A Week in the Rearview – week ending 2/6/09
In the headlines
A look at some of the market movers over the past week:
- Citigroup announced plans to boost its lending
- Oil giant BP posted a loss as oil prices plunged
- Australia’s central bank announced a rate cut along with $27 billion in stimulus spending
- Personal income fell less than expected, while personal spending was lower than expected
- President Obama announced a compensation cap for companies receiving federal aid
- Panasonic announced that it will post a $4.2 billion loss and cut 15,000 jobs
- Miner BHP Billiton took a larger-than-expected hit in the first half of its fiscal year
- January retail sales were down, but not as much as feared
- Falling real estate prices helped boost pending home sales
- Warren Buffett bought $300 million in Harley-Davidson debt and invested $2.6 billion in Swiss Re
- Cisco posted a sharp drop in profit, but managed to beat analysts’ expectations
- Consumers outside of the US helped boost Visa’s bottom line
- The Obama administration is preparing to announce a comprehensive bank rescue plan
- News Corp announced its largest ever quarterly loss
- Nearly 600,000 jobs were lost in January and the unemployment rate climbed to 7.6%
Commentary
The markets finally managed to post a weekly gain in 2009, with the S&P 500 posting an impressive 5.2% rise. This gain was posted despite the fact that economic and corporate news continues to be disappointing.
There was little breathing room during the week as economic and earnings reports combined to create an almost non-stop stream of news reminding investors that the recession continues. This negative news, however, seemed to be balanced out by investors already-lowered perceptions of the economic environment as well as hope that government actions will help bring some life back to the US business scene.
Little, if any, real progress seemed to be made during the week to bring Congress closer to passing a stimulus plan. The Senate’s vote on the plan was pushed to next week as Republicans and Democrats continue to spar over the best way to stimulate the economy.
Meanwhile, President Obama and his economic team continue to press on in their quest to stem the economic bleeding. There’s been a lot of excitement over the potential impact of the banking plan that is expected to be announced on Monday. It’s expected that the plan will likely emphasize other tools such as guaranteeing toxic assets over setting up a “bad bank” to take on those troubled assets.
It was on hopes for good outcomes from both of these initiatives that the markets were able to overcome an poor week of other news that included a worse than expected unemployment rate and disappointing spending numbers. The week could be a signal that investors believe much of the current bad news is priced into the market, or it could have simply been a quick positive bounce off of an awful January performance.
Looking ahead
It should be yet another interesting week ahead. Though the economic calendar is much lighter than the past week, there will be a lot of focus on the retail sales numbers that will be reported on Thursday. Excluding auto sales, the market is expecting a 0.4% fall in January, a much smaller contraction than in December. The actual reported number will be important, but the market’s interpretation of that number will likewise play a big part in its impact on the equity indexes.
Earnings reports will still be hot and heavy next week. Monday and Tuesday we’ll see Barclays, Hasbro, Nissan, Rohm and Haas, Coventry Health, Molson Coors, NVIDIA, Qwest Communications, and UBS. Wednesday’s highlights will be BCE, Chipotle Mexican Grill, Credit Suisse, Groupe Danone, Ingersoll-Rand, Marsh & McLennan, Sanofi-Aventis, and Toll Brothers. And Thursday and Friday will feature ABB, Embarq, LabCorp, Mariott International, McAfee, Coca-Cola, Viacom, Waste Management, Abercrombie & Fitch, Pepsi, and Wyndham Worldwide.
As with last week, the earnings releases cover a range of industries, so it’s unlikely that any one industry will dominate the earnings news. With that said, special attention may be warranted when UBS and Credit Suisse report, as they may be a good early read on whether there’s any light at the end of the tunnel in the financial services sector. We should probably anticipate lackluster earnings across the board, but it’s very likely that most investors have already taken that into consideration, so only if earnings are far better or worse than what we’ve seen so far this earnings season will the market react sharply.
The biggest market movers next week will be the Treasury’s unveiling of its financial rescue plan on Monday along with the Senate’s progress on the economic stimulus package. There seem to be some very high hopes for the Treasury’s bank plan, so it shouldn’t be surprising if it falls short of the market’s hopes and leads to a moderate decline on Monday. This, however, could be easily offset by positive progress or, better still, a passing vote on the economic stimulus plan. There seems to be a good deal of pessimism around the speed at which this plan will move and expectations of further delays may be already baked into the market.
I personally was asked earlier this week why I’m not shorting this market or at least specific stocks within the market. My response was that shorting now seems very similar to rushing to buy in late 1999 and early 2000. As a long term investor, my hope is to capture the major upward movement of the market over decades, not try to outguess the market over days or even weeks and capture many small moves.
During the dot-com bubble there were a great many investors that thought they’d be missing out if they didn’t buy and buy a lot. There will certainly be some investors that will claim big returns from playing pessimist and shorting stocks during this market downturn, just as there were some investors that made out handsomely by timing the dot-com bubble’s peak. It seems likely to me, though, that just as many investors lost their shirts betting on internet stocks, there will be plenty of sad stories from this market of those that tried shorting finance stocks, or just stocks in general, and lacked the timing to get out at the bottom.
If I believed that over the next ten or twenty years the global economy would contract, reversing centuries of experience of long-term economic growth, I would be on board with those shorting the market. My belief, though, is that 2007-2009 (or even 2007-2010) will be a larger-than-normal blip, but it will still be a blip, and those that are betting with the long term growth of the global economy will be better off for it.
