Ignore the Economic Reports, Even if You Can’t Ignore the Pain
By William Patalon III
Executive Editor
Money Morning/The Money Map Report
The economic releases now (and for the immediate future) will be weak – that’s a given.
Therefore, investors should give them a passing glance, evaluate the consequences and potential remedies, and move on. In fact, the bigger picture should focus on how to correct these assorted problems.
Expect plenty of over-analysis of the provisions of the revised bailout plan, as “experts” debate the merits of the overall terms and try to determine if – and how – the bailout plan will work – and who it will benefit. (Does anyone in Congress even understand mark-to-market accounting?)
Politicians will be politicians – they just can’t help themselves. Plenty of back-slapping and blame-placing is inevitable as the campaign season heats up and they try to prove to voters that they personally are not the problems in Washington today (everyone else is).
As the new quarter begins, portfolio managers may try to shore up their funds and limit the losses by the end of the year. They may engage in bargain hunting and bottom fishing and seek value in the depressed market. For now, inflation has been placed on the back burner, so hopefully oil prices will continue to cooperate in the weeks to come.
And, of course, retailers will begin bellyaching in earnest as they predict a lackluster holiday season. That’s a phenomenon that should be widely expected around this time each year – but this time around it’s for real.
Market Matters
Undoubtedly the $700 billion government bailout represented a very tough vote and politicos should not be criticized for having significant reservations. But those reservations should not be partisan in nature and shouldn’t be motivated solely by self-interest and re-election concerns.
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The proposal was designed to improve the balance sheets of the nation’s (remaining) key financial firms, restore confidence in the credit markets, and elevate the economy from further deterioration. Provisions on executive compensation, Federal Deposit Insurance Corp. (FDIC) insurance, and mark-to-market accounting were added to garner support (though plenty of “pork” and unrelated tax breaks appeared in the Senate’s passed version). While the plan may be far from perfect, “experts” believe it represents the best hope for avoiding the economic abyss. On Friday, calmer (or, at least, less partisan) heads prevailed as the House of Representatives approved the revised plan by a resounding 263-171 vote on its second try.
"In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are now."
On that note, Berkshire Hathaway Inc.’s (BRK.A, BRK.B) Warren Buffett urged Congress to act and then put his money where his mouth is by investing $3 billion in ailing General Electric Co. (GE) (to complement his $5 billion investment in Goldman Sachs Group Inc. (GS)). According to Buffett, investment opportunities abound “when others are fearful.” That fear continued during the week as Wachovia Corp. (WB) became the latest bank victim and was acquired by rival (and once “down and out”) Citigroup Inc. (C )… make that Wells Fargo & Co. (WFC) which upped Citi’s offer and may have initiated a bidding war (and a few lawsuits).
The $2 trillion hedge fund industry is also going through significant changes; industry insiders predict 10% to 20% of assets will be redeemed this year and up to 2,000 funds may soon go out of business.
In non-financial news, techs have been taking it on the chin as the credit crisis impacts the IT expenditures of businesses across all sectors. Further, analysts cut ratings on Apple Inc. (AAPL), fearful that iPod sales will suffer this holiday season.
Oil prices plummeted again below the $100 a barrel level (and beyond) as traders “speculated” that the economic slowdown would hinder future demand. Likewise, news of the failed House vote sent equities tumbling and the Dow Jones Industrial Average to its worst one-day drop in its 112-year history. Excess volatility ensued as investors were unsure how to react to the political developments. The corporate debt and commercial paper (short-term borrowing) markets have all but dried up and many businesses may have difficult making payroll without a new funding source. While the bailout is not perfect, crucial action was needed in these dire times.
| Market/ Index |
Year Close (2007) |
Qtr Close (6/30/08) |
Previous Week |
Current Week |
YTD Change |
|
Dow Jones Industrial |
13,264.82 |
11,350.01 |
11,143.13 |
10,325.38 |
-22.16% |
|
NASDAQ |
2,652.28 |
2,292.98 |
2,183.34 |
1,947.39 |
-26.58% |
|
S&P 500 |
1,468.36 |
1,280.00 |
1,213.27 |
1,099.23 |
-25.14% |
|
Russell 2000 |
766.03 |
689.66 |
704.79 |
619.40 |
-19.14% |
|
Fed Funds |
4.25% |
2.00% |
2.00% |
2.00% |
-225 bps |
|
10 yr Treasury (Yield) |
4.04% |
3.98% |
3.83% |
3.64% |
-40 bps |
Economically Speaking
During the week, investors continued to dwell on the economic sluggishness as if they were caught entirely off-guard, and subsequently sent the equity markets lower on each negative release. Of note, the ISM index depicted that manufacturing activity fell to its lowest reading in seven years at 43.5, and is dangerously close to recessionary levels.
Likewise factory orders fell more than expected in August as purchases of aircraft and autos suffered double-digit declines. A weak consumer spending release prompted renewed fears that the holiday shopping season will be one of the worst in recent history.
As for labor, jobless claims soared last week to a seven-year high as businesses trimmed down workforces to accommodate the weaker economy (and due to the effects of hurricanes Gustav and Ike). Additionally, the economy lost another 159,000 jobs in September, the ninth straight month of labor contraction and the worst decline in over five years. Again, while the numbers are indeed concerning, they should not have been totally unexpected.
The U.S. Federal Reserve and the world’s central banks continued to add significant liquidity to the global financial system by enhancing the short-term lending capabilities that are available to banks. The European Central Bank held its key rate unchanged this week, but new speculation has current Fed Chairman Ben S. Bernanke and friends dropping the benchmark Federal Funds rate in the not-so-distant future. Meanwhile, Alan Greenspan (remember him?) predicted that an economic recovery would occur “sooner rather than later.”
Weekly Economic Calendar
|
Date |
Release |
Comments |
|
September 29 |
Personal Income/Spending (08/08) |
Slow activity as spending unchanged from July |
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September 30 |
Consumer Confidence (09/08) |
Surprising rise in confidence |
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October 1 |
Construction Spending (08/08) |
Unexpected rise in residential activity |
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ISM (Manu) Index (09/08) |
Nearing recessionary level |
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October 2 |
Initial Jobless Claims (09/27/08) |
Highest level in 7 years |
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Factory Orders (08/08) |
Weakness continues in aircraft and auto orders |
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October 3 |
Unemployment Rate (09/08) |
Flat at 6.1% |
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Nonfarm Payroll Additions (09/08) |
Another 159k jobs lost last month |
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ISM (Services) Index (09/08) |
Depicts ever-so-slight sector expansion |
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The Week Ahead |
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October 7 |
Fed Policy Meeting Minutes |
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Consumer Credit (08/08) |
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October 9 |
Initial Jobless Claims (10/04/08) |
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October 10 |
Balance of Trade (08/08) |
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News and Related Story Links:
- Money Morning News:
Banking Bailout Becomes Law With House Vote, Bush Signing. - Money Morning Credit Crisis Survival Kit Story:
Credit Crisis Safety Plays: How to Make Sure That Your Bank Deposits are FDIC Insured. - Money Morning News:
Bailout Bill Clears the Senate, Heads for (Another) House Vote. - Money Morning News:
General Electric to Raise “At Least” $15 Billion Via Stock Sale, Investment From Warren Buffett’s Berkshire Hathaway. - Money Morning News Analysis.
Buffett’s Goldman Deal Has Big Benefits, but What Else is Berkshire Up To? - Money Morning News Analysis:
Citigroup Takes Issue with Wells Fargo Bid for Wachovia. - Money Morning News Analysis:
Surprise Rejection of Bailout Deal Causes Record Decline in U.S. Stocks, Paves the Way for a Better Accord. - Money Morning News Analysis:
Trichet Holds ECB Rates Steady but Softens Stance on Inflation.
Comment by Rick R. Pelley on 6 October 2008:
Those on the watch, of course, cannot, and should not, “ignore” per se, the economic reports coming out these days. But the pain, when one needs to pay for something, with or without reports, is becoming more intense and unbearable.
This “money” phenomenon when seen against the backdrop of a “changing” overall world picture can be understood.
Pain for certain individuals, therefore, can mean “gain” in the long run scheme of things.
Comment by Andy Abraham on 6 October 2008:
What happens if we get into a very long term situation as in Japan ..or as we have been discussing on Myinvestorsplace.com… buying in too early as Ben Graham did…What do you suggest we really do? Thank you in advance..
Comment by chris erickson on 7 October 2008:
The issue now is whether the banks will start lending as they should or will they tuck their tails between their legs & run /hide… If they don’t make money avaliable the bill/bailout
will be a sham / for nought…The key to fixing this is 1 getting
money out to people ; 2 stabilze housing , 3 get companies to start producing goods & services here instead of over seas…..
Now if congress had realy wanted to help they would have made the access to these funds ; tied to refinancing all existing loans to a lower rate & to discount the value of the property / loan buy the amount that realestate has dropped in the areas where the loans are made/issued… The lenders as it is will be taking a very large tax credit any way & not paying ant taxes if any due to the loss they have taken this year or maybe for a few years .. On top of this they are going to be able to dump all if not most of the bad loans they hold on the goverment/tax payer…. But congress just panicked & gave the money out with no real strings attached..
So lets see if they lenders get their heads out of where the sun doesn’t shine & do the right thing , or will the just keep their heads there with their tails between their legs , saying
woe is me , woe is me …. But they are foregetting about the
tax payer who is the one holding the bag for their greed.
Who now is paying their bill for them … What a joke….
Lets see if they will actualy help or not…