AND THAT’S THE WEEK THAT WAS…

For the Week Ended February 20, 2009

Market Matters…         

One step forward; two (or more) steps back.  Nothing has been able to get this economy (and market) back on track.  Congress passes (and Obama signs) a near-$900 billion stimulus package AND the Fed revises (negatively) its economic outlook for the remainder of 2009 (see below).  Major financial institutions get significant assistance (bailout) from the government AND Bank of America’s chief is subpoenaed for misleading investors over Merrill’s (excessive) bonuses.  Automakers beg Congress for (and receive) a bailout of their own AND GM and Chrysler come back for (much) more as part of their restructuring plans.  Investors try to look past the unscrupulous practices of Madoff AND the SEC brings suit against billionaire Alan Stanford’s global enterprises over an apparent $8 billion fraud (ponzi scheme) through its high-yielding CDs (with Venezuelans particularly hard hit).  Stanford Financial manages assets of $50 billion in 140 countries with the primary bank operations in question based in Antigua (no warning signs there, huh?).  With the Dow hitting a six year low and falling below the perceived floor set in November, investors are left scratching their heads (and crying over their pocketbooks). 

So much for the “challenging” times setting a tone for bipartisanship in Washington.  As the stimulus package passed with only token Republican support (in the Senate), its party leader called it "a missed opportunity, one for which our children and grandchildren will pay a hefty price."  He then revealed that not one House member even took the time to read the bill (so much for caring about children and grandchildren).  The Administration also announced a plan to help millions of homeowners avoid foreclosure, while attempting to stabilize the housing market (to the tune of another $275 billion).  As long as the Treasury’s checkbook is out, GM wants another $16 billion and Chrysler could live a few more days with an additional $2 billion.  GE’s CEO will be foregoing his (underserved) $12 million bonus as the conglomerate’s stock price fell into single-digits on its significant financial exposure.  HP announced poor quarterly results and downwardly revised its projections for the year, leading to market pressures on many technology issues.  The US Justice Department is suing UBS for the release of clients’ names in connection with tax evasion using Swiss bank accounts.  And Trump Entertainment sought bankruptcy protection (guess “the Donald’s” Apprentices weren’t really ready for the big leagues?). 

Oil rose (briefly) late in the week as the Energy Department revealed a surprising decline in crude inventories and a slight increase in the demand for gas now that prices at the pumps have fallen below $2/gallon and stayed for a while.  After taking the Dow down over 300 points following Presidents’ Day, nervous investors sold all the way to a new six year low and the worst week for equities since October.  Financials continued to be hammered as talks of bank nationalization picked up steam.  Global stock markets followed suit with Japan’s Topix closing at a 20-year low.   With investors shunning equities of all shapes and sizes (and Treasuries offering little in the way of returns), gold became the safe-haven recipient and futures climbed above $1,000/ounce.  For now, investors just talk of “values,” “opportunities,” “rallies,” and “rebounds,” but few seem willing to follow-through with any real buying (more major steps back). 

Weekly Economic Calendar

With Bernanke and friends trying any and all tricks in their arsenal to jumpstart the economy, the Fed Chair admitted that the efforts to date have resulted in very limited successes.  The Fed negatively revised its outlook for the remainder of the year and now projects that unemployment could reach 8.8% and the GDP may shrink by as much as 1.3% in 2009.  Meanwhile, our global trading partners are struggling with problems of their own.  Japan’s economy experienced its worst quarter in almost 35 years as its manufacturers suffered through substantially declining demand for their goods. 

The domestic economic data confirmed that the Fed’s new (weaker) projections may be right on target.  Housing starts in January fell by almost 15% and activity now stands 56% below the pace of construction last year.  Industrial production tumbled more than expected last month and automakers face even more shutdowns as part of their recently proposed restructuring plans.  The labor market remained incredibly weak as new jobless claims rose again in the most recent release and the number of workers receiving unemployment benefits for over a week stood around a record high 5 million people.  On the inflation front, the cries of deflation can be put on hold for the time being.  Both PPI (wholesale) and CPI (retail) experienced their biggest gains since July 2008 as energy prices actually rose last month.  Still, consumer prices remained flat (no real increase) on an annual basis, the lowest level of price change since August 1955.   

On the Horizon…Can you say capitulation?  (Seriously, please say capitulation soon.)   While the term technically means “giving up,” some analysts believe it will symbolize the end of the market bearishness and the beginning of a sustained rally in equities.  It represents the time that panicked investors simply can’t take it any longer and the result is widespread selling (much like the past few days?).  At that time, bargain hunters swoop in, confident that prices cannot fall any lower and the rebound begins.  Some analysts had hoped that scenario played out last November, but apparently, plenty of nervous investors still remain.  Many large institutions claim that significant values and opportunities exist in these markets, but are merely waiting for the last of the panic selling to end.   With plenty of cash on the sidelines (or in 0-ish% yielding fixed income securities), the next rally could be fast and furious (wishful thinking?).  Unfortunately, it may not occur until next week, next month, next year…and prices could be far lower by that time.

On the data front, the week brings some news that could prove to be market moving.  While new construction has been lackluster at best, the home sales releases could show that buyers are finding good bargains in the housing market and activity is resuming, even in certain weak regions.  The GDP release will confirm a dismal 4th quarter, though hopefully the revised number will not be (much) worse than the -3.8% initially reported.  Capitulation anyone? 

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

713-962-9986 (Direct)

ron@ronbrounes.com

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