In Between Days: All Or Nothing

by CC August 30, 2011 12:18 am • Commentary


The S&P 500 finished the first day of the week with a twelve handle at 1210.08, a 2.83% advance from Friday’s close. The final volume numbers aren’t in as I type this, but a preliminary look confirms that Irene was a major distraction for the equity trade. The VIX closed at 32.26, down 9.30%, scarcely in the caution zone above 30. The index is in the red year-to-date at -3.78%, which is 11.26% below the interim high set on April 29.

From an intermediate perspective, the index is 78.9% above the March 2009 closing low and 22.7% below the nominal all-time high of October 2007.


  • 9:00 a.m. ET: Case-Shiller home prices! For June, and the second quarter. 57 varieties of ugly.
  • 10:00 a.m.: Conference Board consumer confidence for August. Did somebody say ugly?
  • 2:00 p.m.: We get minutes of the FOMC meeting on August 9. That was the one with all the dissents, though the minutes will probably not capture all the nuances of the deciding banjo duel between Ben Bernanke and Richard Fisher.


  • One of those dissenters, Minneapolis Fed President Narayana Kocherlakota, will speak. Expect hawkishness.


Investors are paying less for equities than they have during every recession since Ronald Reagan was president amid growing concern that the economy is on the edge of another recession.

The Standard & Poor’s 500 Index has lost 13 percent in the past five weeks, sending its price-earnings ratio down to 12.9. That’s 3.5 percent less than the average multiple during the 10 contractions since 1949 and a level last reached in 1982, according to data compiled by Bloomberg.

Bears say valuations show the U.S. remains in the slowdown that began in 2007. Unlike under Reagan, when U.S. Federal Reserve Chairman Paul Volcker raised borrowing costs as high as 20 percent to combat inflation, interest rates are already near zero, leaving policy makers fewer tools to boost the economy, they say. Bulls say the ratios are so low because they reflect indiscriminate selling by investors convinced that any slowdown will turn into a repeat of the 2008 credit crisis.


Of course, left unsaid is what if analysts estimates are too high; Historically, the fundie community has overestimated earnings growth by a factor of 2X.

Also unsaid was the impact of recession on earnings. A 22% drop during a recession is hardly a Great Depression collapse; its not even a Great Recession drop. Indeed, that line of thinking ignores the overhang of housing, the deleveraging consumer, and tight credit conditions — all of which could easily persist for years to come.

Bottom line: The Reagan Recession came at the end of a 16 year bear market, plus benefited from Volcker breaking the back of inflation. The threat today is a Japan like deflationary spiral, including falling asset prices and an unwillingness for investors to buy up for a dollar of earnings.

In other words, a falling P/E could be evidence of an ongoing deflationary phase, and not proof that markets are cheap.

The New Yorker

In July, 2008, on the eve of the biggest financial crisis in memory, the European Central Bank did something both predictable and stupid: it raised interest rates. The move was predictable because the E.C.B.’s president, Jean-Claude Trichet, was an inflation hawk; he worried about rising oil and food prices and saw a rate hike as a way of tamping them down. But the move was also remarkably ill timed. The crisis was already under way, European economic growth had slowed to a crawl, and within a couple of months the global economy had collapsed, inflation had disappeared, and the E.C.B. was forced to slash interest rates, in an attempt to avert economic disaster. That July rate hike was like kicking the economy when it was down.

One might have thought that the E.C.B. would learn from the experience. No such luck. This year, Europe has been wrestling with high unemployment, slow growth, and a continuing debt crisis, with the economies of Portugal, Ireland, Italy, Greece, and Spain (the so-called PIIGS) struggling to avoid default. Given the situation, Trichet could have decided to keep interest rates where they were, as both the Federal Reserve and the Bank of England have done. Instead, the E.C.B. raised interest rates in April and, once more, in July. Again, as if on cue, European economic growth stalled and the continent’s debt crisis deepened, which has created problems for markets around the world.


The “real” (i.e., inflation adjusted) yields on 5 and 7 year Treasury bonds continue to be in negative territory.

This is an extraordinary situation that ought to be dominating the public debate. What does it mean? Well it means that right now it’s much cheaper for the government to finance some undertaking by borrowing the money and paying for it out of taxes five or seven years from now than to pay for it with taxes.


We consider ‘all or nothing’ days in the market to be days where the net daily A/D reading in the S&P 500 exceeds plus or minus 400.  Including today’s reading of 491, there have now been 12 all or nothing days in the last four weeks (20 trading days).  Going back to 1990, there has only been one other period where the frequency of all nothing days over a four week period was at or above the current level and that occurred in the Fall of 2008.