A Week in the Rearview – week ending 12/12/08
In the headlines
A look at some of the market movers over the past week:
- Congress went back and forth all week on the idea of bailing out US automakers, but ended the week by rejecting the bailout and potentially pushing the matter into the White House’s lap
- The New York Times Company announced that it will be borrowing $225 million against its Manhattan headquarters building
- The 161-year-old Tribune Company filed for bankruptcy
- The Federal Reserve floated the idea of issuing its own debt
- The troubled in insurer AIG may be facing yet more difficulties with some bad trades
- In a rush to safety, investors pushed Treasury bill yields to historic lows
- Pending home sales declined less than expected
- The proposed $41 billion buyout of Canadian telecom BCE officially fell apart
- Reports suggest that hedge fund assets were trimmed by $64 billion in November
- Bernard Madoff has been accused of perpetrating perhaps the largest fraud in Wall Street history
- Bank of America announced the latest round of banking job cuts
- Initial jobless claims continued to climb
- Wholesale prices fell more than anticipated
- Retail sales fell in November, though not as much as many anticipated
Commentary
It was a wild week on the market but finished with a weekly change of less than a half percent on the S&P 500 index. The week started off well, with a cheerful reaction to President-elect Obama’s ideas for a massive stimulus package. The S&P index rallied 3.8% on Monday as investors looked forward to a potential tsunami of government money hitting the economy.
Unfortunately, that was largely where the good news for the week ended. The defeat of the proposed $14 billion aid package for US automakers General Motors and Chrysler topped the list of news that provided drag for the stock market. Though the bill appeared to have positive momentum in Congress early in the week, a coalition of Republican Senators stalled the bill late in the week, effectively killing it. For the time being, the blow to the equity markets has been cushioned by news that the White House may pull funds from the Treasury’s TARP program to help carry the automakers through to the beginning of the next administration.
Company news continued to be rather bleak as well. Tribune Company, which was just bought out by real estate financier Sam Zell in 2007, filed for bankruptcy this week, as did toymaker KB Toys. In addition to Bank of America’s announcement of 35,000 job cuts over the next three years, Dow Chemical and Rio Tinto, among others, announced hefty layoffs. Multiple companies also stepped forward to guide down on anticipated earnings.
Likewise, economic news was mostly to the downside, with initial jobless claims continuing to rise and hitting new highs. The announcement that the producer price index fell more than expected could be taken as a spot of good news, however anything more than moderate deflation could be a threat to the economy.
And though as of yet it appears that there hasn’t been any direct impact on the equity markets from the Bernard Madoff fraud scheme, the announcement that a highly respected trader and former Nasdaq chairman perpetrated perhaps the largest fraud in Wall Street history can’t be good for investors’ already fragile psyches.
There is, however, a silver lining in all of these lousy headlines. The fact that the markets were up slightly for the week, suggests that investors may be starting to see events as already priced into the current market levels. One week certainly doesn’t give us too much of a basis for drawing this conclusion, but a barrage of news like we had this week would have almost certainly caused the markets to swoon just a few months ago.
Looking ahead
There’s no doubt that action will start to slow as we approach the holidays, but next week promises to be particularly eventful.
Front and center we will continue to have the tug of war between the US automakers and the US government. After finishing last week with a dead rescue bill in Congress and a begrudging White House saying it may pull funds from TARP for Detroit, all eyes will be on whether some sort of deal gets worked out. Regardless of what automaker bankruptcies will really mean in the long term, in the near term the market will likely focus on the potential flood of job cuts that would come from a bankruptcy scenario.
On the economic front there will be a few notable events next week. On Tuesday we’ll get both the change in the consumer price index for November as well as November housing starts. The current expectation is that “core” CPI will be up slightly, while overall CPI, which includes food and energy will show a drop of 1.3%. Per usual, Thursday will bring the latest initial unemployment claims, and given the elevated levels recently, this will likely be a focus late in the week.
The biggest economic event of the week, though, will almost certainly be the Federal Reserve’s policy statement on Tuesday. Though the current Federal Funds Rate of 1% is notably low, most market watchers are expecting that the Fed will continue to try to jumpstart the economy by cutting rates. According to the Federal Reserve Bank of Cleveland, which uses Fed Funds futures to calculate implied probabilities of Federal Reserve Board actions, the most likely outcome of Tuesday’s announcement is a 75 basis point cut to bring the intended rate to 0.25%.
And though the primary earnings season rush is over, there is a host of notable earnings reports scheduled for next week. Goldman Sachs and Morgan Stanley report Tuesday and Wednesday, respectively, and will likely bring some of the spotlight from the automakers back to financial services as both are expected to announce losses for the quarter. On the consumer side, Best Buy, General Mills, Nike, Take-Two Interactive, Discover Financial, Pier 1, and Darden Restaurants, among others, will all presumably have comments about their perception of the US consumer. Homebuilders Hovnanian and Lennar will be watched for any sign of light in the housing market. Finally, investors will be looking for broader economic signals in the results from Adobe Systems, Accenture, FedEx, and Oracle.
As I noted above, the market’s relatively benign reaction to a week of pretty bad news releases suggests that we could be nearing a turning point in the markets. As I’ve noted in this column in prior weeks, the equity markets are always trying to anticipate events rather than react to them after the fact. This means that anticipation of economic weakness caused investors to start selling stocks before the worst of the economic news had been released. This also means that contrary to what might seem logical, many investors will not continue to sell through the worst of the economic news, but rather will start anticipating a future turn in the economic picture.
Whether we’re at a bottom, approaching one, or are still nowhere near it, our conviction in consistent investing doesn’t change. As I have reiterated a number of times, there have not been any tools or signals that have consistently been able to correctly time market movements, so we believe that the best approach for long term investors is to continue investing on a regular basis and taking advantage of the long term appreciation of the equity markets.
