Amid all the talk of recession and bailouts, foreclosures and bankruptcies, unemployment and deflation, bear markets and capitulation…finally a story to lift the human spirit from the never-ending “doom and gloom.” On Thursday, Captain Chesley “Sully” Sullenberger III heroically landed his US Airways plane in the Hudson River after engine failure, saving the lives of 150 passengers and five crew members in the process. So, while Pandit (Citigroup), Lewis (Bank of America), Thain (Merrill), Wagoner (GM), and many others shirk responsibility over corporate (and shareholder) losses, let’s not forgot that true heroes still exist and their leadership is not measured by the value of their portfolios or size of their (missed) bonuses. Thank you, Sully.
As Barack Obama prepares to take the historic oath of office as the 44 th President of the United States, he faces the worst financial and economic crises since the Great Depression. He intends to hit the ground running and put his personal touches on the much discussed stimulus package (with or without a new Treasury Secretary who is working through IRS issues). Dems in Congress revealed their plans for the stimulus which has grown to $825 billion and includes $275 billion in tax cuts. For good measure, the Senate approved the release of the next $350 bln of TARP money, but only after Obama pledged to place restrictions on banks that will be receiving funds. Bank of America, fresh on the heals of its first quarterly loss in 17 years, emerged as the initial beneficiary of new TARP dollars (and loan guarantees) to help absorb Merrill into its corporate umbrella (where it joined forces with another failing institution, Countrywide). While BofA seemed to be embracing the “financial supermarket” concept made famous by Citigroup, the latter took the opposite approach and sold part of its Smith Barney brokerage unit to Morgan Stanley and divided its remaining operations into two entities. Citi lost over $8 billion last quarter, despite its personal government bailout and initial TARP money. Deutsche Bank warned of a $6 billion quarterly loss of its own, revealing that the financial debacle is not limited to the States. JP Morgan-Chase recorded a slight profit last quarter, but added to its loan loss reserves as its CEO expressed “disappointment.” (Even “good” news turns negative in a hurry.)
Year Close (2008)
Qtr Close (12/31/08)
Dow Jones Industrial
10 yr Treasury (Yield)
While the financials reported earnings (losses) early to avoid the painful waiting, the news from other sectors was not any better. Alcoa kicked off the season by announcing worse than expected results, while Intel lived up to its dire outlook by reporting a 90% drop in profits. Though Thomson Research predicted a 14% decline in earnings (S&P 500) for the quarter, that forecast may look optimistic after the initial reports. In other corporate news, Nortel filed for bankruptcy; Yahoo found a new CEO; Circuit City moved closer to liquidation; and Apple will continue without Steve Jobs for the foreseeable future. Oil plunged below $35/barrel for a bit as OPEC and International Energy Agency reduced their projections for global demand in 2009. Equities resumed their downward spiral (before rebounding slightly late in the week) as the banking sector proved that TARP was no easy fix and earnings season could be disastrous. A horrific retail sales report (see below) added to the economic woes as investors searched long and hard for something to believe in. Thanks again, Sully, for the welcome relief (no matter how temporary).
Weekly Economic Calendar
Balance of Trade (11/08)
Best showing in 5 years
Retail Sales (12/08)
More than twice the loss the Street was expecting
Fed Beige Book
Broad-based negativity throughout the economy
5 th straight monthly decline in wholesale inflation
Initial Jobless Claims (01/10/09)
Higher than expected post-holiday claims
Lowest annual increase since 1954
Industrial Production (12/08)
Twice the decline analysts expected
The Week Ahead
Martin Luther King Day
Housing Starts (12/08)
Initial Jobless Claims (01/17/09)
Alas, a Bernanke sighting. During the week, Dr. B. expressed his belief that a new stimulus package could provide a “significant boost” to the economy and confirmed that policymakers will “do their part” to promote recovery. The Fed’s Beige Book depicted a domestic economy growing weaker by the day as conditions deteriorated within virtually all sectors across virtually all regions. Fearful of a weakening labor picture, consumers disregarded the available (deep) discounts provided by the nation’s retailers and contributed to a very dismal holiday season. In fact, retail sales plunged by 2.7% in December, more than twice the expected decrease in activity, and suffered the first annual decline on record (since 1992). While the trade deficit dropped to its lowest level in five years, exports also fell as our international trading partners have lost their unlimited appetites for US-made goods and services. This bad news for domestic manufacturers will surely be reflected in corporate earnings in the quarters to come. On that note, industrial production dropped by 2% in December, a far worse showing that analysts expected. On the housing front, 30-year mortgage rates fell below 5%, though home purchases are still rare and borrowers with less than stellar credit face difficulties in refinancing loans in this environment.
The inflation picture offered a bit of a reprieve from the negativity (though naysayers continued touting deflation or worse). Wholesale prices plummeted for the fifth consecutive month and experienced their first annual drop since 2001. In December, gasoline prices fell by another 25% and even food costs suffered their largest decline since early 2006. The less volatile core PPI (excludes the food and energy components) rose slightly in December, though most economists expect that the lower energy costs will soon impact other sectors of the economy as well. CPI data reflected another large decline in retail prices and the smallest increase in annual inflation since 1954. Unfortunately, few analysts even speak of the stimulus package that Americans have received at the pumps over the past few months as gas prices have plummeted well over 50% since mid-summer (and this one won’t cost taxpayers a penny down the road).
On the Horizon… Traders and investors alike take a much-needed vacation on Monday to celebrate MLK day as the markets will be closed. Some may even extend the holiday a day to watch history in the making as President Obama takes the oath of office on January 20 th. The honeymoon ends immediately as the galas come to a close and pressing issues like the stimulus bill and bailout money take precedence. Congress will begin grilling Treasury Secretary nominee Tim Geithner over his failures to pay certain taxes (especially since the position oversees the IRS). A light week on the economic calendar gives way to more earnings reports as investors move beyond (depressed) financials and focus on other key corporate releases: IBM (Tuesday), Google (Thursday), Microsoft (Thursday), GE (Friday). Expectations are incredibly dire so any positive earnings surprises (no matter how low) should be well received. The new (improved?) Citibank will be worth watching as some analysts expect its downward spiral to continue and anticipate a similar fate as Lehman. Any more bailout money available within that $350 billion?
By Ron Brounes, www.ronbrounes.com