Wednesday, 10/16, Market WrapUp (Are We At the Bottom Yet?)

Financial Sense Online ^ | 10/16/2002 | James J. Puplava

[rohry]

 
Weekday Commentary from Jim Puplava
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STORM WATCH UPDATE Bubble Troubles Part I Double, double, toil and trouble; fire burn and cauldron bubble. by Jim Puplava 9/13/2002 Bubble Troubles Part II Yes, Virginia, There IS a Housing Bubble by Jim Puplava 9/20/2002

Bubble Troubles Part III It Ain't Over Yet for the Stock Market by Jim Puplava 9/27/2002

Wednesday Market Scoreboard  October 16, 2002
Dow Industrials		219.65	8036.03
Dow Utilities		8.25	169.88
Dow Transports		85.16	2201.30
S & P 500		21.21	860.06
NASDAQ		50.02	1232.42
US Dollar to Yen			124.46
Euro to US Dollar			.9816
Gold		1.3	314.70
Silver		0.05	4.37
Oil		0.25	29.47
CRB Index		0.62	230.76
Natural Gas		0.02	4.227
	10/16	10/15	Change
HUI (Amex Gold Bugs Index)
Close YTD	110.49	110.57	0.08 69.46%
52week High	147.82	06/03/02
52week Low	59.86	11/26/01
XAU (Philadelphia Gold & Silver)
Close YTD	61.11	61.16	0.05 12.27%
52week High	88.65	05/28/02
52week Low	49.23	11/19/01
All market indexes
Nyquist Column 10/15 The New Economy & The New World Order

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 Market WrapUp for the Week 
Monday  l  Tuesday  l  Wednesday  l  Thursday  l  Friday

The Week in Graphs Storm Watch Geopolitical News Energy Resource Page Precious Metals Raw Materials

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^{Wednesday, October 16, 2002}

Are We At the Bottom Yet?
‘Here today, gone tomorrow’ seems to be the pattern in today’s stock markets. Investors haven’t seen markets in this bad of shape since the Great Depression. That was the last time stock indexes fell more than three years in a row. At this point it looks like 2002 will be another year of double-digit losses for investors. You normally get year-end window dressing and asset pumping by mutual funds in December to spruce up performance. However, mutual fund cash levels are very low with very little room to boost prices, especially with withdrawals on the rise. This is turning out to be no ordinary bear market. The Dow was down close to 40% from its high as of last week. The Nasdaq has lost nearly 80% of its value while the S&P 500 is down close to 50%, and we still haven’t reached bottom yet.

How far will it go before a bottom is reached and how long will it take to get there? That is a question Wall Street has been wrong on for the last three years running. First it was a correction in 2001. Then it became a bear market after September 11^th. This year it was supposed to be a recovery, which now looks impossible. It will take more than intervention to get this market going again. It will take a miracle. Chances are it may be more than a decade before stock prices ever approach their highs again which may be too hard for many investors to swallow. Historically, markets tend to swing to extremes in both directions. The mania of the 1990’s took stock prices to unbelievable heights. The new century should see the markets fall to incredible new lows. There have been three major bull markets in the last century: the 1920’s, the 1950-60’s, and the 1980-90’s. In each case, stock prices rose to extremes but none of these periods were as extreme as the 90’s bull market. After markets reach these levels, they take decades to correct. The 1920’s bull market took 25 years to surpass former levels and the 1950-60’s took 16 years. We have only undergone three years of corrections. Despite the fluff taken out of the market, stocks still remain expensive by any measure of value. History would suggest we might have another 4 to 9 years before we reach bottom.

How will investors know when a bottom is reached? When everyone is out of their mutual funds and when the industry has shrunk to a shadow of its former size, when dividend yields are at 6-7%, PE multiples are down to 7, and nobody you know will admit owning a stock or mutual fund will we have arrived at a bottom. In the meantime, all we are likely to see is tradable rallies that are brief and furious. Momentary excesses will punctuate the markets; violent upsurges followed by deeper plunges all the way down. In the end the market will have its way despite the best efforts to thwart its course. Valuations will become attractive and sound investment principles will be restored and become fashionable. Patience will one day become a virtue again. Quick fixes and momentary thrills will be unfashionable. When I got in the business in the late 70’s, the investment business lived on Graham and Dodd. I remember reading a speech given by John Templeton. Templeton extolled the virtues of buying when markets were low and stocks were cheap, and then holding on to the stocks for 3-5 years until the markets recognized their value. This stands in sharp contrast to today’s investment climate where 5 minutes, much less five days, can seem like eternity to most investors. Fashions come and go and it is no different in the financial markets. Today’s fad to ‘get rich quick’ will also fade as markets fall even further. As my mother-in-law is so fond of saying, “this too shall pass.”

The Fate of the Investor
For the markets and the fund industry the fate of the individual investor may about to change. Plagued by three consecutive years of losses investors may be ready to throw in the towel. In the last bear market rally this past summer investors pulled $5.8 billion out of stock funds as the major indexes rose. It was the first time in 14 years that stock funds experienced outflows at a time markets were rising. Large cap funds, the favorite type of fund outside index funds, have seen money outflows for their 20^th consecutive month for good reason. In the third quarter only 62 funds out of a total of 8,400 actually had positive returns. Most of these were bear market funds that short the market, natural resource or precious metals funds. The financial industry has yet to recognize this trend, which I have written about in the “Next Big Thing.” Assets are slowly exiting the paper markets and heading back into “things” or real assets. The trend hasn’t quite caught on yet as Wall Street, the media and investors chase the last trend in the financial markets. There are still loads of investors still waiting for Intel and Cisco to return to their former heights. This trend has passed and another trend in real assets has taken its place. A look at the breakout in the CRB is a portent of this future trend.

For Wall Street and Main Street, it hasn’t dawned yet that we are in a wartime economy. In war natural resources command a premium. Raw materials are used and expended in instruments of war. In war, things get blown up, broken, and destroyed. Ammunition is expended, bombs and rockets are exploded, and raw materials are commandeered for the production and prosecution of the war. In war faith in paper evaporates as governments inflate their budgets in order to pay for the cost of war. Wars in the past have always been inflationary. There is no reason this time to think that things will be different. We may see deflation in paper and the credit markets, but inflation will be the natural trend of raw materials. If you don’t have a war portfolio you may find yourself out of sync with the markets. This can be viewed by looking at IBD and the strength of sectors that are doing well this year. The US will soon be at war, and the reality of this has not been fully factored into the markets. Most who work on Wall Street were in diapers during the last war. Only the old-timers remember what war can do to a portfolio.

Today on Wall Street
Today credit problems once again surfaced to the front page as several banks and financial institutions reported problems with earnings or with their loan portfolios. J.P. Morgan Chase reported its net income plunged 91% to around $40 million from $449 million the year before. The bank plans on cutting an additional 2,000 personnel. The bank wrote down $834 million in bad loans, mostly in telecomm and in cable, and still has an additional $300 million at risk in Argentina; then there is Brazil. As one money manager put it, “They really don’t have a complete handle on the depth of what’s gone wrong on the credit side for them.” At risk now for investors is the banks hefty dividend, now at 7.5%. The bank isn’t earning enough to cover this dividend without dipping into capital. The smart thing to do would be to cut it. However, a lower stock price and another possible credit downgrade may then impact the bank’s derivative book and credit standing.

In addition to J.P. Morgan’s woes, S&P downgraded GM’s debt as notch from BBB+ to BBB, one level above junk bond status. GM has $187 billion of total debt. S&P said it is also reviewing Ford’s debt, which has total debt of $162 billion. Both GM and Ford have been hit hard by losses in their pension plan. Those losses will require both companies to make additional contributions out of earnings next year. GM’s pension shortfall is $28 billion, which is nearly double that of last year where it stood at $12 billion.

Capital One Financial Corp shares fell as much as 26% today after the fifth biggest issuer of MasterCard and Visa said credit card losses would climb through the remainder of this year and next. Capital One wrote off 4.96% of its loans in the third quarter. The company said that figure may rise to as high as 6% in the fourth quarter. In July federal regulators who monitor Capital One closely made the company boost its loan loss reserves and increase risk controls.

In other credit related matters, Brazil is drawing down its reserves to pay off debt that is maturing this month. Brazil has refinanced only about 20% of its loans coming due this month. A plunging currency and stock market, which has lost over 63% this year has made it difficult for the country to roll over its debt. Brazil must refinance another $20.8 billion by the end of the year.  Raising money in the debt markets has become difficult because of a plunging currency and speculation that the Lula, the Socialist Workers Party candidate, has in the past advocated defaulting on the country’s massive ($250-$300 billion) debt. Brazil may become the next financial crisis as the dominoes continue to fall throughout Latin America heading their way North.

Today’s Market
Outside credit concerns markets fell as a result of more earnings warnings beginning with last night’s announcement by Intel. Intel said things still aren’t looking good. The Dow fell 2.7%, the S&P 500 lost 2.4% and the NASDAQ lost close to 4%. The market’s losses today were just as lopsided as yesterday’s gains. Declining stocks fell by a 3 to 1 margin on the NYSE and the Nasdaq. Volume was heavy with 1.6 billion shares trading hands on the big board. The VIX rose 2.23 points to 41.97 and the VXN rose .50 to 56.87.

Overseas Markets
European stocks fell as companies from Reuters Group Plc to Intel Corp. lowered sales forecasts, shaking optimism that corporate earnings and share prices will rebound this year. The Dow Jones Stoxx 50 Index shed 1.9% to 2536.71. All eight major European markets were down during today’s trading.

Asian stocks rose as a rally in U.S. equities spurred by higher corporate profits boosted optimism that the region's largest overseas market is recovering. Honda Motor Co., Hyundai Motor Co. and other exporters gained. Japan's Nikkei 225 Stock Average added 0.5% to 8884.87, completing a three-day gain of 5.3%.

Bond Markets
Treasuries have been under assault over the past few trading sessions amid mammoth gains for stocks. The 10-year Treasury note slid 12/32 to yield 4.04% while the 30-year government bond was off 15/32 to yield 4.995%. No economic news was scheduled for release on Wednesday. Thursday's data docket will be busy, and will include the release of weekly initial claims, September housing starts--seen coming in at a 1.63 million level--and the industrial production and capacity utilization figures for September.

© Copyright Jim Puplava, October 16, 2002

[rohry]

We'll see what happens tomorrow. This is like reading a good mystery...

[rohry]

Market WrapUp is delivered...

[eno_]

What would you call a "war portfolio?" Oddly, war seems to be getting cheaper almost as fast as fiber optics. Who will benefit? Oil, for sure, in the short term. But after we start reimbursing ourselves from Iraq's oil?

[marvlus]

Are we at the bottom yet? Nope.

[RightWhale]

we are in a wartime economy

That is a stretch. This is not a wartime economy by any measure. No industries have been mobilized, no one has been drafted, rationing has not begun. Not that it will stay this way, but this is not a wartime economy.

[arete]

We'll see what happens tomorrow

Looks like the manipulators and speculators are going to use IBM's "beat the Street" earnings as an excuse to push the market up again tomorrow. Never a dull moment at the casino.

Richard W.

[rohry]

"This is not a wartime economy by any measure."

I agree. When GM is building tanks and Humvees full time then we will be in a wartime economy. This reminds me of Lyndon "guns and butter" Johnson during the Vietnamese War...

[AdamSelene235]

Fannie Mae net falls on unrealized option losses Tuesday October 15, 5:35 pm ET

By Mark Felsenthal

(Updates to market close, adds comment) WASHINGTON, Oct 15 (Reuters) - Fannie Mae (NYSE:FNM - News), the No. 1 U.S. home loan financing company, on Tuesday reported a 19 percent drop in third-quarter net income, as options it uses to protect itself from interest rate swings lost value.

The company said, however, that its operations benefited from falling interest rates, because they prompted consumers to take out mortgages or refinance their home loans.

Excluding the unrealized losses from the derivatives, earnings rose 18.4 percent, hitting the high end of Wall Street estimates.

Many investors agreed with the company that the derivatives losses were not a reflection of the company's performance, and Fannie Mae shares rose nearly 7 percent to close at $70.98 in trading on the New York Stock Exchange.

"The overall results were excellent," said Dreyfus Corp. senior analyst Bill Rubin. "I liked the fact that the net interest margin improved more than expected, and the credit quality looks stellar."

The mortgage financier said it expects 2002 earnings growth, excluding accounting for derivative securities such as options, to be higher than in the past.

For 2003, it said precise earnings estimates are difficult because of the rapid pace of portfolio growth and wider than normal difference between its interest rates for borrowing and lending.

AMPLE BUSINESS

Fannie Mae, which benefits from backing by the U.S. government, said third-quarter net income fell to $994.3 million, or 98 cents per share, from $1.23 billion, or $1.19 per share, a year earlier. The company's net earnings were reduced by mark-to-market write-downs of the value of its options of $1.378 billion, well above the year-earlier write-down of $413.1 million.

Analysts discounted the effect of unrealized derivatives losses on the company's performance.

"They're using derivatives to hedge their portfolio and not to speculate and grow earnings," said David Duchow of Thompson, Plumb & Associates.

Strong housing and mortgage finance markets have created ample business for the company, observers said.

Excluding items, Fannie Mae's earnings rose to $1.63 billion, or $1.62 per share, from $1.38 billion, or $1.33 per share, a year earlier.

On this basis, analysts on average expected a profit of $1.57 per share, with estimates ranging from $1.55 to $1.62, according to research firm Thomson First Call.

"Very strong volumes and stable-to-increasing business margins enabled Fannie Mae to produce another record quarter of operating earnings per share," said Chief Executive Officer Franklin Raines in a statement.

MORTGAGE BUYING UP, MARGIN STEADY

Fannie Mae, which buys home loans from lenders and repackages them as securities for investors or holds them in its own portfolio, reported record mortgage purchase commitments of $128 billion for the quarter.

Buying mortgages for its own portfolio is a big earnings generator for the company, but purchases had slowed in the second quarter as other investors competed to buy mortgage-backed securities.

Another source of profit, the margin between the company's interest rates for borrowing and lending, was unchanged from the previous quarter but higher than a year earlier.

The agency has taken steps to close its duration gap, a measure of how well it matches cash flows between its mortgage assets and its own debt. On Tuesday it said it would commit to buy $57 billion of mortgage bonds and home loans -- its largest monthly commitment to date -- for its portfolio and use those assets to help manage interest rate risk.

"The $57 billion we committed to buy in September made a big push for lowering duration," said Mary Lou Christy, vice president of investor relations at Fannie Mae. "The $57 billion in retained commitments to buy mortgage loans and bonds is a record and reflects the active mortgage market."

DURATION GAP SHRANK

Fannie Mae said its September duration gap was minus 10 months, down from minus 14 months in August. It has a goal of plus or minus six months for its duration gap, which would mean its assets and liabilities would be in better balance.

Analysts said the company's financial report eased concerns raised by widening of the duration gap.

"Investor expectations were a little grim on Fannie Mae. I think there was over concern about the duration gap issue," said Yin Kon, an analyst for State Street Global Investors.

Meanwhile, Fannie Mae's credit-related losses fell to $13.9 million in the third quarter from $17.3 million in the April-June period and from $18.7 million in third quarter 2001.

[ex-snook]

"I agree. When GM is building tanks and Humvees full time then we will be in a wartime economy. This reminds me of Lyndon "guns and butter" Johnson during the Vietnamese War... "

Do you think China and Korea will sell us the steel? And can be get Rosie the Riveter to replace the guys drafted?

[Gritty]

You have to hand it to Puplava.

When the Market is Up, he's DOWN. When the Market is DOWN, he's waa-a-y DOWN.

Unfortunately, he also usually seems to be RIGHT! When he starts acting like a Bull, that's the time to start grabbing stocks with both hands.

[meyer]

Unfortunately, he also usually seems to be RIGHT! When he starts acting like a Bull, that's the time to start grabbing stocks with both hands

I don't think he's ever going to act bullish; the best thing to do is wait until he's just a little bit down and then buy like crazy. :^)

[rohry]

"When the Market is Up, he's DOWN. When the Market is DOWN, he's waa-a-y DOWN."

The point in my posting of Financial Sense Online is that the "mainstream media" is not analyzing what's going on in corporate America. Earnings are not analyzed by them. Jim gives us the "looking under the rock" analysis. I get bashed for this on a nightly basis...

[arete]

This is a slow motion train wreck so I wouldn't count on being a buyer in the near future. What, Korea has nukes -- tell me it ain't so. I thought that Bubba bought them off with our tax dollars.

Richard W.

[Gritty]

I get bashed for this on a nightly basis...

Indeed! But not by me. I've read his thesis.

[rohry]

I get bashed for this on a nightly basis...

"Indeed! But not by me. I've read his thesis."

And I appreciate your support and input...

[Gritty]

I wouldn't count on being a buyer in the near future.

... these days I'm only a buyer in gold and silver stocks... the rest of the crowd can chase GM and JPM.

Korea has nukes -- tell me it ain't so. I thought that Bubba bought them off with our tax dollars.

I think it is much more likely they bought him off with Campaign "donations" and huge sums in his offshore bank accounts. All of Bubba's chickens won't be coming home to roost for a long, long time. We have just been seeing the very first of the huge flocks.

[EVO X]

Unfortunately, he also usually seems to be RIGHT! When he starts acting like a Bull, that's the time to start grabbing stocks with both hands.

Do you remember the fable about the tortoise and the hare? I think the days of grabbing stocks with both hands is over for the time being.

[Gritty]

I think the days of grabbing stocks with both hands is over for the time being.

For most of them, you are probably correct. You'll be able to buy most of them a lot cheaper in future years - if the companies are even around!

[Davea]

Sun report could come with job cuts

Analysts see up to 8,000 positions in peril

By Rex Crum, CBS.MarketWatch.com

Last Update: 11:33 AM ET Oct. 16, 2002

PALO ALTO, Calif. (CBS.MW) -- Analysts say Sun Microsystems could lay off as many as 8,000 of its 39,400 employees when it reports its quarterly results on Thursday.

The layoffs would be on top of the 7,000 jobs the company cut last year.

"The signs of an imminent reduction are there," said Steve Milunovich of Merrill Lynch. "(CEO) Scott McNealy said last week that if Sun isn't making money, 'we will restructure.'"

? Milunovich said that by cutting 8,000 jobs, Sun could break even with revenue of $2.5 billion per quarter instead of the current $3.1 billion. Milunovich said that while such a move could boost Sun's earnings in the near-term, it could also hurt revenue in the coming quarters.

Toni Sacconaghi, an analyst with Sanford Bernstein, says Sun could cut between 4,000 and 8,000 jobs. "(This) would trigger earnings revisions and could serve as a catalyst for the stock," Sacconaghi said.

Sun spokeswoman Diane Carlini said Wednesday that the company could not comment on the analyst reports because of the quiet period leading to its earnings. "But to clarify what Scott (McNealy) said last week," she said, "we would consider making changes in spending, if necessary, with the goal of achieving consistent profitability."

Sun officials virtually laid the groundwork for at least some disappointment during a mid-quarter update in August. CFO Steve McGowan said revenue would come in 10 percent to 15 percent below the $3.4 billion Sun took in during its 2002 fourth quarter, which ended in July.

That quarter brought some of the first good news regarding Sun's bottom line in nearly a year, as the company posted earnings of 1 cent a share, or $20 million. Those good tidings were quickly dashed when McGowan added that Sun would see a "slight loss" during its first quarter.

Sun later revised its fourth-quarter figures to show earnings of 2 cents a share, or $61 million.

Analysts surveyed by Thomson First Call expect a loss of 4 cents a share for the period ended Sept. 30, which was the company's first quarter of 2003.

Sun also will probably face questions regarding a charge of up to $2.2 billion it expects to take later in the year. Sun revealed plans for the acquisitions-related charge in its 2002 annual report, saying that the charge may be necessary if the company's market value does not climb back to its April level of $29.1 billion. On Sept. 30, Sun's market value was about $8.4 billion.

Unless Sun's stock price does a dramatic turnaround, it appears the company will be taking that charge. When the company reported its fourth-quarter figures on July18, its stock had closed at $5.80. Since then, the stock fell to a 52-week low of $2.34 on Oct. 7. It has rebounded a bit, trading at $2.79 at midday Wednesday.

"Our quality of earnings rating (on Sun) declined from last quarter," said Rebecca Runkle of Morgan Stanley. "We expect management to announce actions that could improve financial performance going forward."

Analysts also say Sun will also need to give some insight into its acceptance of open-standard computing platforms. On Monday, Sun said it would partner with IBM (IBM: news, chart, profile), Veritas (VRTS: news, chart, profile), and Hitachi (HIT: news, chart, profile) to promote open-standard technology that allows different computing platforms to work together in data-storage networks. See full story.

Still, Milunovich of Merrill Lynch said that, because of Sun's continuing dependence on its own Sparc and Solaris technology platforms, the company needs to do more to ensure it doesn't become a niche player in the high-end computing market.

"Sun risks becoming the Apple (AAPL: news, chart, profile) of corporate computing -- cool but less relevant," Milunovich said. "McNealy must act to get Sun into the black."

Rex Crum is a reporter for CBS

[Brett66]

I enjoy this guy's articles but I'm curious, what was he saying in 1998? Is he always bearish?