Congratulations, President-elect Obama. You have defied the odds, rewritten history and inspired a nation. But while we will always remember the pomp and circumstance of your arrival, you might well find that you prefer the pursuit to the prize. It was inevitable that whichever candidate won the race on November 4 would likely find himself in the position of the dog that caught the car.
Every smidgeon of economic data released worldwide points to one of the broadest and most treacherous economic downturns in a generation. Prior to your inauguration, much of the fiscal and monetary ammunition will have already been deployed, leaving you with a pretty thin wallet with which to fulfill your promises. The expectations that you have set are lofty; we have given you a night to celebrate, now get to work!
There are massive structural, institutional and governmental questions that need answering. Who will be in charge? You, Pelosi, Shumer, Frank, Reid or Rangel? Will there be continuity within the plans set forth by the Treasury? What will the financial regulatory structure look like? What will the tax structure look like? Will the US automakers be nationalized, like the banks and insurers? Will the New Deal 2.0 programs saddle our future with more of the off balance sheet liabilities that have rendered us technically insolvent? The answers to these questions will require leadership of the highest intellect, judgment and political tact. Tradeoffs will have to be made. For government to be effective in calling its citizens to demonstrate fiscal prudence, it must set the example. Now is the time to set the tone for the Obama administration. Choose your first one hundred words carefully. Our financial future depends on them.
The markets blew off about two thirds of the most recent rally, with dismal Wednesday and Thursday performances last week. Nasty economic data, presidential uncertainty, lowered earnings estimates and more hedge fund liquidation activity simply overwhelmed the low volume buying activity. Notice, I didn’t say credit crisis! Lending rates have come down substantially worldwide and governments have mitigated the insolvency issues surrounding financial services companies. More transparency has been initiated, with even the credit default swap marketplace stepping into the light. Now, banks are not lending any of this money at the moment, but borrowers have reduced their appetites a bit as well. The solvency crisis moment seems to have passed. The current crisis is hoarding.
Cash is like gasoline in a gas can. On its own it has no purpose. Put it in an engine and add a spark, and you’re off to the races. As we know, the banks have been working feverishly to stockpile cash. This phenomenon has now spread to corporations and consumers. For corporations to stockpile in an environment of declining revenue, they must reduce expenses. The largest expense for corporations is personnel. Today the government announced that our national unemployment rate has reached 6.5%, its highest level since 1994. This number has risen quickly, and will continue to rise. 8% seems like the consensus guestimate of the moment. This will be the highest level since the early ’80s, when we reached 10%. Consumers who want to stockpile cash must limit consumption. The retail numbers released yesterday were some of the worst on record. Sales by retailers slipped 1% compared with last year. Wants and needs were clearly delineated, with Saks’ sales slipping 17% while Wal-Mart’s sales climbed 2.4%. Upscale retailers declined 12%, and even teenagers hoarded, with Abercrombie and Fitch down 20%. All of this hoarding pushed money market funds to $3.6 trillion in assets this week. That’s a lot of gas.
In a world of heightened volatility, being range-bound can feel like just the opposite. The boundaries on our current range seem to be 1000 to the high-side and 850 on the low-side for the S&P. This amounts to an 18% spread. The fierce debate between these two boundaries is where earnings will be in 2009, and what multiple should be applied. Expectations for core earnings range from $55 to $90 (another “o”nknown). Applying a 15x multiple would give us S&P levels between 825 and 1350, not too far from the range we are in. Splitting the difference would imply that we could rise another 18% from here, to 1087. This level would project exactly zero earnings growth for 2009, and a 15x multiple. Even with those sober assumptions, the math works. Cut earnings 10% against this year, and you get to 982, still 7% above where we are currently. In other words, we have already priced in a miserable 2009 for corporate earnings.
The tides are a-changin’
The next big event on the calendar will be the G20 financial summit being held at the White House on November 15th. This harkens back to the Bretton Woods summit of 1944 that established the dollar as the world’s currency. At that time we had all the gold, and so we could make all the rules. This time, China has all the gold. It will be fascinating to see if the emerging economies use their reserves to purchase more political relevance. President-elect Obama will have a representative present with their mouth taped. One hopes their ears will be wide open.
David S. Waddell
Senior Investment Strategist
David S. Waddell quoted, Investment News , October 26, 2008
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**This blog represents the opinion of W&A and is for informational purposes only. It is not intended to be construed as tax or legal advice by the recipient. Past returns of investment are no guarantee of future results.
***Any data reported in this blog has been compiled from the Wall Street Journal, Morningstar, Investors Business Daily, or various other informational internet sites.