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By Jennifer Yousfi
After a week like the one we just had, "black seems white;" "up seems down," "conservative seems liberal" and "bearish seems bullish."
For starters, U.S. Treasury Secretary Henry Paulson and the Republican Administration outlined a plan for more government oversight over the financial markets. Within the 200+ page "riveting" document, the U.S. Federal Reserve will be granted greater powers; new regulatory bodies will be created; and additional licenses will be required for some professionals. But in the end, the proposal represents more fluff than substance as these folks will be out of office long before any of it gets approved.
On the surface, the financial news of the week was less than favorable. Swiss bank UBS AG (UBS) said goodbye to its Chairman, Marcel Ospel, and announced its intent to issue new stock to compensate for an anticipated first quarter loss due to another $19 billion in mortgage writedowns. Likewise Deutsche Bank AG (DB), Germany's largest financial institution, revealed it expects to write-down over $4 billion of assets as the credit crisis turns even more global.
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Lehman Brothers Holdings Inc. (LEH) looked to shore up its balance sheet – and avoid becoming the next The Bear Stearns Cos. Inc. (BSC) – by offering a new class of convertible preferred stock that raised the needed cash, but further diluted current shareholders' interests.
U.S. Federal Reserve Chairman Ben S. Bernanke was forced to vehemently defend the Fed's actions in the Bear "bailout" before a Joint Economic Committee bent on grandstanding in an election year. Bernanke also admitted (for the first time) that the economy is dangerously close to experiencing the dreaded "R" word.
And the labor picture is looking bleaker with each passing month. Celent, a financial research and consulting firm, reported that 10% of the 2 million domestic commercial banking jobs will be lost (does "downsized" sound better?) over the next year-and-a-half.
Energy prices climbed again as the weekly inventory report revealed that supply is shrinking just as demand is increasing. In fact, retail gasoline prices soared to an all-time high of over $3.30/gallon.
Dow Jones Industrial
10 yr Treasury (Yield)
First quarter 2008 came to a close and none too soon for most investors. The Dow Jones Industrial Average Index suffered its worst three-month loss (in terms of points) in its history and experienced its most negative quarter in 5.5 years; likewise, the S&P 500 Index fell in March for the fifth consecutive month, its longest losing streak in over 17 years.
At quarter-end, both the tech-heavy Nasdaq Composite Index and the small-cap Russell 2000 Index had fallen about 20% from their October 2007 highs, a significant percentage that typically signifies a bear market.
And yet, investors seemed to take all of the news of the week in stride and sought out any bargains that existed in the aftermath of the past quarter. Stocks surged on Tuesday, the first day of April and the second quarter, and never really looked back.
Some analysts claimed the aggressive UBS and Lehman actions to increase capital indicated managements' confidence that the credit crisis is nearing an end. Others believe labor statistics lag certain economic indicators and the negative employment data represents the "beginning of the end." Still others trust Dr. Bernanke and remain confident that he will continue to lead the economic rescue efforts.
Whatever the reasons, this past week was a welcome relief from the dismal first quarter. If widespread negativity is going to have unexpected effects and boost investors' confidence while pushing the markets higher, then more good news may be on the way. Earnings season is just around the corner and most analysts expect feeble first quarter results. Further, the advance gross domestic product release on April 30 may reveal economic contraction.
Bring it on… after all it seems "negative is positive" these days.
Weekly Economic Calendar
Construction Spending (02/08)
24th straight month of lower home building activity
ISM – Manu (03/08)
Sector contracting but at a slower pace
Factory Orders (02/08)
2nd consecutive monthly decline
Initial Jobless Claims (03/29/08)
Highest level of claims since Sept. 17, 2005
ISM – Services (03/08)
Better than expected though slight sector contraction
Unemployment Rate (03/08)
Highest rate since September 2005 (post-Katrina)
Nonfarm Payroll Additions (03/08)
3rd straight month of job losses
The Week Ahead
Consumer Credit (02/08)
Fed Policy Meeting Minutes
Initial Jobless Claims (04/05/08)
Trade Balance (02/08)
Who can be trusted more for calculating economic statistics: the public or private sector? This week, investors got a look into the labor market from two independent sources and the results seemed to be quite different. According to payroll consultant Automatic Data Processing Inc. (ADP) and research firm Macroeconomic Advisors, 8,000 new nonfarm jobs were added to the domestic economy in March, an indication that labor may be weakening, but still is experiencing growth.
Conversely, the Labor Department reported that 80,000 related jobs were actually cut last month, the largest contraction in five years and the third straight month of losses. Additionally, the unemployment rate jumped to 5.1% and now stands at its highest level since September 2005.
So (over-)analyze the data and pick your poison. But unfortunately, labor is slowing no matter who is calculating.
The other economic releases reflected continued sluggishness, though most of the results were better than predicted. Home construction fell again, marking two straight years of monthly declines, and yet the percentage decline was not as bad as many economists had feared. Both the manufacturing and services sectors revealed only slight contractions in March (as measured by their respective ISM indexes).
And while Fed Chair Bernanke finally admitted in congressional testimony that the economy "will not grow much, if at all…and could even contract slightly," he also said the he felt the downturn would be short-lived. He believes the Fed's aggressive (and creative) actions should combine with the $168 billion government stimulus package to generate growth in the second half of 2008 and beyond.
News and Related Story Links:
- Money Morning:
What Paulson's Plan Means for Your Profits
- Money Morning:
Historic Second Quarter Start Sparks Hope of a Recovery