Testing, testing 1…2…?

World markets are back in testing mode today. We are watching carefully to see how they fare. As of 1pm the TSX at 7845 is some 121 points above its previous all time closing low this cycle of 7724 on November 20, 2008. One would expect buying pressure to kick in strongly in this area; if it is able. If there is a big bounce again off the Nov 20 low that would be constructive and may suggest we have found at least an interim bottom this cycle.
The big wild card here is how much more forced selling we will see from funds and levered players having to raise cash by year end. If the Nov 20 lows are breached, then we are back searching for the next bottom of this downturn.
Our worse case scenario still has its eye on the 2002 lows for the TSX of 5678. That is still 2167 points below where we are trading today and would be a big 62% below the cycle peak last summer of 15200 on the TSX. That would admittedly be one “bad-ass” bear market. Having already fallen 48% to date from its peak, hopefully the TSX won’t go all the way back to its 2002 low. Although this same hope was recently dashed in the US markets as the S&P and Dow broke through to their previous cycle lows, erasing 100% of the price gains they had made since the last expansion began in 2002. At this point we can still hope that Canada can avoid the ’02 re-test. But that may be a low-probability hope at this point.
Our worst case scenario (as I have said for some time) is that the lows this contraction could actually break below the 2002 market lows. I know- that is a horrible thought for people who are risk-exposed here. Only time will tell for sure how deeply the market will discount this worst global economic recession since the Second World War. Markets are mean-reverting things and they have a nasty habit of over-correcting below their longer term average in order to correct for the over-shoot they delivered to their euphoric peak.
Many factors seem to be driving the re-test here. This morning we got job loss numbers in Canada (-70K) and the US (-533K) that were triple and almost double what the consensus had been expecting. Businesses responding to vaporized consumer demand in the world are presently sacking hundreds of thousands of workers a month.
The emblems of demand-ferocity in the 2002-2007 expansion were of course oil and commodities. Copper today has hit a new cycle low at 1.38 (-65%) from its cycle peak of 3.90 just 6 months ago. From its summer peak of $147 a barrel, WT crude was today trading at $40 and change (a 72% correction), and down more than 20% this week alone. Long term secular support for oil since the 1950’s has been $45 a barrel. The fact that we have now traded below that support reflects a secular shift down in western world consumption rates. The big question is how long this shift down will last.
On the one hand, $40 oil will no doubt prompt higher consumption rates than did triple digit prices. But the number one problem in the western world right now is too much debt. Crippling debt is a handicap on consumption that will last for at least a few years. Even Wall Street and other CEOs are not getting big lump sum bonuses these days. For the most part, existing personal debt will have to be written off through bankruptcy or paid down slowly month after month over time. While governments around the world are desperately trying to infuse liquidity into world markets, the real issue is not yet acknowledged: the consumption culture stoked by mass marketing and credit is no longer viable. Not now. Not for quite a while.

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5 Responses to Testing, testing 1…2…?

  1. Anonymous says:

    Hi Danielle,
    I recently purchased your book and enjoyed reading it. My knowledge about the financial system was in the past based on discussions with my co-workers who seemed to be very wealthy where I was not. Over the years based on there advice I focused on maximizing RRSP's, paying down debt and paying off the mortgage. My knowledge of the market place however is extremely limited. I have tried to understand how it works but have found it fruitless. In May of 2008 I did something totally against my grain. I decided not to continue putting money into equities when I could not understand why they where increasing. The desire to stay in them when they were increasing in value was very strong but it just didn't make sense anymore. The TSX was at a high and the price of oil was over $140 bbl. I couldn't see the widget makers producing widgets for a reasonable price while paying such high energy prices. The market in my mind was bound to crash. I thought it would be from inflation. As it turns out it was blind optimism that caused it to fail.
    I was also upset with the way fund managers were stealing my money. There was little to no concern about the return I was getting as long as they received the fees. I felt it was legal theft. Then to make matters worse they charged me to remove my own money. I was infuriated. Paying someone to lose my money, in my mind was foolish. I can lose it just as well as they can. If I do it myself and purchase the same equities I would be further ahead since I wouldn't have to pay the MER charges. I sold all my equities except for 2 smaller valued trusts in May. I had enough of all the mystery of the markets and the theft of the fund managers.
    As I watch the markets fall and the financial system coming apart at the seams I feel good about my decision. In your book you refer to history and cycles a great deal. I will watch for the changes in the cycle to buy back into the market. I have watched the TSX bounce up and down like a YOYO and was mistified why it would go up at all. There seems to be no logic to purchacing stocks in a company that is closing plants and laying off workers. I could be wrong but to me trying to conserve wealth and reduce losses by closing plants is a poor investment. Would it not be better to wait until the company is growing and accumulating wealth?
    The greed in me wants to buy back in very badly while the price is low but logic says we aren't even close to the bottom yet. I can see the TSX at 6500 in January to February 2009.
    Tree

  2. Anonymous says:

    Today the yield on a 10yr. US govt bond is 2.67% The dividend yield on the SandP 500 is north of 3%. This is inverted as it always been. The SandP 500 div yield used to be priced lower to account for the expected growth in dividends. Now, it seems the market is not pricing in any expected growth in dividends, or earnings for the SandP 500 companies for the forseeable future. I am not smart enough to figure out what is going on, Danielle, hoping you can offer your thoughts. Great blog. Henk

  3. Anonymous says:

    Actually it depends on what period you are looking at in history. For many years stocks always yielded higher than government bonds because they had to in order to attract investors. Investors wanted to be paid for their risk while they waited to see if the companies could deliver on their long term expectations. At the start of the late great secular bull of 1982-1999 prices had fallen so much that the Dow Index was yielding more than 9%. From that great deal, prices went so crazy that in recent years, stock yields were less than 2%. This was insanity bred from a world were people forgot what risk looked like. They have seen the belly of the risk beast in 2008 again, and now finally the re-pricing is making stock yields as well as pref and corp bond yields more alluring. So the increased yields are the benefit that comes from the prices falling. So long as you are not holding the assets as they are falling. This is where actual risk management rules and skill come in. D

  4. Anonymous says:

    Hi Danielle,
    I have recently purchased your book and i must say that i love it! I like the fact that you are so candid and upfront about the industry. I am actually trying to start a career in the finance world and i enjoy reading and researching different opinions and views. The reason i love your book is becuase the logic you use is the same as mine. I must admit i have lost money over the years investing somewhat blindly, however i am not ashamed to admit it because i have learned from my mistakes. I like people who do not sugar coat things and tell it like it is, because that is the type of person i am as well. I hope i can enjoy a great career in the industry and i stay as honest and up front as yourself.

  5. Anonymous says:

    07/1981, 14.28
    08/1981, 14.94
    09/1981, 15.32
    10/1981, 15.15
    11/1981, 13.39
    12/1981, 13.72
    01/1982, 14.59
    02/1982, 14.43
    03/1982, 13.86
    04/1982, 13.87
    05/1982, 13.62
    06/1982, 14.30
    07/1982, 13.95
    08/1982, 13.06
    09/1982, 12.34
    10/1982, 10.91
    Market yield on 10 year US treasury.(in the early 80's)
    Maybe I would have rather bought a us government security,guaranteed, rather than invest in stocks at 9% yield.
    Today the 10 year yield=2.64 s&p yield= 3.51%, on november 21, 2008 dividends paid in the last 12 months.
    Seems like a better deal today No!!!!
    The greatest bull market, at the time didn't seem like such a great deal!!!
    “For many years stocks always yielded higher than government bonds because they had to in order to attract investors.”
    Not before the greatest bull market of all time!!!
    I don't know where the market goes, just stating a fact.
    Cheeers
    Brian

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