On the Subject of Bottoms

by Michael Panzner, Financial Armageddon. May 7, 2009

Bond prices were hit hard, extending their recent slide to multi-month lows as investors demanded higher-than-expected yields at today’s auction of $14 billion of 30-year Treasurys. Not that anyone should be too surprised. According to Bloomberg, increased government spending will likely require Washington to raise a record $3.25 trillion in the current fiscal year -- a tsunami of supply that suggests yields have lots more room on the upside. Also worth noting is the fact that the yield curve is steepening in the U.S. and in other countries where governments are cranking up the printing presses, signaling that investors are losing faith in those who control the public purse strings.

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(Data source: Bloomberg)

Although it’s anyone’s guess what tomorrow’s nonfarm payroll report for April will bring, odds are it will show that at least one trend that has been in effect since the 2001 recession is still intact: a steadily declining private sector share of the overall job market. Indeed, with most businesses cutting costs as the supposedly bottoming U.S. economy continues to weigh on orders and revenues, the government is quickly turning into the employer of last resort for a great many Americans.

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(Data source: Bloomberg)

Speaking of bottoms, I thought it would be an interesting exercise to compare how many people are wondering whether we’ve seen one -- or, at least, have been searching for information about that subject on Google -- to moves in the equity market itself. As the following chart illustrates, things did not work out as planned during two prior occasions when people were starting to think that the coast was clear. My guess is that not much has changed since then, despite all the official pronouncements, filtered media reports, and Wall Street book-talking that have been filling the airwaves lately.

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As long as we are on the subject of bottoms, I thought it would be a good time to examine whether we are seeing the kinds of valuations that have existed at the start of prior bull markets. In that vein, I discovered an interesting chart over at the Macro Man blog. Simply put, estimates based on a “bottoms-up” evaluation of operating earnings -- which excludes the string of allegedly one-off losses that much of corporate America has been taking lately -- suggest the market is, at best, trading near fair value -- in other words, it’s not cheap.

Moreover, if you ignore the “cleaned up” or delusional estimates of the Wall Street analysts, the picture looks even less compelling. Whether you employ a top-down approach -- which takes into account current economic reality, among other things -- or rely on actual profitability (i.e., reported earnings), the stock market appears downright expensive.

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(Source: http://macro-man.blogspot.com/2009/05/you-get-what-you-pay-for.html)

Finally, the old saying has it that history never quite repeats itself. Nonetheless, I thought the recent price action in the technology-laden Nasdaq-100 index had an eerie, déjà vu-like feel to it.

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(Data source: Bloomberg)

Stocks ended the day lower, hurt by weakness in technology, telecom, and bank shares, as well as a sell-off in bond markets. The results of the well-leaked bank “stress tests,” which were officially released an hour after the bell, proved to be something of a non-event.

At the close, the Dow Jones Industrial Average was down 102.43, or 1.2%, to 8,409.85. The S&P 500 Index lost 12.14, or 1.3%, to 907.39. The Nasdaq Composite Index slid 42.86, or 2.4%, to 1,716.24.

June gold futures drifted $0.40 to $910.60, while the U.S. Dollar index added 0.2%. Ten-year Treasury yields surged 17 basis points to 3.33% and June WTI crude oil futures rose $0.37 to $56.71/bbl.

Michael Panzner

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