We have long taken the contrarian perspective to the fear that dominates market sentiments. Over night we have now seen the recognition that Europe is unable to fully solve this on their own and needed mediation in the form of a Federal Reserve lowering of the overnight swap rates to release the pressure cooker on European liquidity. Though we have witnessed many interventions this year, this one is pronounced in what it says in a very subtle mannerâŠ.if you could ever call an intervention like this as subtle.
- The move to lower swap rates for dollar rates basically pushes the valve on the pressure cooker that had seen increasing levels of anxiety push the pressure on nearly all aspects of the European economy. By easing the rates with on dollars for loans to European banks, the Federal Reserve has come to the aid of a family member that has fallen on tough times. This action also coincided with the European Central Banks move to increase funding to banks to its highest level in 2 years.
- Prior to this move, foreign bank deposits at the Federal Reserve had risen 104% to $715 billion. This number will only swell which continues two important trends, one short and one long. The short-term trend has now seen the Federal Reserve take over as the Worldâs Banker which had been held by Japan, China and Europe at some time over the last decade. The longer-term trend is to see the U.S. dollar continue its depreciation but affirms its reserve status of the worldâs economy. Even in light of a credit downgrade, near 10% budget deficits and benign growth, when the world hits the panic button, it flocks to the dollar.
- Politically speaking, the Federal Reserves action coincides with President Obamaâs call for a solution to the European situation in an accelerated manner. It also opens up for more criticism from the masses who may not quite understand the symbioticness of the global economy and those who are seeking office next year.
- China also responded with a lowering of the amount of cash that needed as reserves by banks to the lowest level in three years. Though it is lowered from its high of 21.5% to 21%, the size of the move is far less important than the trend of the move.
As such, the amount and number of participants involved in this move have caused a sense of relief in the markets which has seen several European equity markets surge over 4% for the day. The opening of the domestic equity markets are following suit.
This move is also coinciding with continued strength in many economic statistics that we have noted over the last several weeks. ADP employment change saw a surge of 206,000 jobs when the expectation was for 130,000. Last months number was revised upward from 110,000 to 130,000. There havenât been many times when a large current number coincides with a revision upward of last monthâs number. Home sales also surprised on the upside coming in up 10.4% last month, which only affirms the âchutes-and-laddersâ metrics that dominates the housing market.
All the moves today affirm to us the tremendous potential opportunity in various asset classes. Both Value and Growth investors should be fairly intrigued by the metrics of the S&P 500. Cash flow on the S&P 500 stands at $169 per share, or 7 times, which is drastically below the average of 12 times normally seen over the last 15 years. Book value multiple on the S&P 500 stands at 1.93 where the 10-year average has been 2.51 times. For growth investors, earnings have come in strong once again and leave the index trading at a 12.60 multiple while the trailing 12-month average over the last 15 years has been over 16 times.
Though the move upward may not be a linear straight shot upwards, the disconnect between market fundamentals and the perception of their meaning has continued to create an opportunity that we have not seen in a very long time.
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