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AND THAT’S THE WEEK THAT WAS…For the Week Ended February 6, 2009

Market Matters…

The man with the (one-time) optimistic message of hope and change has developed a more somber tone these days as he urged the Senate to embrace an “imperfect” plan to stimulate the economy. "A failure to act, and act now, will turn crisis into a catastrophe and guarantee a longer recession, a less robust recovery, and a more uncertain future.” He begged Democrats to halt delay tactics and grandstanding as the data gets worse with each passing day. "It is inexcusable and irresponsible to get bogged down in distraction and delay while millions of Americans are being put out of work.” He implored Republicans to be open to new ideas and take active roles in devising a workable plan. “We can't embrace the losing formula that says only tax cuts will work for every problem we face.” The Moderates seem to be listening as the negotiations continue…for now, $900 billion and counting (though spending cuts are possible).

Market/Index

Year Close (2008)

Qtr Close (12/31/08)

Previous Week

(01/30/09)

Current Week

(02/06/09)

YTD Change

Dow Jones Industrial

8,776.39

8,776.39

8,000.86

8,280.59

-5.65%

NASDAQ

1,577.03

1,577.03

1,476.42

1,591.71

+0.93%

S&P 500

903.25

903.25

825.88

868.60

-3.84%

Russell 2000

499.45

499.45

443.53

470.70

-5.76%

Fed Funds

0.25%

0.25%

0.25%

0.25%

0 bps

10 yr Treasury (Yield)

2.24%

2.24%

2.84%

2.98%

+74 bps



Shifting gears (though highly related), Obama also announced new guidelines for the bailout package and Treasury Secretary Geithner is scheduled to deliver a comprehensive speech early in the week to address issues such toxic assets and foreclosures. For now, the plan has focused on limits to compensation (to a mere $500,000) for execs of those institutions that have received “exceptional assistance” from taxpayers. (President Obama then spent the rest of his week looking for potential Cabinet officials who have actually paid their taxes on time.)

On the corporate front, UPS posted a profit (though revenue declined) and then announced new cost-cutting measures. Motorola, Disney, Time Warner, and Costco reported disappointing results. Visa’s earnings jumped by 35%, though management warned of tougher times ahead. Bailout plan recipients have tried to cut back excessive spending (and the associated bad PR) as Goldman Sachs (Miami) and Well Fargo (Vegas) canceled huge boondoggles, while Bank of America is selling off corporate jets and Citigroup may be attempting to get out of the $400 million marketing deal with the NY Mets. Other companies offered America their own stimulus packages as Denny’s promoted free Grand Slam breakfasts (folks must really be hungry) and Starbucks looked to compete against McDonalds on a new breakfast fare (want fries with that latté?). While automakers (GM, Toyota, Ford, etc.) realized dismal sales in January, Hyundai took advantage by offering attractive terms to buyers who are worried about job losses.

C-SPAN must be enjoying stellar ratings as investors seem obsessed with the inner-workings of Congress and their debates on the stimulus and bailout. The markets disregarded much of the dire earnings and economic data (terrible unemployment report…see below) and focused on the newfound optimism that politicos can work together to get the country moving in the right direction. (Sorry Rush.) Despite Obama’s (less than optimistic) rhetoric, equity markets moved higher late in the week as Centrists appeared ready, willing, and able to reach some form of deal. Still, plenty of naysayers will try to “upset the apple cart.” Beware…even as a major package moves closer to fruition, the impact on the economy will still be a long time in waiting and the rally may be short-lived (buy the rumor, sell the fact). One step at a time to real hope and change.

Weekly Economic Calendar

Date Release Comments
February 2 Personal Income/Spending (12/08) Most savings since May as income fell 3 rd straight month
Construction Spending (12/08) Largest yearly decline in activity on record (1993)
ISM – Manu (01/09) Recovered slightly from 28-year low in December
February 4 ISM – Services (01/09) Better than expected reading on services sector
February 5 Initial Jobless Claims (01/31/09) Highest claims’ level since October 1982
Factory Orders (12/08) 5 th consecutive monthly decline
February 6 Unemployment Rate (01/09) Surged to a higher than expected 7.6%
Nonfarm Payroll (01/09) Most job losses since late 1974
Consumer Credit (12/08) 3 rd straight month of decreased borrowing activity
The Week Ahead
February 11 Balance of Trade (12/08)
February 12 Initial Jobless Claims (02/07/09)
Retail Sales (01/09)


Just how long until a stimulus package starts creating jobs? That answer can’t come soon enough for the almost 600,000 people who moved to the unemployment line in January, the most devastating month for job losses since 1974. The unemployment rate climbed to 7.6%, forcing many economists to (upwardly) revise their projections for the rest of the year (and beyond). Since the recession began in December 2007 (before many people even realized the economy was sluggish), the country has lost over 3.6 million jobs, the majority of them coming in the past three months. The rest of the data released during the week offered little contradictory evidence to the dire unemployment picture. Factory orders fell for the fifth straight month and the ISM index revealed that purchasing managers still look for contraction in the manufacturing sector. Though the services sector showed a slight rebound in its ISM survey, the index reported a fourth consecutive month of declining activity. Residential construction spending experienced its worst annual decline ever recorded (since 1993), though optimists are hopeful that a stimulus package that focuses on infrastructure growth will prompt a renewal in non-residential building.

The news remained dismal for retailers as same-store sales in January fell across all types of business models: department stores, teen chains, even some discounters. Gap, Target, Stage Stores, and Children’s Place were among those retailers that reported larger than expected declines in activity, and only Wal-Mart (again) took advantage of the countries’ limited appetite for anything but the bear necessities (like groceries). Macy’s and Liz Claiborne announced layoffs during the week, while AnnTaylor and Banana Republic continued major discounting campaigns. With the Fed stuck looking for creative ways to get involved (now that the Fund’s rate stands at about 0%), its international counterparts took action (or inaction) of their own. The Bank of England cuts its primary lending rate to a record low one percent, while the European Central Bank chose to leave its rate unchanged (for now) at two percent.

On the Horizon… When Tim Geithner talks, people listen. (The same could not be said for Hank Paulson by the time he left office.) Geithner is scheduled to outline the next stage of the Administration’s bailout plan and investors wait with bated breath for word about a “bad bank,” “mark-to-market” accounting, and foreclosure measures. Combined with more news about a Congressional stimulus package, Americans will soon see the direction the government intends to lead us down (and the projected costs…can Congress meet Obama’s Valentine’s Day stimulus deadline?). Without much economic data to be released during the week (retail sales, notwithstanding), expect plenty of debate about the likely success/failure of these two plans. Undoubtedly the latest retail statistics will be weak, but perhaps gifts cards (redeemed in January) could shed a tad bit of positive light on consumer activity. (Don’t hold your bated breath.)

Ron Brounes

www.ronbrounes.com

About the author:

Ron Brounes
Ron Brounes owns and operates Brounes & Associates, a Houston-based consulting firm that performs research, marketing, and education projects for financial services companies and other professionals.  Through the years, Brounes has worked directly with retail investors as well as institutional investors. He received his MBA from the Edwin Cox School of Business at Southern Methodist University in Dallas and his BBA degree in Accounting from The University of Texas.  More at: ww.ronbrounes.com

Visit Ron Brounes's Website


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