I was out in British Columbia last week and thus, I wasn’t able to keep up with my daily little “rant” which I regret. I will attempt to provide more content this week and increase the frequency in order to provide more relevant information sooner. I want to catch-up a little bit and I hope I will be able to accomplish that this morning.
Last week we did see further erosion in the price of stocks as the Dow Jones Industrial Average dropped in value by 4.99% and the TSX Composite Index dropped in value by 5.69%. The real loser was the NASDAQ (technology heavy) Index which dropped more than 7% for the week (the MSCI World Index dropped 6.2%). On Thursday the major indices did test their October lows once again before posting sharply higher gains on the day after bargain hunters re-emerged and bought up equities. Stocks dropped as profit outlooks worsened for companies from Goldman Sachs Group to Best Buy (the largest electronic retailer selling discretionary items) and the U.S. Treasury shifted their rescue plan away from banks and buying mortgage backed securities and moved towards General Motors.
It is very clear that stock prices are very cheap but many investors agree that stocks could become cheaper and hence buyers remain on the sidelines until there is more clarity on future short-term prospects, including the prospectus for the overall health of the economy. The recession is getting worse and credit losses from financial companies have now climbed to $964 billion $U.S. The U.S. stock benchmark has dropped 41% this year, which would be the biggest annual decline since 1931 assuming we don’t experience a Christmas rally. U.S. retail sales dropped the most on record, falling 2.8% in October (2/3rds of U.S. GDP is attributed to the U.S. consumer), the Commerce Department reported last week. That is the 4th straight decline and the unemployment rate hit a 14 year high (it is expected to hit 7%).
President-elect Barack Obama said the U.S. government will do “whatever it takes to revive the economy”, and that means “we shouldn’t worry about the deficit next year or even the year after. In the short term, the most important thing is that we avoid a deepening recession,” Obama said in an interview broadcast last night on CBS News’s “60 Minutes.” This would include “aid” or loans to the auto-industry (the big 3) as they scramble to adjust their business and capital structure.
The cost of living in the U.S. probably fell in October by the most in almost 60 years, while manufacturing and homebuilding sank deeper into a recession, according to economists polled by Bloomberg News before reports this week.
On the weekend, leaders from the biggest developed and emerging nations (G-20 Summit) agreed to further steps to shore up the global economy which is in recession. They laid out regulatory proposals to prevent a recurrence of the financial crisis. The Group of 20 urged for a “broader policy response,” indicating the potential for additional interest rate cuts and fiscal stimulus. The Group set a March 2009 deadline for recommendations on strengthening accounting standards, derivatives markets and oversight of hedge funds and debt rating agencies.
A lack of any specific pledges, transparency or coordination by nations will likely disappoint investors in the short-term as nations should act “as deemed appropriate to their respective domestic conditions.”
This morning we are seeing stocks opening lower by about 1%. In short, credit markets are looking pretty good as they begin to lend to each other. The economy is in a major slump but we will see additional direction on Wednesday if the U.S. Congress approves another “bridge loan” to the auto industry. Equity markets will remain volatile in the short-term.
In the interim, stay diversified since the levels of ‘fear’ are still elevated and justifiable, but take comfort in the fact that things are not likely going to get worse in this very chaotic time.
More to come later
Wilfred Vos Bcs, CFP, FMA, FCSI, CIM, CFA, MBA, DMS, CBV
SVP & Partner
