Quote for the quarter. “It still holds true
that man is most uniquely human when he turns obstacles into opportunities.” – Eric
Hoffer
The quarter in brief. Economists
and analysts warned us that the opening quarter of 2008 would be rough. They
were right. Perseverance was the word for the American investor.
Our stock market performed poorly, but investors in Europe
and Asia took the biggest hits. Had the real estate sector hit bottom yet? No
one could tell, and nobody was making that kind of pronouncement. Despite a
weak dollar and signs of rising inflation, the Federal Reserve cut the key
interest rate three times within 1Q 2008, trying to cheer investors contending
with a wave of declining indicators, the collapse of Bear Stearns Cos., and a
steep Wall Street correction in January. The White House rolled out a rebate
plan for the American taxpayer, ostensibly to stimulate consumer spending. If
America was not in a recession, it was apparently in
something very close to one. A (relatively) flat March for the Dow, NASDAQ and
S&P 500 amounted to just a hint of hope for a better quarter ahead.
Domestic
economic health. What
do you do when indicator after indicator, headline after headline, is negative? If
you’re the federal government, you get to work on the economy – fast. The
response was not fast enough or strong enough in the eyes of some investors,
but the White House, the Treasury Department and the Federal Reserve all took some
dramatic action in the first quarter.
The Fed cut and cut, bringing the federal funds rate to its
lowest level since 2004 (2.25%) with its sixth interest rate cut since
September. We saw two radically large 75 basis point cuts during the
1Q, the largest cuts since the mid-1980s: one on January 22, another on March
18, with another half-point drop between them on January 30.1 The
Fed reacted quickly to a January plunge on Wall Street, and also helped JP
Morgan Chase buy out Bear Stearns in March while it worked to patch a crisis of
confidence, announcing an auction program to loan
banks and brokerages as much as $200 billion in Treasuries, in exchange for
mortgage-backed securities and bundled mortgage debt.2
President Bush signed the Economic Stimulus Act of 2008,
which took less than four weeks to go from discussion to bipartisan approval.3 Treasury
Secretary Henry Paulson, the driver behind the 4Q plan to help subprime borrowers freeze the interest rates on their mortgages,
grabbed headlines again
on March 31 when he proposed a sweeping, multi-year reform of the federal regulation
of the financial industry on behalf of the Bush
administration. The 218-page reform blueprint proposes
increasing the Fed’s power, creating one regulatory body to oversee the banking
industry, merging the Securities and Exchange Commission and the Commodity Futures
Trading Commission, and starting a Mortgage Origination Commission to oversee
state mortgage regulations.4
In
January, the markets shook when the Philadelphia Feds January
factory index fell to -20.9, far below the -1.3 economists had forecast.5 The
economy began to shed jobs: 22,000 in January (adjusted north from an earlier estimate of 17,000),
and 63,000 in February.6 The Institute for Supply Management’s January service sector
index sank to its first reading below 50 in nearly five years, a signal of service
sector contraction.7
The
Fed scaled back its 2008 prospectus for the economy in February, projecting an
annual unemployment rate of 5.2-5.3%, 2008 inflation of 2.1-2.4%, and 2008 GDP
of 1.3%-2%.8 Noted economists polled by Bloomberg News
arrived at median estimates of 50% odds of a recession, interest rates at 2.5%
by June, 0.5% 1Q GDP, 1.0% 2Q GDP and 1.7% total growth for 2008.9 As for the consumer, he or she was spending
less: U.S. consumer spending rose only 0.1% in February, a flashing red
indicator that depressed investors worldwide.10
Major
indexes. It
was a miserable first quarter for stocks, a Wall Street swoon featuring by the foundering
of Bear Stearns. The FOMC’s frantic rate cuts and the Fed’s decision to temporarily
loan up to $200 billion in Treasuries to struggling banks and brokerages through
a new auction program gave investors some hope.11 While
the S&P 500 certainly suffered this quarter, the damage did not match 4Q
1987 (-23.2%) or 3Q 1990 (-14.5%).12
|
% Change
|
1Q 2008
|
2007
|
|
DJIA
|
-7.55
|
+6.43
|
|
NASDAQ
|
-14.07
|
+9.81
|
|
S&P 500
|
-9.92
|
+3.53
|
Source: Reuters.com,
APGoogle.com13, 14
Indices
cannot be invested into directly.
Global
economic health. If
America’s economy tanked, Asian economies would ride through the crisis
reasonably unaffected – or so a popular theory goes. But in the first quarter, the
UN Economic and Social Commission issued a report presenting its view of what
would happen to Asia’s economies with a sustained American recession and a weak
dollar. In the Commission’s view, India would emerge with the least damage
because of its strong manufacturing and service sector, while the economies of Taiwan,
Singapore and South Korea would fare the worst because they depend so much on
high-technology exports.15 As
for China, its inflation rate reached 8.7% in February (the highest inflation
in 12 years), as opposed to a government target of 4.6%.16 In Japan, the yen hit its
highest level against the dollar since 1995, climbing over 20% against the buck
since June 2007 – very troubling for an export-reliant economy. But Japan’s consumer spending rose
3.6% in January, a gain not seen since May 2004.17
How about Europe? Europe’s #1 economy, Germany, celebrated
a very positive indicator: unemployment fell to a 15½-year low in March, down to
7.8%; consumer confidence and business confidence also rose, suggesting
resilience.18 Meanwhile, the dollar had its worst quarter against the Euro. 18 Eurozone inflation rose
to 3.5% in March, compared to 3.3% for February (the inflation target of the
European Central Bank has long been 2% or less). A 3.5% inflation reading
represents the highest inflation rate for the Eurozone
since mid-1992. 19
World financial markets.
If you
think it was bad here, consider the headaches of investors in Asia and Europe. The
major Asian indexes took a nosedive in the first quarter: The Hang Seng lost close to 18%, the Nikkei 225 fell more than 18%, and
Australia’s S&P/ASX 200 went down almost 16%.20 The Shanghai
Composite Index dropped 34%; 86% of the stocks in the broad SCI were losers in
the first quarter.21
And
how about the major European indexes in the first quarter?
Well, the numbers were similar. The Dax in Germany:
-20% for the quarter. The FTSE 100 in London: -13%. The DJ Euro Stoxx 50: - 18%. The CAC 40 in France: -17%.20
Commodities
markets. The bull run continued into mid-March
as we saw $1,000 gold prices and $110 oil prices … and then the bulls ran off a
bit of cliff in the wake of the Bear Stearns snafu. On the
day the Bear mauled the Street, it also severely wounded the commodities
markets: gold fell $58.50 on March 19 to $944.79 and crude fell $4.94 to
$104.48.22 The dollar rallied in late March as well, and there was a
movement toward equities. While April might prove to be a challenging month for
the commodities markets, the first quarter saw some very pleasant gains: gold
up 9.7% and platinum up 33% on the New York Mercantile Exchange, wheat futures up
5% on the Chicago Board of Trade, oil futures up 5.8% on the NYMEX.22
Housing & interest
rates. Hmm.
Existing home sales were up 2.9% in February.23 Was
it a sign of a rebound? Or warmer weather? Or just a statistical aberration? Whatever it was, it was
practically the only positive news item from the housing sector. But existing
home sale prices were down 8.2% in February from levels a year ago, and foreclosures
were up 60% from a year ago.23, 24 New home
sales fell to their lowest level since 1995 in February, from
601,000 in January to 590,000. The median new home price in February was $244,100, up from
$225,600 in January but still down 2% from February 2007.25
Unnervingly, the Census Bureau reported in late January that the national
vacancy rate (houses for sale sitting empty) had increased to 2.8% in the
fourth quarter, a high unseen in recordkeeping dating back to 1956.26
At least
mortgage rates were a bit lower … though given the
current liquidity-challenged financial climate, the banking industry has not
exactly lowered them as much as borrowers would like. Take
the 30-year FRM: it closed out the quarter averaging 5.85%, as opposed to 6.17%
for the week ending December 27. The average
rate on the 15-year FRM descended to 5.34% at the end of the 1Q, from 5.79% in
the last survey of 2007.27,28
Second
quarter outlook. Hopefully, the worst of 2008 is behind
us financially. Will we look back on this quarter a year or two from now and see
it as the midpoint of a recession? April has started with a rally. Earnings
season is just ahead. Investors want a new quarter with a new outlook, a clean
slate. April Fool’s Day brought some relatively good
news: the Institute for Supply Management’s March index of national
manufacturing activity came in 48.6 — still below 50, indicating a contraction,
but above analysts’ expectations. The numbers on construction spending for
February also surpassed forecasts.29 Are
we subtly turning a corner? Is there reason for optimism? Stay tuned. Stay
invested.
Please
feel free to forward this article to family, friends, or colleagues. If you
would like us to add them to the list, please reply to this e-mail with their
e-mail address and we will contact them and ask for their permission to be
added.
The Dow Jones Industrial Average is a
price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ
Composite Index is an unmanaged, market-weighted index of all over-the-counter
common stocks traded on the National Association of Securities Dealers
Automated Quotation System. The Standard & Poor's 500 (S&P 500) is an
unmanaged group of securities considered to be representative of the stock
market in general. It is not possible to invest directly in an index. NYSE
Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock
Exchange (the "NYSE") and NYSE Arca (formerly known as the Archipelago
Exchange, or ArcaEx®, and the Pacific
Exchange). NYSE Group is a leading provider of securities listing, trading and
market data products and services. The New York Mercantile Exchange, Inc.
(NYMEX) is the world's largest physical commodity futures exchange and the
preeminent trading forum for energy and precious metals, with trading conducted
through two divisions – the NYMEX Division, home to the energy, platinum, and
palladium markets, and the COMEX Division, on which all other metals trade. These
views are those of Peter Montoya Inc., and not of Gary Hokin and/or Nikoh
Securities Corporation, and should not be construed as investment advice. All
information is believed to be from reliable sources; however we make no
representation as to its completeness or accuracy. All economic and performance
is historical and not indicative of future results. The market indices
discussed are unmanaged. Investors cannot invest in unmanaged indices. Please consult Gary Hokin at (847) 559-1002
for further information Additional risks are associated with international
investing, such as currency fluctuations, political and economic instability
and differences in accounting standards.
Citations.
1 federalreserve.gov/fomc/fundsrate.htm
2 latimes.com/business/investing/la-fi-econ12mar12,1,4491163.story
3 cnn.com/2008/POLITICS/02/13/bush.stimulus/index.html
4 usnews.com/articles/business/economy/2008/03/31/faq-on-paulsons-regulatory-reform-plan.html
5 forbes.com/markets/feeds/afx/2008/01/17/afx4543424.html
6 bloomberg.com/apps/news?pid=20601103&sid=aG6e0kEzgR5E&refer=news
7 biz.yahoo.com/ap/080205/economy_services.html
8 cbsnews.com/stories/2008/02/20/business/main3852726.shtml
9
bloomberg.com/apps/news?pid=20601103&sid=adHUQgyPpGhM&refer=news
10 foxbusiness.com/markets/economy/article/consumer-spending-edges-01-february_537993_3.html
11
latimes.com/business/investing/la-fi-econ12mar12,1,4491163.story
12
usatoday.com/money/markets/2008-03-27-stocks-1q08_N.htm
13
reuters.com/article/topNews/idUSN3145948620080102
14 ap.google.com/article/ALeqM5gHs5OM3gFG_DytQQZFbWfgPT08MAD8VONI8G0
15
atimes.com/atimes/Asian_Economy/JC29Dk01.html
16
businessweek.com/globalbiz/content/mar2008/gb20080311_222191.htm?chan=search
17
businessweek.com/globalbiz/content/mar2008/gb20080319_180083.htm?chan=search
18
bloomberg.com/apps/news?pid=20601068&sid=aeox2DyjApJs&refer=home
19 bloomberg.com/apps/news?pid=20601087&sid=aR2xZcBWBfdA&refer=home
20 nytimes.com/2008/03/31/business/31cnd-markets.html?hp
21 theglobeandmail.com/servlet/story/LAC.20080401.RTIP01/TPStory/Business
22
online.wsj.com/article/SB120699430304178013.html?mod=googlenews_wsj
23 biz.yahoo.com/ap/080324/economy.html
24 msnbc.msn.com/id/23609249/
25 washingtonpost.com/wp-dyn/content/article/2008/03/26/AR2008032603142.html
26 bloomberg.com/apps/news?pid=20601213&sid=a3Vhp40UwPFM&refer=home
27 money.cnn.com/2008/03/27/real_estate/mortgage_rates/index.htm?section=money_latest
28 money.cnn.com/2007/12/27/real_estate/mortgage_rates/index.htm
29 msnbc.msn.com/id/3683270/