68 Nov-69 Jul-71 Mar-73 Nov-74 Jul-76 Mar-78 Nov-79 Jul-81 Mar-83 Nov-84 Jul-86 Mar-88 Nov-89 Jul-91 Mar-93 Nov-94 Jul-96 Mar-98 Nov-99 Jul-01 Mar-03 Nov-04 Jul-06 Mar-08 Historically when inflation is low (below 5% annualized), the PE for the S & P 500 is between 18 and 20. Only when inflation is really strong is the PE ratio less than 10.
Our Outlook Challenges remain, and it will be an uphill climb for the markets over the coming two- to three- years. Unemployment will be the last indicator to improve, and other data points will be negative as the economy works through the shock of last fall. But, our opinion is that the market owes us every point back to the price on what we believe was the day of capitulation 9/29/08 (Dow closed at 10,365). Much of the market s action since then is a function of institutional delevering (and its unintended consequences). Remember, though, the consumer retrenchment will likely have effects on the economy for a few years.