Friends
As we pointed out this morning, the craziness is back as stocks fell more than 4% on the S&P 500 again today, albeit on a bit lighter volume than last week. The Dow Jones Industrial Average closed down 419 points after being down more than 500 points late in the day. With the problems in Europe manifesting itself in their banks and miserable domestic economic news (the Philly Fed report was a disaster) including hotter than expected inflation numbers, stocks never had a chance today. The nice rally we had from last week’s lows is a distant memory as traders staged a buying strike.
First let’s address Europe. The fun started this morning with rumors that a European bank needed to borrow $500 million from the ECB. Bank stocks in Europe were crushed. So much for the banning of short selling in Europe. It only delays the inevitable, if it even works at all. Then as the market opened here in the U. S., our banks, just minding their own business, got immediately crushed. The Dow went right down a couple of hundred points in the first half hour and then tacked on a few hundred more points to the downside after the awful Philly Fed numbers hit. New orders down, backlogs down, shipments dropped and employment deteriorated. Other than that, it wasn’t a bad report (note the sarcasm please). Can you say recession? Well, if we aren’t already in one it sure seems like we are talking ourselves into one.
If we need more evidence of a major slowdown (there I avoided the R word this time), the 10-year treasury note actually traded below 2% at one point today. Folks, that has never happened. I don’t mean in recent times, I mean never. The two-year note is trading at an interest rate of .19% (that is not a misprint).
These unbelievably low yields on fixed income are destined to drive investment toward higher yielding instruments (can you say high dividend paying, great quality U. S. companies?) We have to get the recession argument quantified at some point, but when that happens, we will be able to determine what kind of value stocks really offer.
Gold continued to barrel ahead seeming destined for $2000 having confidently getting through the $1800 level. Oil, with the economic slowdown as the backdrop, was down a whopping 6% and closed the day at $81.51 after almost reaching $90 earlier in the week.
Stocks are attempting to price in recession as sentiment, even when stocks were rising the last few days, is unbelievably negative. Banks are trading as if it’s 2008 all over again (it’s not). A major problem is that a lot of technical damage has been done to stocks. These charts will have to be nursed back to life before we can get any sustained move back up. In our opinion, this will take some time as bottoms are formed over a period of time not just at a certain number. To that end, we will continue to look for opportunities to put our cash to work and feel that we have some time to do so. Volatility is likely here for some time to come.
A final thought as we are frantically attempting to price in the coming recession. What if it doesn’t come?
Have a nice evening everyone. Sorry for the lengthy e-mail. I have a lot on my mind.
