A Week in the Rearview - week ending 9/5/08
In the headlines
A look at some of the market movers over the past week:
- Korea Development Bank is in advanced talks with Lehman Brothers (NYSE: LEH) to acquire up to 25% of the US investment bank
- Oil dropped heavily after hurricane Gustav passed through the Gulf causing far less damage than feared
- Google (Nasdaq: GOOG) took a big step to further challenge Microsoft (Nasdaq: MSFT) by releasing Chrome, its first web browser
- Big pharma consolidation continued as Japan-based Shionogi announced the acquisition of the US’s Sciele Pharma (Nasdaq: SCRX)
- Coca-Cola (NYSE: KO) increased its push into China by announcing the acquisition of Chinese juice maker Huiyuan Juice Group
- Commodity hedge fund giant Ospraie Management announced the closing of its flagship fund after sustaining losses of 38.6% so far this year
- Minutes from the recent Federal Reserve meeting showed disagreement over the level of inflation that is expected
- Ambac (NYSE: ABK) is trying to find new life through its subsidiary Connie Lee
- Boeing (NYSE: BA) is staring a worker strike right in the face
- July factory orders surprised to the upside
- August continued the rough patch for US auto makers
- First-time unemployment claims rose more than expected for the week ended August 30
- Productivity rose more than previously estimated, while the US service sector showed some expansion in August
- The Treasury Department is finishing up plans to backstop the struggling Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE)
- A sharp rise in the US unemployment rate caught the market by surprise
Commentary
After a couple months of benign-to-positive market action, the past holiday-shortened week was a sobering reminder of just how much volatility is still underlying the market. For the week, the S&P 500 index fell over 3%, the index’s worst showing since late June, when the markets were dealing with an extended slide.
Most of the damage for the week was done on Thursday, when poor employment numbers collided with a modestly pessimistic start to the week to send the S&P down 3% in a single session. ADP payroll numbers and initial unemployment claims both surprised economists and investors, causing a fresh bout of anxiety over the state of the consumer and the potential for the economy to take a further leg down in the months to come. Employment data managed to drown out some more positive reports on Thursday, including higher than anticipated productivity growth and an expansionary reading from the ISM services report.
Though the 6.1% unemployment rate that was announced on Friday was above expectations, employment worries seem to have been fully digested on Thursday, and the market recovered a small bit of Thursday’s losses. Surprisingly, financials played a key role in urging the market forward on Friday as reports that private equity giants Blackstone (NYSE: BX) and KKR may be negotiating to buy pieces of Lehman Brothers encouraged investors on the prospects for the industry.
Somewhat overshadowed during the week was the fall in oil prices as the expected destruction from hurricane Gustav never materialized. For the week, oil lost nearly 8% and closed under $107 per barrel.
Looking ahead
Though we won’t be completely without earnings announcements next week, the reports that are coming out will be way under the market’s radar. We will, however, get an earful on the economic front — particularly when it comes to inflation. The market is likely to put a lot of focus on the producer price index that comes out next Friday. The expectation is that the index will show a modest decline for August after spiking in July. If the index does match expectations, or decline more than expected, look for the market to react positively.
Meanwhile, pending home sales, retail sales, business and wholesale inventories, and preliminary consumer sentiment readings will also be reported and a surprise from any of them could move the market. Particularly after the big surprise this week, initial unemployment claims will be closely watched, as will the price of oil as it continues to bounce around.
After the economic reports, the market will likely take some direction from the ongoing struggles of major financial firms. The Treasury’s plan for Fannie Mae and Freddie Mac will likely be of note at the beginning of the week, as will the continued talks between Lehman Brothers and its various suitors.
Despite the market’s sharp reaction, this week’s events don’t tell a much different story than what we already knew. The housing bust and ensuing credit crunch have dealt a body blow to the economy and housing, financial, and retail firms are struggling mightily as mortgages are getting written down and consumers feel increasingly pinched. At the same time oil prices, though lower recently, are up significantly in recent years taking a further bite out of consumers’ spending power. Economic activity, however, remains mixed as negative indicators are being somewhat moderated by a peppering of more positive readings.
As ever, our recommendation is that anyone saving for retirement should continue to invest on a regular basis. Though it may be more difficult to bring yourself to invest when the market looks bleak, historically those are the most advantageous times to add new money to investments. And by continuing to invest regularly you ensure that if the markets do fall further, you’ll be prepared to take advantage of those lower levels as well.
Next week there will be a break from this column as I take off to Barbados and hope to dodge hurricane season. One of the great aspects of taking a long term view of the markets is that a week away from the market is easy since the focus is on performance from year to year, not day to day or week to week. So enjoy the market in my absence and just keep right on investing.
