Magnum has obtained approval to start a new 4-digit game incorporating a jackpot element by end-09. Mildly negative to BToto and mildly positive to Tanjong Plc's long-term prospects. BToto is still a BUY at lower prices
Events
. Magnum has obtained approval from all relevant authorities to launch a new 4-digit game incorporating a jackpot element by end-09.
Impact
. Based on an educated guess of Magnum's game variant (no official details yet) and taking into account Tanjong's likelihood to follow suit to launch a similar product next year, these new games would only modestly dent BToto's longer-term earnings. Our assessment assumes the following for the new games jackpot prizes: a) RM2m start up, b) reasonably high prize limits (e.g. RM20m), and c) lesser popularity for BToto's jackpot games, and hence, slower snowballing of prize quantum. The new games would serve to boost the legal number forecasting market size as illegal bookies do not have the sophistication nor the capital to replicate the jackpot games.
. Modest earnings dampener to BToto, <5% to earnings. But, our sensitivity analysis suggests that losing a jackpot revenue which is equivalent to 5% of gross number forecasting receipts could cause BToto's profit to fall by 9%. Nevertheless, the impact is cushioned by BToto's extensive outlet network (681 outlets, the largest among three NFOs) and jackpot game variants (6).
. A significant positive for Multi-Purpose Holdings (MPHB Mk/NOT
RATED), Magnum's holding company. Magnum's new game variant could potentially raise MPHB's earnings by 10-15%, assuming: a) revenue enhancement of 10-15%, b) prize payout ratio of 55% for jackpot games vs 65% for 4D games, and c) Magnum accounts for 80% of PHB's net profit. Modest benefits to Tanjong Plc (TJN MK/NOT RATED) which we expect to eventually launch a new game variant in 2011 (after it undergoes a system upgrade).
Valuation/Recommendation. BToto: Maintain BUY (on weakness) and DCF-based target price of RM4.90/share (cost of equity of 8.9%, terminal growth of 1%) although the stock lacks a near-term re-rating catalyst. Among the other two NFO operators, Tanjong has more compelling valuations - 8.7x FY11F (ending April) consensus earnings vs Magnum's 2010F PE of 12.4x. Even after imputing earnings enhancements from a new game variant for each company, Tanjong still features a more undemanding PE multiple.
Tuesday, July 28, 2009
Tuesday, July 21, 2009
J.P. Morgan optimistic about emerging market stocks
By Chloe Shea, | 21 July 2009
The US investment bank believes the worst is over for China, Taiwan and Korea and is bullish on other Asian emerging markets as well.
"Best ever bull" is a phrase that was used by J.P. Morgan's Adrian Mowat in a recent press biefing to describe the economic outlook for emerging markets. In contrast to the skeptics who are questioning the sustainability of the recent stock market rebound, the bank's head of equity strategy for Asia-Pacific views the current improvement in various stock market indices
as the beginning of an ongoing expansion.
In line with its optimism, J.P. Morgan recently revised up several of its growth estimates. Its forecast for third quarter US GDP growth now stands at 2.5%, up from its previous estimate of 1% and significantly higher than the consensus estimates of 0.5%. For 2010, J.P. Morgan's growth forecast is 2.8%, while consensus estimates are at 1.8%. Mowat suggested that the
latest economic indicators are signs that the global economy is getting back on the right track.
Indicators such as the US Institute for Supply Management Index (ISM) and the Purchasing Managers Index (PMI) are encouraging, added Mowat. ISM, which measures manufacturers' activity levels, increased by 17% from November 2008 to May 2009. And J.P. Morgan's global manufacturing PMI, which indicates levels of factory production, rose to 46.7 in June, its highest level since Lehman Brothers declared bankruptcy in September 2008. Mowat believes the improvements are driven by more stable domestic demand and inventory contraction in emerging markets, which are taking the lead when it comes to the global recovery. In China, the government's fiscal stimulus package and monetary policies are having a positive effect and
thus consumer spending and infrastructure investments have started to boom. J.P. Morgan expects equities linked to China's domestic consumer sectors, banks and utilities, as well as construction stocks to continue to lead the stock market rally.
Countries that are net exporters, such as Taiwan and Korea, are also favoured by J.P. Morgan. The bank says the strong rally in the Taiwanese stock market is driven by liquidity flows resulting from tax cuts, government policies and most importantly, improving cross-strait relations. In Korea, positive outlooks for retail and auto businesses are being supported by favourable government policies. Low inventory levels suggest an increase in production that can boost the possibility of a healthy economic recovery. Both countries' currencies also remain weak vis-à-vis the US dollar ,suggesting exporters will benefit from larger export orders,
J.P. Morgan believes.
Looking at the economies of Asian emerging markets, Mowat suggests a decline in risk premiums, lower risk-free rates and trade recovery are the three main drivers for robust rallies. He argues that central banks in the US and China are unlikely to raise interest rates in the short term as businesses are starting to benefit from lower rates. Moreover, central banks have learned "a painful lesson" from Japan, where the Japanese finance ministry raised interest rates sharply in 1989 to tackle the housing bubble, but ended up with a significant crash in the domestic stock market.
But Mowat sees risks ahead as well. Commodity prices have been rising, which could fuel inflation and harm the development of emerging markets which are large consumers of commodities. There are also concerns about commodities overheating and eventually create a bubble similar to what happened in July 2008, when speculators pushed up commodity prices and ultimately led to a correction across asset classes.
In addition, Mowat highlights a concern that the US economy will continue to underperform and result in a drag effect on the rest of the world. In the US, the unemployment rate is soaring - it reached 9.5% in June, which was its highest level in 26 years. Falling real estate prices are
encouraging higher savings and consumer spending is suffering, which could delay a recovery.
Economic indicators in China have already turned positive, Mowat said, and added that Korea, India, Indonesia and Thailand are also showing positive signs. Among other Asian markets, Malaysia's economic outlook remains gloomy with GDP growth declining sharply. J.P. Morgan is conservative about Malaysia's economic recovery and says it remains uncertain whether Prime
Minister Najiib Razak will be able to deliver effective fiscal stimulus to the market. Singapore and Hong Kong are expected to have a slow recovery along with other developed countries. Their large exposure to global trade and unsatisfactory employment numbers will possibly have a negative impact on their markets, J.P. Morgan commented. So, whether the momentum of growth in Asia's emerging markets can spread across borders is still a question
mark.
The US investment bank believes the worst is over for China, Taiwan and Korea and is bullish on other Asian emerging markets as well.
"Best ever bull" is a phrase that was used by J.P. Morgan's Adrian Mowat in a recent press biefing to describe the economic outlook for emerging markets. In contrast to the skeptics who are questioning the sustainability of the recent stock market rebound, the bank's head of equity strategy for Asia-Pacific views the current improvement in various stock market indices
as the beginning of an ongoing expansion.
In line with its optimism, J.P. Morgan recently revised up several of its growth estimates. Its forecast for third quarter US GDP growth now stands at 2.5%, up from its previous estimate of 1% and significantly higher than the consensus estimates of 0.5%. For 2010, J.P. Morgan's growth forecast is 2.8%, while consensus estimates are at 1.8%. Mowat suggested that the
latest economic indicators are signs that the global economy is getting back on the right track.
Indicators such as the US Institute for Supply Management Index (ISM) and the Purchasing Managers Index (PMI) are encouraging, added Mowat. ISM, which measures manufacturers' activity levels, increased by 17% from November 2008 to May 2009. And J.P. Morgan's global manufacturing PMI, which indicates levels of factory production, rose to 46.7 in June, its highest level since Lehman Brothers declared bankruptcy in September 2008. Mowat believes the improvements are driven by more stable domestic demand and inventory contraction in emerging markets, which are taking the lead when it comes to the global recovery. In China, the government's fiscal stimulus package and monetary policies are having a positive effect and
thus consumer spending and infrastructure investments have started to boom. J.P. Morgan expects equities linked to China's domestic consumer sectors, banks and utilities, as well as construction stocks to continue to lead the stock market rally.
Countries that are net exporters, such as Taiwan and Korea, are also favoured by J.P. Morgan. The bank says the strong rally in the Taiwanese stock market is driven by liquidity flows resulting from tax cuts, government policies and most importantly, improving cross-strait relations. In Korea, positive outlooks for retail and auto businesses are being supported by favourable government policies. Low inventory levels suggest an increase in production that can boost the possibility of a healthy economic recovery. Both countries' currencies also remain weak vis-à-vis the US dollar ,suggesting exporters will benefit from larger export orders,
J.P. Morgan believes.
Looking at the economies of Asian emerging markets, Mowat suggests a decline in risk premiums, lower risk-free rates and trade recovery are the three main drivers for robust rallies. He argues that central banks in the US and China are unlikely to raise interest rates in the short term as businesses are starting to benefit from lower rates. Moreover, central banks have learned "a painful lesson" from Japan, where the Japanese finance ministry raised interest rates sharply in 1989 to tackle the housing bubble, but ended up with a significant crash in the domestic stock market.
But Mowat sees risks ahead as well. Commodity prices have been rising, which could fuel inflation and harm the development of emerging markets which are large consumers of commodities. There are also concerns about commodities overheating and eventually create a bubble similar to what happened in July 2008, when speculators pushed up commodity prices and ultimately led to a correction across asset classes.
In addition, Mowat highlights a concern that the US economy will continue to underperform and result in a drag effect on the rest of the world. In the US, the unemployment rate is soaring - it reached 9.5% in June, which was its highest level in 26 years. Falling real estate prices are
encouraging higher savings and consumer spending is suffering, which could delay a recovery.
Economic indicators in China have already turned positive, Mowat said, and added that Korea, India, Indonesia and Thailand are also showing positive signs. Among other Asian markets, Malaysia's economic outlook remains gloomy with GDP growth declining sharply. J.P. Morgan is conservative about Malaysia's economic recovery and says it remains uncertain whether Prime
Minister Najiib Razak will be able to deliver effective fiscal stimulus to the market. Singapore and Hong Kong are expected to have a slow recovery along with other developed countries. Their large exposure to global trade and unsatisfactory employment numbers will possibly have a negative impact on their markets, J.P. Morgan commented. So, whether the momentum of growth in Asia's emerging markets can spread across borders is still a question
mark.
Tuesday, July 14, 2009
Sanguine on Tanjong's growth strategy
TANJONG plc's (RM14.40) earnings results for the first quarter of its financial year ending January 2010 showed little signs of pressure from the global economic downturn.
The company reported a net profit of RM191.4 million for the three-month period from February to April 2009 — recovering smartly from the immediate preceding quarter in the absence of one-off items.
Tanjong's results underscore the resilience of its key businesses, which we believe will remain steady for the remainder of the financial year, barring unforeseen events or extraordinary charges.
Growth prospects at cheap valuations
We estimate net profit to grow to RM654.5 million in FY10, equivalent to about 162.3 sen per share. This prices its shares at a forward P/E multiple of only 8.8 times - making Tanjong one of the most attractively valued big cap blue-chip stocks on the local bourse.
Shareholders will also earn higher-than-market average yields. We estimate dividends will rise to RM1 per share in the current financial year, on the back of higher earnings. This will translate into gross yield of 7% at the current share price.
Most importantly, we believe that Tanjong remains committed to pursuing a strategy of growth. The company is actively on the lookout for new investing opportunities, particularly within the power generation sector.
It has a strong foothold in developing countries such as Egypt, Bangladesh and Pakistan where power consumption is expected to grow rapidly. Hence, we are sanguine of Tanjong's future growth prospects.
Power rebounds sans one-off items
Tanjong's three local power plants generated EBIT (operating earnings before interest and tax) of roughly RM118 million in 1QFY10, almost double that in the previous corresponding quarter. This was due to the absence of one-off charges - earnings in 1QFY09 were hurt by about RM35 million in development costs written off as well as losses from unscheduled outage.
Meanwhile, earnings from Tanjong's overseas power generating subsidiaries were broadly in line with expectations, EBIT increasing by about 4% year-on-year (y-o-y) to RM147 million. Pre-tax profit from its power associates was also higher at RM15.4 million.
Going forward, contributions from the power business are not expected to vary significantly from that recorded in 1QFY10. Returns from all the power plants are backed by long-term power purchase agreements.
EBIT for its power subsidiaries are estimated to total some RM1 billion for FY10, up from RM793.7 million in the previous financial year. Meanwhile, profit before tax from its power associates is estimated to hold steady at around RM59 million.
Gaming holds steady
Similarly, earnings from the NFO business should also remain fairly steady for the rest of the year. We estimate about 175 draws in total for FY10, including draws carried forward from the previous financial year, and sales per draw growth of about 1.5%.
Although quarterly earnings would fluctuate depending on the luck factor, prize payout should average out at around 65%-66%. Operating profit is estimated at roughly RM239 million in FY10, similar to that in FY09. On the other hand, the RTO business is expected to remain in the red.
Menara Maxis fully occupied
Tanjong's property earnings, primarily rental income from Menara Maxis, too are not expected to see any material volatility. The building achieved full occupancy over the past few years and is expected to remain so for the foreseeable future. The property arm contributes EBIT of over RM40 million a year to Tanjong's coffers.
Losses narrow for Tropical Islands
The Tropical Islands resorts business should fare better in the current financial year. The resorts achieved positive EBITDA (earnings before interest, tax and depreciation) in FY09 on the back of higher visitor numbers and average spending per visitor. This follows the completion of additional facilities under the second phase of development in July 2007.
We estimate operating losses will narrow to about RM20 million in the current financial year, down from losses of RM33.9 million in FY09. However, a significant turnaround is only likely once the last phase of the project takes shape.
Tanjong is partnering with third parties who will independently finance and develop on-site accommodation facilities. This would expand its target market, which currently consists primarily of day-trippers, beyond the local geographical area. The availability of overnight accommodation will also lengthen the duration of stay and raise the average spending per visitor.
The initial phase of the development is targeted for completion by end-2011. Elsewhere, the company will see full-year contribution from TGV Cinemas for FY10 after completing the acquisition of the remaining 50% equity stake. It plans to increase the total number of screens to 114 in the current year, up from 100 at end-FY09.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
The company reported a net profit of RM191.4 million for the three-month period from February to April 2009 — recovering smartly from the immediate preceding quarter in the absence of one-off items.
Tanjong's results underscore the resilience of its key businesses, which we believe will remain steady for the remainder of the financial year, barring unforeseen events or extraordinary charges.
Growth prospects at cheap valuations
We estimate net profit to grow to RM654.5 million in FY10, equivalent to about 162.3 sen per share. This prices its shares at a forward P/E multiple of only 8.8 times - making Tanjong one of the most attractively valued big cap blue-chip stocks on the local bourse.
Shareholders will also earn higher-than-market average yields. We estimate dividends will rise to RM1 per share in the current financial year, on the back of higher earnings. This will translate into gross yield of 7% at the current share price.
Most importantly, we believe that Tanjong remains committed to pursuing a strategy of growth. The company is actively on the lookout for new investing opportunities, particularly within the power generation sector.
It has a strong foothold in developing countries such as Egypt, Bangladesh and Pakistan where power consumption is expected to grow rapidly. Hence, we are sanguine of Tanjong's future growth prospects.
Power rebounds sans one-off items
Tanjong's three local power plants generated EBIT (operating earnings before interest and tax) of roughly RM118 million in 1QFY10, almost double that in the previous corresponding quarter. This was due to the absence of one-off charges - earnings in 1QFY09 were hurt by about RM35 million in development costs written off as well as losses from unscheduled outage.
Meanwhile, earnings from Tanjong's overseas power generating subsidiaries were broadly in line with expectations, EBIT increasing by about 4% year-on-year (y-o-y) to RM147 million. Pre-tax profit from its power associates was also higher at RM15.4 million.
Going forward, contributions from the power business are not expected to vary significantly from that recorded in 1QFY10. Returns from all the power plants are backed by long-term power purchase agreements.
EBIT for its power subsidiaries are estimated to total some RM1 billion for FY10, up from RM793.7 million in the previous financial year. Meanwhile, profit before tax from its power associates is estimated to hold steady at around RM59 million.
Gaming holds steady
Similarly, earnings from the NFO business should also remain fairly steady for the rest of the year. We estimate about 175 draws in total for FY10, including draws carried forward from the previous financial year, and sales per draw growth of about 1.5%.
Although quarterly earnings would fluctuate depending on the luck factor, prize payout should average out at around 65%-66%. Operating profit is estimated at roughly RM239 million in FY10, similar to that in FY09. On the other hand, the RTO business is expected to remain in the red.
Menara Maxis fully occupied
Tanjong's property earnings, primarily rental income from Menara Maxis, too are not expected to see any material volatility. The building achieved full occupancy over the past few years and is expected to remain so for the foreseeable future. The property arm contributes EBIT of over RM40 million a year to Tanjong's coffers.
Losses narrow for Tropical Islands
The Tropical Islands resorts business should fare better in the current financial year. The resorts achieved positive EBITDA (earnings before interest, tax and depreciation) in FY09 on the back of higher visitor numbers and average spending per visitor. This follows the completion of additional facilities under the second phase of development in July 2007.
We estimate operating losses will narrow to about RM20 million in the current financial year, down from losses of RM33.9 million in FY09. However, a significant turnaround is only likely once the last phase of the project takes shape.
Tanjong is partnering with third parties who will independently finance and develop on-site accommodation facilities. This would expand its target market, which currently consists primarily of day-trippers, beyond the local geographical area. The availability of overnight accommodation will also lengthen the duration of stay and raise the average spending per visitor.
The initial phase of the development is targeted for completion by end-2011. Elsewhere, the company will see full-year contribution from TGV Cinemas for FY10 after completing the acquisition of the remaining 50% equity stake. It plans to increase the total number of screens to 114 in the current year, up from 100 at end-FY09.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.
Wednesday, July 8, 2009
Unemployment, Not the Stock Market, Distinguishes a Recession From a Depression by Claus Vogt
What are the most important and enduring characteristics of the Great Depression? And what should we monitor to determine how severe today's situation really is?
The stock market will give important clues. But the economy, especially unemployment, defines depressions.
That should be obvious. However, after the stock market rallied off its March 2009 low, the media and many pundits seem to be fixated on the financial markets to determine the severity of the crisis and to call its end.
To see if the bulls' hopeful thinking holds water, let's go back to 1929 and have a look at the stock market's behavior during those horrific times ...
The Bear Market Rally of 1929/30
Yes, there was a spectacular stock market crash in 1929. But a stock market crash does not a depression make. Remember 1987? There was a very similar crash ... but no depression. Not even a mild recession.
The crash of 1929 proved to be only the prelude to further heavy losses in 1930-1932. After the initial crash from 381 to 199, a huge rally emerged. Prices rose all the way back to 294 for a 48 percent bear market rally. Hence initial losses were roughly cut in half!
The stock market crash on Black Thursday, October 24, 1929, was just the beginning of the carnage to hit Wall Street.
The stock market crash on Black Thursday, October 24, 1929, was just the beginning of the carnage to hit Wall Street.
Unfortunately, investors didn't recognize this rally as a selling opportunity. Instead, they listened to the bullish advice of Wall Street pundits and the government's declarations that the worst was over and prosperity was right around the corner.
As we all know, this optimism proved to be, well, premature. The huge rally turned out to be just a bear market rally ... soon the market started to tank again.
First, stocks tumbled back to the crash-lows, where a second and shallower rally emerged. Then after this bout of hope had evaporated, the market cascaded lower for another two years. From the high during the summer of 1929, the losses mounted to a staggering 89 percent.
Now, let's fast forward to ...
The Bear Market Rally of 2009
After having lost more than 50 percent off its October 2007 high, a huge stock market rally started in March 2009. This rally amounted to 43 percent and had all the typical characteristics of a counter trend move. Especially noteworthy was the low and diminishing volume, which is typical bear market rally behavior.
Just as in 1929, this rally led Wall Street and official sources to conjure economic optimism. This is not a coincidence ... the stock market and sentiment measures are highly correlated. But rising sentiment does not forecast a betterment of the economy. Instead a rising stock market foregoes rising optimism.
Now it looks like this bear market rally is over ...
There is technical support around 880 in the S&P 500. A break below this mark would ignite another sell signal and confirm the end of the rally. The next support level is around 800. If this line doesn't hold, it's back to the March lows. And if these lows do not stop the slide, a very important message concerning the economy will have been given: "Depression ahead."
I think that the next few weeks and months will not only be very interesting, but also very important. Yet hardly anybody on Wall Street seems to think about the possibility of a new, stock market low.
They should. And so should you. Remember ...
Employment Is Much More Predictive
Of Recessions and Depressions Than the Stock Market ...
Since the start of this crisis, world industrial production and world trade have been following the pattern of the 1930s very closely. But unemployment is the most important indicator to distinguish a recession from a depression.
Year Unemployment Rate
1929 3.2%
1930 8.7%
1931 15.9%
1932 23.6%
1933 24.9%
1934 21.7%
1935 20.1%
1936 16.9%
Take a look at the table on the right to see the unemployment situation during the Great Depression.
Where do we stand now concerning this all important indicator?
The official U.S. unemployment rate rose from the cycle low of 3.4 percent in 2007 to 9.5 percent as of June 2009.
But the Bureau of Labor Statistics computes a second unemployment rate. This broader measure includes all forms of job market slack and is a whopping 16.5 percent. Yes, one in six Americans is unemployed or underemployed right now. That's a horrible number! And it will not go away soon.
If you look at the chart below, showing the civilian employment to population ratio, you can see that the downtrend had already started in 2000. Then the stock market bubble burst. This was just the first act in a much longer drama ...
Civilian Employment Population Ratio
The bursting of the real estate bubble was act two. And more is sure to follow. California's default may be a harbinger of what the third act may look like.
The second chart shows the median duration of unemployment. Here you can see how long it takes Americans to find a job ...
Median Duration of Unemployment
These statistics clearly show the severity of the current situation. Here you can easily see why this is not a garden variety post-WWII recession, but something very different.
The current plunge is structural, not cyclical. Most of the jobs lost will never come back. The real estate bubble severely distorted the economic structure. Now the world economy has a lot of rebalancing to do. And this process will last much, much longer than the "green shoots" crowd deems possible.
My suggestion for you today is to watch the stock market for hints of the beginning of the next stage of this crisis. Watch unemployment and world trade as reliable indicators of the severity of the slump. And then watch California to get a feel for the next important act of this economic and financial drama: The government funding crisis and all its related repercussions.
The stock market will give important clues. But the economy, especially unemployment, defines depressions.
That should be obvious. However, after the stock market rallied off its March 2009 low, the media and many pundits seem to be fixated on the financial markets to determine the severity of the crisis and to call its end.
To see if the bulls' hopeful thinking holds water, let's go back to 1929 and have a look at the stock market's behavior during those horrific times ...
The Bear Market Rally of 1929/30
Yes, there was a spectacular stock market crash in 1929. But a stock market crash does not a depression make. Remember 1987? There was a very similar crash ... but no depression. Not even a mild recession.
The crash of 1929 proved to be only the prelude to further heavy losses in 1930-1932. After the initial crash from 381 to 199, a huge rally emerged. Prices rose all the way back to 294 for a 48 percent bear market rally. Hence initial losses were roughly cut in half!
The stock market crash on Black Thursday, October 24, 1929, was just the beginning of the carnage to hit Wall Street.
The stock market crash on Black Thursday, October 24, 1929, was just the beginning of the carnage to hit Wall Street.
Unfortunately, investors didn't recognize this rally as a selling opportunity. Instead, they listened to the bullish advice of Wall Street pundits and the government's declarations that the worst was over and prosperity was right around the corner.
As we all know, this optimism proved to be, well, premature. The huge rally turned out to be just a bear market rally ... soon the market started to tank again.
First, stocks tumbled back to the crash-lows, where a second and shallower rally emerged. Then after this bout of hope had evaporated, the market cascaded lower for another two years. From the high during the summer of 1929, the losses mounted to a staggering 89 percent.
Now, let's fast forward to ...
The Bear Market Rally of 2009
After having lost more than 50 percent off its October 2007 high, a huge stock market rally started in March 2009. This rally amounted to 43 percent and had all the typical characteristics of a counter trend move. Especially noteworthy was the low and diminishing volume, which is typical bear market rally behavior.
Just as in 1929, this rally led Wall Street and official sources to conjure economic optimism. This is not a coincidence ... the stock market and sentiment measures are highly correlated. But rising sentiment does not forecast a betterment of the economy. Instead a rising stock market foregoes rising optimism.
Now it looks like this bear market rally is over ...
There is technical support around 880 in the S&P 500. A break below this mark would ignite another sell signal and confirm the end of the rally. The next support level is around 800. If this line doesn't hold, it's back to the March lows. And if these lows do not stop the slide, a very important message concerning the economy will have been given: "Depression ahead."
I think that the next few weeks and months will not only be very interesting, but also very important. Yet hardly anybody on Wall Street seems to think about the possibility of a new, stock market low.
They should. And so should you. Remember ...
Employment Is Much More Predictive
Of Recessions and Depressions Than the Stock Market ...
Since the start of this crisis, world industrial production and world trade have been following the pattern of the 1930s very closely. But unemployment is the most important indicator to distinguish a recession from a depression.
Year Unemployment Rate
1929 3.2%
1930 8.7%
1931 15.9%
1932 23.6%
1933 24.9%
1934 21.7%
1935 20.1%
1936 16.9%
Take a look at the table on the right to see the unemployment situation during the Great Depression.
Where do we stand now concerning this all important indicator?
The official U.S. unemployment rate rose from the cycle low of 3.4 percent in 2007 to 9.5 percent as of June 2009.
But the Bureau of Labor Statistics computes a second unemployment rate. This broader measure includes all forms of job market slack and is a whopping 16.5 percent. Yes, one in six Americans is unemployed or underemployed right now. That's a horrible number! And it will not go away soon.
If you look at the chart below, showing the civilian employment to population ratio, you can see that the downtrend had already started in 2000. Then the stock market bubble burst. This was just the first act in a much longer drama ...
Civilian Employment Population Ratio
The bursting of the real estate bubble was act two. And more is sure to follow. California's default may be a harbinger of what the third act may look like.
The second chart shows the median duration of unemployment. Here you can see how long it takes Americans to find a job ...
Median Duration of Unemployment
These statistics clearly show the severity of the current situation. Here you can easily see why this is not a garden variety post-WWII recession, but something very different.
The current plunge is structural, not cyclical. Most of the jobs lost will never come back. The real estate bubble severely distorted the economic structure. Now the world economy has a lot of rebalancing to do. And this process will last much, much longer than the "green shoots" crowd deems possible.
My suggestion for you today is to watch the stock market for hints of the beginning of the next stage of this crisis. Watch unemployment and world trade as reliable indicators of the severity of the slump. And then watch California to get a feel for the next important act of this economic and financial drama: The government funding crisis and all its related repercussions.
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