Start the conversation
By William Patalon III
Money Morning/The Money Map Report
Another day, another write-down – and another cash infusion from a foreign government.
Investors awoke each morning last week – expecting a new day – only to seemingly relive the same events over and over again.
Financial institutions post big losses. Federal Reserve Chairman Ben S. Bernanke makes some reassuring comments, President George W. Bush tries to do the same [with less success], and there's another three-digit loss on the Dow Jones Industrial Average.
The next day, we do it all again.
While it may sound like a sequel to the 1993 Bill Murray comedy vehicle "," we've actually just detailed what U.S. investors have been experiencing day after day after day of late.
If anything, last week's events only exacerbated the pain investors have been feeling. While U.S. giants General Electric Co. (GE) and International Business Machines Corp. (IBM) reported favorable fourth-quarter earnings, investors only seemed to care about the financial-services companies. Even with the extremely low expectations that replaced previous profit forecasts, the ensuing earnings reports clearly were a disappointment.
Citigroup Inc. (C) lost slightly less than $10 billion for the quarter, its worst showing in the company's "rich" 196-year history. The banking giant also went against promises and slashed its dividend. It had to reach out to a few, new global friends – sovereign-wealth funds Singapore Investment Corp. and the Kuwait Investment Authority – and one old friend [Saudi Prince Alwaleed bin Talal], raising $12.5 billion.
Not to be outdone, Merrill Lynch & Co. Inc. (MER) matched that $10 billion loss with one of its own [the worst in its equally "rich" 94-year history], accepting so-called "passive" investments from sovereign funds Korean Investment Corp., Kuwait Investment Authority, and Japan's Mizuho Corporate Bank.
Moody's Investors Service (MCO) moved closer to a ratings downgrade of Ambac Financial Group Inc. (ABK), a major bond insurer. And investors panicked [yet again] over the potential declining valuations of Ambac-insured municipal bonds.
In other equally depressing earnings news, American Airlines parent AMR Corp. said it lost almost $70 million during the prior three months, as soaring fuel costs took a huge bite out of the revenue it has generated.
Intel Corp. (INTC) helped reverse the recent optimism that surrounded the high-tech sector by announcing poor earnings and offering a dire outlook for the upcoming quarters. Consumers have started to feel the pinch in a big way as home-furnishings retailer Williams-Sonoma Inc. (WSM) warned that future profits would disappoint, and California Pizza Kitchen (CPKI) cut its 2008 outlook due to reduced patron traffic and lower meal spending.
Investors got a bit of a reprieve on the energy-fueled inflation front as oil prices continued to back away from recent highs of $100 a barrel. President Bush begged his counterparts in Saudi Arabia to do him "a solid" and boost production [though our "trustworthy" allies have yet to comply]. The weaker economy eased the potential U.S. demand for oil and the latest supply report also eased some of the very immediate concerns. Crude even traded below the $90 a barrel level during the week.
While President Bush offered his $145 billion economic stimulus plan [with virtually no details] and Bernanke, the central bank chief, seemed to support one [as long as it doesn't lead to permanent tax cuts], investors gave little credence to words that weren't followed immediately by measurable actions.
The over/action: The bloodbath on Wall Street continued last week, as triple-digit losses became very much the norm for 2008. Techs tumbled on the Intel news – although IBM's profit report and an Oracle Corp. (ORCL) acquisition offered some solace. Energy stocks plummeted because of lower oil prices.
Financial stocks – brokerages, investment banks, commercial banks and mortgage firms – have become the "dot-com" stocks of the 21st century, only this time it was housing prices that were whipped up into need-to-crash territory by the "irrational exuberance" of investors.
Gold hit new highs records north of $900 an ounce and bonds benefited from the surging "flight-to-quality" .
When the real Groundhog Day rolls around on Feb. 2, let's hope thatl doesn't predict six more weeks of a financial nuclear winter. Otherwise, it might well be the Fed's Bernanke who decides to hibernate for six more weeks.
Year Close (2007)
Qtr Close (12/31/07)
10 yr Treasury (Yield)
Weekly Economic Calendar
Retail Sales (12/07)
Poorest showing in 6 months
Worst level of wholesale inflation in 26 years
Highest annual rise in food and energy costs in 17 years
Industrial Production (12/07)
Flat in December
Fed Beige Book
Individuals and businesses are more "cautious"
Housing Starts (12/07)
Worst annual decline in 27 years
Initial Jobless Claims (01/12/07)
Fewer benefit claims again last week
Leading Eco Indicators (12/07)
Fell for third month in a row
The Week Ahead
Initial Jobless Claims (01/19/07)
Existing Home Sales (12/07)
With Bush and Bernanke both supporting at least the concept of an economic-stimulus package, U.S. Treasury Secretary Henry Paulson took the road show directly to the people. In an interview with noted economist and "Today" host Matt Lauer, Paulson expressed confidence that "a package could be agreed upon quickly." While the weekly data releases revealed some somber data, Bernanke continued to predict that there would be slower growth – but not a recession – this year. The Treasury-futures market pointed to a 60% chance of a rate cut of half a percentage point at the Jan. 30 close of the two-day policymaking Federal Open Market Committee Meeting (FOMC).
Some economists, however, are hoping the Fed acts even sooner.
Bad news of varying degrees may well force the central bank's hand.
In terms of "mostly bad" economic news, retail sales plunged 0.4% in December, the worst annual showing since 2002. Even worse, the National Retail Federation predicted even slower growth for this year. Wholesale inflation – the producer price index (PPI) – soared by 6.3% in 2007, its largest increase in 26 years.
Retail inflation fared slightly better, climbing "only" 4.1% last year. In December, energy prices moderated somewhat, and both of the related monthly reports benefited a bit. Housing construction plummeted 24.8% last year, the largest amount in 27 years. Leading economic indicators, a predictor of future activity, fell for the third straight month. The Fed Beige Book claimed that the ongoing housing and credit challenges are causing businesses and individuals to become "more cautious."
The "not-so-bad" news is much less plentiful. On Friday, the University of Michigan reported that its consumer confidence index posted a surprising increase. Unfortunately, few investors seemed to care.
Any thoughts, Matt Lauer?
News and Related Story Links:
- The Associated Press:
Ambac Downgraded, Cities Seen at Risk.
Bond-insurer woes may trigger more write-downs.
- All Movie Guide:
President George W. Bush biography.
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. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.