November 2009 Wrap-Up
December 11th, 2009
There have been many surprises over the past month; both positive and negative. As has been the case over the past few months, bulls and bears are increasingly frustrated. The broad market seems to have shifted into neutral and has made no sustained progress since mid-November. Bulls call it a natural consolidation in a healthy bull market. Bears call it a growing inability to climb measurably higher. There has been a noticeable shift in overall market psychology in terms of response to news; especially Economic news. A tendency to “sell the news” has begun to emerge which drives the bull camp crazy. Then, just after a bit of downside momentum starts to intensify, the bears hardly get started into their victory lap before a low-volume rally forms.
The Economy
· Preliminary Q3 GDP came out on November 24 at +2.8%; significantly below Advanced GDP of +3.5% which came out on October 29. When Advanced Q3 GDP came out, the S&P 500 was at 1042.63; up 56.4% from the 2009 low on March 6. Presently, the index is up 4.4% since the first estimate of Q3 GDP which suggests that the market may have priced in a strong GDP report. With the second estimate of Q3 coming in weaker than the initial one and Final Q3 GDP coming out on December 22, markets may be disappointed.
Employment
· On December 2, ADP reported November Employment of -169,000 (est. was -155,000). This was the eighth consecutive monthly improvement in the series but also the twenty-second consecutive month of job loss.
· On December 4, the government reported Non-Farm payrolls for November at -11,000 (est. was -190,000); the twenty-third consecutive month of job loss.
· Unemployment came in at 10.0%; down from October’s 10.2%
The Market
A lingering concern is how the market and economy will perform once all the government programs are withdrawn. In recent weeks there have been rumblings that “some” of the programs will “soon” be wound down. But those comments are quickly followed with the ominous warning that “we are not out of the woods yet”. The flagship bailout program, TARP (Troubled Asset Relief Program), was set to expire on December 31, 2009. Today, Treasury Secretary Geithner told Congress that the administration is extending TARP to its legal maximum duration which is October 3, 2010, according to Bloomberg. Mr. Geithner said, “The Treasury may expand the Federal Reserve’s Term Asset-Backed Securities Loan Facility, an effort to jumpstart securitization markets, as well as continue using TARP to help struggling homeowners and small companies.”
Investors are being told that “all is well” and the stimulus/bailout/rescue initiatives are working like clockwork. Today, the administration’s move to extend the proverbial safety net just in case something unforeseen happens does not convey a lot of confidence about the underlying strength of the recovery or the market’s ability to handle a negative surprise.
There is an interesting correlation that is sending a very loud message. The CBOE Volatility Index (VIX) and the broad markets are inversely correlated. While the VIX is typically referred to as a “fear gauge”, it can be equally viewed as a “complacency gauge”. From July 2007 to September 2008, VIX repeatedly found support in the 16-20 area. During the same time, the S&P 500 set a new all-time high and then drifted into a 17.5% decline. Over the next six months, the index accelerated into a 48.6% decline. Since October 21, the VIX has been testing the 20 area as support again; where the index was before the most intense problems emerged in 2008.