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Recap of Last Week
by Steve Romasko
The bear market investors are currently experiencing took a turn for the worst, when the S&P 500 not only set new lows for the cycle, but erased all of the gains from the 2002-07 bull market. Uncertainty was the order of the week, following poor corporate news, economics, and the Big Three leaving Washington empty-handed. Citigroup was front-and-center in corporate news, as investors worried that capital-raising is imminent among financials in order to offset the steep losses. Adding fuel to the fire, was surfacing signs that the commercial mortgage backed securities (CMBS) market is beginning to deteriorate— evident in the defaulting $209 million loan made to Westin Hotels in Arizona and South Carolina , as well as the defaulting $125 million loan made to the Promenade Shops in California; both loans were originated by JP Morgan. Investors saw no signs for a positive outlook, took this as such, and triggered a broad sell-off in the financial sector. Citigroup, however, took most of the pain with their share price plummeting 60% to $3.77, amid no indication of pay cuts from senior executives and announced plans to cut 52,000 jobs.
News only got worse when automakers met in Washington to ask for bailout money. The CEOs started the session on a bad note, and created a PR nightmare, by arriving in Washington in three separate private jets. The point was made that commercial travel should have been used—Rep. Gary Ackerman (DNY) said it best, stating that you don’t “show up at the soup kitchen in a high hat and tuxedo” asking for food. The meeting went on disastrously as the executives failed to provide a clear-cut plan about how they were going to significantly restructure their businesses so they wouldn’t have to return to Washington in the future. Congress was unimpressed, and consequently, withheld aid from the automakers. A deadline was set for December 3rd for the automakers to hammer out a new plan if they were going to expect any money from this remaining administration. This left investors in a state of unease, and added to the selling pressure, due to the uncertainty of what bankruptcy would do to the economy if the big three are to leave, again, empty-handed.
In addition to the news from Citigroup and Detroit, came a wave of bleak economic data. The Fed implicated significant downward revisions to its 2009 outlook— GDP was revised from 2.0-2.8% to (0.2)-1.1%, unemployment was revised from 5.3-5.8% to 7.1-7.6%. The data also suggested a second-half economic recovery—however, without signs of slowing in the current crisis, investors felt this was not the case. In economic releases, October industrial production increased 1.3% due to the reopening of plants after hurricane season.
Housing data showed starts falling 4.5% in October, and building permits declined 12% to a rate of 708,000, showing no signs of slowing. Moving to jobless numbers, claims spiked 27,000 to a horrid 542,000. Continuing claims reflected the difficult job market jumping from 3.9 million to 4.01 million. The only good economic news came from inflation reports. Consumer prices fell 1.0% and Producer prices declined 2.8% in the month of October. However, this is taken with a grain of salt, as it indicates the potential for a deflationary environment. Perhaps the single most positive news that emerged from the week was the nomination of New York Federal Reserve President, Timothy Geithner, to become the new Treasury Secretary under the Obama Presidency— the market took it as such and rallied 6.3% on Friday. Geithner is highly regarded among his peers and is seen as having a firm understanding of the current financial and economic situation. From today’s standpoint the future is uncertain, and investors should remain cautious. As with all economic crises, the market will recover but it takes time—then, it should be understood that the problem of today is multifaceted and complex, and there is no cure-all solution that will fix everything overnight.
Outlook for Next Week
by Ryan Wheeler
This week’s equity market should consist of relatively light volume after last week’s news about an expected decision of New York Fed President Timothy Geithner as Treasury Secretary relieved some of the amassed tension on the street and the Thanksgiving Holiday should take people’s minds off of the market. But, as always there is the potential for unexpected news or deviation from market expectation that can start an uproar. This week has that potential written all over it.
The financials could add another name to the list of government aided companies as Citi Group (NYSE:C) is said to be in talks with the Fed to guarantee as much as $200B in troubled assets. These assets are part of a larger asset pool that CEO Vikram Pandit said previously he was looking to shed over the next three years. Why shed them when you can have an explicit guarantee by the US government? Smart man if you are a CEO looking limit losses.
Black Friday, one of the biggest shopping days of the year, will certainly reflect lightened consumer spending due to tight budgets. The trade-down effect that has been this year’s retail theme will continue to affect higher-end retailers and benefit the thriftier names like Wal-Mart, Target and Costco. Higher-end department stores could find their lines a little shorter this year, leaving shelves stocked and little need for high inventory build-up. The only hope for retailers is that they correctly forecast sales so they don’t have to pay the high interest rates that are currently being charged for short-term loans that many company’s use to buy inventory.
Existing Home Sales are expected to rise to 5.00M for the month of October, a decrease of 3.4% from September’s level of 5.18M homes, but 4bp higher than the 9 month average of 4.96M. Any positive surprise in Home Sales could indicate a recovering demand in a housing market that has been oversupplied by weak demand and forced sales by owners who have recently seen a decrease in their underlying worth. Preliminary third quarter GDP figures will also help dictate the direction of stocks as economists and portfolio managers look to refine their expectations for the direction of US production in the short to intermediate term.
Further discussions about the fate of the major auto makers will surly cause a lot of movement in the Big 3 as congress decides whether or not to fund the failing giants as they run out of operating cash. It can be expected that this issue will be highly debated in the media and on the street, making any action a force to move the broader market. Some economists will argue about basic economic theory that says that the market powers will fix the problem if it is left untouched, while others will argue about the ripple effect that a failure of any of these companies would create. Whatever the decision, the market will show its opinion in the usual fashion of a wild swing. Have at it day-traders, the rest of us will sit back and watch.
