Tags: William Patalon III

Ignore the Economic Reports, Even if You Can't Ignore the Pain

By , Executive Editor, Money Morning •

William Patalon IIIWilliam Patalon III

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. 

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
(9/26/08)

Current Week
(10/03/08)

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

September 30

Consumer Confidence (09/08)

Surprising rise in confidence

October 1

Construction Spending (08/08)

Unexpected rise in residential activity

 

ISM (Manu) Index (09/08)

Nearing recessionary level

October 2

Initial Jobless Claims (09/27/08)

Highest level in 7 years

 

Factory Orders (08/08)

Weakness continues in aircraft and auto orders

October 3

Unemployment Rate (09/08)

Flat at 6.1%

 

Nonfarm Payroll Additions (09/08)

Another 159k jobs lost last month

 

ISM (Services) Index (09/08)

Depicts ever-so-slight sector expansion

The Week Ahead

 

 

October 7

Fed Policy Meeting Minutes

 

 

Consumer Credit (08/08)

 

October 9

Initial Jobless Claims (10/04/08)

 

October 10

Balance of Trade (08/08)

 

News and Related Story Links:

 

William Patalon IIIWilliam Patalon III

About the Author

Browse William's articles |

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.

… Read full bio