Bear Market Blues
March 6th, 2009
A bear market is one where news is construed in a pessimistic direction and where the same news recycled causes further falls. This week has shown that is still happening.
Yesterday Wall Street had another bad day. We were told the market was spooked by the auditors’ remarks on General Motors. Last year’s figures from that company showed it was in a dire financial position. The company sought taxpayer assistance last year. For weeks we have been told it needs more support. In the circumstances it would have been surprising if the auditors had given it a clean bill of health.
Markets have been worried by banks not paying dividends or reporting further problems with their loan books. Again, this should not have been a surprise. It has hardly been a well kept secret that a number of western banks are in serious financial difficulty. Why would investors expect good dividend payments or stunning profit figures in the circumstances?
In the UK the monetary authorities and government duly went to the next stage in their adoption of monetary easing. They took interest rates down another 50 basis points, and stated an intention to buy £75 billion of bonds from the private sector. Corporate bond prices moved little. Gilts did rise modestly. This news was potentially bullish for asset prices. It did not have a strong positive impact whilst the bad news did have a big impact on shares.
In Euroland the ECB followed suit with a 50 basis point interest rate cut, as the Central Bank there surveyed the sharp decline in German economic activity, adding to the woes of the area where the peripheral economies have been in stress and strain for some time.
Normally half point reductions in interest rates would themselves be both very newsworthy and positive for markets. The arrival of large additional buying power like the UK government bond buying programme would usually shift prices more strongly. Markets are being driven lower or held back by the growing disillusionment of a wide range of professional investors. Many of them have been trained in long bull markets, and are shocked that there can be such a savage decline in asset values. They see authorities in panic, trying a whole range of policy responses that have not been seen on this scale before, or even talked about at all. Suddenly, whatever the news or the state of the cycle, more of these investors want to hold more cash at the very point where the authorities take interest rates to virtually zero, undermining the returns on the last asset left standing.
We look at sustainable income as one of the important questions for longer term investors to consider. If you can buy shares or property on high yields with the prospect of income growth you should do well, and in the meantime even if capital values decline you can pay the bills from that income. One of the problems at the moment with assets like UK equities is how far will dividend cuts go, and how long will cuts last, before we can tell what true income yield the market is on and look ahead to income growth again. On a historic yield of 6% the market looks very cheap, but in practice it is on a much lower yield when you take account of the lack of dividend paying power in big sectors like the banks. Property too is now on attractive yields, but only if we could see the end of rental declines. Property experts are moving from a more positive to a less positive attitude, seeing that the high rents of 2007 could fall substantially before this property bear market is over.
We are still not recommending UK shares and property. We remain cautious, awaiting more signs that investors generally will start to look through this nasty recession to eventual recovery.
