Thursday, January 17, 2008
It's Really Not As Bad
by David Yu
Despite reasons prescribed by everyone else, the market continues to discount a potential severe economic contraction at the conclusion of the war in Iraq (see my Sunday Chartmentary for more details). Both the Russell 2000 and the S&P SmallCap 600 had dropped more than 20% from their respective July 2007 highs. Small caps are therefore defined to have entered a bear market.
Before this market correction took shape, I was enthused to share my insights of a possible long-term market downtrend with everyone. It's the same enthusiasm I had back in 2004, when I began alerting my friends, colleagues, and clients of a possible peak housing market in my newsletter. I collected local MLS statistics, and I applied financial market technical analysis techniques to the local housing market. I understood how I might've become quite a nuisance to some of them, but I charged forward. It was fun, and I was on a mission then. Now that everyone's on the same page, I've suddenly found myself far less motivated to inscribe the same things over and over again. How many times and how many ways must we repeat that the economy's stalling, the housing market's folding, the stock market's falling?
But, you know what? Things really aren't as bad as they seem. People are still shopping, dining, and entertaining in the real world. It's still hard to find mall parking space sometimes. In the statistical world of finance, meanwhile, the banks are lending again. I've shown you the declining Libor and the Fed Fund's rate before. Here's the commercial lending.
Total commercial paper outstanding had an weekly increase of $35.46 billion last week, which was the largest increase in 2 years, since 1/11/2006. The surge in outstanding ABCP (Asset-Backed Commercial Paper) over the past 3 weeks was nothing short of spectacular. The total increase of more than $57 billion (see Chart 1) during this period was the largest I'd ever seen since I started tracking this data set. Credit had been easing.
Chart 1
But, corporations aren't the only ones getting the liquidity. Homeowners are getting the financing too. Last week, the Mortgage Bankers Association's Refi Application Volume Index had shot up to 3,575.50, which was the highest in 4.5 years, since August 2003 (see Chart 2).
Chart 2
And, this growing number of homeowner-applicants aren't getting any more ARM's. Instead, they're getting fixed rate mortgages. Last week, the ARM share of the total loan application volume, according to the MBA, plummeted to merely 9.2%, which was the lowest in more than 6 years (see Chart 3 below).
Chart 3
So, is it at all possible that the market might've overreacted? The Nasdaq TRIN (short for TRading INdex) Index seems to think so; it had encroached the extreme oversold territory of above 1.40 (see Chart 4). Yes, the market could stay oversold for an extended period in a bear market. But when the pendulum's swung too far, the ensuing reversion to the mean could get just as fierce.
Chart 4
This short-term upside statistical probability has made some of the beaten-down tech stocks look attractive even to this tech-phobic bear. It's unbelievable that some of the best run tech companies continue to take such a beating day after day. Intel (INTC) had lost 30% since December for improving its gross profit margin to 58% and net income by 51% from a year ago. That's insanity. I don't own INTC, but I sure feel sympathetic for its shareholders.
At today's closing price of $19.33, the world's biggest chip maker is selling at P/E of just 12 (based on high-end estimates). It's a very simple technical proposition. If the price held up at this level without violating March 2007 low (see Chart 5), then it's definitely a great buying opportunity for a good short-term 10%-20% profit or a long-term addition to one's portfolio.
Chart 5
And, that's all the time I've got folks. Have a wonderful weekend!
email: dyuguard-2@yahoo.com