Wednesday, August 29, 2007

The Fat Lady hasn’t sung yet and may not for a while.

The markets were surprised yesterday at the release of the August Fed Open Market Committee meeting notes. With the market off 150 points markets, they were thinking about interest rate cuts and the Fed announces that it was discussing a rate increase two weeks ago. So, which one, the markets or the Fed is out of sink? As I said last week, I do not think short of a major meltdown the Fed will lower interest rates at the September meeting. Yesterdays almost 300-point decline could be considered a melt down in some places, but I do not think it is enough in its self to move the Fed. Keep in mind that almost half the decline in the markets yesterday came after the Fed release.

Last week people were more upbeat that the correction was over and the markets were heading higher again. The train is leaving the station you had better get on board or the opportunity is going to leave you behind. It appears to me that the train yesterday was at least diverted to a siding or derailed. I have no doubt that the markets will have wild swings up and down, but I do believe the direction of the market has shifted to down and will be down for some period.

By my guess, about 25% of the S&P 500 stocks are related to the housing or credit sector. I do not expect the third or fourth quarter earnings to be good and therefore they will bring down the total earnings for the S&P 500. If the earnings will decline then what is the right earning multiple (price) for the market? Something less than what it is today. It going to be hard for the markets to go up on a sustained basis given the changes in process of re-pricing of assets classes it has to deal with at least until the end of the year.

What is going on in both the credit and equity markets is re-pricing the value of assets. We have not yet figured out what the right price should be and until we do, prices will be volatile.

Dan Perkins

Thursday, August 23, 2007

Have we made the turn in the markets?

As I look at the recovery attempts trying to made, by the markets this week, I am reminded of the sophisticated concept called, “The Dead Cat Bounce”. This very descriptive, if not gruesome phrase, referrers not to how high a dead cat will bounce if you throw it, but rather as to how far the markets will rebound after a significant correction like the one just completed.

Investor psychology is a very fragile thing. When the markets are going up anybody can make money and believe they have the ability to do so, but let the markets turn vicious and investors panic. I was talking to a client recently about the volatility and the decline of the markets and the impact of people's portfolios. He made the comment that it is much easier to recover from a decline of 1% to 2 % than that of 10% or more, seems obvious but most people do not think that way about what it takes to recover from a significant decline.

The 40% decline in the markets around the turn of the century lost a great many people a significant amount of their investments and many have yet to recover their loss. This most recent decline should remind people that stocks do have risk and you can loose money. The concept of risk is what he correction was all about, quantifying the risk that you are taking with your money has now changed.

I am being asked what I think the next move might be for the markets? I think it is possible to suck a great deal of money back to the market from the sidelines by the markets moving back to the previous high around 14,000 on the Dow Jones. It is possible that this could happen over the next 30 days but I would be concerned about the markets prospects if in fact we do go back to the previous high very quickly.

If we go back to the 14,000 level and can’t move strongly through that level then I think the markets could see a decline in October greater than the decline experienced in early August.
No one knows for sure the outcome of the September Fed meeting. The futures markets are strongly suggesting that the Fed will cut the important Funds Rate by 50 basis points. This predictor has been very accurate within 30 days of a Fed meeting. I think there is chance that unless something dramatic happens the Fed will not cut the funds rate in September. This disappointment may well be the trigger the sets the market into a significant decline.
Dan Perkins

Wednesday, August 22, 2007

How bad is the real estate market?

I just received a flyer from a realtor on Sanibel Island Florida were we recently purchased a home. In the letter she was talking about the state of the real estate market on the island and indicated that there is currently over 12 months of inventory on the market today. Prices are down and she thinks the market is holding up well we compared to the rest of Florida. She is advising possible sellers to get their property listed as it may well take 12 months to sell if it’s priced right. Here are some numbers:

Condo’s Sold:
2005 232
2006 143
2007 66
Pending 7

Houses :

2005 266
2006 156
2007 104
Pending 21

I will be posting over the next few days some of my thoughts over the last year that I have published in my printed newsletter so you can understand why I still feel negative about the prospects of residential real estate.

I don’t believe that we are even half way through this correction. With the price of housing on a national level down just under 3% on a year over year basis we need more damage before we can see a positive move up in real estate prices. I realize that it seems impossible that we could see real estate prices, on a national basis, fall another 10% before things get better.

Check back in a few days and see what’s on the Blog.
Dan Perkins

Monday, August 20, 2007


Yields on U.S. Treasury bills fell the greatest amount in almost two decades. Three-month yields dropped the most since the stock market crash of 1987 and more than in the wake of the Sept. 11, 2001, terror attacks in the U.S.

The three-month Treasury bill yield fell 0.66 percentage point to 3.09 percent as of 5:06 p.m. Monday August 20, in New York. This represents the most decline since Oct. 20, 1987, when the yield fell 85 basis points on the day the stock market crashed, and eclipses the drop of 39 basis points on Sept. 13, 2001, the day the Treasury market reopened after the attacks. The yield has fallen from 4.69 percent on Aug. 13. The bills yielded about 7 percent in mid-October 1987 and 3.2 percent in the days before the September 2001 attacks.

Money market funds, considered among the safest instruments, have seen redemptions based on concern that money funds, which hold $2.5 trillion, have invested in risky collateralized debt obligations backed by subprime mortgage loans.

Institutional investors added $39.7 billion from Aug. 14 to Aug. 17 to government securities only money market funds, according to Connie Bugbee, managing editor of the Money Fund Report newsletter in Westborough, Massachusetts.

The Federal Reserve Bank of New York said in a statement it won't re-invest the $5 billion of Treasury bill holdings maturing on Aug. 23 through its System Open Market Account to give it ``greater flexibility'' to manage reserves. It is the first time the Fed redeemed the bills since the 2001 terrorist attacks.

Will the next move by the Fed in September be a cut of 25 basis points, 50 basis points or surprise the markets and leave interest rates alone?

The markets have priced in a 75% chance of a downward move of 25 basis points. Clearly the 90-day T-BILL is well below the current Fed Funds rate of 5.25%. My concern is that as the Fed was increasing interest rates it moved in 25 basis points increments. A move of 50 basis points I think would spook the markets that the Fed is panicked about the risk to the economy.

As I said on Friday I was concerned about the yield on he 90 day T-Bill in such a strong recovery. I’m more concerned today at just over 3%.

Friday, August 17, 2007

Is the Fat Lady a little happier?

I felt that the rally we saw on Friday, in reaction to the Fed cutting the discount rate, would fizzle after options expiration at 2:30 on Friday. While the market was off its high for the day it still closed up strong.

Has the Fed move on interest rates changed the direction of the markets? Perhaps for a short-term time period it may well have changed the momentum. What concerns me is the fact that the yield on the 90-Day T-Bill was around 3.88% at the close on Thursday and at the same level at the close on Friday. During the day on Friday the 90 Day Bill yield got to almost 4.10%,

The yield for the 90-Day T-Bill is based on the demand for the 90-Day T-Bill. It is clear that some significant number of investors were taking money out of the stock market (perhaps more global investors than Americans) and buying T-Bills. If the stock market rally had legs then I would have expected the yield of the 90-Day T-Bill to rise as investors were selling Bills to buy stocks.

Dan Perkins

It isn't over till the fat lady signs

Hope sprang eternal this mornings opening bell on Wall Street. As the day has progressed the momentum has wained and the reality of the fact that nothing has really changed began to set in.

It would not suprise me at all if by the end of the trading day today the market will have lost ground(closed at a loss).

I believe that most of the unward movement in stock prices was the result of short coverings and after 2:30 we will see the real tren in the market.