Weekly wrapup for the Week Ended September 26, 2008 by Ron Brounes (B&A) Brounes & Associates
Market Matters…
Ah, the theater of politics…let the grandstanding begin. Apparently, when a Treasury Secretary, Fed Chair, and even W talk (plea, warn), House Republicans (and a prez candidate) don’t listen (especially in an election year). Throughout the week, Congress grilled the powers-that-be about the specifics of the $700 billion government bailout plan; at one point, they appeared to have reached an agreement by adding provisions on executive compensation and equity interest in those participating firms. But before the “I’s” were dotted and “T’s” crossed, disgruntled House members offered their own “insurance-based” plan (that, of course, included tax breaks) which Paulson and many banking experts called “unworkable.” Senator McCain (apparently now a renown economist) appeared to have sided with this vocal minority, ceased campaigning, and even tried to reschedule the first presidential debate to focus on these matters (and further pander to certain constituencies…while Obama preached “change”). Meanwhile, Bernanke warned that inaction could lead to “recession, higher unemployment, and increased foreclosures.” Even Warren Buffett, fresh off his Berkshire Hathaway’s $5 billion confidence building investment in Goldman Sachs (GS), urged Congress to act now and said “he could understand the anger…but action was needed.” While most people would agree that the bailout is far from a utopian solution, inaction could lead to the worst economic times since the Great Depression. Despite the politicizing, some form of a deal most likely will be passed (and just in time for Congress to hit the campaign trail). Still, the jury will be out for some time about the plan’s overall effectiveness.
While much of the country focused on the bailout, the negative ramifications of the financial meltdown continued. Washington Mutual (WM) was taken over by the FDIC and became the largest bank failure in history. Its assets were promptly sold to JP Morgan Chase (JPM) , which jumped into first place in terms of domestic banking deposits. Meanwhile, Goldman Sachs (GS) and Morgan Stanley (MS) moved beyond the old investment banking model to become bank holding companies with hopes that their newfound abilities to accept deposits will improve their liquidity and overall operations (despite the enhanced regulatory environment). Morgan Stanley also bolstered its balance sheet by selling a 20% interest to Japan ’s Mitsubishi UFJ Financial, while its country counterpart, Nomura, bought Lehman’s Asian operations for $225 million. GE reduced its earnings expectations, ended its stock repurchase program, and halted its dividend through 2009, thus, becoming the another victim of the financial crisis.
Commodities remained highly volatile as investors scrambled to make heads or tails about the bailout and seemed to have no idea where to put their dollars. Oil even soared $25/barrel in one day before profit taking ensued and prices (somewhat) came back to earth. Supply issues in the aftermath of Gustav and Ike contributed to the energy uncertainties. Equities plunged on Congress’s inaction, rose on prospects for a deal, and fell again once the plan fell apart. Investors seem to be holding out hope that some agreement will be reached by Monday, though naysayers predict an early bloodbath in the markets should that not occur by the open. The time for political theater is over…The stakes are simply too high. (Plus, Congress has reelection to think about.)
Economically Speaking…
Weekly Economic Calendar
While Congress debated the merits of a bailout and the prospects for further fallout, numerous sectors of the economy continue to suffer. Analysts once considered health care to be immune from a slowdown, though recent data showed that fewer prescriptions were filled in the first half of the year than during that time frame in 2007, a phenomenon that hasn’t occurred in over a decade. Additionally, an insurance commissioners’ survey reported that consumers are visiting their physicians less frequently. Retailers are declaring “doom and gloom: for the holidays as the National Retail Federation predicted that sales activity will increase by only 2.2%, far less than the 4.4% average growth rate of the prior 10-years (at least, it’s still positive). On the non-profit front, donations are down across the country, especially in New York where organizations rely on the philanthropy of Wall Street. Finally, an AARP poll depicted that 27% of employees over age 45 claim they will postpone their plans for retirement because of the uncertain times.
And the news did not get any better from the week’s economic releases. Housing continued to struggle (what a shock) in August as existing home sales declined by 2.2% and new home sales experienced its slowest pace of activity in 17 years. Durable goods orders dropped by 4.5% as the manufacturing sector remained weak, thanks to transportation. The domestic growth rate as depicted by 2 nd quarter GDP was revised down to 2.8% from 3.3% reported last month, a sign that the prior stimulus package was not nearly as effective as once believed.
On the Horizon… The bailout plan will remain the top headline as analysts monitor whether the politicos can put partisanship aside and work out an agreement that has a chance to positively impact the economy. Many investors will be on pins and needles as they wait to see how the markets open on Monday morning and what “experts” say about the long-term prospects of any deal (or non-deal). Should they avoid “risky” equities at all costs and look to the “safe-haven” of commodities? (Surely no speculation in a market that rises $25/barrell in one day?) Are more money markets close to “breaking the buck,” a trend that threatens the most conservative of investors? While Congress seemed intent on finger-pointing, few were looking in the mirror or discussing their responsibilities in this mess and the lack of legislative oversight. Surely, the next Congress will seek to prevent similar calamities in the future and will rush to enact new (though not necessarily better) laws and regulations. While everyone already realizes the economy is sluggish, next week brings further confirmation in the form of labor (unemployment rate, non-farm payroll), manufacturing (ISM index, factory orders), and consumer-driven (income/spending, confidence) data. Some positive surprises sure would be nice.
Market Matters…
| Market/Index | Year Close (2007) | Qtr Close ( 06/30/08 ) | Previous Week ( 09/19/08 ) | Current Week ( 09/26/08 ) | YTD Change |
|---|---|---|---|---|---|
| Dow Jones Industrial | 13,264.82 | 11,350.01 | 11,388.44 | 11,143.13 | -15.99% |
| NASDAQ | 2,652.28 | 2,292.98 | 2,273.90 | 2,183.34 | -17.68% |
| S&P 500 | 1,468.36 | 1,280.00 | 1,255.08 | 1,213.27 | -17.37% |
| Russell 2000 | 766.03 | 689.66 | 753.74 | 704.79 | -7.99% |
| Fed Funds | 4.25% | 2.00% | 2.00% | 2.00% | -225 bps |
| 10 yr Treasury (Yield) | 4.04% | 3.98% | 3.77% | 3.83% | -21 bps |
Ah, the theater of politics…let the grandstanding begin. Apparently, when a Treasury Secretary, Fed Chair, and even W talk (plea, warn), House Republicans (and a prez candidate) don’t listen (especially in an election year). Throughout the week, Congress grilled the powers-that-be about the specifics of the $700 billion government bailout plan; at one point, they appeared to have reached an agreement by adding provisions on executive compensation and equity interest in those participating firms. But before the “I’s” were dotted and “T’s” crossed, disgruntled House members offered their own “insurance-based” plan (that, of course, included tax breaks) which Paulson and many banking experts called “unworkable.” Senator McCain (apparently now a renown economist) appeared to have sided with this vocal minority, ceased campaigning, and even tried to reschedule the first presidential debate to focus on these matters (and further pander to certain constituencies…while Obama preached “change”). Meanwhile, Bernanke warned that inaction could lead to “recession, higher unemployment, and increased foreclosures.” Even Warren Buffett, fresh off his Berkshire Hathaway’s $5 billion confidence building investment in Goldman Sachs (GS), urged Congress to act now and said “he could understand the anger…but action was needed.” While most people would agree that the bailout is far from a utopian solution, inaction could lead to the worst economic times since the Great Depression. Despite the politicizing, some form of a deal most likely will be passed (and just in time for Congress to hit the campaign trail). Still, the jury will be out for some time about the plan’s overall effectiveness.
While much of the country focused on the bailout, the negative ramifications of the financial meltdown continued. Washington Mutual (WM) was taken over by the FDIC and became the largest bank failure in history. Its assets were promptly sold to JP Morgan Chase (JPM) , which jumped into first place in terms of domestic banking deposits. Meanwhile, Goldman Sachs (GS) and Morgan Stanley (MS) moved beyond the old investment banking model to become bank holding companies with hopes that their newfound abilities to accept deposits will improve their liquidity and overall operations (despite the enhanced regulatory environment). Morgan Stanley also bolstered its balance sheet by selling a 20% interest to Japan ’s Mitsubishi UFJ Financial, while its country counterpart, Nomura, bought Lehman’s Asian operations for $225 million. GE reduced its earnings expectations, ended its stock repurchase program, and halted its dividend through 2009, thus, becoming the another victim of the financial crisis.
Commodities remained highly volatile as investors scrambled to make heads or tails about the bailout and seemed to have no idea where to put their dollars. Oil even soared $25/barrel in one day before profit taking ensued and prices (somewhat) came back to earth. Supply issues in the aftermath of Gustav and Ike contributed to the energy uncertainties. Equities plunged on Congress’s inaction, rose on prospects for a deal, and fell again once the plan fell apart. Investors seem to be holding out hope that some agreement will be reached by Monday, though naysayers predict an early bloodbath in the markets should that not occur by the open. The time for political theater is over…The stakes are simply too high. (Plus, Congress has reelection to think about.)
Economically Speaking…
Weekly Economic Calendar
| Date | Release | Comments |
|---|---|---|
| September 24 | Existing Home Sales (08/08) | Record decline depicts continued weakness in housing |
| September 25 | Durable Goods Orders (08/08) | Surprisingly large decline in orders |
| Initial Jobless Claims ( 09/20/08 ) | Highest level of claims in 7 years | |
| New Home Sales (08/08) | Slowest pace of sales in 17 years | |
| September 26 | GDP 2 nd Qtr (final) | Revised down to 2.8% growth rate |
| The Week Ahead | ||
| September 29 | Personal Income/Spending (08/08) | |
| September 30 | Consumer Confidence (09/08) | |
| October 1 | Construction Spending (08/08) | |
| ISM (Manu) Index (09/08) | ||
| October 2 | Initial Jobless Claims ( 09/27/08 ) | |
| Factory Orders (08/08) | ||
| October 3 | Unemployment Rate (09/08) | |
| Nonfarm Payroll Additions (09/08) | ||
| ISM (Services) Index (09/08) |
While Congress debated the merits of a bailout and the prospects for further fallout, numerous sectors of the economy continue to suffer. Analysts once considered health care to be immune from a slowdown, though recent data showed that fewer prescriptions were filled in the first half of the year than during that time frame in 2007, a phenomenon that hasn’t occurred in over a decade. Additionally, an insurance commissioners’ survey reported that consumers are visiting their physicians less frequently. Retailers are declaring “doom and gloom: for the holidays as the National Retail Federation predicted that sales activity will increase by only 2.2%, far less than the 4.4% average growth rate of the prior 10-years (at least, it’s still positive). On the non-profit front, donations are down across the country, especially in New York where organizations rely on the philanthropy of Wall Street. Finally, an AARP poll depicted that 27% of employees over age 45 claim they will postpone their plans for retirement because of the uncertain times.
And the news did not get any better from the week’s economic releases. Housing continued to struggle (what a shock) in August as existing home sales declined by 2.2% and new home sales experienced its slowest pace of activity in 17 years. Durable goods orders dropped by 4.5% as the manufacturing sector remained weak, thanks to transportation. The domestic growth rate as depicted by 2 nd quarter GDP was revised down to 2.8% from 3.3% reported last month, a sign that the prior stimulus package was not nearly as effective as once believed.
On the Horizon… The bailout plan will remain the top headline as analysts monitor whether the politicos can put partisanship aside and work out an agreement that has a chance to positively impact the economy. Many investors will be on pins and needles as they wait to see how the markets open on Monday morning and what “experts” say about the long-term prospects of any deal (or non-deal). Should they avoid “risky” equities at all costs and look to the “safe-haven” of commodities? (Surely no speculation in a market that rises $25/barrell in one day?) Are more money markets close to “breaking the buck,” a trend that threatens the most conservative of investors? While Congress seemed intent on finger-pointing, few were looking in the mirror or discussing their responsibilities in this mess and the lack of legislative oversight. Surely, the next Congress will seek to prevent similar calamities in the future and will rush to enact new (though not necessarily better) laws and regulations. While everyone already realizes the economy is sluggish, next week brings further confirmation in the form of labor (unemployment rate, non-farm payroll), manufacturing (ISM index, factory orders), and consumer-driven (income/spending, confidence) data. Some positive surprises sure would be nice.
