Exploring 2009's Darker Market Landscape
At the start of this new year, investors find themselves in a new world where vast swaths of territory are marked 'unknown.'
There is always uncertainty in investing. This year, however, the availability of capital -- one of the most important variables in the functioning of an economy -- can no longer be taken for granted. Meanwhile, shell-shocked investors around the globe have become significantly risk-averse.
That is markedly different than in recent years, when billions of dollars were sloshing around global financial markets. If one wave of money pulled out, it seemed that another was always coming in to fill the void.
Over the course of 2008, the credit crisis that began with securities backed by home loans engulfed virtually every market that could be tapped by borrowers -- individuals, corporations and investors. Although there have been some signs of improvement in recent weeks, such as in the market for interbank lending, the cost of borrowing by even the most highly regarded companies remains unusually high. For borrowers without pristine credit, the credit markets are nearly closed.
'The credit-creation machine is semi-permanently impaired,' says Jason DeSena Trennert, chief investment strategist at Strategas Research Partners. 'It's almost like a switch was turned off.'
The effects on the economy and the stock market have been dramatic; major stock indexes posted the steepest declines since the Great Depression.
The challenge now facing investors is to assess to what degree the pool of available capital has been drained, and how successful governments and central banks such as the Federal Reserve will be in reversing the tide. The Fed has cut interest rates to near zero and announced a series of unprecedented measures to stabilize the financial markets.
Complicating matters is the world-wide nature of the economic crisis. Europe is facing a significant recession. Japan, despite its hoard of savings, is sinking fast. Even the Chinese economic powerhouse is slowing.
Meanwhile, now that oil prices have collapsed, cash-rich sovereign wealth funds are focused on supporting their own economies rather than seeking out investments on the other side of the globe.
For now, any predictions are little more than guesses. In a recent report about the Fed's aggressive steps to flood the financial system with credit, Anatole Kaletsky of Hong Kong-based GaveKal Research, posed the question: 'What happens when an irresistible force' -- the Fed's actions -- 'hits an immoveable object' -- the paralyzed global economy?
'The correct answer is that there is no answer,' Mr. Kaletsky wrote. Eventually, the Fed's moves are likely to fuel a rebound in economic activity, he says, but 'nobody yet has any idea how much permanent damage may have been done to the structural underpinnings of U.S. and global capitalism.'
Among other unanswered questions: Might a cash-starved world mean a prolonged period when interest rates for corporate borrowers stay well above historic levels? Will there be a protracted retrenchment among heavily indebted consumers who carry mortgages bigger than the value of their homes? What kind of a premium will investors pay for stocks that reliably churn out scarce cash in the form of dividends? Will having governments as shareholders of banks and brokerage firms impair the risk-taking that fuels a vibrant economy?
For years, Yale University professor John Geanakoplos has been talking about cycles of leveraging and deleveraging -- taking on debt and cutting back -- and the resulting economic impact. He argues that the current risk today is an extended period when the cost of capital remains historically high.
The problem, he says, starts with the fact that buyers, whether of homes or securities, are faced with much bigger collateral requirements than in the past. Meanwhile, he says, 'with this overhang of depressed asset prices, every risk-taker is buying old assets. Why would you bother to make a new mortgage when you can buy an old one that only costs 55 cents on the dollar?'
It's a similar story in the corporate-bond and equity markets. Until policies are put in place that directly address prices of assets such as houses, 'we're going to see the cost of capital remain high,' says Mr. Geanakoplos.
There are still more unknowns. 'What does it mean to our economy that people can no longer buy a car or lease a car with no money down, or what does it mean that the equity line of credit won't get extended?' asks Basil Williams, chief executive of hedge-fund managers Concordia Advisors. 'How much of a contraction in demand will we have because if people want to have something they'll have to save money before they buy?'
Then there's the impact of scarce capital on the financial markets themselves. With banks and brokerage firms forced to conserve cash, there is less capital available to support trading. That means wider spreads between the prices at which investors can buy and sell stocks or bonds. That in turn can lead to heightened volatility, which often diminishes the appetite for risk-taking.
For investors itching to be the first to call a bottom in the stock market and start buying, it isn't just an academic exercise. It has the potential to mean a big change in terms of which strategies will work for years to come.
It could mark an end the nearly single-minded focus on corporate income statements and quarterly earnings that has dominated the stock market. 'The determining factor in terms of growth for equity investors will be the availability and the cost of debt capital,' says Strategas's Mr. Trennert. 'Companies that have access to the credit markets will have a decided advantage.'
Expensive and scarce capital translates into lower profit margins and market values, says Steven Romick, manager of the FPA Crescent Fund. He notes that while stocks may appear cheaper than they've been in years, that's compared to a period of record profit margins and an economy supported by the credit boom. 'We're looking at [the ratio of stock prices to earnings] being much lower than what people expect,' he says.
Investors are also likely to demand higher returns for owning for riskier assets such as stocks, which usually means lower prices. 'If somebody is married and they have a horrible divorce, then they aren't going to be so quick to get married again,' says Mr. Romick.
Strategas Research Partners首席投资策略师特恩纳特(Jason DeSena Trennert)说，创造信用的机器已经受到了半永久性的损害，这就像是开关已经关掉了一样。
现在，任何预测都同猜测差别不大。香港GaveKal Research的凯尔斯盖(Anatole Kaletsky)在最近分析美联储向金融市场注入大量信贷的文章中，提出了这样一个问题，当不可抗拒的力量──美联储的行动──碰上了无法移动的物体──陷入瘫痪的全球经济──时会发生什么？
还有更多的未知因素。对冲基金管理公司Concordia Advisors的首席执行长威廉姆斯(Basil Williams)说，如果人们不付定金就不能再买车或租车，这对我们的经济意味着什么？或如果股票信用额度不能延长意味着什么？如果因为人们需要攒钱才能购买他们想要的东西，我们的需求将面临多大的萎缩呢？
FPA Crescent基金的经理罗米克(Steven Romick)说，资本昂贵又稀缺，意味着利润率和市场价值的下降。他指出，尽管股票看来比前些年便宜了，但这是相对于这样的时期而言的：利润率创纪录，经济得到信贷繁荣的支持。他说，我们看到市盈率已经比人们预计的水平更低了。