Wednesday, January 14, 2009

Less uncertainty puts a floor under prices

The retail sales air pocket has the markets spooked. Lots of talk about how stocks are going to test their November lows before this is all over. FUD (fear, uncertainty, doubt) is very much in the air. But as this chart shows, one measure of FUD, the Vix index, has improved significantly since the November lows. There really isn't as much uncertainty today as there was just a month or two ago. We know more about Obama, we know more about the economy, and key prices (e.g., swap spreads, the TED spread, etc.) are improving on the margin. The Fed remains extremely accommodative, and the risk of a banking system collapse is an order of magnitude less than what it was a few months ago. The market has been priced to a catastrophically bad economy, but every day it seems less likely to happen.

Less uncertainty should lead to higher, not lower prices.

12 comments:

Jeff said...

Scott: I agree with your comments and appreciate them. However, such as we are seeing today, how is this economy truly going to move forward until the financials get cleaned up. I have bad feeling (such with Citi, HSBC, Barclays and others) this is still far from over and billions are still going to have to be injected into these institutions to keep them viable. And once that happens, they still are not going to be motivated to lend/work especially with all the strings the government puts on them. I just wonder how much value/viability the measures such as LiBor and the TED spread truly are with this problem. Every day people are falling into a more negative equity situation which is only killing the banks capital ratios further....I truly want to see a path to recovery, but I have to admit, I'm struggling to see it. I appreciate your thoughts.

Scott Grannis said...

Libor is way down, and the TED spread is way down. This has to be a very positive thing. A few big banks are still in trouble, but the vast majority are doing OK, and lending is still increasing. If something happens like mark-to-market accounting rules getting suspended, this could open a floodgate of relief. The market is worried that Geithner's tax problems will keep him out of the Treasury spot, but politicians on both sides of the aisle like him; it's too early to rule him out.

eric said...
This comment has been removed by the author.
eric said...

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Eldon Mast said...

Yet another thoughtful and reasoned post from the beach, thanks...

Totally agree that the chill we saw back in Oct/Nov is subsiding. Warmth in bank to bank lending and commercial paper issues seem to me to be back to "normal" levels.

One uncertainty that still remains in my mind is how much junk is still on the top 10 banks' books. I think the Fed will keep bailing them out -- in order to make sure their portfolios float -- but with Ben B saying more $$ are needed, I wonder how much more junk is hiding (that he already can see)...

Eldon

Cabodog said...

Scott,

What are your thoughts about the current inventory to sales ratio at 1.41?

Brian Wesbury comments "business inventories fell 0.7% in November while the inventory-to-sales (I/S) ratio spiked up to 1.41. The recent increase in the I/S ratio is the fastest since 1981-82. As a result, the turnaround in real GDP growth is likely to lag the turnaround in consumption as firms
reduce production to cut excess stockpiles."

The excess inventory (compared to sales) troubles me when thinking in terms of a quick recovery.

The Therapist Is In said...

Scott,
In honor of your morning at the beach, I spent the day with my wife, Sarah and daughter, Liza at Cataract Falls, a hike in West Marin County, N. of San Francisco. Seemed like a worthy investment to me....

Scott Grannis said...

Eldon: good question. I'm still of the belief that most of the losses that have to be taken have been taken. But I am not an expert on bank balance sheets. Nevertheless, the tightening of credit spreads has been meaningful and should bring some relief to all holders of junk bonds.

Scott Grannis said...

Cabodog: I've never followed I/S ratios, so don't have much to offer. The ratio has spiked mainly because sales have collapsed, and I don't think that is permanent. Regardless of the status of inventories, news that the economy is bottoming should overwhelm all other considerations I think.

Gene Prescott said...

Bank of America might be looking for another injection
Amid reports that Bank of America needs another multibillion-dollar government injection, sources close to BofA say the bank wanted last month to call off its acquisition of Merrill Lynch after learning the depth of Merrill's fourth-quarter losses. Coupled with concerns about the financial health of Citigroup, the revelations about Bank of America indicate even greater woes within the U.S. banking sector. Financial Times (1/15) , The New York Times (1/14)

Bernard said...

There seems to be plenty of positive sentiment coming out of this corner of the internet but I can't help but think, that while an utter collapse has been thwarted, with all of the government intervention, we are well poised for a decade of mediocrity alla Japan.

Creative destruction no longer has a place in our economy and that can only mean bad things are on the horizon.

Sure risk measures have come down markedly, you would expect that with infusions of capital and mountains of government gaurantees, but that doesn't bode well for the efficient allocation of capital in the future.

We should be equally focused on how we are going to quickly remove government from the markets or our future is much bleaker than a V shaped American style recovery funded by another round of fresh consumer debt.

I think the markets are beginning to price the mediocrity in...

Scott Grannis said...

Bernard: I agree with your concerns. I've said quite a few times in the past that while I see an earlier recovery than most, I also expect the economy to grow at a sub-par rate for some time, due mainly to increased government intervention in the economy.