Worth reading again now and in the future.
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A horrible experience this year for investors got even worse this week. The losses in the major indices were material and new lows were set in this bear market move.
In fact, with the losses seen this week, the entirety of the gains recorded during the bull market move from the October 2002 low to the October 2007 high were wiped out at one point and the S&P fell to levels seen in 1997.
Uncertainty continued to be the albatross around the market's neck as some key corporate developments (or lack thereof) and a number of economic releases fed the market's concerns about not knowing how deep and how long this economic slowdown will last.
Among the more stunning developments this week was the collapse in Citigroup's (C) stock price. To be exact, Citigroup plummeted 60% to $3.77 per share, or nearly the equivalent of its ATM fee.
Balance sheet concerns were at the heart of the sell-off as burgeoning reports of growing weakness in the commercial loan category fanned fears that Citigroup, and the financial sector, would need to raise a lot more capital to offset losses.
Citigroup bore the brunt of the selling, though, as its management rankled investors Monday when it didn't indicate senior managers would forego bonuses this year, yet announced plans to cut up to 52,000 jobs from the bank's payroll.
That was dumb corporate development #1. Dumb corporate development #2 was the CEOs of the major U.S. auto makers flying to Washington on private jets to beg Congress for billions of dollars of taxpayer bridge financing to avoid bankruptcy.
That PR debacle went hand-in-hand with an inability of the executives to provide any clear sense of how they would restructure their businesses so that they wouldn't have to return to Washington to ask for more money six months down the road... or ever.
Congress withheld any financial aid for the time being, saying it needs to see an actual turnaround plan from the auto makers before it can consider providing the auto makers a lifeline. Congress, reportedly, will take up the matter again in early December.
Despite that fiscally prudent position by Congress, the fear of the multiplier effect of a bankrupt auto industry prevailed and compounded this week's selling interest.
The Fed added to the market's concerns with sizable downward revisions to the central tendencies of its economic projections for next year. Specifically, it was noted in the minutes for the Oct. 28-29 FOMC meeting that the central tendencies for real GDP growth in 2009 were lowered from 2.0% to 2.8% to -0.2% to 1.1%. The projections for the unemployment rate, meanwhile, were raised from 5.3% to 5.8% to 7.1% to 7.6%.
Fed officials felt real GDP would contract somewhat in the first half of 2009 and then rise in the second half of the year.
Given recent economic and earnings reports, the market didn't embrace the forecast that conveniently anticipated the economy returning to growth mode in the second half of next year.
Right now the prevailing economic view for the market is half empty because it hasn't found much in the hard economic data to think otherwise and this week's reports didn't help at all in that respect.
Industrial production increased 1.3% in October, yet that move was regarded as aberrant since it reflected a snapback from the shutdowns related to hurricanes Gustav and Ike and given the market's understanding that the manufacturing sector is in retrenchment.
On a related note, housing starts continued to decline, falling 4.5% in October from the prior month to a seasonally adjusted annual rate of 791,000 units. Building permits, meanwhile, declined 12% to a seasonally adjusted annual rate of 708,000. The starts number provides another weak data point for fourth quarter GDP calculations while the permits number portends continued weakness for housing starts in the months ahead.
Separately, weekly initial jobless claims surged 27,000 to 542,000, ensuring that we'll see an 11th consecutive decline in nonfarm payrolls when the November data are released. Continuing claims jumped to 4.012 million from 3.903 million and reflected the difficulty of finding a new job.
The good economic news this week was found in the inflation reports. Producer prices declined 2.8% in October while consumer prices declined 1.0%. That good news didn't hold much sway, though, as a nervous market was quick to consider it a by-product of the economic weakness and a precursor possibly to a deflationary environment.
Good news was limited during the week. Hewlett-Packard (HPQ) provided some preliminary earnings guidance that was very reassuring, only it was soon discounted as being company-specific.
However, the market, which was languishing Friday, did cheer the news that New York Fed President Timothy Geithner is going to be nominated by President-elect Obama to be Treasury Secretary.
Geithner is highly regarded by the financial community and, given his current position at the Fed, is considered to have a very competent understanding of the issues gripping the capital markets. His appointment, then, was heralded as allowing for a smooth transition of what promises to be an extremely complex and important job in the immediate future.
Prior to the news of Geithner's selection, the S&P was down approximately 1.0% in Friday's trading. It ended the day up 6.3%.
The Friday rally took some sting out of a hurtful week. Of course, we've seen relief rallies before end up being short-lived.
We don't know what the coming week brings, but taking things one week at a time is all the market appears capable of, or willing to do, at this point.
That's understandable given the fluidity of developments in the political, financial and economic spheres. Yet, for those willing to consider a longer-term view, it's hard not to be struck by the valuation disparity between stocks and bonds.
The earnings yield for the S&P 500, based on the latest available calendar 2009 consensus earnings estimate of $85.73 provided by Thomson Reuters, is 10.7% versus the 10-year Note yield of 3.20%!
Of course, investors know that consensus number is going to come down, so there isn't any faith in its value. Even so, if one took a draconian approach and assumed the consensus estimate comes down 50%, the earnings yield based on Friday's closing price would still be 5.4%.
The yield spread underscores the significant, long-term value stocks provide relative to bonds at current prices, but that matters little in emotion-charged markets where capital preservation is all anyone cares about.
Not that anyone can blame an investor for favoring such an approach. There are so many big, worrisome issues that need confronting right now that it makes it exceedingly difficult to have anything other than the most cautious view.
We will get through this period. We always do. How long it takes is the great unknown, so there isn't any strong conviction yet in buying stocks.
Still, the widening valuation disparity between stocks and bonds supports the notion in our estimation that an attractive buying opportunity is availing itself for the investor with a long-term orientation (i.e., someone who thinks in increments of 5 years rather than 5 days or 5 minutes).
--Patrick J. O'Hare, Briefing.com
**For interested readers, the S&P 400 Midcap Index, which isn't included in the table below, was down 11.3% for the week and is down 48.5% year-to-date.
| Index | Started Week | Ended Week | Change | % Change | YTD % |
| DJIA | 8497.31 | 8046.42 | -450.89 | -5.3 | -39.3 |
| Nasdaq | 1516.85 | 1384.35 | -132.50 | -8.7 | -47.8 |
| S&P 500 | 873.29 | 800.03 | -73.26 | -8.4 | -45.5 |
| Russell 2000 | 456.52 | 406.54 | -49.98 | -10.9 | -46.9 |
