Last Week’s Highlights:
Oil: Tops $111
Stocks: Friday slide on Bear Stearns news
Retail Sales: Weaker than expected
CPI: Mild, encouraging report
Economics This Week:
Date Item Est. Comment
3/18 Housing Starts 980K Weakness again
3/18 PPI 0.1/0.2 Energy increases seen
3/18 FOMC 75 bps Will it be more??
Fed in Early – More to Come this Week
The Federal Reserve, in an emergency weekend decision, cut the Discount rate. In an announcement before the start of trading on the Tokyo Stock Exchange, the Fed lowered the discount rate by a quarter of a percentage point to 3.25 percent. The Fed also announced it approved the financing of JPMorgan Chase & Co.'s purchase of Bear Stearns Cos., including support for as much as $30 billion of Bear's assets. Later this week the FOMC meets and the speculation is all over the place, with many now wondering if the Fed will cut by a full 1%. Seems a bit much but the weekend Discount cut was unexpected and certainly designed to help the US open after Friday’s Bear news.
The FOMC meets on Tuesday, and it now appears the bets, based on fed funds futures (as opposed to market rumors) are for at least a 75 bps cut.
Bear Stearns Buried
Just when you thought it couldn’t get much worse in the markets, Friday’s news of the near collapse of Bear Stearns sent the markets down wildly across the big board with a final close down nearly 200 points. Despite the very good news on CPI, the announcement that JP Morgan and the Fed were in Rescue mode for Bear sent prices right off the edge. Bear shares slumped more than 40% in a matter of hours. Ironic that it took so many years to build the capitalization and reputation of this icon of Wall St, and only a matter of hours to unravel it to its core. "The (Fed) Board voted unanimously to approve the arrangement announced by J.P. Morgan Chase and Bear Stearns this morning," the Fed said in its statement. "The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system."
JPMorgan Chase & Co said it's providing Bear with secured funding for up to 28 days, in conjunction with the Federal Reserve Bank of New York. J.P. Morgan also said it's working with Bear to secure permanent financing or "other alternatives" for the brokerage firm. "Our liquidity position in the last 24 hours had significantly deteriorated," Alan Schwartz, chief executive at Bear, said in a statement. "We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."
As you may have seen over the weekend, it appears JPM will now end up buying Bear for a paltry $2 per share plus the assumption of lots of liability (helped somewhat by the Fed of course). Kind of surreal given Bear’s stock was trading at $57 at Thursday’s close with many on the Street thinking they were going to make it through the liquidity crisis unscathed. Another great name destined for the scrap yard.
Dollar Demise?
The wonderful news about Bear Stearns gave international currency traders a simple excuse to take the US dollar down another notch or two. Over the weekend the dollar fell to 1.57 euro and 97 on the yen. While positive for further export help in GDP, the import inflation, as well as the loss in confidence in the US financial markets, is not going to be a helpful factor in the coming quarter. And, of course, the fall in the dollar will most likely be another reason for oil prices to rise just to keep pace with the valuation loss in petrodollar transactions. We open Monday with crude near $110.
Economic Forecasts Get a Bit Worse
Last Friday, the Wall Street Journal’s survey showed worsening outlooks from the Street. Thirty six of 51 respondents of the survey, or more than 70%, said that the economy now is in recession. On average, the economists surveyed predicted the unemployment rate will be 5.5% in December, up from the current 4.8%, said the survey. The economists, on average, forecast economic growth of just 0.1% (annualized) for the current quarter, and 0.4% (annualized) in the second. Nearly half the economists surveyed said a recession this year could be worse than the 2001 and 1990-91 downturns.
Respondents expect more action from policy makers, with 63% saying the use of public money to deal with the housing crisis is now likely or certain, while on average they expect the Federal Reserve to lower the target for its benchmark federal-funds rate to 2% by June from the current 3%. Given the expectations after last week, the 2% mark might come much sooner rather than later.
Washington to the Rescue?
While the Fed was helping the markets and Bear Stearns, it appears lawmakers don’t think we are paying enough taxes to really make it hurt. The Senate last week rejected an extension of President Bush's tax cuts for middle and higher-income taxpayers, investors, and inheritors of businesses and big estates. The Senate on Thursday rejected the idea of renewing many of President Bush's tax cuts, as all three major presidential candidates interrupted their campaigns to cast their votes. The House approved a budget blueprint that would raise taxes by $683 billion over the next five years. Let’s see, recession, energy inflation, and higher taxes – yup, that should get everyone encouraged to go out and spend….
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