A few days ago (before the super bailout was mentioned), I made an uncharacteristic comment about the future of the stock market. I stated that we were not at, but close to, a bottom.
While the fundamentals may still erode, I will give you 2 indicators that are surprising:
The first is the Yield Curve for the last 50 days. I’ll let it speak for itself:
That is a normally sloping yield curve. That is not at this time portending a recession like it was when I wrote this back in November 2006:
Imagine if investors caught a whiff of Lacker’s higher inflation, increased risk aversion, and China begins a rebalancing or reduction of US reserves? The result could be catastrophic to our debt-based economy. No longer would borrowing be cheap. No longer would funding be plentiful. No longer would assets be liquid.
This is precisely what happened. The “snap-back” I told about happened over the ensuing 18 months. I believe that pressure is abating.
I also wrote the following:
Our current housing prices are fueled entirely by easy, cheap credit, as is evidenced by our high ARM content, and astronomical house-price to income ratios. If a credit event does occur, we have the most to lose. However, all other unwinding scenarios depends on many other moving parts of our global economy to work in clockwork like precision. While the current slowdown is a manifestation of the bubble stretching under its own weight, it is likely that the added pressure of a credit event (and likely even the perfect unwinding as described) would pancake the entire housing and local retail economies that are so dependent on lending. While I would admit I still don’t believe the residential real estate bubble has yet popped, the true test of future direction will be in the credit markets over the next year, not in the for-sale housing market.
I feel a strong desire to state that once again, we are not too far away from the stock market being an attractive place to invest in. Not yet, but soon.
Housing? At least still 1 or 2 years out to being close to attractive. Almost everything is still overpriced.
The second interesting piece I bring today is news about the Treasury Prices auctions announcing that T-bill rates fell below Zero. Yes, you heard me right, Zero.
Here are some notable quotes:
Elsehwere, Treasury bill rates fell with one-month rates slipping below zero, prompted by an unrelenting migration into cash and low-risk assets amid turbulence in money markets.
Worries about the passage through Congress of the government’s proposed $700 billion bank bailout intensified safety bids for bills as well as longer-dated bonds, traders and analysts said.
“There’s a tremendous amount of anxiety whether this (bailout) bill will get passed,” said Thomas di Galoma, head of U.S. government bonds at Jefferies & Co. in New York.
I believe that at least portends a tradeable bounce coming up when the anxiety is resolved. That will happen whether it passes or not (I hope it doesn’t). However, there is a lot of cash in short-term treasuries now. That’s a significant development.
“There’s still a lot of money trying to find a home on the front end,” di Galoma said.
The thrust into T-bills sent one-month rates a touch below zero percent overnight and three-month rates below 0.50 percent.
The intense T-bill demand could crimp demand for longer-term Treasury paper, so the market will closely watch the Treasury’s auction of a record $34 billion of two-year notes later Wednesday, analysts and traders said.
The only question now is, how long before we hit the bottom. I know I won’t be able to call it when it happens, but things are much more attractively priced today than they were 6 months ago. Much more.
For example, I recently purchased GE sporting a 6% yield (that is, if they can maintain it).
On the flipside, many are calling for a return to the commodities bubble. I don’t see that happening. It’s a gutsy call to make, and I may be wrong, but I think this 6-year long commodities bull has been ridden hard and put up wet. If you want an alternate opinion, go visit Tim Iacono at The Mess That Greenspan Made blog.
And, as a parting gift, I have returned Housing Panic blog to my feed again after a respite. I highly suggest visiting it. Great outrage mixed with comedy. It’s gold, pure gold.
“we are not too far away from the stock market being an attractive place to invest in. Not yet, but soon.”
I, too, finally felt that the market’s reaction on 09/15 was the first sign of capitulation and by the 17th, I started licking my chops until P&B felt it was time to leak their “plan”. (And, certainly, a crash of the DJIA to 8300 would’ve been a dream considering my situation). Anyway, tonight Bush did a great job installing fear into the masses which should allow for some good buying opportunities if people begin to panic and then we could see some money currently on the sidelines creeping back into the markets. However, I’m still torn between the market beginning to look attractive and Schiff’s view of the Dow equalling (or nearing) the price of an ounce of gold–whatever level that may be.
Does the latter no longer apply given the period of deflation and the bailout having seemingly put in a level of support? Since I’m a n00b, I’ll have to go against my instincts and error on the side of Schiff, even though we both feel a return to the commodity bubble is unlikely.
Thoughts? Please feel free to slap me around a bit because any further explanation of your opinions would be appreciated. Thanks in advance.
There is no sure way to make money in stocks. In any bull market, some stocks will do poorly; in any bear market, some stocks will do well. I recommend that if you don’t have the stomach for it, buy bonds, bond funds, or conservative return funds. (I used to have my money in a total return fund)
Once you’re comfortable with losing every penny, then you might be comfortable investing in the stock market. It’s not for everyone.
But, in this kind of market, my opinion is that those companies that pay a solid dividend and are not directly involved in the current crisis are great investments. You don’t want to put your bulk in risky stuff like Financials, Homebuilders, or Retail. You may want to take a small portion of your portfolio and test the waters on catching a falling knife, or at least a few dead cat bounces.
Oh, and to the other questions,
Deflation means that companies with resilient earnings will be worth that much more as they are a flight to quality.
Look for a great debt structure with low rates and good free cash flow. Anything with a dividend that is solid is going to be good.
Chuck Ponzi
I was wondering if you had any take on how much the debt service is shaping up to look like? What percent of revenues for the gov and what percentage of GDP?
Should give us some answers on deflation vs potential for hyper inflation.
Also interventionist measures will probably leave foreign investors uncertain and might cause a retreat in the markets over time. Who is to say you will not get caught by the next wave on nationalizations?
ding ding ding… dow is at 10,500k.
Who says they don’t ring a bell at a market bottom?
I think you just rung the bell.
I’m looking at some great buys.
Chuck