By William Patalon III
Money Morning/Money Map Report
After a two-day “holiday” to start the week–Martin Luther King Day today (Monday) and Inauguration Day tomorrow (Tuesday)–it’ll be back to business on Wednesday as Congress begins to grill U.S. Treasury Secretary nominee Timothy Geithner – the appointment many observers believe to be the most important of the new Barack Obama administration.
Geithner, currently the president of the Federal Reserve Bank of New York, is viewed by Democrats and Republicans alike as probably the most qualified candidate to succeed current Treasury Secretary Henry M. “Hank” Paulson Jr., since whoever fills this post will have to be able to step right in and make whatever moves are needed to fix a financial system that seems to get worse by the week. Geithner is actually viewed as perhaps the one candidate with the qualifications, personality and personality needed for success.
But there’s a problem. The man chosen by President-elect Obama to run the U.S. Treasury failed to pay $34,000 in taxes over several years in the first half of the decade. This oversight, which relates to a period when Geithner worked as a senior official with the International Monetary Fund (IMF), will complicate a Senate Finance Committee hearing into his nomination as U.S. treasury secretary, the online edition of the London (U.K.) Times reported. That issue – as well as a second, regarding the employment of a housekeeper without a work permit – emerged in papers released last week by the Senate Finance Committee.
Lawmakers on both sides of the aisle were saying last week that they were still hoping Geithner could be confirmed, but with each passing day there are a growing number of critics, many of whom are calling for him to withdraw. The days ahead will tell us whether Geithner will be able to assume the post so many believe he’s just right for, or whether President Obama will have to settle for a less-than-perfect replacement.
As Obama prepares to take the historic oath of office as the 44th President of the United States tomorrow, he faces the worst financial and economic crises since the Great Depression. He intends to hit the ground running and put his personal touches on the much discussed stimulus package.
Congressional Democrats revealed plans for the new administration’s stimulus, which has grown to $825 billion and which includes $275 billion in tax cuts. For good measure, the Senate approved the release of the next $350 billion of Troubled Asset Relief Program (TARP) money, but only after Obama pledged to place restrictions on banks that will be receiving funds.
A light week on the economic calendar gives way to more earnings reports as investors move beyond (depressed) financials and focus on other key corporate releases, including:
- International Business Machines (IBM) (Tuesday).
- Google Inc. (GOOG) (Thursday).
- Microsoft Corp. (MSFT) (Thursday).
- General Electric Co. (GE) (Friday).
Expectations are incredibly dire so any positive earnings surprises (no matter how low) should be well received. The new Citigroup Inc. (C) will be worth watching as some analysts expect its downward spiral to continue and anticipate a similar fate as the bankrupt Lehman Brothers Holdings Inc. (LEHMQ).
Amid all the talk of recession and bailouts, foreclosures and bankruptcies, unemployment and deflation, bear markets and capitulation, there was actually an airline-related story that actually was the feel-good story of the week last week – and it involved perennial also-ran US Airways Group Inc. (LCC). On Thursday, in an incident that the New York governor has labeled as “Miracle on the Hudson” – and in a story that finally lifts the human spirit above the “gloom and doom” of the ongoing financial crisis – U.S. Airways Capt. Chesley “Sully” Sullenberger III made a series of split-second decisions and heroically ditched his Airbus jetliner in the Hudson River after a dual engine failure, saving the lives of all 150 passengers and crew.
Many folks didn’t even get their feet wet.(NTSB) said it will be studying this case as an example of all the things to do “right” during such a crisis – in stark contrast to most of its investigations, which look at the sometimes scandalous events that went wrong. Sullenberger, a former U.S. Air Force fighter pilot is also a skilled glider pilot, and is also the airlines’ expert on safety.
So while Vikram S. Pandit (Citigroup), Kenneth D. Lewis (Bank of America Corp. (BAC)), John Thain (Merrill Lynch & Co. Inc. (MER)), G. Richard Wagoner Jr. (General Motors Corp. (GM)), and many others, shirk responsibility over corporate (and shareholder) losses, let’s not forgot that true heroes still exist and their leadership is not measured by the value of their stock options or investment portfolios, or the size of their (missed) bonuses. Thank you, Sully.
Bank of America, fresh on the heals of its first quarterly loss in 17 years, emerged as the initial beneficiary of new TARP dollars (and loan guarantees) to help absorb Merrill into its corporate umbrella (where it joined forces with another failing institution, (Countrywide Financial Corp). While BofA seemed to be embracing the “financial supermarket” concept made famous by Citigroup, the latter took the opposite approach and sold part of its Smith Barney brokerage unit to Morgan Stanley (MS) and divided its remaining operations into two entities (See related stories on both Citi and BofA in today’s issue of Money Morning.)
Citi lost more than $8 billion last quarter, despite its personal government bailout and initial TARP money. Deutsche Bank AG (DB) warned of a $6 billion quarterly loss of its own, revealing that the financial debacle is not limited to the United States. JP Morgan Chase & Co (JPM) recorded a slight profit last quarter, but added to its loan loss reserves as CEO James “Jamie” Dimon expressed “disappointment” over the results.
While the financials reported earnings (losses) early to avoid the painful waiting, the news from other sectors was not any better. Alcoa Inc. (AA) kicked off the earnings season by announcing worse-than-expected results, while Intel Corp. (INTC) lived up to its dire outlook by reporting a 90% drop in profits.
Though Thomson Research predicted a 14% decline in Standard & Poor’s 500 Index earnings for the quarter, that forecast may look optimistic after the initial reports. In other corporate news, Nortel Networks Corp. (NT) filed for bankruptcy; Yahoo Inc. (YHOO) found a new CEO; Circuit City Stores Inc. (CCTYQ) moved into liquidation mode; and Apple Inc.(AAPL) will continue without Steve Jobs for the foreseeable future.
Oil plunged below $35 a barrel for a bit as the Organization of Petroleum Exporting Countries (OPEC) and the International Energy Agency (IEA) each reduced their projections for global demand in 2009. Stocks resumed their downward spiral (before rebounding slightly late in the week) as the banking sector proved that TARP was no easy fix and that the earnings season could be disastrous. A horrific retail sales report (see below) added to the economic woes as investors searched long and hard for something to believe in. Thanks again, Sully, for the welcome relief (no matter how temporary).
Year Close (2008)
Qtr Close (12/31/08)
Dow Jones Industrial
10 yr Treasury (Yield)
Weekly Economic Calendar
Alas, a Ben Bernanke sighting. During the week, the U.S. Federal Reserve chairman expressed his concern that a new stimulus package might not be enough to provide a “significant boost” to the economy and confirmed that policymakers will “do their part” to promote recovery. The Fed’s Beige Book depicted a domestic economy growing weaker by the day as conditions deteriorated within virtually all sectors across virtually all regions. Fearful of a weakening labor picture, consumers disregarded the available (deep) discounts provided by the nation’s retailers and contributed to a very dismal holiday season. In fact, retail sales plunged by 2.7% in December, more than twice the expected decrease in activity, and suffered the first annual decline on record (since 1992).
While the trade deficit dropped to its lowest level in five years, exports also fell as our international trading partners have lost their unlimited appetites for U.S.-made goods and services. This bad news for domestic manufacturers will surely be reflected in corporate earnings in the quarters to come. On that note, industrial production dropped by 2% in December, a far worse showing that analysts expected. On the housing front, 30-year mortgage rates fell below 5%, though home purchases are still rare and borrowers with less than stellar credit face difficulties in refinancing loans in this environment.
The inflation picture offered a bit of a reprieve from the negativity (though naysayers continued touting deflation or worse). Wholesale prices plummeted for the fifth consecutive month and experienced their first annual drop since 2001. In December, gasoline prices fell by another 25% and even food costs suffered their largest decline since early 2006. The less volatile core producer price index (PPI) – which excludes the “volatile” food and energy components – rose slightly in December, though most economists expect that the lower energy costs will soon impact other sectors of the economy, as well. Consumer price index (CPI) data reflected another large decline in retail prices, and the smallest increase in annual inflation since 1954.
Unfortunately, few analysts even speak of the stimulus package that Americans have received at the pumps over the past few months as gas prices have plummeted far more than 50% since mid-summer (and this one won’t cost taxpayers a penny down the road).
Balance of Trade (11/08)
Best showing in 5 years
Retail Sales (12/08)
More than twice the loss the Street was expecting
Fed Beige Book
Broad-based negativity throughout the economy
5th straight monthly decline in wholesale inflation
Initial Jobless Claims (01/10/09)
Higher than expected post-holiday claims
Lowest annual increase since 1954
Industrial Production (12/08)
Twice the decline analysts expected
The Week Ahead
Martin Luther King Day
Housing Starts (12/08)
Initial Jobless Claims (01/17/09)
News and Related Story Links:
- London Times online:
Obama's pick as treasury secretary, Timothy Geithner, failed to pay taxes.
Geithner should withdraw nomination for failure to pay self-employment taxes.
- Money Morning News:
Obama Requests Release of Second Half of $350 Billion TARP.
- Money Morning Week Ahead Column:
$800 Billion Obama Stimulus will be Topic of Debate Through Inauguration.
- Money Morning News:
Yahoo Names Carol Bartz New CEO.
- Money Morning News:
Retail Sales Extend Record Streak of Monthly Declines.
- Money Morning News Analysis:
U.S. Trade Deficit Narrowed by Spending Slump and Plunging Oil Prices.
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. 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.