AND THAT’S THE WEEK THAT WAS…

For the Week Ended October 3, 2008

Market Matters…         

During challenging times, true leaders emerge (where are they?).  Shame on you, Speaker Pelosi AND House Republicans.  Shame on you for politicizing the dire events of the day purely for partisan purposes (“…the costs of the Bush Administration’s failed policies built on budget recklessness.”).  Shame on you for caring more about personal gain and not exhibiting leadership qualities (“We are all worried about losing our jobs…”).  Shame on you for seeking public praise instead of doing what was needed (“It is hard to get political credit…”).  Shame on you for passing the buck rather than making difficult decisions (“I want this to pass, but I want you to vote for it, not me.”). And so the initial bailout vote failed (as did remaining investor confidence). 

Undoubtedly the $700 billion government bailout represented a very tough vote and politicos should not be criticized for having significant reservations.  But those reservations should not be partisan in nature and motivated solely by self-interest and reelection concerns.  The proposal was designed to improve the balance sheets of the nation’s (remaining) key financial firms, restore confidence in the credit markets, and elevate the economy from further deterioration.  Provisions on executive compensation, FDIC insurance, and mark-to-market accounting were added to garner support (though plenty of “pork” and unrelated tax breaks appeared in the Senate’s passed version).  While the plan may be far from perfect, “experts” believe it represents the best hope for moving beyond the economic abyss.  On Friday, calmer (or, at least, less partisan) heads prevailed as the House approved the revised plan by a resounding 263-171 vote on its second try. 

"In my adult lifetime, I don't think I've ever seen people as fearful economically as they are now." On that note, Warren Buffet urged Congress to act and then put his money where his mouth is by investing $3 billion in ailing GE (to complement his $5 billion investment in Goldman Sachs). According to Buffett, opportunities abound “when others are fearful.” That fear continued during the week as Wachovia became the latest bank victim and was acquired by rival (and once “down and out”) Citigroup.  Wait…make that Wells Fargo which upped Citi’s offer and may have initiated a bidding war (and a few lawsuits).  The $2 trillion hedge fund industry is also going through significant changes; industry insiders predict 10% to 20% of assets will be redeemed this year and up to 2,000 funds may soon go out of biz.  In non-financial news, techs have been taking it on the chin as the credit crisis impacts the IT expenditures of businesses across all sectors.  Further, analysts cut ratings on Apple, fearful that iPod sales will suffer this holiday season. 

Oil prices plummeted again below $100/barrel (and beyond) as traders “speculated” that the economic slowdown (to put it mildly) would hinder future demand.  Likewise, news of the failed House vote sent equities tumbling and the Dow to its worst one-day drop in its 112-year history.  Excess volatility ensued as investors were unsure how to react to the political developments.  The corporate debt and commercial paper (short-term borrowing) markets have all but dried up and many businesses may have difficulty making payroll without a new funding source.  While the bailout is not perfect, crucial action was needed in these dire times.  Did any true leaders emerge? 

Economically Speaking…        

Weekly Economic Calendar

During the week, investors continued to dwell on the economic sluggishness as if they were caught entirely off-guard, and subsequently sent the equity markets lower on each negative release.  Of note, the ISM index depicted that manufacturing activity fell to its lowest reading in seven years (43.5) and is dangerously close to recessionary levels.  Likewise factory orders fell more than expected in August as purchases of aircrafts and autos suffered double-digit declines.  A weak consumer spending release prompted renewed fears that the holiday shopping season will be one of the worst in recent history.  As for labor, jobless claims soared last week to a seven-year high as businesses trimmed down workforces to accommodate the weaker economy (and the effects of Hurricanes Gustav and Ike).  Additionally, the economy lost another 159,000 jobs in September, the ninth straight month of labor contraction and the worst decline in over five years.    Again, while the numbers are indeed concerning, they should not have been totally unexpected. 

The Fed and the world Central Banks continued to add significant liquidity to the global financial system by enhancing the short-term lending capabilities that are available to banks.  The European Central Bank held its key rate unchanged this week and new speculation has Bernanke and friends dropping the funds rate in the not-so-distant future.  Meanwhile, Alan Greenspan (remember him?) predicted that an economic recovery will occur “sooner rather than later.”  (Now, isn’t he supposed to be Mr. Gloom and Doom?) 

On the Horizon… The economic releases now (and for the immediate future) will be weak…that is a given.  Therefore, investors should give them a passing glance, evaluate the consequences and potential remedies, and move on.  In fact, the bigger picture should focus on how to correct them (see bailout above).  Expect plenty of over-analysis of the provisions of the revised bailout plan as “experts” debate the merits of the overall terms and try to determine just how it will work and who it will help.  (Does anyone in Congress even understand mark-to-market accounting?)  Politicians will be politicians (they can’t help themselves).  Plenty of back slapping (with friends) and blame placing (about enemies) is inevitable as the campaign season heats up and they (try to) prove to voters that they personally are not the problems in Washington today (everyone else is).  As the new quarter begins, portfolio managers may try to shore up their funds and limit the losses by the end of the year.  They may engage in bargain hunting and bottom fishing and seek value in the depressed market.  For now, inflation has been placed on the backburner, so hopefully oil prices will continue to cooperate in the weeks to come.  (Maybe there was some speculation, after all?)  And, of course, retailers will begin bellyaching in earnest as they predict a lackluster holiday season (a phenomenon that should be widely expected around this time each year). 

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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