Market Matters…         

A shift in market sentiment?  Or a temporary reprieve from the never-ending madness?  In any case, investors welcomed the “correction” this week, despite the uncertainty of its short- or long-term duration.  Freddie Mac and Fannie Mae stayed in the headlines as Treasury Secretary Paulson announced plans for a non-bailout government “bailout,” complete with improved borrowing terms and an expanded line of credit (subject to Congress’s approval…easier said than done).  By week’s end, Freddie toyed with the idea of “going at it alone” (like any good private enterprise should) and opened discussions about raising capital by offering up to $10 billion in new stock.  Given the company’s current “dire” financial position, any new shares must offer great incentives to potential investors.  Currently, Freddie’s outstanding preferred stock yields in the neighborhood of 14 percent.  Meanwhile, the Security and Exchange Commission (remember them?) emerged from hibernation and offered a few regulatory ideas of its own.  With short-interest (positions in stock sold short) at all-time high levels, the SEC initiated actions aimed at limiting investors’ abilities to engage in short-selling strategies (which some claim accelerate the downward movements in the markets).  Not to be left out, the FDIC took possession of IndyMac, another troubled institution engaged in “risky” mortgage lending, which opened again as a federally-owned institution.  (So, who’s next and just what will that cost the taxpayers?) 

Bailouts and new regs aside, the financial crisis still has a way to go, but each day seems (a bit) closer to a “light at the end of the tunnel.”  While Wells Fargo, JP Morgan Chase, and Citigroup announced weaker earnings (or losses) last quarter, their results actually beat Wall Street’s expectations.  Merrill Lynch helped shore up its capital position by selling its 20% interest in Bloomberg (thanks Mr. Mayor) for around $5 billion.  The world’s largest brokerage firm also reported its fourth straight quarterly loss and was downgraded by Moody’s immediately after the release.  Outside of financials, airlines (Continental, Delta, AMR) reported significant losses as expected.  Google and Microsoft issued disappointing forecasts, despite quarters that saw earnings jump by over 35 percent.  Oil services giant Schlumberger reaped the benefits of higher energy prices and manufacturer Honeywell raised its forecast for the rest of the year. 

Investors enthusiastically received the positive (yet negative) earnings news from the (depressed) financials and also reacted to a pullback in oil prices.  Early in the week, the dollar dropped to a record low against the euro and oil continued its endless climb.  However, over four consecutive trading sessions, crude plunged by over $15/barrel to below $130, its first such close in over a month.  Excellent supply reports showed that oil and gas inventories actually rose last week as demand slowed given the higher prices.  Mid-week, investors took the opportunity to seek out some bargains as the Dow soared close to 500 points and experienced its best two-day percentage gain since October 2002.  The other indexes lagged (thanks Google), though still ended the week in positive territory.  Bonds tumbled as investors unwound previous flight-to-quality trades.  The week came to a close with plenty of uncertainty, but also with the slightest glimmer of hope that the financial (and oil) madness may one day come to an end. 

Economically Speaking…        

Weekly Economic Calendar

News from the economic front was not quite so positive this week as those inflationary fears appear to be coming to fruition.  June PPI rose at its fastest pace in 27 years and wholesale prices now stand over nine percent above last year’s levels.  Likewise, CPI jumped by 1.1% in June as energy prices skyrocketed by over 6.5% during the month.  For those economists who choose to discount the energy statistics, core CPI experienced its worst showing since January and reflected escalating prices in airline tickets among others.  (Since tickets are directly tied to gas prices, shouldn’t those optimistic economists factor travel out of the “core” equation as well?)  Retail sales rose by a slower than expected 0.1% in June as weakness in auto sales overshadowed the consumers’ desires to spend those government rebate checks.  In fact, many naysayers previously warned not to put too much stock in recent retail statistics as they are more reflective of the (temporary) economic stimulus than any real motivation for consumers to shop. 

Bernanke took center stage this week (isn’t he always on stage?) as he delivered his mid-year testimony to Congress and discussed the Fed’s ongoing challenges of stimulating a weak economy without prompting additional inflationary pressures.  The Fed continued to walk a fine line between these two crises and the minutes from last month’s policy meeting revealed the difficult balance.  While many Fed watchers expected the next move in rates to be higher, the continued economic weakness makes such actions potentially damaging.  For now, the best move may just be no move at all.  The Fed also announced some new rules aimed at protecting residential home buyers against the “predatory” practices of those (now defunct) mortgage originators.  These days lenders actually may be required to verify a potential borrower’s income to determine if he/she qualifies for a loan.  (What a shame IndyMac never thought of that before.) 

On the Horizon…Earnings season plugs along and a few new financials reveal how they are weathering the storm.  Bank of America issues it final report in the pre-Countrywide merger era and investors hope that Wachovia follows in Citi’s and JP Morgan’s footsteps with better than expected (though certainly negative) results.  Yahoo gives its shareholder a bit more ammunition for the never-ending Microsoft debate as execs hope some decent numbers can save their skin (WWID…What Would Icahn Do?).  Amazon.com’s report will shed some insight into the retail picture; however, those IRS rebate checks have most likely been spent by now.  The Fed stays in the limelight as the Beige Book release gives the country one more look at the mindset of those policymakers.  The energy supply data will be analyzed more closely as investors hope that prices are headed down to more manageable levels.  And, of course, the Freddie/Fannie saga bears watching.  Anyone interested some newly issued stock of these financially strapped companies? 

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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