To read the full report, click here.
Recap of Last Week
by Steve Romasko
Despite a historic affair in politics, with the election of Barack Obama, Wall Street turned a blind eye after Tuesday and put economics front and center. Posting the biggest Election Day rally ever, gaining 4.1%, the S&P 500 snapped an 18% rally in the previous 6 trading sessions and gave way to a 10% decline in equities on Wednesday and Thursday. Concerns mounted on Wednesday when ADP’s employment report showed a contraction of 157,000 jobs. This report came in tandem with poor auto sales for Oct, and set the tone for Friday’s government report on employment. Adding to the pressure came several other economic reports—September’s factory orders declined 2.5%, October’s ISM Services Index dipped below expansion (>50) coming in at 44.4, 3rd Quarter productivity fell from 3.6% to 1.1%, and continued jobless claims spiked to 3.84 million.
Economics quickly coupled with poor earnings and cautious guidance from cyclical corporations as the last heavy release of earnings wound down. In retail, same-store sales declined -0.9%; 4.2% ex. Wal-Mart, who showed a 2.4% gain. Wal-Mart’s sales are relatively impressive from a bottom-up perspective, but does not bode well from a macroeconomic point-of-view as this suggests that cash-strapped consumers are shifting from the higher-end retailers to the lower-end alternatives to fit into the constrained needs of their personal budget. Moving to Central Bank action, the ECB cut rates 50bps to 3.25%, in line with expectations. The Bank of England acted aggressively, slashing its rate by 150bps to 3.00%—suggesting that they are behind the curve and underestimated the severity of the situation.
Progressing to Friday’s report, Nonfarm payrolls fell 240,000 well above consensus of 200,000; pegging unemployment at 6.5%. Worse, was the massive downward revision of September’s report from 159,000 to 284,000. Despite the extremely negative economic data, the reporting of the uncertain state of GM/Ford, and the amount of cash-burn they’re experiencing ($14.6B in one quarter), the market managed to trade up for a 2.9% gain—implying that the data was priced in the two previous sessions.
Outlook for Next Week
by Ryan Wheeler
While US markets wait for signs of economic strength domestically, the Chinese gave investors a signal that the rest of the world is feeling the same pain by announcing an economic stimulus package to help reduce the chance of a world recession effecting China. The 4 trillion Yuan (~$582) package, roughly 1/5 of china’s GDP, is centered around boosting infrastructure and low rent housing to help strengthen the economy. Markets will likely look at this move as a good sign for the slumping world economy, as the question of government support has previously been unclear.
As reported last week, auto-makers are announcing that they are burning through cash at an alarming rate and may require assistance from the US government. This issue will be important this week as President-Elect Obama starts the transition into his presidency. Obama has already shown sympathy for the auto market, signaling possible avocation for stimulus. Auto stocks are down an average of 63% in 2008 due to the effects of lower consumer spending, higher oil prices, and inflated input costs. The most recent sell-off has come as the outlook for auto-manufacturing continues to turn negative, possibly lasting much longer than previously expected. Obama has another tough decision to make in the near future that could help dictate the steps the government takes to aid the failing financial markets. The role of the Treasury Secretary has taken on a new level of importance in the last few quarters, making Obama’s choice of Paulson’s successor a possible market mover.
Next week’s economic calendar is back-end weighted with retail sales being the biggest market mover. Expectations are for the index to decline by 1%(ex-auto) after a 1.2% drop last month. The other important indicators this week include Business Inventories, Consumer Sentiment and Trade Prices. Consumer Sentiment should give investors an idea how consumers will act during this year’s holiday season. With this set of data, big retailers could be the stocks to watch this week. Financials will, as every week in the last year, continue to be the most sensitive, jumping at the sight of any flea of hope or disaster.
To read the full report, click here.
