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So, Have We Hit Bottom?
by Guy Baker

So have we hit the bottom? Is Obama a genius and have things turned. With a great March and the Dow Jones Industrial Average up about 10%, the ides of March have certainly changed the direction of the winter storms. But are the sentiment from February real? With resistance levels being broken and economic data coming in better than expected, are the good times here?

Oh that it would be true. But we are standing in a big hole, a debt crisis of tsunami proportions and it is not appropriate to declare the crisis over and things are going back to normal, at least not yet.  Please don’t think me bearish, I'm just trying to be pragmatic.

The latest plan to absorb the banks' toxic assets, all those mortgages and other debt-related securities is not being received with open arms. Our beloved Treasury Secretary tax cheat Tim Geithner wants private investors to buy them in partnership with the government. The idea is for the banks to sell off distressed debt and taxpayers get a chance to make some money because of the huge discounted purchase price.

So what’s wrong with that? Judging by last the recent stock market rally, institutional investors must fell this is a great deal for everyone. However, there is one, tiny weenie little problem. Nobody knows if the banks and private investors will be able to agree on a FAIR price. Banks may balk if the offer price is too low. They may choose to keep the assets on their balance sheets rather than face more large write-offs. If the banks ask too much, private investors will walk away.

This has been the problem all along. There has been a total inability to find the balance between the value of the toxic assets and the price investors are willing to pay. Banks don't want to accept the huge write downs the private investors are offering. And worse, there is no guarantee anything will change. If this falls apart, there is every likelihood, the Dow would set new lows.

So is there any GOOD NEWS?  We are starting to see signs the velocity of money is picking up. This is very good. When money stops circulating virtually all economic activity grinds to a halt. The pace of deterioration seems to be slowing. February home sales, both new and used, rose by about 5%. Housing starts and building permits improved as well. What hasn't made the news is the trend in nonfarm payrolls. During the past few months, the rate of unemployment has has stabilized:

Losing 646,000 jobs per month is horrible, but at least it is not happening at an accelerating pace. (We'll see if this trend is holding when the March data is released on Friday, Apr 3.)

Corporate earnings estimates are not declining as dramatically either. During March  only three full year profit projections have been cut for every forecast that has been raised. In January, that ratio was sic to one. This is a good sign. But again, there are still more declines than advances. But regardless, this change is a step in the right direction.

Don't Wait For Confirmation Of A Turnaround

It is still too early to declare a bottom has been reached for the markets or the economy. We need to see more signs of stabilization. Look for Chicago Board of Exchange (CBOE - VIX) Volatility Index to trade consistently below 40. This has not occurred since last September. This is a good indicator things are moving in the right direction. Granted, there can be gaps between the data metrics and markets performance but we have seen the market reflects both emotion and economics. The market does not have to be right in order to react to it. This is particularly the case when it comes to trend reversals. It maybe the Mar 9 intraday low of 6,440 will turn out to be the bottom. If so, the Dow lost 55% of its value from the high of 14,164 on Oct 9,2007.

There are several bits of data that may indicate the beginning of the end of the crisis, even if they don't necessarily signal an upturn:

1. Personal spending rose +0.2% in February, and January spending was revised upward to +0.1%.  The gains in spending came even though personal income actually fell by -0.2% in February.  Perhaps this signals an increase in consumer confidence. It will take consumer spending to recover.

2. Existing-home sales were up +5.1% in January while new-home sales gained +4.7%.  While those gains are at the cost of a further decline in home prices, it does signal activity which is a good thing. According to the National Association of Realtors, median home price dropped to $165,400 in February compared to $195,800 a year ago.

3. The economy saw durable goods orders rise for the first time in seven months. Machinery orders were up +13.5%.

4. The ISM Index rose in February above the consensus expectation of 36.0 to 36.3.  (Levels higher than 50 signal expansion; levels below 50 signal contraction). The output components of the overall index tilted upward. The new orders index increased to 41.2 from 33.1, the production index increased to 36.4 from 36.3, and the employment index increased to 28.1 from 26.1. The index for inventories fell to 32.2 from 37.0 and the supplier deliveries index declined to 43.6 from 46.7.

5. A few economists expected auto sales (cars and light trucks) would start recovering from the abysmally low 9.1 million unit annual rate in February 2009.  The consensus end of 2010 figure is 15.9 million units. While it’s only February, the recent report on March auto sales shows vehicle sales increased 7.8% in March to a 9.8 million annual rate. This should cause auto production to increase substantially in the US over the next couple of years. Whether this happens fast enough to help the Big Three is still an open question.  

 Bottom Line: So are we reaching the bottom of the worst recession since the Big D of the 30's? Only time will tell. While this uptick may be a “dead cat bounce” or the real thing, the stock market seems inclined to think it is real. We won’t know for several months, but at least it gives us something to smile about.

Market Notes

The Dow [+6.84%; - 11.39%], the S & P 500 [+6.17%; -9.64%], and the NASDAQ Composite [+6.03%; -2.02%] all recorded strong gains for the third consecutive week. Even though corporations announced declining profits, the focus on future gains from the bail-out and the stimulus programs has brought optimism.
But it would be nice to know why there was a drop in 90-day T-bill yields. The 13 week Treasury Bill (IRX) is back into it’s 2 month trading range after dropping 70% to 12 basis points March 30. These low rates indicate significant investor fear about where to put their money. Investors are still more concerned about the "return of their money” than “the return on their money."
Mortgage rates slid again in all major categories.  Get this! The rate on conventional 30-year, fixed-rate loans and one-year, adjustable rate mortgages (ARMs) was the same – 4.85%.  Why would an ARM borrowers lock this in?  Do they think ARM rates will decline even lower in the coming months? I would lock in these rates for thirty years if it were me.
The price of crude oil continued its baton death march to steadily higher prices in March. Gas prices went right along with it. Many areas of the country are now above the $2 mark and it is likely will hit $2.50 by summer.

FINANCIAL FACT OF THE WEEK

A little nostalgia. Remember the good ol' days?  This is when the stock market indicators reached new highs on a regular basis.  And when was that?  Here's a table showing the date when the major indicators hit their all-time highs.

Final thought – nothing is forever.

Guy Baker is named one of top
250 advisors by Worth Magazine