A Week in the Rearview - week ending 11/21/08
In the headlines
A look at some of the market movers over the past week:
- Leaders from the so-called Group of 20 met to discuss the state of global finance
- Company insiders are busy snapping up shares in the open market
- Multiple Goldman Sachs executives opted out of 2008 bonuses
- A survey by the National Association of Business Economists shows a pretty dim outlook for the US in the near term
- Japan’s economy entered recession
- Embattled Yahoo! leader Jerry Yang opted to step down from his CEO position
- Citigroup announced 52,000 job cuts, but couldn’t seem to stem the slide in its stock
- Dallas Mavericks owner Mark Cuban ended up on the wrong side of securities laws
- Bank of America doubled its stake in China Construction Bank
- Industrial output was up more than expected, but may not portend a recovery
- It’s been a rough year for most hedge funds
- The Producer Price Index (PPI) dropped a record amount in October
- Consumer prices posted a likewise steep drop
- Minutes from the most recent Federal Reserve meeting show that more rate cuts could be on the table
- Economic leading indicators fell in October
- Congress held off on pushing through a bailout package for US automakers
- Rumors on Friday suggest that Barack Obama will name New York Federal Reserve president Timothy Geithner the new Treasury Secretary
Commentary
Selling pressure continued on the markets this week with major downswings on Wednesday and Thursday pushing the S&P 500 index down nearly 14% by Thursday’s close — the lowest level on that index since 1997. Excitement over the potential naming of Tim Geithner as the new Treasury Secretary sent markets on a roaring upswing to help Friday finish with a 6.3% gain, but even with that the S&P closed the week having shed over 8%.
Economic news continued provide a drag on the equity markets this week. The only upside highlight of the week was industrial production notching a better performance than expected for October. However, this was largely explained away as just a recovery from a lackluster September because of Hurricane Ike. The Producer Price Index and Consumer Price Index both logged significant declines showing that the drop in energy prices is helping to moderate price levels. While this would have been heralded as good news earlier this year when inflation was beginning to look like a problem, today it’s being taken as a sign that recession is deepening and The Fed will have its work cut out trying to prevent a deflationary spiral.
Meanwhile, company specific events played a big role in the markets this week. Front and center were Citigroup and the “big three” US auto makers. Citigroup’s stock continues to struggle as investors weigh the possibility that loan losses will overwhelm the company and induce a forced sale or government rescue — either of which would make the equity close to worthless. Massive layoffs at Citigroup and a follow-on investment from Saudi prince Walid bin Talal failed to comfort investors. The company, which was at one time the world’s largest bank, now carries an equity value of just over $20 billion and a stock price of under $4 per share.
The US automakers didn’t have much luck either this week. Hopes were high that some agreement would be reached so that Ford, General Motors, and Chrysler would receive some kind of funding or bridge loan to help them survive quickly-dwindling cash reserves. Supporters of such an action say that a failure of any or all of these companies would severely impact the US economy and ripple out into other areas, while opponents claim that the automakers do not have sustainable business models that would allow them to operate profitably without continued bailout funding. Talks reached a standstill when Congress demanded a recovery plan from the automakers before moving forward.
Since the one bit of news that seemed to cheer investors during the week was the announcement of Tim Geithner as a potential successor to Hank Paulson as Treasury Secretary, readers may wonder who Mr. Geithner is and why his appointment is so important. He has a pretty impressive resume, which includes serving as Undersecretary for the Treasury for International Affairs under Treasury Secretaries Robert Rubin and Lawrence Summers as well as serving as a director at the International Monetary Fund. His most recent position as the president of the Federal Reserve Bank of New York is also very notable as he is also the Vice Chairman of the Federal Open Market Committee under Fed Chairman Ben Bernanke.
However qualified Mr. Geithner may be, though, the reaction at the end of the trading day on Friday was much more straight forward. Investors tend to hate uncertainty of any kind. The length and depth of the current recession is a very large current source of uncertainty and investors have certainly reacted very unfavorable to that. Another current source of uncertainty, though, is the Presidential transition from George Bush to Barack Obama. Positions such as Treasury Secretary have taken on extreme importance in today’s crisis, so the unveiling of who will be taking over these financial positions should bring some comfort of certainty to investors.
Looking ahead
With a wake of so much bad news from last week, what can we look forward to next week? Unfortunately, extreme volatility is probably still all that I can promise will be on the menu for sure. It’s unlikely that economic reports will cheer the markets much next week, as it seems unlikely that existing home sales, consumer confidence, personal income, or personal spending will surprise to the upside. A preliminary reading of third quarter GDP also has a good chance of bringing on pessimism as the market expects it to decline to an annual rate of contraction of 0.6% from 0.3% last quarter.
On the brighter side, though, as I’ve discussed in the past, the market tends not to move based on what is happening currently, but rather what is expected in the future. So though current economic readings continue to decline, the market is already looking ahead to the next quarter and next year to see what they will hold. Any indication of light at the end of the tunnel — even two quarters out — could cause markets to begin to recover. At the same time, there have been some indications that President Elect Obama may be naming the rest of his economic posts next week and that could likewise spark markets to the upside.
To a large extent corporate earnings will be lighter next week due to the Thanksgiving holiday. There will however be some notables like Hewlett Packard and Deere that will report prior to Turkey Day. More likely, though, the major company specific news that we’ll see will be continued focus on the travails of Citigroup and the automakers.
In retrospect, this has now been one of the worst stock market collapses that we’ve ever experienced. Not only has any excess excitement been shaken out of the market, but there seems to be an overdose of pessimism which has brought the S&P index’s current earnings multiple markedly below its long term average. While this doesn’t mean that there isn’t room for the market to fall further — after all, investors don’t always act rationally — we don’t recommend making any drastic changes to your long term investment strategy.
