The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

Second Half of the ‘W’?

Posted on | June 1, 2010 | 13 Comments

The Dow Jones Industrial Average closed down 113 points Friday, having lost 1,181 points (10%) since its recent peak of 11,205 on April 26, and 4,069 points (29%) below its historic high of 14,093 on Oct. 12, 2007.

For the past two weeks, the Dow has been struggling to stay above the 10,000 level. To close below that level would be to give back everything the market has gained since Feb. 8. As it is, the Dow is about where it was in 2005, although 3,398 points (51%) above its March 6, 2009, low of 6,626 points.

What investors must wonder is whether the past month’s declining trend on Wall Street is merely a short-term correction — a dip downward in search of a solid market “floor” before the Dow begins a steady ascent to new heights — or the onset of the second wave in a W-shaped (“double dip”) recession. Ever the pessimist, my conclusions may be biased, but let’s examine the evidence. The precipitating cause of Monday’s slump was none other than the Attorney General of the United States:

Stocks took another late-day dive Tuesday after the government said it was starting criminal and civil investigations into the Gulf of Mexico oil spill.
The Dow Jones industrial average dropped 112. Its plunge came shortly before the close and minutes after Attorney General Eric Holder made the announcement. Stocks in energy companies and oil service providers tumbled on the news, and other stocks followed.
Holder would not say which companies or individuals might be under investigation. But investors quickly dumped stocks across the energy industry. BP PLC, which operated the rig that caused the spill, fell almost 15 percent. Oil services company Anadarko Petroleum Corp. fell almost 20 percent, and competitor Halliburton Inc. fell almost 15 percent.

So this would be an input that we might call episodic, rather than systemic or chronic, and once investors absorb the negative impact on the energy sector, we could expect stocks to bounce back in coming days. However, there are other market signals out there:

“The pace of recovery in Britain’s dominant services sector appears to be faltering, business leaders warn today, casting new doubt on the economy’s ability to avoid a ‘double dip’ downturn.”
— David Prosser, Independent (U.K.)

“Hewlett-Packard Co., the world’s largest personal-computer maker, plans to cut about 9,000 jobs . . . HP will take a $1 billion charge for paying severance and modernizing its data centers to provide more automated services to customers. . . . HP said the $1 billion in expenses for severance costs and asset impairments will be applied between now and fiscal 2013. The moves will result in net annual savings of $500 million to $700 million by the end of fiscal 2013, the company said.”
— Hugo Miller and Katie Hoffmann, Bloomberg

“According to a study by the London-based Centre for Global Energy Studies, world oil markets, until recently buoyed by Asian spending, are living in fear of a double-dip recession. . . . ‘In the space of just four weeks, sentiment has reversed and the market now seems fixated on the risks of a double-dip recession,’ CGES said in the report . . .”
—Clifford Bryan, Examiner

“Unemployment claims in California hit 768,709 in April, a modern-day record . . . [T]he state remained at a record 12.6% unemployment rate, third highest in the country.”
— Mary Ann Milbourn, Orange County Register

“Signs emerged Tuesday that Europe’s sovereign debt crisis was feeding through into the euro-area economy, as unemployment rose and a survey pointed to a slowdown in the recovery of manufacturing, with a sharp decline in Greece. . . . The surveys show ‘the speed with which uncertainty surrounding the sovereign debt crisis appears to have hit business activity,’ Chris Williamson, chief economist at Markit in London, said in a statement.”
— Jack Ewing, New York Times

“[I]nfluential economist Nouriel Roubini said advanced economies face years of anemic growth and the risk of a double-dip recession as they cope with a weak labor market and high debt.”
— Ryan Vlastelica, Reuters

At least according to these sources and indices, then, prospects for near-term recovery are rather dim. And it appears that investor concern about a double-dip recession is increasing.

Category: Economics

Comments

13 Responses to “Second Half of the ‘W’?”

  1. Andrew Sullivan
    June 1st, 2010 @ 11:50 pm

    Freudian slip there Stacy. W Of course Dubya is to blame for all of this. Dubya is to blame for all the harm in the world. Everything is his fault.

    Obama is a wise and gentle leader, who can do no wrong.

  2. Andrew Sullivan
    June 1st, 2010 @ 6:50 pm

    Freudian slip there Stacy. W Of course Dubya is to blame for all of this. Dubya is to blame for all the harm in the world. Everything is his fault.

    Obama is a wise and gentle leader, who can do no wrong.

  3. Dubya W. Doublyu
    June 2nd, 2010 @ 5:01 am

    What W? With this president and congress, all we’re going to get is a /

    Is there a letter for that? A Backwards-N?

  4. Dubya W. Doublyu
    June 2nd, 2010 @ 12:01 am

    What W? With this president and congress, all we’re going to get is a \/\

    Is there a letter for that? A Backwards-N?

  5. Estragon
    June 2nd, 2010 @ 6:16 am

    Remember that the “double dip recession” isn’t necessarily related to the DJIA chart. There are many factors affecting the economy besides equity prices, and stocks are just one way of measuring the market’s best guess of the short-term future (roughly 6-9 months) performance of the constituent equities of the averages. Obviously the markets attempt to evaluate everything, but uncertainty is the constant wild card.

    That said, the DJIA has closed in on a level without clear price support in sight. If it breaks through the flimsy support around 9700, it’s a long way down. The most evident support is in the 8000 area (touched several times since October 2008) and that isn’t very convincing. [ http://tinyurl.com/2g8nzto ]

    It is also now trading below its short-term (15 day), intermediate (50 day), and longer term (200 day) moving averages. This is not a sign of health.

    It’s possible the market is forming a long-term double-headed bottom, though, which would put the low point in the 6300 – 7700 area next spring, and only hitting the resistance around 11000 in the first half of 2012. Getting over that could signal new heights.

    Of course, for this scenario to occur, Republicans will have to take enough House and Senate seats in November to keep Obama from making things worse, and probably enough to undo much of what he’s already done.

    I can see him reduced to staying in the White House in his special room full of mirrors, pouting all day about how no one says how cool he is anymore.

    The downside is a hog-tied Obama thwarted by Republicans is his best chance to see a full recovery on his watch, and the timing makes it likely he would get credit for much of the recovery even though it was only created by undoing his agenda. 2012.

  6. Estragon
    June 2nd, 2010 @ 1:16 am

    Remember that the “double dip recession” isn’t necessarily related to the DJIA chart. There are many factors affecting the economy besides equity prices, and stocks are just one way of measuring the market’s best guess of the short-term future (roughly 6-9 months) performance of the constituent equities of the averages. Obviously the markets attempt to evaluate everything, but uncertainty is the constant wild card.

    That said, the DJIA has closed in on a level without clear price support in sight. If it breaks through the flimsy support around 9700, it’s a long way down. The most evident support is in the 8000 area (touched several times since October 2008) and that isn’t very convincing. [ http://tinyurl.com/2g8nzto ]

    It is also now trading below its short-term (15 day), intermediate (50 day), and longer term (200 day) moving averages. This is not a sign of health.

    It’s possible the market is forming a long-term double-headed bottom, though, which would put the low point in the 6300 – 7700 area next spring, and only hitting the resistance around 11000 in the first half of 2012. Getting over that could signal new heights.

    Of course, for this scenario to occur, Republicans will have to take enough House and Senate seats in November to keep Obama from making things worse, and probably enough to undo much of what he’s already done.

    I can see him reduced to staying in the White House in his special room full of mirrors, pouting all day about how no one says how cool he is anymore.

    The downside is a hog-tied Obama thwarted by Republicans is his best chance to see a full recovery on his watch, and the timing makes it likely he would get credit for much of the recovery even though it was only created by undoing his agenda. 2012.

  7. ak4mc
    June 2nd, 2010 @ 1:30 pm

    From what I’m seeing I think this recession is going to be shaped more like an O.

  8. ak4mc
    June 2nd, 2010 @ 8:30 am

    From what I’m seeing I think this recession is going to be shaped more like an O.

  9. cm
    June 2nd, 2010 @ 6:10 pm

    I believe there’s a typo in the first paragraph. The Dow on April 26 was 11,205, not 12,205.

  10. cm
    June 2nd, 2010 @ 1:10 pm

    I believe there’s a typo in the first paragraph. The Dow on April 26 was 11,205, not 12,205.

  11. Robert Stacy McCain
    June 2nd, 2010 @ 6:27 pm

    The Dow on April 26 was 11,205, not 12,205.

    Right you are! I corrected it and the correction means that the decline between April 26 and yesterday was 10% rather than 8%.

  12. Robert Stacy McCain
    June 2nd, 2010 @ 1:27 pm

    The Dow on April 26 was 11,205, not 12,205.

    Right you are! I corrected it and the correction means that the decline between April 26 and yesterday was 10% rather than 8%.

  13. Black Friday? : The Other McCain
    June 4th, 2010 @ 4:01 pm

    […] 1: Second Half of the ‘W’? — “For the past two weeks, the Dow has been struggling to stay above the 10,000 level. […]