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RISK PREMIUM:
IS THAT ALL THERE IS?
For The Week Ended April
25, 2008
RISK PREMIUM INDEX FALLS OFF THE CLIFF
For the week ended April
25, 2008, our Risk Premium Index took a precipitous fall, with the Dow
Jones Industrial Risk Premium declining to 1.75% from 6.42% the previous
week. At the same time, the Risk differential declined to -2.86% from
1.95%, which was expected since both measures move in tandem when there
is no change in the risk investors ascribe to stocks. The radical
behavior in our Index was due primarily to the expectations that General
Motors (GM) and its finance subsidiary, GMAC (49% held by GM), are
expected to post substantial first-quarter losses. The effect was to
force the Dow Jones Industrial Index P/E significantly higher, to 57
times earnings versus a normalized index multiple of approximately 14,
which reflects the unwillingness of investors to adjust stock prices so
that they reflect earnings’ performance and risk.
We have been concerned
that there is an underlying bullish sentiment that stock prices in
general have yet to fully discount, leading us to characterize this
market as still possessing significant risk of lower prices in the short
run. This is despite the rally which has been under way since mid-March
when the Fed not only cut interest rates by 75 basis points but
stabilized the financial sector by rescuing Bear Stearns from imminent
failure. Stocks have managed to rebound since the Fed intervention,
leading many to conclude that this bear market had run its course. Our
Index does not show signs that a reversal trend is in place. Instead,
the current favorable sentiment reflects the abatement of negative news
from the financial sector. The earnings’ outlook for corporate America
remains weak, with many companies heavily dependent on international
markets for their earnings.
STOCKS LANGUISH
The Dow Jones Industrial
Index ended the week up 41 points, closing at 12,891.86, the highest
level since the Fed made its last major interest-rate cut in March. The
rally does not appear to have been based on a turn-around in
fundamentals. Rather, the market uptick seems to reflect the better than
expected earnings’ reports from some major companies. In short, they
have not been as bad as investors had anticipated. This was demonstrated
Friday when the Dow rose despite American Express’ (AMEX) announcement
that its quarterly profits fell. Still, the results beat expectations
and AMEX affirmed a positive full- year earnings’ outlook, which
apparently gave the market index a boost. Nevertheless, stocks continue
to languish.
IS THAT ALL THERE IS?
The Fed is expected to
cut short-term interest by 25 basis points when it meets on April
29-30th, reducing rates to 2%, the central bank’s stated target for this
year. Whether the Fed will be willing to lower rates further is
questionable. It is likely that any future rate cuts will depend on GDP
performance. Once the Fed funds’ rate reaches the 2% mark, there will
be considerable uncertainty about the bank’s next moves. A pause in
interest-rate cuts is the likely scenario though we wonder how investors
will react if they think that’s all there is?
ECONOMIC STIMULUS FUNDS
The Treasury will begin
mailing out the economic stimulus checks in May and, although probably
beneficial, the overall economic impact on the economy is doubtful. The
success of the economic stimulus plan depends on households spending the
checks, not saving them or paying down credit card debt. How they use
the proceeds will reflect the degree of confidence Americans have in the
economy. Only time will tell if the stimulus program has its intended
effect.
RISK PREMIUM STATISTICS
§
The Industrial Risk Premium
ended at 1.75% versus 6.42%
§
The Transportation Risk
Premium decreased to 4.29% from 4.50%
§
The Utility Risk Premium
increased to 5.92% from 5.77% n
|
Date |
April 18, 2008 |
Date |
April 25, 2008 |
|
DJ Industrial Risk Premium |
6.42% |
DJ Industrial Risk Premium |
1.75% |
|
30 Year Treasury |
4.47% |
30 Year Treasury |
4.52% |
|
Industrial Risk Differential |
1.95% |
Industrial Risk Differential |
-2.77% |
|
|
|
|
|
|
Date |
April 18, 2008 |
Date |
April 25, 2008 |
|
DJ Transportations Risk Premium |
4.50% |
DJ Transportations Risk Premium |
4.29% |
|
30 Year Treasury |
4.47% |
30 Year Treasury |
4.52% |
|
Transportation Risk Differential |
0.03% |
Transportation Risk Differential |
-0.23% |
|
|
|
|
|
|
Date |
April 18, 2008 |
Date |
April 25, 2008 |
|
DJ Utility Risk Premium |
5.77% |
DJ Utility Risk Premium |
5.92% |
|
30 Year Treasury |
4.47% |
30 Year Treasury |
4.52% |
|
Utility Risk Differential |
1.30% |
Utility Risk Differential |
1.40% |
Continues ▼
Continues ▼
Continues ▼
For April 18th's Comment Please Click Here
For April 11th's Comment Please Click Here
For April 4th's Comment Please Click Here
For March 28th's Comment Please Click Here
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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