AND THAT’S THE WEEK THAT WAS…

For the Week Ended December 12, 2008

Market Matters…         

Just what is…Our top story tonight (this week)?  The auto bailout plan hit a major roadblock in Congress (nope).  The Governor of Illinois tried to auction off a Senate seat to the highest bidder (not even close).  Bank of America may be eliminating 35,000 jobs as it adds Merrill Lynch to its “happy” family (relatively minor news).  In a week that featured some pretty prominent stories, Wall Street powerbroker, Bernard Madoff stole the headlines (and about $50 billion from investors in the process).  This former chairman of the NASDAQ was arrested for committing perhaps the largest investor fraud in history (Enron may be off the hook) as Madoff Investment Securities appears to have been “basically a giant Ponzi scheme” (his own words).  Though the client list seemed relatively small at first, the implications will be quite widespread as some of the largest hedge funds of funds participated in Madoff’s investments; their clients include some of the world’s wealthiest folks (or, at least, they were).  Additionally, regulators will have quite a few questions to answer as lax oversight failed to uncover this massive fraud that may have been perpetrated for years.  Stay tuned…This one isn’t going away any time soon. 

In “lighter” news, the House of Representative passed a “preliminary” auto bailout package that would provide $14 billion to the Big Three (Ford may not need any for now) and create a new Czar to oversee industry restructuring.  While Wall Street initially hailed the move as a positive step to a necessary overhaul, the Senate demanded greater concessions from auto unions and the bill became basically “dead on arrival.”  Since the Treasury appears to be growing more comfortable with the bailout concept with each passing day, Administration spokespersons implied that aid would be forthcoming even without Senate approval (TARP perhaps?).  By the way, an oversight committee gave the financial bailout a rather poor initial report card, claiming a lack of transparency in terms of how dollars are being spent and whether recipients are complying with government intentions (no wonder the automakers want to participate as well). 

Elsewhere, Merrill’s John Thain reversed an earlier position by “choosing” to forgo his 2008 bonus and Morgan Stanley’s John Mack quickly followed suit.  Dow Chemical, Sony, and 3M joined BofA and others in announcing sizable job cuts.  FedEx and Procter & Gamble reduced prior outlooks and sales projections.  Oil prices fluctuated greatly as traders weighed contrasting supply/demand reports: 1) the Energy Information Administration expects weak demand to result in declining consumption through 2009 vs. 2) significant production cuts could be announced at the upcoming OPEC meeting.  With oil trading below $47/barrel, Goldman Sachs (of “we’re going to $200/barrel fame”) contradicted past forecasts by claiming prices could fall to $30 (and lost some credibility in the process.)  Equities reacted favorably to rumors of Obama’s $500+ billion stimulus package (see below) and the apparent progress with automaker negotiations.  As the week moved on, reports of new job losses and more financial woes halted the brief optimism and the Senate’s inability to pass an auto bill brought more excessive volatility (again).  A “flight to quality” sentiment contributed to yields on 3-month T-bills dipping to ZERO percent.  (Talk about risk averse.)  Bet some of Madoff’s investors wish they could get those yields now. 

Weekly Economic Calendar

"I am absolutely confident that if we take the right steps over the coming months, that not only can we get the economy back on track, but we can emerge leaner, meaner and ultimately more competitive and more prosperous."  Somehow an economic stimulus plan which directs $500+ billion into new FDR-like public works programs to increase employment does not necessarily imply “leaner and meaner.”  Still, many analysts believe the Obama plan (still in its infancy) may be just the tonic needed to jumpstart the economy.  Meanwhile, the EU announced its own $200 billion package as the 27 member countries struggle with global recession.  Not to be outdone, Japan revealed some sizable stimulus measures of its own late in the week.  With the recession already pushing a year in duration, Duke University released results of its Global Business Outlook Survey which showed that 60% of domestic CFOs believe the downturn will last until the 4th quarter 2009 (and maybe beyond).  Similarly, a Wall Street Journal forecasting survey predicted four straight quarters of negative growth (GDP), the longest period of economic contraction since the Great Depression.  (Don’t forget…stocks may be leading indicators.) 

A light week on the economic calendar ended with a couple of major reports that gave the Fed a bit more anecdotal material to (over-)analyze prior to the December 15-16 policy meeting.  With claims for unemployment benefits soaring to its highest level since November 1982, Bernanke and friends must make job creation among their top priorities.  November retail sales fell by 1.8% as automakers reported their worst level of monthly activity in 26 years.  Still, the decline was less than Wall Street expected, leading Morgan Stanley’s analysts to speculate about future downward revisions.  (Nice boost of confidence, guys.)  Wholesale inflation (PPI) declined by 2.2% as gasoline prices plummeted by 25% in November.  Normally, consumers would welcome such news and gladly spend those savings from the pumps at the malls for the holidays.  Instead economists continue to spread more “gloom and doom” by suggesting consumers may hoard their savings and resist spending amid these uncertain times.   (Nice boost of confidence, guys, part II.) 

On the Horizon…When the Fed meets over the next few days, many watchers expect another 50 bps cut in the funds rate.  However, with fed funds currently standing at 1%, the policymakers don’t have much room to move in this particular area.  Still, they may have more ammunition in their arsenal and the accompanying statement at the conclusion of the meeting could shed some insight on the “creative” actions they could consider in addition to rate cuts (extending the new investment firm discount window, additional loan guarantees, etc.)  The OPEC ministers get together in Algeria on December 17 and President Khelil implied that a surprisingly sizable production cut is in the cards.  While OPEC controls about 40% of the world’s oil supplies, energy analysts hold more stock in actions rather than words as one pointed out "But you can announce all the cuts you want. Compliance is the key."  On the inflation/deflation front, analysts welcome the latest CPI release, though good news (low inflation) seems to be construed as bad news (deflation) these days.  And President Bush has one last opportunity to offer his own economic stimulus package to automakers and their labor unions (strange bedfellows indeed). 

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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