November 28, 2008

The S&P 500 ended the month, down 7.5%.  During November, the S&P plunged to levels not seen since 1997.  Although the final week was strong (up 12%), we are still firmly entrenched in a bear market.  The technicals, on a weekly basis, are still very bearish.  In fact, we’d need to see a rise of over 300 points to even begin to question the down market trend that began at the end of 2007.

What we experienced this week was a very normal bounce from a very oversold level.  The VIX (fear index) is still near record highs suggesting more turbulence ahead.  At today’s close, the S&P is 43% off its peak close in October 2007.  There’s certainly no cause for celebration or to declare the end of the bear market.

The economic fundamentals were terrible: new and existing home sales, durable goods orders, Chicago PMI, personal spending, and Michigan sentiment all came in below expectations.  Q3 revised GDP, Case-Shiller, and weekly jobless claims roughly met expectations that were already weak.  Credit markets continue to be tight and show few signs of easing.  The junk bond market is effectively shut down; even non-junk spreads are near record highs.  Consumer credit is still tightening: lenders are tightening standards and consumers are borrowing less.  In some ways, the US government is stepping in to become the lender of first resort.  Unfortunately, the government’s liquidity and credit programs are akin to pushing on a string.  It can provide all the credit in the world, but that doesn’t mean that corporations or consumers will increase borrowings and therefore purchases.  The upcoming fiscal stimulus, although massive, will not arrive for several months, allowing aggregate demand to continue slipping into deep recession territory.

Corporate fundamentals are still weak.  Although Q3 reporting is just about over, most new announcements this week have warned about poor or cloudy outlooks for Q4 and beyond–hardly the stuff to signal an imminent turnaround in earnings trends.  Analysts have continued to slash Q4 (and 2009) estimates, but they’re still–in aggregate–far higher than the top-down estimates.  Either the analysts or the economists are dead wrong.  Given that, in the last year, the economists have been right, I’d bet on the economists.

Looking ahead, The Big Three return to Washington DC to present a new and improved pitch for a $25 billion bailout.  US auto and truck sales for November should show another month of dismal sales.  And most importantly, the November jobs figure and unemployment rate will provide another clue about the severity of the recession.  The numbers will very likely be weak.  But much of this weakness is already baked into the S&P.  If the numbers are far worse than predicted, expect another downturn in the equity markets.  Also look for more blow-ups, defaults and bankruptcies–a couple of US auto makers, and many regional banks, LBO deals, retailers and hedge funds are hanging on by a thread.