Stock Market Train Wreck Continues

By: PaddyPowerTrader

With the impenetrable global financial market gloom showing no signs of abating, stocks took another pounding yesterday. Financials were crushed again and that will grab all the headlines today. Tabloid focus remains on the cosmic black hole that is AIG(reed) and their latest visit to the ATM (American Taxpayers Money), the prospects of Citibank ($1.20) becoming a sub $1 stock and the pared payouts at GE.

Also, note the performance of those stocks who have found themselves on the wrong side of the Obamalus i.e. drug makers and health insurers. The Morgan Stanley healthcare index has lost 26.4% over the past four days and the AMEX pharmaceutical index has dropped 12.3% over that same time span. Élan lost over 10% yesterday.

It will be interesting to see what buy side spin Kudlow and the other brokers at CNBC put on it if their parent needs a buyout. Much is being made this morning of the fact that US stocks are now at a level below the level when Greenspan gave his famous Irrational Exuberance speech on Dec 5th 1996. But in real terms of course, they are much lower, about a quarter, due to inflation ! And in case you were wondering, check out www.IsThisTheBottom.com .

Today's Market Moving Stories

• According to people in the know, the Obama administration is considering creating multiple investment funds to purchase bad loans and other distressed assets that lie at the heart of the financial crisis. No decision has been made on the final structure but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss. These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout. To encourage participation, the government would try to minimise risk for private investors, possibly by offering non-recourse loans. Mmmm, ALL THESE MONTHS LATER it sounds very like Hank Paulson 's three pager TARP 1 that got shot down in flames.
• Auto stocks are likely to be back in the limelight today with the release of US vehicle sales numbers. They are expected to print a 6.8m number for domestic and 9.4m for total vehicle sales.
• UK Chancellor Darling says that the UK Treasury has given the Bank of England “the levers” to start its own quantitative easing and “they may decide this month that it's appropriate to do so.”
• Shares in U.K. subprime lender Cattles slumped over 60% in early trading today after the group said it had suspended three senior executives at its Welcome Financial Services arm and that impairment policies at the division had been applied incorrectly.
• Davy's stockbrokers have cut their forecasts for both AIB and Bank of Ireland again. For AIB they see EPS of -182c this year and -99c in 2010, compared with -85c and -91c previously. For Bank of Ireland, they forecast March 2009 EPS drops to 11c, March 2010 goes from -60c to -123c and March 2011 goes from -60c to -70c. They have suspended share price targets as down here you are effectively valuing an option.
• Drinks group C&C is to pay a 6c dividend (full year 9c). The focus remains on cost savings and reorganisation at the Clonmel plant after a poor years trading. The outlook / guidance for 2009 was about €5m more than the market expected.
• The international building materials group, CRH, produced results in line with that guided at in the January trading statement, reflecting tough construction markets in the US and Europe. The group has decided to launch a 2 for 7 rights issue at €8.40 per share to raise €1.24 billion, representing a 39.3% discount to the closing price of €15.40. €500 million of the rights will be used to repay borrowings early. The remaining €738 million will provide increased headroom to fund strategically important and value enhancing acquisitions and used for global corporate purposes. The board believes that it is well positioned to benefit from attractive acquisition opportunities.
• In a sign of the times, The NYSE want to reduce market cap requirements and even suspend the de-listing rule for stocks that fall under a dollar.

ECB And Quantitative Easing
Reports are that the ECB is crafting a plan to lend directly to euro area businesses by purchasing CP and corporate bonds, reflecting approaches taken elsewhere. However, there is very little detail. The claim is that with the credit crunch showing no signs of easing and rates approaching very low interest rates the ECB 's mind is turning to other policy possibilities. This is entirely consistent with Trichet's claim that the ECB is capable of further “non-standard action” and comments from his Council colleagues that other actions are being studied.

The ECB won't necessarily announce anything this week, but if there is some truth to the story Trichet will find it difficult to point-blank deny it at this Thursday's press conference. But note that if there is some truth to this story Trichet will be extremely annoyed that it has been leaked. Expect an angry reception from him on Thursday.

Aside from this, market consensus is for a 0.5% cut from our chums in Frankfurt, which of course they should have done last month.

Those Pesky Price / Earnings Ratios
The cyclically-adjusted price earnings ratio for the financial sector has now fallen to 4.4 in the UK and to 4.7 in the US. That's way below their 15.2 and 16.0 averages, respectively, since the late 1970s. While financials remain in the limelight, the rest of the equity market is not, however, out of the woods.

Indeed, within the US market the cyclically-adjusted P/E ratios for the utility and consumer goods sectors are currently just 3% and 6%, respectively, below their long-run averages of the past thirty years or so. Healthcare and telecom stocks have also held up comparatively well relative to the broader market. Nonetheless, defensive sectors could yet be in for a rougher ride. Cyclically-adjusted P/E ratios for the utilities, telecoms and consumer goods sectors all fell considerably below their current level during the stock market crash earlier this decade. What's more, they plumbed lower depths during the last deep recession in 1982, when healthcare stocks were also noticeably cheaper.

In fact, if you take out the performance of financials, cyclically-adjusted P/E ratio for the U.S. market is currently 12.7. While this is around 40% below its long-run average, it is still well above the low of 8.0 hit in August 1982. I still think stocks have further to fall. My mid-year target for the S&P 500 remains 650.

Data Today
A day mercifully free of data of any consequence, but we will see ECB board members Weber, Liikanen and chairman JC Trichet speaking over here and Ben Bernanke and regional Fed President Lockhart speaking in the US.

Disclosures = None

By The Mole
PaddyPowerTrader.com

The Mole is a man in the know. I don’t trade for a living, but instead work for a well-known Irish institution, heading a desk that regularly trades over €100 million a day. I aim to provide top quality, up-to-date and relevant market news and data, so that traders can make more informed decisions”.

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