AND THAT’S THE WEEK THAT WAS…

For the Week Ended May 15, 2009

Market Matters…         

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).  To date, some signs have emerged that the recession may be nearing an end (see below), though naysayers also warn about the ramification of “excessive” intervention.  On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could impact employees at institutions that did not even accept bailout moneys.  While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.  Team Obama also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions.  While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact.  Stay tuned.

With the much ballyhooed stress-tests in the books (though still subject to debate), banks moved to raise capital with US Bancorp, Capital One, and Bank of NY Mellon among those issuing $1 to $2.5 billion in new stock (and diluting current shareholders).  In fact, US Bancorp expects to be the first major institution to repay TARP funds over the next few weeks.  Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3+ billion government infusion with others to follow.  Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000 share offering of its own.  GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood. 

On the earnings front, Macy’s, JC Penney, Liz Claiborne, and Sony all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity.  While Wal-Mart continued to outshine rivals, it earnings were negatively impacted by currency translation.  Both SAP AG and Intel expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses.  Microsoft announced its first debt offering (36-years) and some expect the tech giant to explore M&A opportunities. 

Equity investors took a break from the bargain shopping frenzy to better assess the economic situation.  Stocks (especially financials) had moved a long way in a short-period of time and were due a pullback (which some analysts argued will prove healthier for them in the long-run).  Nasdaq remains the one major index still “in the black.”  Oil prices moved above $60/barrel to the highest level in six months before backtracking late in the week on weakness in equities.  Still gas prices sure look cheap compared to the $4/gallon paid last year.  (Seems like a lifetime ago.) 

Weekly Economic Calendar

Yep, the consumer is a fickle sort.  In fact, consumer statistics are quite fickle these days as well.  A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy.  Well, this past week, the Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months.  Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Street expectations.   Additionally, the U. of Michigan Sentiment Index reached its highest confidence level since September 2008.  As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as PPI climbed in April on rising food prices and CPI was reported as unchanged last month.  Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day.  Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments. 

A recent Wall Street Journal survey of 52 economists concluded the recession will officially end by fall, though the actual recovery will be slow to develop.  The respondents estimate that GDP will drop by 1.4% in the 2nd quarter, a weak number but a vast improvement from the 6.1% decline in the first.  Further, these economists believe activity will resume in 2010 with over two percent growth projected for the first half of the year.  Speaking of eternal optimists, former Fed Chair Alan Greenspan sees "the seeds of a bottoming" within the housing sector (foreclosure data notwithstanding) as some buying activity resumed in depressed states like California, Nevada, Arizona and Florida.  (Then again, Greenspan may have lost a bit of his luster these days.) 

On the Horizon…With few economic releases on the calendar for the upcoming week, investors can focus on the latter stages of earnings season as more retailers provide insight into the “fickle” mind of the consumer: Home Depot (5/19), Target (5/20, Limited Brands (5/20).  The HP report (5/19) should reflect whether tech is indeed “bottoming out” and if any real “glimmers of hope” truly exists within the sector.  Meanwhile, energy traders continue to take their cues from the direction of the stock market instead of crude inventory reports or global demand projections.  Perhaps they should take note of those trusted folks at OPEC as oil production climbed in April for the first time in nine months and the likes of Angola, Iran, and Venezuela seem to be busting their quotas (what a shock!).  Even with the higher prices, AAA expects Memorial Day travel to increase by 1.5% from last year’s levels.  “T minus two weeks” for GM as auto suppliers look for their own federal assistance, dealers worry how long their doors will remain open, and shareholders consider selling (at about $1/share).  Any white knights (Fiat?) in the midst? 

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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ron@ronbrounes.com

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