AND THAT’S THE WEEK THAT WAS…

For the Week Ended January 23, 2009

Market Matters…         

On January 20, 2009, Barack Obama took the oath of office (for the first time) and became the 44th president of the United States.  In his inaugural address, President Obama called for “action, bold and swift - not only to create new jobs, but to lay a new foundation for growth.”  He then acted “boldly and swiftly” by freezing the pay of high ranking members of his administration.  One of those potential members, Tim Geithner, faced the wrath of Congress for his role in the (mis-)handling of the bailout plan AND for his failure to pay a mere $34,000 in taxes.  Since Treasury Secretary oversees the IRS, certain “rule sticklers” in Congress frowned upon his “careless mistakes.”  Still, he was approved by the Senate Finance Committee and is expected to be confirmed (just in time to oversee the distribution of that next round of TARP money). 

While Obama begins a new job and tries to “faithfully execute the office” (rather “execute the office faithfully”), a few financial execs are headed for the unemployment line.  John Thain, formerly of Merrill Lynch fame/infamy, stepped down from his role at Bank of America after failing to disclose dramatic losses prior to the shareholder approved acquisition.  (So, what’s a few less billion between friends?)  In an effort to stop the negativity (and protect his own job), Bank of America CEO Ken Lewis and several cronies bought over 500,000 company shares (earning a collective yawn from investors).  Citigroup will be replacing Chairman Win Bischoff with ex-Time Warner CEO Richard Parsons and also announced its intent to sell Japan’s Nikko Cordial Securities, a move that confirms that brokerage will no longer be considered a core business.  In other financial news, State Street reported a far worse than expected quarter from its asset management business; US Bancorp announced that profits fell to the lowest level since 2001; Capital One posted a huge loss in the quarter and predicted that credit card defaults will only grow in 2009.  Across the pond, Royal Bank of Scotland forecast an annual loss above $40 billion which would be the largest ever reported in the UK.  On the heels of that news, the British government introduced new measures to its bailout plan, including a form of insurance to limit future loan losses.  Investors were hoping that earnings from non-financials would fare better, but Microsoft, eBay, GE, AMD, and Xerox (among others) disappointed with weak results as well (though Google and Apple offered some bright spots).  Time Warner, Intel, and Clear Channel (among others) announced layoffs, proving that most sectors of the economy are hurting.  Non-government arranged deals still exist as Pfizer attempts to acquire pharmaceutical rival Wyeth and The NY Times received a much needed loan from Mexican billionaire Carlos Helu.  

Traders returned from the MLK holiday in time to watch the Obama speech.  While the eloquent Prez reassured Americans to “choose hope over fear,” frightened investors realized that the dismal earnings and economic reports ensured dire times for the foreseeable future.  Equities suffered their worst inauguration day performances ever as the Dow moved back below 8,000 (before rebounding a day later) and volatility was back in the markets.  Bond buyers breathed new life into junk (high yield) markets as over $1 billion in new debt hit the Street on Thursday alone.  The credit markets are thawing, slowly but surely.  One day at a time, Mr. President. 

Weekly Economic Calendar

When is $825 billion simply not enough?  As President O. wraps his arms (and legs) around the completeness of the economic and financial collapse, members of Congress weigh in on the allocation within the proposed stimulus package.  “Business as usual” dictates they disagree along political party lines.  (So much for change.)  Republicans wants more tax cuts (so what else is new?) and claim that infrastructure spending will do little to stimulate growth any time soon.  Democrats fear that tax cuts will benefit only the wealthy (where have we heard that one?) and want to go so far as to repeal the Bush cuts even before the 2010 expiration date.  So Obama played chief negotiator, summoning leaders of both parties for a pep talk along the lines of “the administration and members of Congress may differ about particular details of the plan, but are unified by a recognition that we are experiencing an unprecedented, perhaps, economic crisis."  (How did that work out?)  According to an Internet career/job site, certain sectors will benefit most from the stimulus plan as currently designed: accounting, engineering, nursing, and IT. 

A rather slow week on the economic calendar allowed investors time to focus on the earnings data (and attend those elaborate inauguration balls…what recession?).  Housing starts fell for the sixth straight month and building permits, a predictor of future activity, dropped to its lowest level ever reported.  The never-ending layoff announcements continued to hinder the labor picture as jobless claims surged far more than expected.  In China, GDP rose by 6.8% in the 4th quarter, a number that would have prompted parades in this country; however, one that confirms dramatic slowdown in the world’s third-largest economy.  The “weak” report means that growth for all of 2008 came in as nine percent, the first year since 2002 the rate fell below double-digits. 

On the Horizon…With Congress (at least, the Dems) promising a stimulus package by Presidents Day (February 16th), Obama will have his hands full initiating some “give and take” from the dissenters of the current plan.  (Plus, he has a few wars to manage as well.)  The economic calendar heats up in the coming week as economists get their initial look at the domestic GDP data for the 4th quarter.  Needless to say, the results are not expected to be pretty with analysts predicting a 5% contraction during the prior three months.  Bernanke also leads the first Fed policy meeting of the Obama administration though he and his cohorts have no more wiggle room when it comes to cuts in the funds rates.  The Fed statement should provide insight into the additional measures they have in their arsenal to help jumpstart the economy (something to stem the tide of foreclosures, perhaps?).   And earnings season moves forward with energy companies prepared to show the ill-effects of the drop in oil prices.  Exxon-Mobil and Chevron announce late in the week as does consumer products giant Procter & Gamble.  Amazon.com also reports quarterly earnings during the week and analysts are speculating whether investors will cheer its results (ala Google) or frown along the lines of eBay.  Hopefully the worst of the season is behind us (a man can dream, can’t he?)   Surely, $825 billion will help? 

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

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