Dow Jones valuations are just getting tougher

With the Dow Jones Industrial Average firmly under 7,000, the US stock market is now well below its early-1995 level, adjusting for changes in nominal GDP.
That suggests it is cheap, assuming growth prospects are as good as they were back then. But there is a risk to such a an analysis: too much fiscal and budgetary stimulus could bring on growth-stultifying inflation.

Fast back to December 5, 1996. The Standard and Poor's 500 Index closed at 744.38. That evening, Fed Chairman Alan Greenspan decried the market's "irrational exuberance". On the S&P's close of 700.82 on Monday, the market is clearly exuberant no more.
It is not, however, exceptionally low. Greenspan announced a new easier monetary policy to Congress later in early 1995. That day, the Dow Jones average, which had been generally rising since 1990, first reached 4,000. Adjusting for the 95pc increase in nominal GDP since that time would give an equivalent Dow level today of around 7,800. That suggests that current levels are only somewhat below their long term trend, and that the 1996-2007 period represented a lengthy bubble.
As for the S&P 500, Standard and Poor's currently projects 2009 earnings on the index of $48.10. Over the 20-year period to 2008, it traded at an average of 19.4 times earnings. That would imply a current value of 933.14. That 20-year period however includes the 12-year bubble. Taking a longer-term average of around 15 times earnings gives a valuation of 721.5 - again, just slightly above the current level.

So, based on 1995 stock prices and long-term earnings considerations the market is just below a middling valuation. However that assumes US growth and earnings prospects are as good today as they were in 1995, or over the long-term average.
That's where doubts creep in. If the exceptional monetary stimulus since September produces inflation, which needs to be squeezed out, or the unprecedentedly large budget deficits in fiscal years 2009 and 2010 "crowd out" private investment, then growth and earnings prospects for the next few years would be below average.

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Dollar higher as yen wanes

The dollar rose against major rivals on Monday, while the yen weakened on news of a record current account deficit in Japan, the world's second biggest economy after the United States.
The European single currency fell to 1.2626 dollars in London trade, from 1.2652 dollars late in New York on Friday.

Against the Japanese currency, the dollar rose to 98.70 yen from 98.27 yen on Friday.
Traders were reluctant to drive the US currency down far against its major rivals given deep worries about the health of the euro zone and Japanese economies, market-watchers said.
"With the global economic outlook remaining rather bleak, it's going to be that fight for the safer havens that will continue to dominate market direction in the near term and so long as there's nothing better out there then the dollar may end up holding its ground," said CMC Markets analyst James Hughes.

The yen meanwhile declined on news that Japan posted a current account deficit of 172.8 billion yen (1.8 billion dollars) in January -- the largest since comparable records began in January 1985.
The data means "it's difficult for the yen to strengthen further," Koji Fukaya, senior currency analyst at Deutsche Securities, told Dow Jones Newswires.
Historically, Japan has run a large surplus in its current account thanks to brisk foreign demand.
But the global crisis has prompted consumers to tighten their purse-strings in the United States and Europe, prompting Japanese companies such as Toyota and Sony to launch a wave of job cuts.

The yen, once seen as a safe haven in the global financial crisis, has lost some of its allure in the eyes of investors because of the rapid deterioration of the Japanese economy.
"Fundamentally, we believe that sustained yen strength is over for now," Standard Chartered analysts wrote in a note.
Elsewhere on Monday, the European Bank for Reconstruction and Development (EBRD) urged the European Union to ease euro entry rules so as to help crisis-hit eastern European countries.
"The European Commission should send a clear signal of solidarity to eastern European countries," EBRD head Thomas Mirow told the German business newspaper Handelsblatt in an interview published Monday.
The euro was changing hands at 1.2626 dollars against a level of 1.2652 dollars reached late on Friday, at 124.45 yen (124.35), 0.9033 pounds (0.8986) and 1.4619 Swiss francs (1.4654).
The dollar stood at 98.70 yen (98.27) and 1.1593 Swiss francs (1.1579).
The pound was at 1.3958 dollars (1.4076).
On the London Bullion Market, the price of gold rose to 938.10 dollars an ounce from 936 dollars an ounce on Friday.


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Barclays hit by toxic loan fears

shares fell again today ahead of what are expected to be difficult negotiations with the government over whether it will be allowed to participate in the asset protection scheme and at what cost.

Shares in the bank were down by more than 10% by lunchtime as analysts drew parallels with the amount of loans Lloyds put into the APS scheme at the weekend. Barclays reportedly has a much larger exposure than its rival to at risk loans.
Lloyds, in total, injected £260bn of loans into the Asset Protection Scheme in a deal thrashed out last week. As a result it will be 77% owned by the government.
Most of the risky loans came from Lloyds' recent acquisition, HBOS, but analysts were still shocked that Lloyds itself had sheltered £44bn from its own loan book under the APS.
Reports today suggested Barclays is still mulling the possibility of joining the APS, but its final decision will depend on what is in its shareholders' best interest.

It refused to join the last government bail-out of the bank sector, raising money instead from a group of Middle East investors. But the bank was criticised for the move, as it ended up paying more, even though it kept the UK government off its share register.
Weekend reports suggested Barclays may be considering putting up to £150bn in to the scheme, but is concerned about the harsh terms and conditions attached to Lloyds' participation.


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Barack Obama to reverse George Bush's stem cell funding ban

Barack Obama today plans to lift George W Bush's restrictions on federal funding for stem cell research, the latest reversal of policies implemented by his predecessor.
The long-promised move, coming nearly two months into his term, will allow a rush of research aimed towards finding better treatment for ailments from diabetes to paralysis. But it has sparked firece opposition from pro-life groups.
Obama also plans to make a broad declaration that science — not political ideology — would guide his administration.

"I would simply say this memorandum is not concerned solely — or even specifically — with stem cell research," said Harold Varmus, chairman of the White House's Council of Advisers on Science and Technology and a Nobel Prize-winning biologist. He said it would address how the government uses science and who is advising officials across federal agencies.
The proposed changes, which Obama is due to sign around noon mean that stem cell scientists, who until now have had to rely on private donations, can apply for government money for the research, just like they do for studies of gene therapy or other treatment approaches.
At the same event, the Mr Obama intends to announce safeguards through the National Institutes of Health so science is protected from political interference.
Embryonic stem cells are master cells that can morph into any cell of the body. Scientists hope to harness them so they can create replacement tissues to treat a variety of diseases — such as new insulin-producing cells for diabetics, cells that could help those with Parkinson's disease or maybe even Alzheimer's, or new nerve connections to restore movement after spinal injury.
The research is controversial because days-old embryos must be destroyed to obtain the cells. They typically are culled from fertility-clinic leftovers otherwise destined to be thrown away.
"I believe it is unethical to use human life, even young embryonic life, to advance science," said Tony Perkins, president of the Family Research Council, a conservative organization that opposes the move.

"While such research is unfortunately legal, taxpayers should not have to foot the bill for experiments that require the destruction of human life," said Mr Perkins. "I urge President Obama to direct funding not only to the best science, but also to the surest common ground — research using adult stem cells and stem cells created by reprogramming."


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Bank of America to participate in US Treasury's Making Home Affordable plan

Bank of America has announced that it will participate in the Making Home Affordable plan based on program guidelines released by the US Department of the Treasury, extending new foreclosure prevention and refinancing options to eligible customers across the US.

While the company becomes operationally ready, Bank of America said that it will extend its foreclosure sale moratorium for borrowers that potentially qualify for the program.
The company will offer the refinancing options available under the plan to customers with loans owned by Fannie Mae and Freddie Mac. Under the Making Home Affordable program, these agencies will provide loans as high as 105% of the property's value. The company will offer the Home Affordable Modification program for its own loans and loans it services for Fannie Mae and Freddie Mac, as well as for all other investors unless their servicing contracts prohibit it.

Barbara Desoer, president of mortgage, home equity and insurance services at Bank of America, said: "The affordability focus of the new loan modification plan is consistent with Bank of America's streamlined loan modification program launched last year. We have confidence in this new plan as it broadens the opportunity to help more homeowners."


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