Facts

Reasons for a Market Decline

Date: September 9, 2004

The recovery is unlikely to be a normal one since the recession was abnormal for modern times. The recession wasn't caused by reduced monetary supply but by the bursting of the stock market bubble. Bubbles are blown up with huge debt that must be paid off to if normal growth is to continue. ¹

Overall corporate indebtedness has risen due to low interest rates and cheap mortgages.¹

Household debt has climbed to 180% of GDP.¹

Federal budget deficit will be 6% of GDP next year.¹

The current account deficit is 5% of GDP and growing a percentage point a year. ( If America cannot save then it must borrow the savings of others). Investors (foreigners) will want more reward for their money which means lower asset prices or lower dollar or both.¹

The S&P500 P/E ratio sits at 20 according to First Call.  The average since 1970 is 17.4.¹

The market has corrected by approximately 30% since the March 03 lows due primarily on decreased cost structures (layoffs) and a weak dollar. 

Mortgage delinquencies rose in Q2/03, a sign the Americans are struggling to keep up with debt payments.  The delinquency rate rose from 4.52% to 4.62% ²

Housing market might be turning around.  Home prices rose 0.78% in Q2, the slowest rate of appreciation since 1996.

Mortgage debt rose 14% during Q2, the fastest pace since 1987. Equity fell to a record low of 54.3% from 55.3%.

Loans in foreclosure dropped to 1.12% from 1.20% but this is a lagging indicator.

A report last week showing employers slashed 93,000 workers from their payrolls in August surprised economists, who thought an unusually long period of labor market weakness was finally drawing to a close. August's hemorrhaging brought the job-loss toll since the economy fell into recession in early 2001 to 2.8 million, including 1.1 million since the recession ended 21 months ago. ³

More layoffs announced, 3000 from International Paper, 1000 from 3Com, 3700 from the Postal Service.

Anticipated  five year earnings growth rate for the SP500 companies is 7%.

The SP500 multiple is currently at 28. To put that in perspective, the multiple was 32 times earnings in March 2000. 

According to the Federal Reserve's latest Flow of Funds Report, federal government borrowing rose at a seasonally adjusted annual rate of 24.3% in the first quarter. Even state and local governments got in on the act, borrowing at a 12% rate. Consumers were just one step behind as household debt grew at an 11.5% rate.

The Bank of Tokyo-Mitsubishi lowered its sales growth projection  for chain stores for September to 3.5% from 4%.

In August, the government's report listed 503,000 discouraged workers, up 33% from a year earlier.

The fact is the US is in its 20th month of economic "recovery" without creating jobs, according to the Federal Reserve. This is the worst since 1939. Compare that to a normal recession, when there is only a three-month gap between recovery and job creation.

Personal bankruptcy filings jumped 10.2% in the second quarter of 2003 as 430,926 Americans cried financial "uncle." So far this year, more than 835,000 individuals have declared bankruptcy. Fitch Ratings expects bankruptcies to increase about 8% to 1.65 million, but the final figure will likely be higher. http://money.cnn.com/2003/08/29/news/economy/credit.reut/index.htm

The market is overvalued according to Levy Institute. Asset and Debt Deflation in the US http://www.levy.org/ 

Government Deficit: $480B/year  beginning October 1. Cumulative total though 2013 is $5.8T

Trade Deficit: $244B for 6 months in 2003.  $195B for first 6 months in 2002. 

September 12

The University of Michigan's closely-watched gauge of consumer confidence fell to a preliminary 88.2 in September, from August's final 89.3, the sources said. Economists polled by Reuters had expected a preliminary median September reading of 90.0. The survey's index on consumers' current view of the economy fell to 98.9 in September from 99.7 in August, while the index of consumers' future expectations fell to 81.3 from August's final reading of 82.5.⁵

U.S. retail sales rose 0.6 percent in August, the Commerce Department said, well below Wall Street's expectations for a hefty 1.4 percent advance. "Consumer spending slowed dramatically. It could be an indication that the temperature of the economy is turning cooler than what people wanted to see," said John Person, head financial analyst with Infinity Brokerage Services. "Due to this report, there will be questions arising as to the health of the U.S. economy."⁶

Reasons for a Market Turnaround

Retail sales rose 1.4% in July ...Wal-Mart's August same-store sales (sales at stores open at least a year) jumped 6.9%, above its initial forecast of a 3% to 5% gain ... and auto sales surged to a seasonally adjusted annualized rate of 18.9 million in August -- up from 17.3 million in July and far above expectations.⁴

Second quarter GDP shows the economy has grown at an annualized rate of 3.1% not 2.4% as originally thought¹

Since the March low the S&P has risen nearly 30%,

The consensus First Call estimates for S&P earnings rose $13.11 a quarter and will nudge $14 in the fourth quarter. ¹

According to national accounts data, adjusted pre-tax company profits grew by $78.5B in Q2 compared to a fall of $4B in Q1. ¹

"The recovery has followed a text book pattern"¹

Monetary and fiscal incentives in the economy. money supply: For the last 12 months, the broadest measure of money (M3) has been growing at the rate of 8.4%, the highest since March 2002. And last month, the government pumped it up at a breakneck pace of 24.7%, the highest since September 2001.

1. The Economist. Stockmarkets Looking Up? page 63. September 6,2003

2. Wall St Journal, September 11, 2003.  Mortgage Delinquencies Increase Pg A6.

3. Reuters http://story.news.yahoo.com/news?tmpl=story&u=/nm/20030911/bs_nm/economy_usa_dc_1

4. Safemoneyreport.com

5. Wall St. Journal

6. Reuters http://biz.yahoo.com/rb/030912/markets_stocks_8.html