By William Patalon III
Executive Editor
Money Morning/The Money Map Report
With the benchmark Federal Funds rate already down to 1.0%, U.S. Federal Reserve Chairman Ben. S. Bernanke has only so much room for another cut (although many economists are predicting an additional half-percentage-point cut at the Dec.15-16 meeting).
The Fed extended the lives of recently initiated programs (lending facilities for investment firms, for instance) and is exploring additional moves (like Treasury purchases) aimed at reviving the credit markets. Bernanke believes more needs to be done to slow the pace of foreclosures, especially since they jumped another 10% in September.
Meanwhile, the U.S. Treasury Department is working on a plan to rejuvenate the housing market by slashing mortgage rates to 4.5% on new purchases. Experts say that at some point these stimuli must take hold, but that’s not necessarily true.
This week’s economic calendar is highlighted by two late-week releases that are sure to garner much analysis. The producer price index (PPI) brings another look into the inflation picture, though the dramatic decline in energy prices may renew “premature” talks of deflation. And November retail sales should offer few positive surprises for the holiday season.
Are there any 12-step programs for overcoming “gloom and doom?”
Market Matters
Black Friday has passed. And so has Cyber Monday (the Monday after Thanksgiving when online shopping begins in earnest). So let the analysis begin.
While retailers continued to cry “gloom and doom,” the so-called experts did not appear to be quite as pessimistic. According to National Retail Federation, holiday sales will climb by 2.2% from last year’s levels. Research firm ShopperTrak claimed that sales on Black Friday rose by 3%, and ComScore Inc. (SCOR) said Monday’s online activity soared by 15% from 2007. Toys “R” Us Inc. execs “were definitely pleased with sales” during the initial holiday shopping weekend, and Internet data collector, Hitwise, revealed that web traffic increased by 21% at Amazon.com Inc. (AMZN).
While November sales remained bleak (see below), analysts point out Thanksgiving came late in the month (Nov. 27) and Cyber Monday actually fell in December. The optimists (rare as they are) are hopeful holiday activity may be skewed with December faring far better than November.
Automakers returned to Capitol Hill. But for “Begging for a Bailout II,” the “Big Three” CEOs were smart enough leave their corporate jets at home and arrive in hybrid sedans. Maybe next time they can carpool. But there’s a problem: Combined, the Big Three are this time are requesting $34 billion in loans, which is $9 billion more than they’d been lobbying for all along. Ford Motor Co. (F) implied its situation may be less dire and a mere $9 billion standby line of credit would suffice (assuming the others don’t fail). The execs also expressed a willingness to operate under a federal oversight board, and even the unions offered concessions regarding health plans and the jobs bank. While some politicos used scare tactics to predict even greater economic hardships should relief not be granted, others remained skeptical of the unlimited bailouts. Mostly, they chose to grandstand and politicize the tragic times to win support at home (as if their constituents even watch C-SPAN). Stay tuned…
In other corporate news, Goldman Sachs Group Inc. (GS) may be forging more into the banking world as it considers launching an Internet operation to increase its deposit base. Meanwhile, analysts predict its fourth quarter loss could skyrocket to $2 billion. Beezer Homes USA Inc. (BZH) and Blackberry-maker Research in Motion Inc. (RIMM) both lowered their quarterly outlooks and AT&T Inc. (T) became the latest domestic giant to announce layoffs. While General Electric Co. (GE) believes its earnings will be weaker than initially expected, the company plans to maintain its dividend and solid commitment to shareholders. Merrill Lynch & Co. Inc. (MER) shareholders approved its sale to Bank of America Corp. (BAC), though total valuation plunged to $20 billion (from $50 billion at announcement) as a result of the stock market decline.
Oil continued its never-ending decline below the $41 a barrel level, a point not seen in four years, while gas fell below $1.80 a gallon nationally. While winter weather generally means higher energy prices, the economic doldrums have more than offset the traditional trend.
Treasury yields plunged to historic lows on speculation that the Fed may purchase government securities to support the credit markets (as well as the ongoing “flight-to-quality” moves). Stocks resumed their overall bearish ways on dramatic volatility, as investors grew more fearful about the economy before totally disregarding the awful unemployment data (see below) and staging a late-week “illogical” rally. Then again, since when have markets been considered logical?
Market/ Index |
Year Close (2007) |
Qtr Close (09/30/08) |
Previous Week |
Current Week |
YTD Change |
|
Dow Jones Industrial |
13,264.82 |
10,850.66 |
8,829.04 |
8,635.42 |
-34.90% |
|
NASDAQ |
2,652.28 |
2,091.88 |
1,535.57 |
1,509.31 |
-43.09% |
|
S&P 500 |
1,468.36 |
1,164.74 |
896.24 |
876.07 |
-40.34% |
|
Russell 2000 |
766.03 |
679.58 |
473.14 |
461.09 |
-39.81% |
|
Fed Funds |
4.25% |
2.00% |
1.00% |
1.00% |
-325 bps |
|
10 yr Treasury (Yield) |
4.04% |
3.83% |
2.96% |
2.66% |
-138 bps |
Economically Speaking
In what could one of the worst kept secrets of the year, the National Bureau of Economic Research (NBER) revealed the domestic economy has been in a recession since December 2007. In the post-World War II era, the average length of recession has been 11 months, with the downturns of 1973-74 and 1980-81 lasting 16 months.
And the current recession will likely surpass the norm. As the data gets weaker with each passing release, most economists expect this recession to last beyond the next four months and to set a new duration record in post-World War II times.
Then again, each new month means we are getting closer to the end; additionally, equity markets typically serve as leading indicators and begin to rebound months before a recovery starts – meaning we’ll see a bull market get under way while the economy is still in the depths of recession.
The weekly releases revealed that any pending rebound should remain on the back burner for some time. In November, the unemployment rate jumped to 6.7% as the U.S. economy lost more than 500,000 jobs, the largest monthly decline in 34 years. In the last three months alone, more than 1.2 million individuals have moved into the ranks of the unemployed.
November represented the 11th straight month of labor contraction. Both the manufacturing and services sectors continued to struggle according to Institute for Supply Management and factory orders plummeted by the largest amount in eight years. Retailers reported weak same-store sales numbers, with only Wal-Mart benefiting from the dire times. Even Costco Wholesale Corp. (COST) experienced a steeper than expected decline. And of course, dismal auto sales brought more ammunition to those Congressional hearings as General Motors Corp. (GM) (-41%) and Ford (-31%) were joined by Honda Motor Corp. (ADR: HMC) (-32%) and Toyota Motor Corp. (ADR: TM) (-34%) in the “if misery loves company” category. Meanwhile, Bernanke and friends are hard at work dreaming up creative ways to shore up the economy, particularly after the Beige Book reported softer activity across the country.
Weekly Economic Calendar
|
Date |
Release |
Comments |
|
December 1 |
Construction Spending (10/08) |
Larger than anticipated decline |
|
|
ISM (Manu) Index (11/08) |
Worst level since May 1982 |
|
December 3 |
ISM (Services) Index (11/08) |
Continued contraction in non-manufacturing sectors |
|
|
Fed Beige Book |
Enhanced weakness across all 12 districts |
|
December 4 |
Initial Jobless Claims (11/29/08) |
2nd straight decline in claims, though reflects weak labor |
|
|
Factory Orders (10/08) |
Largest drop in orders in 8 years |
|
December 5 |
Unemployment Rate (11/08) |
Climbed to 6.7% |
|
|
Non-farm Payroll (11/08) |
Largest loss in jobs in 34 years |
|
|
Consumer Credit (10/08) |
Decline in borrowing due to lower auto sales |
|
The Week Ahead |
|
|
|
December 11 |
Initial Jobless Claims (12/06) |
|
|
|
Balance of Trade (10/08) |
|
|
December 12 |
PPI (11/08) |
|
|
|
Retail Sales (11/08) |
|
News and Related Story Links:
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Money Morning News Analysis:
Black Friday, Cyber Monday Fail to Allay Retail Anxiety.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.