Looks like the Feds could use a mulligan (do-over). When the bailout plan was first announced, one of its primary goals was to resurrect the balance sheets of ailing banks by buying underwater assets.
Additionally, direct government investments were supposed to encourage bank lending activity that would help thaw the stalled credit markets. Well, just a few weeks after its creation, Treasury Secretary Paulson announced that the government will not buy troubled assets (that no one seems to know how to value) and the plan instead will focus on enhancing consumer lending. Meanwhile, some healthy institutions have received direct investments, but used the proceeds to purchase struggling competitors and have not increased lending programs that could stimulate economic growth. Non-banks also have been recipients of the government’s generosity as insurance giant AIG received $40 billion from this package under the terms of its newly structured bailout. American Express applied for and became a commercial bank in order to tap into the resources, while GM and other automakers are pleading to participate. While certain tweaks should have been expected to ensure the bailout effectively achieves its goals of repairing the financial system, the actions this week did little to generate any investor confidence.
With foreclosures soaring in October by 25% from last year’s level, Freddie/Fannie (now known as the government) announced plans to modify hundreds of thousand of loans by reducing mortgage rates or even forgiving a portion of the outstanding principle. Likewise, Citigroup (C), JP Morgan-Chase (JPM), and Bank of America (BAC) have increased their efforts to stem foreclosures by aiding struggling borrowers through similar modifications. Speaking of Citi, its CEO announced plans to slash total compensation expenses by 25% or up to 60,000 jobs and rumors have its Chairman among those to be given his walking papers. Not to be outdone, Morgan Stanley will be cutting close to 10% of its institutional securities and asset management units. In non-financial news, Sun Microsystems (JAVA) plans to reduce its workforce by over 5,000 jobs; Intel and Best Buy (BBY)offered pessimistic outlooks; Circuit City filed for bankruptcy protection (just in time for the holidays), and retailers Macy’s and J.C. Penney issued weak earnings reports. While Wal-Mart fared better than many competitors, the company also warned of a challenging quarter ahead.
Early in the week, China announced a $586 billion economic stimulus package that served to give a jumpstart to the global markets. Unfortunately, the euphoria was short-lived (so what else is new?) as investors focused on the weak earnings reports, the uncertainty about the domestic automakers, and the restructured bailout plan. Three days of intense selling meant $1 trillion of lost shareholder wealth. With the Dow plunging below 8,000, bottom-fishers re-emerged late Thursday, propelling the index to a 900-point swing and its third-largest point gain ever recorded. Volatility continued Friday as investors worried about the weak retail numbers (see below) and sold positions heading into the weekend (especially late in the session). Oil prices fell below $60/barrel to a 20-month low; gasoline pushed closer to a national average of $2/gallon with consumers in Des Moines, Iowa (of all places) paying as low as $1.75. At least, that’s good news for those “gloom and doom” retailers. (Maybe they should tap into the bailout fund as well?)
Market Matters…
Weekly Economic Calendar
How quickly things can change. In June, the Organization for Economic Cooperation and Development (OECD) projected global economic growth to increase by 1.7% in 2009, as the agency believed the financial crisis had all but ended. Remember, last summer most Fed watchers also expected the next rate move to be higher as Bernanke and friends seemed more concerned about threats of inflation (with $145/barrel oil) than any domestic (or global) recession. Fast forwarding to today, the OECD now claims the developed nations of the world have slipped into a collective recession, and 2009 will bring a consolidated decline of 0.3% in GDP for its 30-member countries (with the U.S. suffering a 0.9% contraction).
By contrast, in a recent Wall Street Journal survey, the 54 participating economists believe that the domestic economy will begin to rebound by mid-2009 and slight growth will emerge by the fourth quarter. (No shortage of contradictory “experts” these days.) These same economists overwhelmingly believe that President Obama should reappoint Fed Chair Bernanke in 2010. Late in the week, Dr. B. stated that the world’s central bankers have pledged to work together to solve the global financial crisis and even opened the door to another rate cut (below the current 1% level). President W welcomed world leaders to an economic summit by praising the benefits of capitalism (that some may be doubting these days) and warned against excessive government regulations (despite the ever-expanding global bailout plans).
A light week in the economic calendar brought little stress relief to investors (not to mention retailers). Friday’s retail sales release was reported as a 2.8% decrease in October, the largest percentage decline on record. While prospective buyers have been staying off those auto lots in droves, the complete and utter lack of consumer confidence these days also resulted in lower sales of furniture, clothing, and virtually everything else. However, a few eternal optimists remain who point out the reduced prices at the pumps should serve as an economic stimulus package of its own over the next few months. Further, the plans to renegotiate mortgage terms will help many borrowers get a better handle of their cashflow positions (without suffering foreclosure).
On the Horizon… Rhetoric about the bailout appears never-ending as the topic moves beyond banks to automakers. With GM burning through cash at a pace that could mean bankruptcy, Dems are pushing for an auto bailout (or access to the bank’s package). Meanwhile, Republicans claim their counterparts are merely pandering to their union base and the domestic automakers should not be rewarded for inefficient operations and ineffective management. Expect the debate to grow more heated as some policymakers point out the massive job losses that would ensue, while others project few negative ramification beyond the auto industry itself (unlike the financial crisis which impacted all sectors). Target (TGT), Home Depot (HD), and Ann Taylor (ANN) (among others) report earnings, though poor results are already forgone conclusions. A hectic economic calendar will be highlighted by the widely anticipated inflation data as falling energy prices work through the economy. (Just a few months ago, such releases were feared…How quickly things can change.)
Additionally, direct government investments were supposed to encourage bank lending activity that would help thaw the stalled credit markets. Well, just a few weeks after its creation, Treasury Secretary Paulson announced that the government will not buy troubled assets (that no one seems to know how to value) and the plan instead will focus on enhancing consumer lending. Meanwhile, some healthy institutions have received direct investments, but used the proceeds to purchase struggling competitors and have not increased lending programs that could stimulate economic growth. Non-banks also have been recipients of the government’s generosity as insurance giant AIG received $40 billion from this package under the terms of its newly structured bailout. American Express applied for and became a commercial bank in order to tap into the resources, while GM and other automakers are pleading to participate. While certain tweaks should have been expected to ensure the bailout effectively achieves its goals of repairing the financial system, the actions this week did little to generate any investor confidence.
With foreclosures soaring in October by 25% from last year’s level, Freddie/Fannie (now known as the government) announced plans to modify hundreds of thousand of loans by reducing mortgage rates or even forgiving a portion of the outstanding principle. Likewise, Citigroup (C), JP Morgan-Chase (JPM), and Bank of America (BAC) have increased their efforts to stem foreclosures by aiding struggling borrowers through similar modifications. Speaking of Citi, its CEO announced plans to slash total compensation expenses by 25% or up to 60,000 jobs and rumors have its Chairman among those to be given his walking papers. Not to be outdone, Morgan Stanley will be cutting close to 10% of its institutional securities and asset management units. In non-financial news, Sun Microsystems (JAVA) plans to reduce its workforce by over 5,000 jobs; Intel and Best Buy (BBY)offered pessimistic outlooks; Circuit City filed for bankruptcy protection (just in time for the holidays), and retailers Macy’s and J.C. Penney issued weak earnings reports. While Wal-Mart fared better than many competitors, the company also warned of a challenging quarter ahead.
Early in the week, China announced a $586 billion economic stimulus package that served to give a jumpstart to the global markets. Unfortunately, the euphoria was short-lived (so what else is new?) as investors focused on the weak earnings reports, the uncertainty about the domestic automakers, and the restructured bailout plan. Three days of intense selling meant $1 trillion of lost shareholder wealth. With the Dow plunging below 8,000, bottom-fishers re-emerged late Thursday, propelling the index to a 900-point swing and its third-largest point gain ever recorded. Volatility continued Friday as investors worried about the weak retail numbers (see below) and sold positions heading into the weekend (especially late in the session). Oil prices fell below $60/barrel to a 20-month low; gasoline pushed closer to a national average of $2/gallon with consumers in Des Moines, Iowa (of all places) paying as low as $1.75. At least, that’s good news for those “gloom and doom” retailers. (Maybe they should tap into the bailout fund as well?)
Market Matters…
| Market/Index | Year Close (2007) | Qtr Close ( 09/30/08 ) | Previous Week ( 11/07/08 ) | Current Week ( 11/14/08 ) | YTD Change |
| Dow Jones Industrial | 13,264.82 | 10,850.66 | 8,943.81 | 8,497.31 | -35.94% |
| NASDAQ | 2,652.28 | 2,091.88 | 1,647.40 | 1,516.85 | -42.81% |
| S&P 500 | 1,468.36 | 1,164.74 | 930.99 | 873.29 | -40.53% |
| Russell 2000 | 766.03 | 679.58 | 505.79 | 456.52 | -40.40% |
| Fed Funds | 4.25% | 2.00% | 1.00% | 1.00% | -325 bps |
| 10 yr Treasury (Yield) | 4.04% | 3.83% | 3.78% | 3.75% | -29 bps |
Weekly Economic Calendar
| Date | Release | Comments |
| November 13 | Initial Jobless Claims ( 11/08/08 ) | Worst showing since immediate aftermath of 9-11 |
| Balance of Trade (09/08) | Overall deficit shrank, though shortfall with China grew | |
| November 14 | Retail Sales (10/08) | Largest monthly decline on record |
| The Week Ahead | ||
| November 17 | Industrial Production (10/08) | |
| November 18 | PPI (10/08) | |
| November 19 | Housing Starts (10/08) | |
| CPI (10/08) | ||
| Fed Policy Meeting Minutes | ||
| November 20 | Initial Jobless Claims ( 11/15/08 ) | |
| Leading Eco. Indicators (10/08) |
How quickly things can change. In June, the Organization for Economic Cooperation and Development (OECD) projected global economic growth to increase by 1.7% in 2009, as the agency believed the financial crisis had all but ended. Remember, last summer most Fed watchers also expected the next rate move to be higher as Bernanke and friends seemed more concerned about threats of inflation (with $145/barrel oil) than any domestic (or global) recession. Fast forwarding to today, the OECD now claims the developed nations of the world have slipped into a collective recession, and 2009 will bring a consolidated decline of 0.3% in GDP for its 30-member countries (with the U.S. suffering a 0.9% contraction).
By contrast, in a recent Wall Street Journal survey, the 54 participating economists believe that the domestic economy will begin to rebound by mid-2009 and slight growth will emerge by the fourth quarter. (No shortage of contradictory “experts” these days.) These same economists overwhelmingly believe that President Obama should reappoint Fed Chair Bernanke in 2010. Late in the week, Dr. B. stated that the world’s central bankers have pledged to work together to solve the global financial crisis and even opened the door to another rate cut (below the current 1% level). President W welcomed world leaders to an economic summit by praising the benefits of capitalism (that some may be doubting these days) and warned against excessive government regulations (despite the ever-expanding global bailout plans).
A light week in the economic calendar brought little stress relief to investors (not to mention retailers). Friday’s retail sales release was reported as a 2.8% decrease in October, the largest percentage decline on record. While prospective buyers have been staying off those auto lots in droves, the complete and utter lack of consumer confidence these days also resulted in lower sales of furniture, clothing, and virtually everything else. However, a few eternal optimists remain who point out the reduced prices at the pumps should serve as an economic stimulus package of its own over the next few months. Further, the plans to renegotiate mortgage terms will help many borrowers get a better handle of their cashflow positions (without suffering foreclosure).
On the Horizon… Rhetoric about the bailout appears never-ending as the topic moves beyond banks to automakers. With GM burning through cash at a pace that could mean bankruptcy, Dems are pushing for an auto bailout (or access to the bank’s package). Meanwhile, Republicans claim their counterparts are merely pandering to their union base and the domestic automakers should not be rewarded for inefficient operations and ineffective management. Expect the debate to grow more heated as some policymakers point out the massive job losses that would ensue, while others project few negative ramification beyond the auto industry itself (unlike the financial crisis which impacted all sectors). Target (TGT), Home Depot (HD), and Ann Taylor (ANN) (among others) report earnings, though poor results are already forgone conclusions. A hectic economic calendar will be highlighted by the widely anticipated inflation data as falling energy prices work through the economy. (Just a few months ago, such releases were feared…How quickly things can change.)
