Market Matters…         

And then panic set in.  It’s one thing for Bear Stearns with all of its interconnected relationships to be close to failing and require a “bailout.”  But what about two government sponsored entities (GSE) which own or guarantee $5 trillion in mortgages and serve as the backbone of that entire industry?  Surely, Freddie Mac and Fannie Mae have made news in the past (accounting irregularities, ineffective management) and have long been targets of certain politicos who have warned about a “too big to fail” mentality.  Well, after losing a combined $11 billion (as of March 31) and raising $20 billion to shore up balance sheets, rumors are swirling that both entities face another major liquidity crunch and are in dire need of new infusions.  Lehman analysts (like they have room to talk) and St. Louis Fed President Poole were among the “experts” who implied both GSEs were on the verge of collapse without an immediate capital investment.  Fannie and Freddie shares plunged to their lowest levels in over 16 years and firms with significant mortgage holdings (investment-related and REITs) fell in lockstep. Though the Office of Federal Housing Enterprise Oversight (OFHEO) and Treasury Secretary Paulson offered their best political spin by claiming the GSEs are “adequately capitalized,” investors were not buying (literally) as some awaited news of a government “bailout.”  A lonely optimistic voice in the crowd emerged Friday as Citigroup (as if it doesn’t have its own problems) stepped forward…“We expect cooler heads to prevail…we believe the recent sell-off in the shares of Freddie and Fannie is overdone.” 

The Freddie-Fannie news overshadowed virtually every other business story of the week.  Staying within financials, Merrill Lynch is close to raising more capital of its own (possibly new write-downs on the horizon?) as it looks to reduce its investments in Blackrock and Bloomberg.  Likewise, Citi is selling its German banking unit to France’s Credit Mutuel for over $7.5 billion.   Outside of financials, Dow Chemical is acquiring Rohm and Haas for $15 billion in a cash deal, and GM will be handing out more pink slips (so what else is new?) as it reevaluates most of its brands.  Oh yeah, earnings season kicked off this week with Alcoa beating estimates and GE affirming its profit forecast for the year.  Thomson Reuters predicts S&P 500 companies lost 13% in the 2nd quarter, with financials leading the slide with related earnings falling by over 65%. 

Oil prices ended a highly volatile week on a very negative note.  After tumbling over nine points in two days, crude once again soared to record levels as Iran threatened the world (or, at least, Israel) by test-launching a few missiles.  After starting the week around $145, prices plunged to $136 on Tuesday before rallying again (to $147 at one point Friday).  Now, who says speculators aren’t involved in these wild price swings?  Can sheer supply/demand issues move markets in that manner?  The Dow and S&P 500 struggled as negative news from financials and higher oil prices late in the week brought out the bears (again).  The Dow even fell below 11,000 for the first time in two years before closing slightly above that level.  Meanwhile, the S&P moved into “bear” territory as the index has dropped 20% from its October 2007 highs.  As the weekend began, some investors speculated that Bernanke, Paulson and others may participate in more “round the clock” meetings over this Freddie-Fannie fiasco.  Is it time to panic yet? 

Economically Speaking…        

Weekly Economic Calendar

No rest for the weary.  Just because the economic calendar was light this week doesn’t mean the Fed officials are taking any (much-deserved) time off.  Instead, “power-hungry” Dr. B. was pushing for more Fed regulatory authority over the financial markets.  He believes that such a move would help ensure damage control in case of future potential failures (ala Bear...no not Freddie-Fannie yet).  In congressional testimony, Bernanke spoke of the Fed’s continued creative moves to assist in the current credit crisis; he suggested that investment firms should be able to borrow from the discount window beyond the mid-September deadline (and into 2009).  Late in the week, reports claimed that Freddie and Fannie likewise would have access to the Fed’s discount window.  Across the pond, ECB Prez Trichet implied that his policy-makers stand prepared to raise rates further should threats of inflation continue to rise across Europe. 

This week, retailers reported “same-store” sales data (stores open at least a year) for June and the results were not half bad (at least, not for discounters).  Wal-Mart, Costco, and BJ’s Wholesale Club each reported better-than-expected sales as consumers went “crazy” with those government rebate checks (or as crazy as a $300 to $600 refund will allow).  Children’s Place also reaped the benefits of the government’s generosity, though traditional mall-based stores like Limited and Gap failed to take advantage.  After struggling through a poor June, Nordstrom warned that its 2nd quarter results may not meet prior forecasts.  Analysts have grown concerned that the rebates served as a temporary windfall for some stores, and retailers will suffer for the immediate future.  On that note, Morgan Stanley reduced its earnings forecast for the entire sector for 2009. 

On the Horizon…For starters, the Freddie-Fannie debacle will remain fresh on the country’s collective mind as investors, economists, bankers, mortgage brokers, homeowners, and politicos alike monitor the fate of these institutions.  Are these GSEs too big to fail?  Are their capital positions not as dire as some claim?  Will the government nationalize them (at the taxpayers’ expense)?  Will residential borrowing costs shoot through the roof?  Next, the country can turn its attention to earnings season (remember that?) as some key financial companies report: US Bancorp (7/15), State Street (7/15), Wells Fargo (7/16), Merrill Lynch (07/17), JP Morgan-Chase (7/17), and Citigroup (7/18).  Will these results lead to more write-downs and additional capital infusions?  Are those foreign sovereign wealth funds still looking for more American investments?  Technology also takes center stage as Intel (7/15) and Microsoft (7/17) report quarterly results.  By the way, any new news on the Yahoo front?  Investors get another look into the inflation picture as both June PPI and CPI are released.  Have the higher energy costs started to work their ways into other sectors of the economy?  Are companies passing along these costs to the ultimate consumer?  (Remember, the core data is useful, but check out the full inflation picture for a change.)   Finally, June retail sales may look promising as those government checks will be reflected in the data, but don’t be fooled.  This month, consumers are on their own again. 

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

(c) Brounes & Associates

www.ronbrounes.com