There is no silver bullet and there is no single solution. The economy is contracting at a record pace and we are in uncharted territory. The S&P/TSX Composite Index, Toronto’s main stock index, managed to push ahead with a small gain yesterday as energy issues strengthened on higher oil prices which managed to offset weaker gold miners with the retreat in the price of gold.
The heavily weighted energy sector broke a 2 session losing streak to end 3.3% higher as oil prices soared more than 14% to above $39 a barrel on an unexpected fall in crude inventories (nobody wants to bring new supply on line at these prices).
The financial services sector started the day in positive territory (not unusual these days) but fell by the end of the day on concerns about the global recession and the global banking sector weighed (rumors are circulating that both Bank of America and Citigroup could be nationalized, and considering their stock prices, they are trading for a cup of coffee).
The S&P/TSX composite index closed up 0.11% with about half of the index’s 10 sectors higher. The up tick broke a bad 3 day losing streak.
In the United States the Dow industrials closed at a more than 6 year low (11 years for the price index) as investor fears that banks could be nationalized drove bank stocks to a 17 year low. A rise in the number people receiving jobless benefits rose to a record high and “stoked” worries about the deepening global recession with apparently no end in sight (initially investors thought this would bottom out in Q2 of 2009).
The Dow Jones Index the “blue chip” index of 30 stocks (blue chips are the most valuable poker chips) “blew by” the November 20th current bear market low erasing the Christmas rally which was built upon hopes a new president who would successfully resolve the deepening recession.
Hewlett-Packard, the world’s largest PC maker, warned it expects weak market conditions to persist. The stock dropped 8% and was the Dow’s biggest negative weight. Shares of major banks dropped again on concerns about government plans to relieve them of their toxic assets. The KBW banks index fell to its lowest level since 1992.
The Dow Jones industrial average lost 1.19 % after setting an intraday bear market low of 7,447.55. The Standard & Poor’s 500 Index lost 1.20% and the Nasdaq Composite Index lost 1.71%. Since the start of the year, the Dow has fallen nearly 15% and the S&P 500 marked its longest losing streak since October after posting a 4th day of losses and it has lost close to 14% year to date (but at least it is still 4% higher than its November current bear market low).
It is interesting to note that despite the new lows (or close to lows) investors have not sold as rapidly as in October and November and the CBOE VIX index is not really testing new highs. Although, the index is lower it primarily due to financials while the rest of the market is treading water a little better.
The Labor Department reported that the number of Americans collecting unemployment benefits surged to 4.99 million two weeks ago. The Philadelphia Federal Reserve Bank said manufacturing in its region shrank the most since 1990. In addition, inflation did tick up a little bit but will likely remain contained for some years by the prolonged U.S. recession.
Some Fed officials were concerned over a risk of deflation at last month’s policy meeting, according to minutes of the gathering released by the central bank. The Fed has injected an unprecedented amount of cash and loans into the financial system in an effort to stem the economy’s current decline.
Rising joblessness argues against continued price increases (wholesale prices also ticked up a little). Total unemployment benefit rolls surged by 170,000 in the week ended Feb. 7, according to Labor, and first-time applications were unchanged at 627,000 last week, higher than economists projected.
General Motors the largest U.S. automaker, said this week it will cut about 47,000 more jobs worldwide as it drop brands and asks for as much as $16.6 billion in new loans to avoid bankruptcy. Chrysler said it is seeking $5 billion more from the government and will shed 3,000 more positions.
“We have continued to see an unprecedented decline in the automotive sector,” Chrysler Chief Executive Officer Robert Nardelli said. “The focus of this company for the last two years and going forward is going to be to right size for the marketplace and the realities of the economy.”
The Fed Bank of Philadelphia’s general economic index dropped to minus 41.3 this month lower than forecast, compared with minus 24.3 in January. Negative numbers signal contraction. Measures of employment and sales plunged to the lowest levels since the Philadelphia Fed’s records began in 1968.
In short, the economy is still contracting at a substantial pace! The US economy is expected to contract by 2% this year, the biggest drop in the postwar era, according to projections by Bloomberg News. The unemployment rate may climb to 8.8% in the US.
Currently stocks are trading at below book value and at below their cash value – at some point buyers will come back to the stock market and drive prices higher, however, investors will wait for a catalyst before buying aggressively. We will need to be patient until the stimulus takes hold, banks are fixed and there is more clarity for the auto industry.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
