Posted on 08/24/2002 5:08:45 AM PDT by arete
Stocks skidded lower today with the Nasdaq losing the most ground. The Nasdaq dropped 3%, the S&P 500 fell 2.3%, and the Dow lost 2% to close down 180 points to 8872. The Russell 2000 followed suit, dropping 2.3%. For the week the Dow added 1.1%, the S&P 500 1.3% and the Nasdaq 1.4%. Internet stocks were big losers today with the Bloomberg Internet index down 3.7%. For the week the Internet stocks gained 7.4%. Utilities fell 1.5% despite a rally in Treasuries. The 10-year closed out the week at 4.23% compared to 4.32% a week ago. Spot gold prices fell about $7 for the week, taking the Gold Bug index down 5.1%.
Chip stocks were among the day’s biggest losers, dropping almost 6% and falling 3.5% on the week. Intel fell 6.2% with help from lowered earnings predictions from Wall Street. Weak PC demand was the culprit. Advanced Micro suffered a 7% drop today. Chip equipment companies suffered downgrades by at least one firm. Applied Materials fell 6.7%.
The stodgily named Economic Cycle Research Institute’s Weekly Leading Index (known in the economic prediction game as the WLI) rose a bit to 120.8. But the index’s rate of growth over six months fell. The stock market and housing boosted the measure while lower commodity prices were a drag.
Lucent continues to shrink operations. The company is going to drop some product lines and cut staff further. According to the Street.com, the employee count reach 30-35,000, a figure the company disputes. If that’s the case, however, the company will be 25% of its size when it was spun off by AT&T, according to TSC. This is not a complete aberration in the telecom world. In this week’s Mid-week comments, Chad notes that telecom industry employment is now below 1993 levels.
A story in the NY Times today notes that more people who refinance are moving to 15-year mortgages. Wells Fargo Home Mortgage, for example, reports that 15-year mortgages rose in January to 33% of monthly business, up from 15% last August. It’s good to see more consumers avoiding the temptation of extending the length of their mortgage, but there’s ample evidence that Americans continue to treat their homes like a line of credit with windows.
Freddie Mac says that 67% of folks who refinanced in Q2 increased the size of their mortgage by at least 5% (cash out refinancing). It’s hard to believe many of those people reduced the length of their mortgage. A good bet would be the reverse was true. Another fun fact for tonight’s dinner party conversation is that the median age of loans refinanced was 4.1 years in Q2, and the median house appreciation since the original mortgage was 23%. Holy Cow.
The NY Times piece does nail the risk to refinancing game when it quotes a Countrywide Home Loan exec, “It's a finely balanced thing that could go either way… If we see a rise in the cost for long-term financing, then the same driver that was driving consumers could take them the other way.”
The godfather of mutual funds, John Bogle, is betting on a shakeout in the industry. The vanguard of Vanguard thinks half of U.S. equity funds could disappear. For a visual on the growth in equity funds, check out slide 16 of this flash presentation on the home page.
Academics duke it out
The authors of Dow 36,000 who argued that investors should wake and smell the shrinking risk premium take a punch from one of their own in this piece by fellow AEP colleague John Makin. The Polly Anna-proof Makin does not buy the idea that a single asset class should always outperform, and he does a fine job of describing the stock promotion industry, and the risks to investors of following their advice too closely. Makin closes his fine piece with this jewel:
As with every other bubble, the aftermath of the equity market bubble leaves investors with the basic truth that chasing extraordinary returns on any particular asset class, be it stocks, tulips, or bonds issued by Latin American countries, is a fool's game. If nothing else, keeping that lesson in mind, American investors may hope to earn back most of their losses over the past two and a half years with a diversified portfolio of investments. But it is probably going to take at least five years to recoup those losses. Markets tend to go down faster than they go up, and there is no reason to suppose that investing most of one's funds in the stock market will speed up the process of recouping losses suffered over the past few years.
6% have already disappeared this year and there are many more yet to go. If they aren't merged, they are going to be selling their portfolios.
Richard W.
Comments and opinions welcome.
Richard W.
Another strange week. I am encouraged that it is was an up one. We have another up week next week and I will be back in the bulls camp. For now, I am still in a holding pattern.
Richard W.
The government clearly doesn't know when or if it can re-ignite this economy. The university professors are proving that it is a lot easier to explain the theory after the event, but they don't know anymore than the rest of us about how to solve the problems now.
I would like to read more articles by folks who cut through all the spin and marketing hype to discuss the basic fundamentals. They need to tell us about the cake before before they start hyping the icing. I want to learn how they plan to re-ignite an economy where jobs are disappearing or being replaced by low paying jobs without benefits. Does the vision for an economic rebound include a broad segment of the country, or is it narrowly defined to a rise in stock prices driven by foreign demand for US assets and exporting of US jobs overseas. Can a market that generates capital gains for a few at the expense of jobs for many continue upward. Can the Republicans survive in the politics of such an economic environment? What happens to capital markets if the unemployed or "barely employed" masses turn control over to the Democrats (i. e. socialists).
Richard W.
I think that you could probably get a consensus of so called experts to agree that the economy is weak. After that, all the spin and hidden agendas take over the discussion. If you are part of the financial industry including the media that reports on it, you are out there telling people how bullish everything is and to please turn over your cash to them to manage for you. That is how they make a living. Without investor money, they are unemployed. Then there are the politicians who are going to tell you anything that they think will keep them in office. They may be clueless as to how to solve any problems, but that doesn't stop them from telling you that they alone have all the right answers. How about those economic gurus at the FED. Think they are about to tell the truth about how badly they've screwed things up? Their whole scam now depends on keeping consumer and investor "confidence" because there is nothing else keeping the wheels on the wagon.
There's the problem. Everyone is working their own agenda for their own reasons. There is so much misinformation being put out it is little wonder people are becoming increasingly confused and skeptical.
Richard W.
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