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RISK PREMIUM: A
Fractured Market
Week Ending March 28, 2008
EARNINGS
RESULTS: LIKELY TO REFLECT A FRACTURED MARKET
The overriding
question on every investor’s mind is: Has the stock market
“reached bottom”? Despite some flattening in our Risk Premium
indicator, we continue to believe that this is a “trading” market and
that stocks may still be overpriced based on the 2008 economic and
earnings' outlook. The Dow Jones Industrial Index closed the week at
12,216, down 145 points, a comparatively modest decline given the
volatility displayed since the beginning of the year. Since then the the
Dow Industrials are down 1,048 (about 7.9%), which does not seem
momentous given the unprecedented events in the financial services' and
housing sectors. These areas have lead the decline in stocks, resulting
in a fractured market as other industries have gyrated in response to
increasingly unfavorable reports from financial institutions as well as
the housing and labor markets.
HAS THE STOCK MARKET REACHED A BOTTOM?
We are reluctant to
call a bottom at this point because the decline in investor wealth may
not be fully reflected in stock prices. In upcoming weeks, corporate
America will begin to release first-quarter results, giving investors
their first glance at the impact on the broader market. We suspect that
the bloodshed will not be uniform, with certain sectors, for example
heath care and low-end retailers, weathering the economic downturn
better than other industries. Technology, for example, will be closely
monitored by us as an important indicator of macro-economic health,
since these companies draw heavily from consumer and corporate vibrancy.
We would not be surprised to see stocks plateau for awhile as
first-quarter earnings' results and company guidance figures on
full-year performance are digested by investors.
Despite the Fed's
efforts to ease money market stress, financial institutions continue to
hoard cash, leading us to conclude that the recent respite in stock
prices may not signal the end of the credit crisis. Moreover, the
unsettled housing and credit markets are too great to ignore. Until such
time as money begins to flow on a normalized and sustainable basis it is
difficult to feel that a bottom in this bear market will have been
reached.
THE FED: BACKED INTO A CORNER?
Insofar as interest
rates are concerned, additional reductions by the Fed become problematic
at these low absolute levels and investors are unlikely to see cuts of
50-75 basis points at a single time in the future. Prospectively the
Fed may return to its 25 basis-point incremental changes and it would
not surprise us if the Fed were more reticent to lower interest rates at
all.
The harsh reality is
that investors need to start thinking about when the Fed will feel
comfortable enough to abandon its easing policy and revert to raising
interest rates. As the presidential election heats up, we worry that the
Fed’s policies and recent actions could easily become the subject of
political debate and second-guessing, thereby limiting the central
bank's effectiveness in the second half of this year. We acknowledge the
possibility of undue political pressures but feel that Ben Bernanke will
have the stamina to defend his agency's actions.
THE RISK PREMIUM INDICATOR: STILL BEARISH
The Risk
Premium results are illustrated by the yellow line and we believe
certain anomalies should be noted. First, the Transportation Index is
giving a false positive, as the P/E multiplier has been distorted by the
sharp decline in UPS' earnings. Next, we feel investors have sought some
of the higher dividend yields offered by utility stocks, which have
posted a nominal rally. The Industrials, however, continue to reflect a
bearish sentiment. The Risk Premium results for the week ending March 28
are:
§
The Industrial Risk Premium ended at 6.75% versus 6.67%
§
The Transportation Risk Premium decreased to 4.83% from
6.91%
§
The Utility Risk Premium increased to 6.29% from 6.23%
n
|
Date |
March 21, 2008 |
Date |
March 28, 2008 |
|
DJ Industrial Risk Premium |
6.67% |
DJ Industrial Risk Premium |
6.75% |
|
30 Year Treasury |
4.26% |
30 Year Treasury |
4.33% |
|
Industrial Risk Differential |
2.41% |
Industrial Risk Differential |
2.42% |
|
|
|
|
|
|
Date |
March 21, 2008 |
Date |
March 28, 2008 |
|
DJ Transportations Risk Premium |
6.91% |
DJ Transportations Risk Premium |
4.83% |
|
30 Year Treasury |
4.26% |
30 Year Treasury |
4.33% |
|
Transportation Risk Differential |
2.65% |
Transportation Risk Differential |
0.50% |
|
|
|
|
|
|
Date |
March 21, 2008 |
Date |
March 28, 2008 |
|
DJ Utility Risk Premium |
6.23% |
DJ Utility Risk Premium |
6.29% |
|
30 Year Treasury |
4.26% |
30 Year Treasury |
4.33% |
|
Utility Risk Differential |
1.97% |
Utility Risk Differential |
1.96% |
Continues ▼
Continues ▼
Continues ▼
For March 21st's Comment Please Click Here
For March 14th's Comment Please Click Here
For March 7th's Comment Please Click Here
For February 29th's Comment Please Click Here
For February 22nd's Comment Please Click Here
For February 15th's Comment Please Click Here
For February 8th's Comment Please Click Here
For February 1st's Comment Please Click Here
For January
25th's Comment Please Click Here
For January
18th's Comment Please Click Here
For January
11th's Comment Please Click Here
For January 4th's Comment Please Click Here
For December 28th's Comment Please Click Here
For December 21st's Comment Please Click Here
For December 14th's Comment Please Click Here
For December 7th's Comment Please Click Here
For November 30th's Comment Please Click Here
For November 23rd's Comment Please Click Here
For November 16th's Comment Please Click Here.
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