Chart of the day

Today's chart illustrates rallies that followed massive bear markets. For today's chart, a 'massive' bear market is defined as a decline of greater than 50%. Since the Dow's inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). Today's chart also adds the rally that followed the dot-com bust during which the Nasdaq declined 78%. One point of interest is that the current Dow rally has followed a path that is fairly similar to that of the Nasdaq rally that began in late 2002. It is also worth noting that each rally lasted from about 300 to 370 trading days and then moved into a trading range/choppy phase that lasted for a year or more. In the end, the current post-massive bear market rally is by no means atypical.

I continue to believe that we are in a bull market and not in a bear market rally.

Source:

Chart of the day

http://www.chartoftheday.com/20100416.htm?T

Chart of the Day -US Unemployment

Last week, the Labor Department reported that non-farm payrolls (jobs) decreased by 11,000 in November - the smallest decline since the recession began at the close of 2007. Temp-agency employment surged 52.4 k in November, the largest surge for 5 years; this metric is a quite reliable forward-looking indicator. These number are definitely positive but let's wait their confirmation in December and if they are not just part-time employees hired for the season's shopping.

Today's chart puts that decline into perspective by comparing job losses during the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1950-2006 (dashed blue line). As today's chart illustrates, the current job market has suffered losses that are more than triple as much as what occurs at the lows of the average recession/job loss cycle.


Sources:

Chart of the Day
http://www.chartoftheday.com/20091204.htm?T

Bureau of Labor Statistics
http://www.bls.gov/news.release/pdf/empsit.pdf

Chart of the Day

For some long-term perspective, today's chart illustrates the Dow adjusted for inflation since 1925.

When adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s.

The inflation-adjusted Dow is now a little more than double where it was at its 1929 peak and trades a mere 51% above its 1966 peak – not that spectacular of a performance considering the time frames involved.

It is also interesting to note that the Dow is up 54% from its March 9, 2009 low which is actually slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today.

Chart of the Day

Despite a host of concerns (weak economy, high unemployment, mounting foreclosures, geopolitical issues, etc.), the Dow made another post-crash high today. While the recent string of new rally highs is significant, it should be noted that the Dow is currently testing resistance (see red line).

Liquidity is still abundant and flowing to investing asset classes more than to the real economy. The dichotomy between the real economy and equity markets is widening.

Chart of the Day

Friday, the US Labor Department reported that nonfarm payrolls decreased by 263,000 in September. Note how the number of jobs has steadily increased (top chart) over the long-term. During the last economic recovery, however, job growth was unable to get back up to trend (first time since 1960). More recently, nonfarm payrolls have pulled away from its 50-year trend by a record percentage (bottom chart). The number of US jobs is currently at level first seen in early 2000.

Chart of the Day

Where do we stand with the US residential real estate?

Whilst the Case-Shiller index has improved over the past few releases, yesterday's single-family home price dropped 2.3% in August.The stock market sold off on the news.

today's chart illustrates the US median price of a single-family home over the past 39 years. Not only did housing prices increase at a rapid rate from 1991 to 2005, the rate at which housing prices increased – increased. That brings us to today's chart which illustrates how housing prices are currently 30% off their 2005 peak. In fact, a home buyer who bought the median priced single-family home at the 1979 peak has seen that home appreciate by a mere 4%. Not an impressive performance considering that three decades have passed. Over the past two months, single-family home prices have resumed their decline and remain (until proven otherwise) in an accelerated downtrend.

Chart of the Day

The US stock market continues it resilience, which surprises me since I do not see any additional steam coming through: all good news are priced and bad news ignored; this cannot last for ever, whilst I am not denying that markets can diverge from reality for a long time. Risks of a larger correction are only increasing.

Today's chart illustrates how the recent plunge in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the recent plunge in earnings and recent stock market rally, the PE ratio spiked and just peaked at 144 – a record high (Japanese style before the stock market crashed - I do not predict this, different time, different situation).

Currently, with 97% of US corporations having reported for Q2 2009, the PE ratio now stands at a lofty 129. At constant market prices, earnings have to be multiplied sixfold to go back to the historical average. Yes markets anticipate, but I doubt that 1) we will see earning recover by the magnitude withing 12-18 months and 2) that markets anticipate earning further away. Draw your own conclusions.

Chart of the Day

For some perspective on the current state of the labor market, today's chart illustrates the unemployment rate since 1948. Despite this month's encouraging decline, there was only one general period in the post-World War II era during which the unemployment rate was higher than the current rate of 9.4% (i.e. June 1982 - June 1983). It is worth noting, however, that a one-month decline in the unemployment rate (even a small decline) after a significant spike (i.e. the unemployment rate spikes by 1.5 percentage points or more) has tended to occur slightly after a recession had ended.

Chart of the Day

Today's chart presents the Dow divided by the price of one ounce of gold: it currently takes 9.8 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces it took back in 1999. When priced in gold, the US stock market has been in a bear market for the entire 21st century and is currently trading 78% off its 1999 highs. The recent five-month rally, however, has the Dow (priced in gold) putting in a significant test of resistance of an accelerated downtrend that began in mid-2007.

Note that in 1980, the ratio was approximately 1.5, i.e. +/- 6 times less than today.

Chart of the Day

Yesterday, US nonfarm payrolls (jobs) decreased by 467,000 in June. The headline came in at -467k compared with -350k consensus and the back revisions were negligible(+8k). The diffusion index fell to 28.6 from 31, which means that nearly three-quarters of the corporate sector is still in the process of shedding jobs. The 4 weeks average is continues it downward slope however. The stock market as well as commodities and energy declined sharply on the news.

Today's chart puts that decline into perspective by comparing job losses during the current economic recession (solid red line) to that of the last recession (dashed gold line) and the average recession from 1954-2006 (dashed blue line). The US have lost a record 9 million full-time jobs this cycle, more than triple the average in the context of a post-WWII recession, with over 2 million pushed onto part-time work. In fact, if this were an average recession/job loss cycle, the number of jobs would have begun to increase three months ago. This confirms the severity of the recession, but do not forget that employment data is a lagging indicator.
Source:

Bloomberg: July 03, 2009
http://www.bloomberg.com/apps/news?pid=20601110&sid=aNWsvYFLUCjA

Gluskin Sheff: July 02, 2009
Market and data musings - David A. Rosenberg
http://www.gluskinsheff.com/us-intl/musings/

Chart of the Day

For some long-term perspective, today's chart illustrates the Dow adjusted for inflation since 1925.

When adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. Also, the inflation-adjusted Dow is now less than double where it was at its 1929 peak and trades a mere 30% above its 1966 peak – not that spectacular of a performance considering the time frames involved.

It is also interesting to note that the Dow is up 30.7% from its March 9, 2009 low which is actually slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today.

Despite globally better news on the economic and financial front (well... let's see that will happen to commercial real estate), I believe that we have entered a period of market correction after a superb performance: look beyond the Western world tropism, emerging (leading?) markets (MSCI index) have increased by +/- 80% from through (28 October) to recent peak (2 June)! Since, they decreased by 8%.

Chart of the Day

Together with collapsing EPS (down 90% over the past 20 months), the S&P 500 PER has zoomed up to levels last seen in Japan in the 1980's.

From 1936 into the late 1980s, the PE ratio tended to peak in the low 20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s) and the dot-com bust (early 2000s). As a result of the current plunge in earnings and the recent 2.5 month stock market rally, the PE ratio has spiked to the low 120s – a record high.

Either the perspective on corporates earnings has to dramatically and quickly improve, or the stock market has to adjust quite sharply; exhuberance cannot last for ever.

Chart of the day

The magnitude of the decline of the 12-month, as-reported S&P 500 earnings is unprecedented (the data goes back to 1936) with 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1 2009).

Real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.

Chart of the day

After the inflection point in the early 2000's, the Dow/Gold has entered in a new phase since 2006-07 and the downward tunnel is accelerating.

This reflects not only the current financial and economic crisis but also the remonetization of gold in the eyes of investors.

European central bankers do not like gold (at the a cost of over $40 billion - see previous post), but they cannot continue acting without noticing this.

I believe that gold is going to decisively break the $1000/oz by year end. Let's tuned on.

Chart of the day

Interesting chart from Chart of the Day, showing that the S&P500 is testing the resistance of its newly established trend channel in October 2008 following the September meltdown and is currently testing resistance.

Don't forget that, whilst the US market leash effect on the rest of the world cannot be severed yet, it is not leading the recovery: emerging markets are, and China in particular, that display double digit growth since the start of the current rally early March vs. single digit for most developed markets.