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By William Patalon III
Executive Editor
Money Morning/The Money Map Report
President-elect Barack Obama's transition team is reportedly putting the finishing touches on an economic recovery plan that could run from $675 billion to $1 trillion, though many experts believe the program will most like range between $700 billion and $800 billion.
Briefings for top congressional Democrats were to start either over the weekend or today (Monday), a senior transition-team official told The Associated Press late last week. President-elect Obama is slated to meet today with House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nev., in a Democratic strategy session that is likely to focus on the economic recovery package.
It’s time to look forward, not back. The 111th Congress meets tomorrow (Tuesday), and a comprehensive economic stimulus package is at the top of its agenda. Hopefully, the lawmakers can put partisan bickering aside (fat chance) and have a bill in place for President-elect Barack Obama’s signature soon after his Jan. 20th inauguration.
Experts are looking for a stimulus package of $800 billion to $1 trillion (“pork-barrel” projects included), although the Obama administration officials claim they will trim away any unnecessary fat.
Don’t expect much joy from retail-land as a trade group projected that December sales plunged by more than 1% with J.C. Penney Co. Inc. (JCP) (-11%), Kohl’s Corp. (KSS) (-10%), and Target Corp. (TGT) (-8%) among the primary victims. As Money Morning predicted in a recent “Buy, Sell or Hold” column, discounter Wal-Mart Stores Inc. (WMT) is believed to have benefited most from the economic weakness with sales projected to have risen by 3% in December. While the holiday numbers seem dire at best, gift card sales don’t show up in the data until they are redeemed so retailers have one last opportunity for positive news in January (and beyond).
Unemployment data highlights this week’s news reports and a 12th straight month of labor contraction is a foregone conclusion.
As for stocks, the so-called “January Effect” states “as the first five days of January go, so goes the market for the year.” Let’s hope the full week sets a nice tone for 2009 (not a bad start). The first trading session of the New Year on Friday got things off to a fine start. The Dow Jones Industrial Average soared 258.30 points, or 2.9%, pushing the 30-stock blue-chip index back up over 9,000 to its highest close in two months. The Dow ended trading on Friday at 9,034.69.
Many investors closed their books on 2008 a few weeks early, but took some opportunities to rebalance their portfolios for 2009. The Dow experienced its worst year since 1931 and the Nasdaq and S&P 500 indexes have fallen almost 45% since their 2007 highs. Foreign markets suffered similar fates, for instance, with Japan’s Nikkei having plunged 42% last year.
On Friday, trading was thin and the economic backdrop was dour, but it still felt “good to get off to a good start on the first trading day of the year,” Fred Dickson, chief market strategist at the investment firm D.A. Davidson & Co. told The Washington Post. “Even though all the economic data is discouraging, I think there's a psychological lift to starting off the year on solid footing.”
Investors actually shrugged off a report from the Institute for Supply Management that showed that manufacturing activity contracted to a 28-year low in December. All but one of the stocks in the Dow posted gains – JP Morgan Chase & Co. (JPM) being the only loser. General Motors Corp. (GM), Alcoa Inc. (AA), The Boeing Co. (BA) and Citigroup Inc. (C) posted the biggest increases in the Dow.
Citigroup shares rose 6.4% to close at $7.14 after the bank revealed it would not be paying bonuses to its top executives [For more details on the Citi announcement, check out this related story in today’s issue of Money Morning]. Financial stocks also got a boost from a report that the U.S. Treasury Department said it would consider insuring toxic assets at large firms from unlimited future losses, just as it did for Citigroup in November.
General Motors shares soared 14% to close at $3.65 a share on Friday after financing company GMAC LLC said that as part of its $6 billion federal bailout and decision to become a bank, it will no longer have the exclusive right to provide low-interest loans to borrowers who buy General Motors cars and trucks. The change may help GM sell more vehicles, and rely less on GMAC's ability to provide credit. GM sales fell 41% in November after GMAC had significantly tightened credit the prior month, leaving many prospective buyers unable to borrow.
The Standard & Poor's 500 Index advanced 3.2%, or 28.55 points, to close at 931.80, while the technology-heavy Nasdaq Composite Index climbed 3.5%, or 55.18 points, to close at 1,632.21.
The Dow has now risen for three consecutive trading sessions. But the market still has a long way to go to recover from a year that handed the Dow a 34% decline, its biggest drop since 1931, and left the S&P down 38% for its worst performance since 1937. The Nasdaq was down more than 41% for the year.
"We still think the market bottomed on Nov. 20, and 2009 will show a continuation of the 25% rally we've seen the past six weeks," Phil Orlando, chief equity strategist with Federated Investors, told The Post. "The economy will start to improve by mid-2009, and stocks are starting to discount that now.”
Market Matters
Though the year-end fanfare and fireworks were lackluster at best, investors put a disastrous 2008 in the rearview mirror and looked forward to better times ahead (or more of the same). While many had hoped for a last minute Santa Claus rally, the fat man did make an appearance over the last two weeks of the year, though results were modest and contributed little to overall holiday cheer.
Amid light volume, investors seemed content to take some time off to lick their collective wounds, analyze what went right (a very short list, indeed!) and wrong (much too long a list to reproduce here), and set their sights on 2009 (or update their résumés). As has become the norm, the news headlines were dominated by the usual suspects: The bailout deals (financial and auto), the Bernard Madoff scandal, retail, and energy prices.
While much of the financial crisis has involved residential loans, Foresight Analytics predicts that commercial mortgages will become the next ax to fall as property developers take their place in line for the next federal bailout. The continued freeze in credit and a vast recession could set the tone for an array of hotels, shopping centers, and office complexes to move toward default.
The afore-mentioned GMAC represented the latest non-bank to become a bank as the U.S. Federal Reserve approved its charter and the U.S. Treasury Department opened its Troubled Asset Relief Program (TARP) pocketbook to the tune of $5 billion (and another $1 billion for parent GM). Soon after, the financing company (rather bank) announced plans to offer 0% loans for certain GM models in an attempt to jumpstart the auto sector (Now, that’s what TARP was designed to do).
A Credit Suisse Group AG (ADR: CS) analyst quickly put a damper on these “positive” developments by downgrading GM to an “Underperform,” and claimed the company could still fall into bankruptcy. Bernard Madoff turned over a list of his personal assets to the U.S. Securities and Exchange Commission as the befuddled agency attempted to track down that missing $50 billion. Meanwhile, those “lucky” Madoff investors who managed to take distributions may be forced to give that money back as lawsuits apply a six-year “claw back” provision on past redemptions.
While Amazon.com Inc. (AMZN) reveled in the unexpected delight of its best holiday season ever, MasterCard Inc. (MA) predicted that most retailers were not so fortunate. Its SpendingPulse unit projected that total holiday sales declined by 2.5% to 4% from last year’s levels and the International Council of Shopping Centers (ICSC) predicted more store closings in 2009.
Turmoil in the Middle East and a dispute between Russia and Ukraine served to advance the energy markets as oil prices jumped above $46 a barrel on the first trading day of the New Year. For the most part, traders (and speculators) continued to take their cues from the weak global economy (and sluggish demand) as oil prices have fallen more than $100 a barrel since mid-July.
| Market/ Index | Year Close (2007) | Qtr Close (09/30/08) | Previous Week | Current Week | Change from 2007 |
Dow Jones Industrial | 13,264.82 | 10,850.66 | 8,515.55 | 9,034.69 | -31.89% |
NASDAQ | 2,652.28 | 2,091.88 | 1,530.24 | 1,632.21 | -38.46% |
S&P 500 | 1,468.36 | 1,164.74 | 872.80 | 931.80 | -36.54% |
Russell 2000 | 766.03 | 679.58 | 476.77 | 505.82 | -33.97% |
Fed Funds | 4.25% | 2.00% | 0.25% | 0.25% | -400 bps |
10 yr Treasury (Yield) | 4.04% | 3.83% | 2.14% | 2.42% | -162 bps |
Economically Speaking
The economic data of the past two weeks did little to instill confidence that the U.S. recession will be short-lived or to promote an expectation that a rebound is imminent. The manufacturing sector remained weak as durable goods orders fell for the fourth straight month and the ISM purchasing managers’ survey revealed widespread pessimism as it hit its lowest reading in 28 years.
Consumer confidence dropped to an all-time low, as individuals remained worried about their jobs and were hesitant to spend on much beyond the bare essentials (bad news for retailers). Third-quarter gross domestic product (GDP) was again reported as down 0.5%, and most analysts expect a far worse showing for the fourth quarter.
On the housing front, both existing and new home sales continued to decline in November and median prices tumbled on a national level. The drop in mortgage rates, however, prompted a surge in refinancing activity and borrowers may soon have a few extra bucks in their pockets to contribute to the economy.
On that note, all hope is not lost. As the government continues to pour money into the mortgage markets, the most optimistic of analysts believe that the same housing sector that started the downturn eventually will lead the economy out of its doldrums. Home prices are affordable; mortgage rates are extremely low; and the incentives are there for those who can take advantage, meaning there’s perhaps a slightly brighter light at the end of the tunnel.
Weekly Economic Calendar
| Date | Release | Comments |
Last Week |
|
|
December 23 | GDP (3rd Quarter) | Biggest decline since 3rd quarter 2001 |
| Existing Home Sales (11/08) | Largest drop in home prices on record (since 1968) |
| New Home Sales (11/08) | 4th straight monthly decline |
December 24 | Initial Jobless Claims (12/20) | Highest level of claims in 26 years |
| Durable Goods Orders (11/08) | Continued weakness in auto industry |
| Personal Income/Spending (11/08) | 5th consecutive month of spending declines |
This Past Week |
|
|
December 30 | Consumer Confidence (12/08) | Worst showing on record since 1967 as job cuts mount |
December 31 | Initial Jobless Claims (12/27) | Surprisingly large decline in new claims |
January 2 | ISM – Manu Index (12/08) | Lowest reading since 1980 |
The Week Ahead |
|
|
January 5 | Construction Spending (11/08) |
|
January 6 | Factory Orders (11/08) |
|
| ISM – Services (12/08) |
|
January 8 | Initial Jobless Claims (01/03/09) |
|
| Consumer Credit (11/08) |
|
January 9 | Unemployment Rate (12/08) |
|
| Nonfarm Payroll Additions (12/08) |
|
News and Related Story Links:
- Money Morning Buy, Sell or Hold Feature:
Buy, Sell or Hold: For a Defensive Stock, Wal-Mart Plays a Great Offense. - Wikipedia:
January Effect. - The Washington Post:
Stocks Start Year With a Bang. - Dow Jones:
Financial Shares Rise As US Mulls Insuring More Bad Assets. - Money Morning News Analysis:
Citigroup Lands Government Rescue Plan. - Reuters:
GM, GMAC loosen finance pact after lender bailout. - Wikipedia:
Troubled Asset Relief Program. - Money Morning News Analysis:
Obama, Paulson May Ask for a Combined $1.2 Trillion from Skeptical Congress. - Money Morning News Analysis:
Gazprom-Ukraine Dispute Could Leave Europe Out in the Cold.
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.
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Very comprehensive article. Being in the relocation business, we get a lot of feedback from potential buyers who have, for the last year, opted to rent for a while before buying. Unlike retail stores who give a guarantee that if they sell an item for less during the next 30 days, you can get a refund, it doesn't work that way with homebuying. Buyers still seem to be concerned about paying too much. That the sin of buying at $200,000 on the way down to a low of $180,000 is much greater than buying the same house at $200,000 when the market goes back up again. Buyers seem to all be looking for that elusive "bottom" of the market. But by the time most buyers are confident that the bottom has been reached, home prices should already be on the way up again. I feel that ridiculously low interest rates (such as the 0% GM is offering car buyers) may be the only thing that will alay the "paying too much" obsession of home buyers.
I have to agree with Annie B about low interest rates being the only thing that might "Jumpstart" the housing market. As a Realtor, I keep hearing people say that as soon as the mortgage rates fall another couple of points, then they will buy or refi.
Sorry to see that you feel, or were told, that the statistics on Gold and Silver are not to be published along side the dismal martket numbers. It would be embarassing to all the investors that listened to the financial talking heads that they were duped once more over the last 8 years, while Gold and Silver made double digit gains over the same period. The lemmings will soon learn how to protect themselves from the thievs of the "Street" and the FED.
[…] allocated. On top of this, the coming US president, Barack Obama, is currently putting together an economic recovery package, possibly amounting to just under another trillion USD. United State's current account deficit is now about 700 billion USD, or 4.5% GDP, according […]