News Archive - 03.01.2010

Edition 2010-3, As of March 1, 2010

1.    January’s market performance:

The ten month long equity market rebound from the bottom in March of 2009 stalled in January. No sector was spared, as shown in Table 1.

2.   Financial Market Index Performance in the twenty five months thru January 2010:

Chart 1 may signal the end of the partial recovery from the global equity market bottom in March 2009. Perhaps it is only a hiccup. Opinions vary widely. Some observers are looking for an S&P Index value of 1,300 by mid-year. Others question the effectiveness of U.S. and European stimulus programs, fret about continued high unemployment data, are shaken by fears of sovereign debt defaults, e.g. Greece and the other “Club Med” countries and wonder if the market recovery will continue.

Chart 1 adds a touch of perspective. The equity markets sagged in the first half of 2008, declining by 4% (U.S. mid cap) to 12% (U.S. large cap). The plunge over the next six months stripped away a further 26% (U.S. small cap) to 49% (emerging markets). The downward slide continued for another two months. A remarkable recovery began in March, rapidly for the next seven months and continuing at a quieter pace in 4Q2009. After dipping in January 2010 global equity market indexes – adjusted for dividends - remain well below their values at the beginning of 2008, ranging from -15% (U.S. mid cap) to -29% (EAFE).

3.    The impact of currency relationships:

The equity market movements shown above were coincident with currency movements in many markets. The effect was to deepen 1Q09 losses on the international sector of U.S. portfolios and to amplify foreign market gains in the six months ending in August 2009.

Charts 2 & 3 plot these currency relationships. Chart 2 focuses on five major market currencies. Chart 3 shows the patterns for the BRIC group of emerging economies.

The U.S. $ strengthened against most currencies over the full year 2008. (Significant exceptions were: the Yen that weakened by 25%; the Hong Kong Dollar, which held virtually constant; and the Chinese Renminbi, which fell about 5% in the first half, then held constant for the remainder of the year.)

The movements were not steady. The first half saw U.S. $ weakness against seven of the nine currencies graphed in Charts 2 & 3. In response to the global liquidity squeeze and market implosion in the late summer, the U.S. $ saw major strengthening against six of these nine currencies during the second half.

The U.S. $ peaked around the end of February 2009, coincident with the bottoms in worldwide equity markets. In the next six months the major currencies, excepting Hong Kong and China, strengthened significantly against the U.S. $. Market movements in the last four months of 2009 were in a minor key. In January, coincident with falling equity markets and worries about sovereign debt, the U.S. $ moved up against the Euro and the Real. 

4.    Putting the past twenty five months into historic context:

Our March 2009 News page gave a summary of our research into historic market declines in the 20th century. (See the News Archive.) Economists and financial market historians have been searching for parallels to the 2007-2009 recession, financial institution failures and stock market implosion. Some have detected – or disputed – similarities to the 1930s. A few have compared our recent past to the tech bubble of 2000-2002. Paul Krugman’s The Return to Depression Economics has documented a persuasive comparison to the Asian crash of 1997-98.

Why have distinguished authors, commentators and academics, including Niall Ferguson, Paul Krugman and Robert Skidelsky, not drawn our attention to parallels with the Panic of 1907? We see an eerie resemblance between the human and structural causes of the Panic of 1907 and our recent history.

Financial market turmoil coincided with recession. Market participants sacrificed prudent risk management on the altar of profit. By late 1907 the Dow Jones Industrial Average had fallen by 49%. =>This time the S&P 500 was down 50% from June 2007 thru February 2009.

A failed attempt to corner the copper market led to a liquidity crisis and a cascade of brokerage house closures. =>Think illiquid leveraged buyouts with market values now a fraction of their cost.

Banks refused to lend to competitors. =>Think counterparty risk. Knickerbocker Trust Company was insolvent and allowed to fail. =>Think Lehman Brothers. Depositors queued for withdrawals from banks in the U.S. and other countries. =>Think Countrywide and Northern Rock.

Failing companies were rapidly sold to solvent survivors. =>Think Bear Stearns. DJIA component (Tennessee Coal, Iron and Railroad Company) was taken over by the dominant steel producer (U.S. Steel) with Teddy Roosevelt’s blessing. =>Think weekend sale of Merrill Lynch to Bank of America. A major brokerage firm (Moore & Schley) was overleveraged in a single stock and supported when its stock’s price collapsed. =>Think AIG and its exposure to credit default swaps.

Many other banks and trust companies were taken over or closed their doors, but no Bank Holiday. =>Think now, not 1933. Stock exchange firms were unable to settle trades, but saved by J.P. Morgan’s intervention. =>Think the Fed’s no-limits opening of its cash window. The Secretary of the Treasury deposited $25 million of Federal money in New York banks to calm fears. =>Think Fed loans to investment and commercial banks.

Congress established the National Monetary Commission in 1908. The Federal Reserve System was created in 1913, six years later. =>Think global financial market regulation by 2014?

The dividend-adjusted Dow Jones Industrial Average returned to its 1906 peak nine years after the market bottomed in November 1907. =>Think 2018 for a return to 14,000 on the Dow?

The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing involves risks in regards to all of the investment products mentioned in this commentary, including the potential loss of principal. International investing involves additional risks including risks associated to foreign currency, limited liquidity, government regulation, and the possibility of substantial volatility due to adverse political, economic and other developments. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results. Please note that individual situations can vary.  Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

The price of commodities, such as gold and currency, is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities and currency is widely unregulated and concentrated investing may lead to higher price volatility. Foreign currency trading carries a high level of risk and can result in loss of part or all of your investment.