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By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Come Wednesday morning – after the presidential election tomorrow (Tuesday) – the United States will have a new commander-in-chief in the wings. The president-elect will face some significant challenges: A weak economy (okay, a recession, given last week’s gross domestic product (GDP) report, which confirmed just how dire the country’s economic situation has become).
While this week’s data from the manufacturing and housing sectors will be eagerly anticipated, nothing compares to Friday’s reports on unemployment and the picture of the ailing labor market. After nine consecutive months of job contraction, few analysts hold out much hope for optimism. In fact, some believe the jobless rate will climb to 7.5% during 2009.
Clearly the new president will have some major problems to solve, perhaps the biggest being that he’ll have to find a way to restore investor confidence.
After all that’s happened in the global economy and in the stock market in recent weeks – with the tremendous whipsaw volatility, that will be easier said than done.
Even so, watch this week as Money Morning carries several investment reports that will tell you what to expect, what to avoid, and where you may potentially profit.
Stay tuned.
Market Matters
For most investors, Halloween was a welcome treat from the haunted trickery of the markets over prior few weeks. In fact, despite some frightful economic releases that virtually confirmed recession (as already noted), the major equity indexes received a nice reprieve this past week as investors moved beyond mass hysteria and found bargains in the carnage. On Tuesday alone, the Dow Jones Industrial Average and Standard & Poor’s 500 Index each shot up more than 10%, and then proceeded with their remarkable (if not illogical) runs as the week continued.
Despite the positive moves, the Dow plunged by 14% in October, while the S&P 500 lost about 17%, making it among the worst performing months in over two decades. The volatility was almost too much for investors to bear as the Dow experienced triple digits moves from open to close on all but three trading sessions. Global markets underwent similar gyrations, with Hong Kong’s major index – the Hang Seng Index, for example, plunging 12.7% one day before soaring 14.4% the very next session.Â
The recent panic seemed to have subsided as some of the stimulus packages began to take effect. The credit markets have thawed as corporations took advantage of the Fed’s decision to buy short-term commercial paper, thus, providing them much needed liquidity. Major banks began receiving capital injections from the government as part of the bailout package and were “told” (in no uncertain terms) by their new “partner” to re-initiate lending programs.
Capital One Financial Corp. (COF) and Sun Trust Banks Inc. (STI) chose to be participate in the government’s generosity by selling preferred stock and warrants, though both were rumored to be eyeing weaker institutions as acquisition targets – a a strategy that may have differed from the Bush Administration’s goal of enhanced lending. [Editor’s Note: For an in-depth report on U.S. bank’s using government money to mount takeover campaigns – instead of for increased lending -- please click here. The report is free of charge].
The week’s quarterly earnings releases were mixed at best though companies continued to warn about future weakness (which will hopefully lead to some positive surprises). Exxon-Mobil Corp. (XOM) reaped another record quarter and rival Chevron Corp. (CVX) – the subject of a recent “Buy, Sell or Hold” featurue here at Money Morning pin jwwwwsaw its profits double during the period. Bear in mind, crude has plunged over 50% since mid-July (and suffered its worst monthly decline on record) so their future results may not be as strong.Â
United States Steel Corp. (X) announced favorable earnings, athough it also warned that weakness in commodities could impact its operations. The Procter & Gamble Co. (PG) experienced a better-than-expected quarter, though management reduced its sales estimates for the remainder of the year. Motorola Inc. (MOT) announced a quarterly loss and laid off 3,000 workers to cut expenses.  General Motors Corp. (GM) and Honda Motor Co. Ltd. (ADR. HMC) both reported poor quarters, as automakers struggled worldwide.                       Â
| 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 |
8,378.95 |
9,325.01 |
-29.70% |
| NASDAQ |
2,652.28 |
2,091.88 |
1,552.03 |
1,720.95 |
-35.11% |
| S&P 500 |
1,468.36 |
1,164.74 |
876.77 |
968.75 |
-34.03% |
| Russell 2000 |
766.03 |
679.58 |
471.12 |
537.52 |
29.83% |
| Fed Funds |
4.25% |
2.0% |
1.50% |
1.00% |
-325 bps |
| 10 yr Treasury (Yield) |
4.04% |
3.83% |
3.70% |
3.97% |
-7 bps |
Economically Speaking
For days, weeks, months, maybe even years, analysts warned about the dreaded “R” word and, with each new report, the inevitability of such a downturn became more and more possible.
The afore-mentioned third-quarter GDP report confirmed that the economy actually contracted by 0.3% during the period, the worst results in seven years. By definition, two straight quarters of negative growth translates into a recession, so the economy is officially halfway there (especially since the fourth quarter data is shaping up to be just as depressing).
Sluggish consumer activity highlighted the GDP report, as consumer spending plunged by 3.1% during the quarter. Such activity accounts for about 70% of the growth of the economy, so the ongoing concerns about future employment, market losses, and housing valuations (among others) have kept consumers out of the malls. And those reports now to significantly hinder the upcoming holiday season. In fact, a recent BDO Seidman survey showed that retail-marketing execs believe their November and December sales will fall by 2.7% from the same periods last year.
On an even more pessimistic note, consumer confidence in October fell to its lowest level ever reported.
Almost lost in the negativity was the fact that new home sales actually climbed by an unexpected 2.7% in September, as bottom fishers found some bargains within the worst housing market in decades. Still, sales remained more than 30% behind last year’s levels.
The central bankers continued their (somewhat coordinated) efforts to stem the global economic slowdown. U.S. Federal Reserve Chairman Ben S. Bernanke and friends announced a half-percentage-point cut in the Fed Funds rate, reducing its target for that benchmark for U.S. interest rate. It was the second such move in October.
Some Fed watchers believe that policymakers could drop the rate even lower as conditions seem worse today than when that rate touched this level – in 2003. Others feel that such moves have become more symbolic than substantive, and believe the Fed needs to halt future actions to let the lower rates work their ways through the system and begin impacting the economy over the next six to 12 months.Â
In other moves, central bankers in South Korea, China, and Norway each reduced their respective rates, and the European Central Bank (ECB) appears to be leaning toward a similar cut next week.
Weekly Economic Calendar
| Date | Release | Comments |
| October 27 | New Home Sales (09/08) | Unexpected 2.7% rise confirms slight sector rebound |
| October 28 | Consumer Confidence (10/08) | Worst level ever reported since index started in 1967 |
| October 29 | Durable Goods Orders (09/08) | Surprising surge in orders for big ticket items |
| Â | Fed Policy Meeting Statement | 2nd 50 bps point cut this month |
| October 30 | Initial Jobless Claims (10/18/08) | Claims flat from prior week’s level |
| Â | GDP (3rd quarter) | Economy contracted by 0.3% last quarter |
| October 31 | Personal Income/Spending (09/08) | Largest drop in spending in over 4 years |
| The Week Ahead | Â | Â |
| November 3 | Construction Spending (09/08) | Â |
| Â | ISM - Manu Index (10/08) | Â |
| November 4 | Factory Orders (09/08) | Â |
| November 5 | ISM – Services (10/08) |  |
| November 6 | Initial Jobless Claims (10/25/08) | Â |
| November 7 | Unemployment Rate (10/08) | Â |
| Â | Nonfarm Payroll Additions (10/08) | Â |
| Â | Consumer Credit (09/08) | Â |
News and Related Story Links:
-
Money Morning News Analysis:
Third Quarter GDP Suggests U.S. Has Entered Into Recession. -
Money Morning Investigation:
Credit Crisis Update: An Inside Look at the Commercial Paper Debacle.
-
Money Morning Investigation:
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis.
-
Money Morning News Analysis:
Exxon Mobil Posts Record $14.8 Billion Profit, Shell Tops Estimates.
-
Money Morning Investigation:
Inside the Credit Crisis: How the Fed’s Efforts to Lower the Fed Funds Rate May Leave it Powerless to Stop the Financial Meltdown.
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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.
[…] Construction Spending (09/08). ISM – Manu Index (10/08) More […]
Come Wednesday morning – after the presidential election tomorrow (Tuesday) – the United States will have a new commander-in-chief.??????????
How stupid. Bush will be the President until January of 2009. That's when the "unknown" will start.
Who knows where the economy will go with an Obama administration? It is hard to tell where he really stands on so many issues…nevertheless I have high hopes.
My biggest fear is that Obama won't get the right economic advisors. One man who he certainly needs to consult with on the economy is Steve Forbes. I've been really impressed with his recent commentary on the crisis…and then I read an article last week which discussed why the economy wouldn't be where it is if Forbes had become President in 2000.
http://tcsdaily.com/article.aspx?id=102208A
This is an excellent article, and I happen to agree with it. We need fiscal and monetary discipline right now..government spending can't go haywire any longer. I just hope Obama takes some of Forbes views into account.
[…] Uncertainty Escalates as Tomorrow?s Presidential Election Looms Money Morning – USA … the United States will have a new commander-in-chief. The president-elect will face some significant challenges: A weak economy (okay, a recession, … See all stories on this topic […]
Obama wants to change the world to socialist. And history shows that has only produced stagnation not growth coupled with 13% unemployment rates, just look at Europe.
Obama, associates with people of the socialist left. They are his role models as is his 'father' who left his mother when he was three and worked for the most oppressive socialist regime Kenya ever had. Obama like Bill Ayres a left wing radical who advocates bringing down our Constitution and form of government. Obama is buddies with Farakhan the white hater and with Rev. Wright another white hater. And Rescoe an indicted Chicago mobster. Obama is the most far Feft voter of anyone in our Congress and you see hope in Obama?
Obama also played an key role in the demise of Freddie Mac and Fannie Mae's financial stability by using ACORN to pressure these institutions to lower their standards for buying mortgages. See: Investor's Business Daily Article detailing
"Why the credit crisis happened."
Are you deluding yourself? Obama pay attention to Steve Forbes never. Maybe Lenin and Marx but not Forbes or anyone senseable.
There is not enough money to do one third of what Obama promises. But people without thinking ability buy the promises anyway because they are brainwashed by a media enamored with socialism. A very bankrupt media both morallyy and financially. A media who will be crushed under Obama's new corporate tax rate of 50%. Which will be 42% higher than our current 35% tax rate.
Obama is an unknown quantity who is clueless on business.
He does not understand that in small business the owner gets paid last and sometimes not at all. That the employees get paid first and for them to get paid at all, the customers have to pay their bills. So without a profit everyone will be down the toilet. And with a new 50% tax rate on all businesses over $250,000 in gross income these businesses will sufer an approximate 35% decline in future earnings from the new tax rate that will be 42% higher than our current tax rate.
Sorry you are so deluded.
Hi Dan, guess you're not keen on an Obama victory. I'm a Kiwi so not really my concern but I'd take issue with a couple of your assertions: Obama a socialist? I hadn't heard he was planning to do away with the capitalist system, a bit of redistribution of wealth doesn't make you a socialist. The rapid growth of China tends to refute your claim that left wing Government leads to low growth and left leaning Governments in Europe, particularly Scandinavia have quite strong economies. On the issue of taxation, well something needs to be done. Bush and co have an accumulated deficit to pass on to the new guy of almost $11,000,000,000,000. So where do you think that's going to come from? In other words, the money has already been spent and insuficient tax paid – what a bloody mess! What's your alternative, the outfit that has just partially nationalised the insurance and banking industry?
Cheers,
Davd
Another excellent article from Money Morning….but could go deeper into the real causes – acknowledging the conspiratorial nature of these events. We're watching from New Zealand – already much affecting us and if America crashes it will be terrible for you ( nearing civil war ) and very bad for the rest of the world.
Do you really believe all these smart money people could consistently screw up the markets, breaking basic finance rules, over 15 years, all accidentally ? I don't. They were trying to hype, then collapse, the market, fully aware a corrupt admin would help them re-arrange things after. Paulson now has 'power of God' over the banks and is helping the chosen ones swallow up others. The tax money going to banks is just accentuating the credit squeeze, taking cash out of circulation while the banks save themselves. Biggest winner so far is JPMorgan Chase – ( Rockefeller bank with links to Bush family ).
In a depression, the banks turn ferral and the big ones, surviving, just help in the looting of the economy as they and rich speculators buy it up.
The key to setting up a depression is to choke the money supply until there is structual damage and the spiral starts. At a certain point, the slide can't really be stopped with money and that's the time to hyper-inflate. This whole exercise is to break America, crash the dollar and make the Euro the default currency, under a new Global Monetary Authority with the IMF in the middle, probably acting as a world central bank in conjunction with Euro bank. Good bye to freedom.
There's a meeting on Nov 15th. They'll probably suggest all this ( New World Order etc etc ), after insulting America. Then in December ? , the USA will be crashed out, allowing foreign buy ups against a devalued dollar. Or could be Jan -Feb when President Obama pulls out of Iraq. At least, a socialist style president will be more useful then because you have to stage manage and spend out of a depression – addressing the structural collapses. You can't just take the Austrian economic approach at that point – would be like standing back after an earthquake…gotta send in the emergency team.
The danger is the Merchant bankers who want a world state, and bank. In the great depression, they just hyped the market…then sucked out the money…then in 1933 confiscated/stole all the gold from a desperate America so they could later set up the Bretton Woods system.
The long term hope for America is to heed your Constitution and have a nationalised money supply, controlled by congress. No Fed. Then Treasury controls money levels to match productivity ( eg with deposit ratios ) – there's much discipline – and interest rates are kept low. America has run a system like this in colonial times – worked fine.
Interest is the biggest problem – really only the Gov should be able to charge it or set it.
All the best in saving…..or resurrecting …..the Land of the Free.
David, great comments. Elsewhere, some kooky thoughts here and there. No disrespect intended. Go vote, folks! Next guy better be pretty sensible, if you ask me, no "wishing" as in the past, or sticking the nation's collective head in the sand, just ideas that will darned well work. I know who I'm voting for!
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