AND THAT’S THE WEEK THAT WAS…

For the Week Ended December 19, 2008

Market Matters…         

“Have yourself a merry little (insert applicable holiday); make the yuletide gay; next year, all our troubles will be miles away.”  Wishful thinking, perhaps?  The contrarians among us (you know who you are) point out that numerous catalysts could jumpstart the economy and the markets in 2009 and help put the past few miserable months in the rearview mirror.  Billions (make that, trillions) of dollars in bailout money should finally start to provide much needed liquidity to the financial markets; the fed seems intent to do “whatever it takes” to reverse the downturn (even if runaway inflation may be a repercussion down the road); Obama’s stimulus plan could create new jobs, while enhancing the country’s aging infrastructure; risk-free treasury yields at 0% should start to look less and less attractive, prompting investors to look into stocks and non-government bonds again.  Just a few last minute items to add to the holiday shopping wish list. 

Sadly, Bernie Madoff saw to it that his investors will have a holiday season to forget as the list of prominent victims grew each day: real estate mogul Mort Zuckerman, Senator Frank Lautenberg, Steven Spielberg, Spanish bank Grupo Santander, France’s BNP Paribas, Nomura Holdings, and many charitable foundations and non-profit organizations.  Plenty of finger-pointing has been directed at the Securities & Exchange Commission for failing to uncover some rather obvious signs of wrongdoings through the years.  (Guess W will soon praise the SEC Chair with his patented “Coxie, you’re doing a heck of a job!”)  Obama tapped FINRA chief exec Mary Schapiro to head up the SEC during this time of turmoil.  Congrats on the appointment, I guess? 

The automakers received early holiday cheer as the Treasury will release $17.4 billion of TARP money in return for potential equity stakes and other concessions from management and unions.  GM and Chrysler will be the recipients, while Ford tries to make do on its own.  Meanwhile, Chrysler will be shutting down all of its North American production plants for at least a month and also will begin charging dealers large fees on unsold cars that remain on their lots after prolonged periods.  In perhaps a sign of things to come, a consortium of 14 companies (3M, Johnson Controls) have asked for $1 billion in government funding to begin manufacturing state-of-the-art batteries for electric cars.  The move is reminiscent of action taken by computer chip firms decades ago that helped make the industry more competitive domestically. 

Energy traders disregarded OPEC’s decision to cut production by a record 2.2 million barrels a day, fearing lack of compliance by its member.  Instead they focused on the shrinking demand in the sluggish economy as oil prices briefly fell below $35/barrel to levels not seen since 2004.  Goldman Sachs reported its first ever quarterly loss and Morgan Stanley followed with a shortfall of its own.  FedEx posted a higher profit, but gave a dire outlook and announced major compensation cuts for senior management (and benefits cuts for the rank and file).  Stocks were relatively flat as investors digested the latest on Madoff, the auto bailout, and significant Fed actions (see below).  On that note, let’s put the somber news on the backburner and do some last minute holiday shopping.  Your family, friends, and the nation’s retailers surely will appreciate it. 

Weekly Economic Calendar

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability."  (Perhaps, Dr. B. should add a “ho ho ho, happy holidays.”)  After setting the target rate for funds at 0% to 0.25%, the policymakers revealed they are studying other measures and may purchase treasuries at some point to stimulate the financial markets.  In reality, some signs are already evident that their actions are working.  Mortgage rates have dropped dramatically and borrowers are taking advantage of refinance opportunities to save on future interest payments.  Investors are finding value in corporate and municipal securities as certain high quality issues yield over 6% more than comparable treasuries.  Meanwhile, Japan’s central bank followed suit with a rate cut (to 0.1%) of its own.

More details of the Obama stimulus plan emerged during the week and his economic team pegs the total package at about $800 billion (or over $1 trillion by the time Congress adds its required “pork.”).  Tax cuts of up to $100 billion will serve as the most immediate stimuli with construction (infrastructure), energy, and heath-care among the industries that will benefit the most over time.  The data of the week revealed that his package can not arrive soon enough.  Housing starts fell by 18.9% to a record low and declining building permits did not offer much promise for future construction.  Another forecasting release, leading economic indicators, fell for the second consecutive month; in fact, over the past six months, the index has experienced its worst decline since 1991.  The inflation picture remains favorable, though naysayers find pessimistic views in that data as well.  November CPI fell 1.7%, the largest decline on record (since 1947) as gasoline prices plummeted by 29.5 percent.  While the deflation-mongers claim that falling prices will force consumers to delay purchases (for when they become even cheaper), others point out that gas purchases can not be delayed as people have to get to work (and few are choosing to ride their bikes or shift into mass transportation).  In reality, plunging gasoline serves as a stimulus package without any government interaction (though OPEC is getting involved). 

On the Horizon…If it’s good enough for Wal-Mart…  Looks like that famous discounting model will make its ways to some unlikely high-end sources.  Retailers like Barney New York and Neiman Marcus have announced significant price reductions (up to 75%) over the next few days to avoid a disastrous season.  All hope is not yet lost for holiday sales.  A National Retail Federation survey showed that only 47% of consumers have finished their holiday shopping and another 19% have not even started.  As a dismal 2008 comes to a close for the markets, the last die-hard eternal optimists are calling for a year-end Santa Claus Rally as the government bailouts and fed actions give investors some hope for 2009 and beyond.  Then again, an updated reading of 3rd quarter GDP (last reported as -0.5%) could serve to bring them back to the realities of the sluggish economy.  (Bah Humbug.)  Nevertheless, tis the season.  Happy holidays. 

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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