And That's the Week That Was...

AND THAT’S THE WEEK THAT WAS…

For the Week Ended September 12, 2008

Market Matters…         

Finally, a watershed moment that may represent a “light at the end of the housing tunnel” (but at what price?)  This past week the federal government announced a “bailout” of Fannie Mae and Freddie Mac, the leading financial institutions that fund about three-quarters of new home mortgages.  The US Treasury is prepared to inject up to $200 billion to support (rather take over) these companies so critical to the nation’s housing sector and the global financial markets.  While the taxpayers will undoubtedly face much of the burden of the bailout (and shareholders lost most of whatever value was left in the stock), many analysts hailed the move as the “beginning of the end” of the housing bust.  Apparently, the Administration believed that the risk of a global financial system collapse (too strong?) was simply too great to bear should Freddie and Fannie be left to work out their own “challenges” without any government intervention.  While the jury remained out over what structures and roles the subsequent entities will maintain, analysts see some positives for the housing market developing in the aftermath of the bailout.  In fact, mortgage rates already have declined to their lowest levels in five months (and that’s a nice start).

News was not quite so rosy for Lehman Brothers as the company struggled to raise much-needed capital and investors seemingly have lost any and all confidence in management.  While Korea Development Bank was initially thought to be a “white knight,” the deal failed to materialize and the newest option includes the sale of its asset management (Neuberger Berman) and private equity units.  The stock already has lost over 90% of  value since November and more pessimists have emerged as the company looks (begs) for a buyer (any buyer).  In (more positive) non-financial news, McDonalds showed that Big Macs are recession-proof as sales in August rose by a greater than expected pace; even Disney has encountered better than expected results as the weak dollar and strong global sales have helped company performance. 

Before Gulf Coast residents (and oil companies) even had time to move beyond Hurricane Gustav, along came Ike with far worse (potential) consequences on the energy sector.  Texas accounts for about 25% of the nation’s refineries and the potential for major production disruptions became very real.  While gas prices soared as Ike moved closer to landfall, oil continued to decline (touching below $100/barrel) as traders focused more on the longer-term consequences of a stronger dollar and global economic slowdown.  OPEC threw a new monkey wrench into the equation by announcing a decline in its production levels (though many investors shirked off the news, knowing that member countries tend to cheat on their allotments anyway).  The equity market volatility continued as investors dissected the seemingly positive news on Freddie/Fannie (at least in the short-term) and the negative talks about Lehman.  The Dow surged close to 300 points (on the bailout) and then gave back those gains one day later (on Lehman).  While Ike remained a major concern (and the news from OPEC was less than favorable), investors seemed to be suffering from hurricane fatigue and failed to engage in panic trading over the inflationary potential of oil and gas prices.  Perhaps investors actually like bailouts?  Surely auto companies and even the airlines could use a handout or two?  (And, of course, Lehman.)

Economically Speaking…        

Weekly Economic Calendar

And this survey says…While most recent economic polls have been predicting “doom and gloom” for the future state of affairs, the Duke University/CFO Magazine survey of 1,300 corporate financial execs actually reported some positive views.  These CFOs have become more optimistic this quarter than last (28.5% vs. 21%) and about half of the respondents believe that recovery will begin by mid-2009.  By contrast, the opinions of those European CFOs surveyed have become far less promising, revealing that the U.S. may be moving closer to a rebound than many of our trading partners (potentially good news, though a bad sign for future exports). 

Investors had to wait until the end of the week to get the latest picture on the domestic economy.  Early on, the dueling deficits were in the news as trade deficit was reported at its highest level in 16 years and the Congressional Budget Office predicted a $400+ budget shortfall for this year (growing even higher in 2009…welcome to office Mr. McCain/Obama).  However, the real economic news of the week did not come until Friday with the release of the August retail sales and PPI data.  On a positive note, wholesale prices plummeted by 0.9%, the largest percentage decline in almost two years; even core PPI (ex-food and energy) reflected very few inflationary pressures.  Meanwhile, sales in August fell by 0.3%, disappointing analysts who expected a nice rebound on the lower energy prices (maybe next month will provide a better reading?). 

On the Horizon…Last week’s crude and gasoline inventories dropped more than expected as the effects of Hurricane Gustav resulted in some production disruptions.  And then came Ivan.  Before the platforms and refineries could get back up and running at capacity, the new (bigger and stronger) storm took a different path in the Gulf and threatened to halt production for an even greater time frame.  Over the next few days, traders will monitor the situation closely as operators assess the damage (in both equipment loss and duration).  Now that Labor Day has passed, many so-called experts expect the demand for gas to weaken as vacations come to a screeching halt and virtually all kids have gone back-to-school, another potential positive development for energy prices (if only Hurricane season would cooperate).  The Fed holds its periodic reunion (policy meeting) on Tuesday and most folks anticipate little more than some tough talk about the weak economy and potential threats of inflation.  As commodity prices continue to decline, many economists believe that the concerns over price pressures may subside somewhat in the months to come, thus, allowing the Fed to focus on the struggling housing and labor markets.  Combined with the Fed policy statement at the conclusion of the meeting, a nice array of releases (housing, manufacturing, inflation) will help paint another picture of the current state of the economy.  Retailers still hold out hope that the frugal consumer will wake up one day soon, recognize that oil and gas prices have dropped (even with the recent Hurricanes), and open up their pocketbooks (in a big way) in time for the holidays.  And, by the way, let’s keep watching Lehman.    

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:

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