Skip to comments.Friday, 9/20, Market WrapUp (Granddaddy of Derivatives in Trouble)
Posted on 09/20/2002 5:55:07 PM PDT by rohry
Friday, September 20, 2002 Market WrapUp
Rough Road of Recession Relapse
3 Year Charts for Dow, S&P 500 and Nasdaq Composite
The markets have been pricing in a second half recovery that now looks like an illusion. For three years now, individual investors have held on while insiders and professionals have bailed out of stocks or have gone short. Wall Street has predicted a second half recovery for three consecutive years. These forecasts have all fallen short of their targets with the economy and the stock market traveling in opposite directions. This makes the current stock market extremely vulnerable due to present valuations. Current P/E multiples are 2-3 times historical averages. And you can forget all of the balderdash of a new era; there never was one, nor is there one on the immediate horizon. Dividend yields of less than 2% on the S&P 500 and a P/E multiple of around 30 indicate that this bear market has a long way to go on the downside before any meaningful rally can occur. The situation is not quite as bad for the Dow, which is double historical norms, and only offers a dividend yield of 2.34%. Companies are still sitting on hundreds of billions of impaired assets as a result of the merger and acquisition binge of the 90s. There will be more writedowns coming over the next few quarters. In fact, it may take another few years before companies clean up their balance sheets. The highly-leveraged companies wont survive and those that do will need years to repair all the damages of the 90s excesses.
Granddaddy of Derivatives in Trouble
This is one risky hedge fund that could implode and bring down the financial system. Another credit downgrade, or an explosion in the price of gold, could make Morgan a relic of the past. Morgans gold derivative book could be the Achilles heel of this blue shoe bank. JPM is a major bullion bank with a gold derivative book of $45.12 billion. Morgan holds over 60% of all gold derivatives within the banking system. It is believed that most of this gold derivative position is short gold. It may be one reason why authorities have become anxiety-prone each time the price of gold rises. Unlike paper contracts, gold cant be printed. Morgan would be in big trouble if they had to deliver into those shorts. Gold deficits are running at an annual rate of 1,500 tonnes or more. Without gold leasing, and sales and suppression through paper gold derivative contracts, the price of bullion would be much higher.
Insurance Premiums on The Rise
Earnings Warnings Troublesome
Energy Supplies Shrinking
In the natural gas markets on the supply-side, production is falling. Inventories are adequate to get the US through a normal winter, but not much more. Production of natural gas is expected to be down 6-10 percent in the second half of the year. Oil inventories were down again this week by 6.4 million barrels to 292 million barrels. Oil prices are still hovering at close to $30 a barrel. It now appears that war with Iraq is inevitable. The uncertainty of war and possible supply disruptions keep oil prices high. The rush to war is based on information that Saddam may be only months away from developing nuclear weapons. Once that happens, he graduates into the big leagues. Neither the US or any other major power have ever taken action against a nuclear power. This is one of the reasons why so many states are acquiring nuclear weapons. They are less costlier to build than conventional weapons and are much more effective in their ability to kill and destroy. The nuclear club keeps growing and Saddam wants to be included. The rush to war is to prevent the dictator from acquiring these weapons, which will give him the ability, in his mind, to do great things.
Not Too Promising Next Week
This market still has a long way to go despite the losses from the beginning of this bear market. Chart formations, when viewed on a longer-term chart for most stocks, still look like their top formations are still in the process of breaking down. So what we continue to have is a weak technical picture followed by worsening fundamentals and pricey valuations. The worst of all of these is the widespread complacency by investors both amateur and professional. Mutual fund cash balances are in the low 4 percent range and John Q is still holding on preferring to play the part of an ostrich. Im watching mutual fund outflows. This week $4.6 billion flew out the doors of mutual funds compared to inflows of $1.8 billion the previous week. It is amazing to think of all of the portfolios that have been cut in half in this unwinding bear market and John Q is still hanging in there. The worst is yet to come.
The next phase of the downturn is the white-knuckle phase that should shake the remaining apples off the trees. It will take some kind of event, of which there are numerous candidates to choose from, that may provide the final impetus. A war, a financial collapse, a derivative implosion of a hedge fund or major money center bank such as JP Morgan, or a terrorist attack, should do the job. Of course we still have Saddam who is capable of surprising us all. Add up all of the evidence and it isnt hard to reach some very definite conclusions. At the risk of sounding repetitive, this bear market has a long ways to go. A long ways before the next countertrend rally, and a long, long way before the bear market exhausts itself and a new bull market emerges.
Asian stocks fell after U.S. home and job reports suggested that growth in the region's largest export market may be slowing. Kyocera Corp. and Taiwan Semiconductor Manufacturing Co. led the decline. Japan's Nikkei 225 Stock Average lost 2% to 9481.08.
Next week's calendar heats up, with leading indicators, consumer confidence, new and existing home sales, durable goods orders and the University of Michigan consumer sentiment index due out. Additionally, the Fed will meet to decide on interest rates Tuesday.
© Copyright Jim Puplava, September 20, 2002
It is going to snowball. The mutuals will have to sell into an already weak market.
"IMF says U.S. dollar overvalued
Global lender says global trade imbalances have left the U.S. dollar overvalued, asks for reforms.
WASHINGTON (Reuters) - Global trade imbalances have left the U.S. dollar overvalued, are unsustainable and call for prompt reforms in the United States, Europe and Japan, a new International Monetary Fund report said.
"With the U.S. current account deficit remaining in the range of 4 percent of GDP, an historical record, there is continuing concern that the dollar may be overvalued," the IMF said in its semiannual World Economic Outlook, issued Wednesday.
But the risk to the global economy goes beyond the U.S. position alone. The report said the imbalances between nations with surpluses, notably the euro area and Japan, and deficit countries like the United States, have "risen to levels almost never seen in industrial countries in the post-war era."
Perhaps more worrying, the IMF research suggested the situation could worsen in the coming years and concluded that the existing imbalances were unlikely to be viable.
It also said the possibility of a disorderly correction cannot be ruled out -- something that could produce a sharp correction in exchange rates among major currencies and a steep decline in global economic activity..."
"the Achilles heel of this blue shoe bank." ...what the heck is a blue shoe bank?...is he referring to the bank's pedigree as in Morgans, Rockefellers and Park Ave?......I always heard it was blue stocking or silk stocking...also on the above derivatives chart what is the "notional amount"...does that mean the actual amount?....Warren Buffett referred to derivatives as sewage...from the chart it looks like the septic tank needs pumping out....
Good luck to everybody!! Stonewalls
My friend has told me to stop sending him CSCO prices. He continues to buy on a payment plan and he will not sell. He won't sell no matter what. How many people like him are out there? How does this affect the aggregate market psychology? His "VIX" is zero, I can tell you that.
The price of CSCO will have to be cut in half and earnings will have to double to get the P/E down to 12. But on Yahoo it says earnings are predicted to more than double (0.25->0.57). That means the stock will have to fall to $7 to be considered cheap, assuming P/E of 12 is cheap.
My question is: if he and others like him never sell out, the market will never reach a bottom, nor will it rise, it will just languish forever while my friend keeps waiting for the long run. Is he just ruining it for the rest of us?
Each time I consider bailing out I look at a few facts: (1) my 401 is heavily weighted to money market because I started with a conservative weighting. (2) I have watched the market slide a large percentage and it doesn't seem worth the time and effort to bail now.
So my question remains, how will the market bottom out if lazy people like me never sell?
Hmmm...that sounds like thats one more good reason to get yourself out of debt! At least thats the way I'm reading it.
Wouldn't a tax deduction only apply to losses outside of retirement plans, and only kick in if stocks were sold at a loss? I can't see how that would help those who lost value in 401Ks or other retirement plans.
The price of the stock is the last price someone paid per share. So, if people were only willing to pay a really small amount of money for stocks, the value of your stock would keep going down while it sat there.
It's like anything else you own and might decide to sell. Shares of stock only translate to cash if someone is willing to buy them.
Probably continuing to buy equities at this time isn't the most conservative thing to do. If someone wants to hold what he has already, even though stock certificates are down in the paper towel valuation range, fine, someday the companies that survive will come back. Whether your friend and others who think that way are delaying the final bottom or something like that, well, earnings reports have more effect.
That would be another way of doing tax cut, I guess. But if the potential deduction is bigger than whatever current income you have, does IRS give you a tax refund to make up the difference ? Do you happen to know the details ?
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