AND THAT’S THE WEEK THAT WAS…

For the Week Ended June 19, 2009

Market Matters…         

Looks like the celebratory “high-fiving” and “back-slapping” was a bit premature as the Dow’s push into positive territory for the year was relatively short-lived.  Just one trading session beyond the index’s surge into the “black,” traders surveyed the economic landscape, evaluated the new regulatory environment, reconsidered the ballooning deficit (not even including health care) and chose to book some profits (for the time being).  While the other major indexes remain profitable year-to-date, many investors believe the markets stand at a crossroad as they attempt to determine whether the recent move has been…1) a mere blip on the radar screen amid a much-longer bear market; 2) a much-too-fast run-up for a rebounding economy that that still faces many concerns; 3) the start of a new bull market that simply is taking a week off to digest all the “euphoric” news.  The analysts, TV pundits, and bloggers maintain no shortages of views about the markets’ future direction.  Only time will tell…So much for the typical doldrums of summer. 

As expected, major financial institutions rushed to pay back $68 billion in TARP money and get out from under the strong arm of the government.  JP Morgan-Chase, Goldman Sachs, and Morgan Stanley highlighted the list, while Citigroup, Wells Fargo, and Bank of America are among those still seeking Uncle Sam’ approval for every action (no bonuses for you!).  Meanwhile, S&P downgraded 18 related institutions including a few that paid back the bailout moneys (BB&T, US Bancorp) and warned about the industry’s future.  (Where were these rating agencies before all the troubles began?)   The Obama administration revealed plans for the most significant financial regulatory reform since the Great Depression.  The proposal expands the oversight role of the Federal Reserve and includes higher capital and liquidity requirements, stricter reviews over hedge funds and certain derivative products, and the creation of a new consumer protection agency.  Treasury Secretary Geithner detailed the plan before the Senate and was met with mixed (but predictable) reactions…Republicans thought it was excessive, while Dems felt it didn’t go far enough.  (Perhaps a good plan is one in which both sides disapprove?) 

Volatility returns to the markets (did it ever leave?) as the VIX (Chicago Board Option Exchange Volatility Index) surged past the critical 30 mark early in the week, a sign generally associated with pessimism among equities.  Bonds continued their ongoing roller coaster ride as some fixed income investors remained concerned about the global demand for US debt, while others turned to the asset class as a flight-to-quality from riskier securities.  The worries continued as both China and Japan reportedly cut back their treasury holdings in April, a worrisome development considering the upcoming treasury auctions will add a record $104 billion of government securities to the Street.  Oil hovered around the $70/barrel level and gas prices increased for 52 straight days as consumers began to feel the pinch just in time for summer holiday travel.  Options expiration from “quadruple witching Friday” brought additional volatility as each major equity index gave back some ground for the week on less than favorable reports from the likes of Best Buy and Federal Express.    Short-term pullback or trend reversal?   Only time will tell. 

Weekly Economic Calendar

While Bernanke must be basking in the glow of the potential enhanced powers for the Chairman of the Federal Reserve, he must be wondering whether he will be around to experience them.  Despite the unprecedented challenges he has faced over the past few years, Obama has been tightlipped about whether he will reappoint Dr. B. for another term when his expires in January 2010. “Ben Bernanke has handled his position extraordinarily well under extraordinary circumstances…but I'm not going to make news on that right now."   Some Fed watchers believe that Prez O. has former Treasury Secretary Lawrence Summers and current National Economic Council chair in mind for the position.  (So, let the lobbying begin.) 

On the economic front, inflation data highlighted the week’s releases as both PPI and CPI for May were reported as below expectations.  While certain naysayers pressed forward on the scary  “deflation” argument, other naysayers point to the rapid rise in energy prices as proof that the dreaded “I” word is merely lurking on the horizon.  For now, however, inflation is not considered “public enemy number one” and economists will focus on housing, labor, and manufacturing for more signs of economic stability.  Turning to housing, new construction climbed by its largest amount in three months and even building permits jumped in May as prospects for the future look more promising.  Bear in mind, however, homebuilding activity still remains over 45% below last year’s levels.  Industrial production fell over one percent in May as automakers Chrysler and GM continued shutting down plants and limiting production as they initiated their restructuring plans.  While initial jobless claims actually increased slightly in its most recent weekly release, total insurance claims actually fell for the first time in five months.  Still, the labor market remains the primary concern as the economy begins to show some signs of improvement.  On that note, leading economic indicators, an index thought to forecast economic activity for the next three to six months, experienced its best showing since March 2004. 

On the Horizon…All eyes will be on the bond market as the government auctions a record amount of supply in its continuous effort to “bailout” the entire domestic economy.  The results of the auctions can go a long way to determining what the rest of the world thinks about our actions and whether they still perceive dollar-denominated securities to be the fixed income investment of choice.  Meanwhile the ongoing political debate about the administration’s plan for financial reform will go a long way to determining what our “powers-that-be” think about the actions.  With new talks about health care heating up each day as well, expect more cries of “socialism” and calls for greater “choice” to be included in the political talking points.  News from housing and manufacturing highlight the economic data and analysts hope the GDP revision improves from its prior -5.7% level.  The Fed gets together to set monetary policy, though few expect any upward move in the funds rate at this point.  (Any thoughts, Mr. Summers?) 

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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