A Week in the Rearview – week ending 4/10/09
In the headlines
A look at some of the market movers over the past week:
- HSBC further bolstered its capital base with a $19 billion rights offering
- Budget analysts revised up the estimate of what the TARP program would ultimately cost taxpayers
- The Treasury expanded potential participation in its PPIP program after receiving criticism
- Goldman Sachs’ Lloyd Blankfein spoke out in favor of financial executive pay changes
- General Motors appears to be preparing for a potential bankruptcy filing
- A Madoff “feeder fund” manager was charged with fraud
- The Congressional Budget Office estimated a near $1 trillion US budget deficit for the first half of the fiscal year
- The Congressional panel overseeing TARP suggested that liquidation of the hardest hit banks may be the best way to go
- Life insurers joined the list of TARP-eligible companies
- The Treasury plans to keep bank stress tests a secret until after first quarter earnings have been released, though early indications point to glimmers of health
- Alcoa kicked off first quarter earnings season with a second consecutive loss
- Consumer borrowing fell more than expected
- The SEC is revisiting its rules on short selling
- Japan announced a $154 billion stimulus package
- Moody’s cut the credit rating on Berkshire Hathaway
- Minutes from the Federal Reserve’s March meeting revealed concern over further downside
Commentary
After a worrisome start to the holiday-shortened week, the market changed course and continued its winning streak. Going into Wednesday, the S&P 500 index was down 3.2% after losing sessions on Monday and Tuesday. A positive day on Wednesday followed by a stellar session on Thursday helped the index finish the week with a 1.7% gain. Over the past month, the S&P is up 26.6% and year-to-date losses have been cut to just over 5%.
As can be gathered from the list above, it was an eventful week. The week got off on a bad note largely because of the lack of immediate news. The general concern over the state of the banking industry — stoked by a very negative report by bank analyst Mike Mayo — along with the questionable efficacy of the government’s programs, led investors to briefly turn back on the buying they’d been doing over the past few weeks.
The kickoff to earnings season from Alcoa didn’t help much as the aluminum producer came up relatively flat. The company released a larger than expected loss as prices continue to soften due to the economic conditions.
New government actions along with some surprising news from the financial sector were the fuel for the turnaround in the back half of the week. On the government side, the Treasury opened up the TARP to life insurers a move that was seen bullish not only for the sector but for the financial system as a whole as life insurers are major players in the fixed income markets. In addition, apparently leaked reports suggested that the Treasury’s bank stress tests would not lead to the closure of any banks, even though further funding will likely be required.
These actions seemed to largely drown out a relatively critical report by the Congressional panel overseeing TARP. Though the members of the panel disagreed significantly, the primary report released suggested that the subsidization approach of TARP may not be particularly effective and liquidation or receivership may be better approaches.
Building on the positive momentum created by the government, Wells Fargo gave a very positive preliminary report on its first quarter on Thursday. The bank said that it expects to blow past analysts’ expectations an outcome we haven’t seen in the banking sector for some time. The report sparked a massive rally in banking shares and the financial sector, and helped drive the 3.8% gain in the S&P 500 index.
Looking ahead
The economic calendar for the week ahead is jam packed. On Tuesday and Wednesday we’ll get the twin pricing reports with the Producer Price Index coming out on Tuesday and the Consumer Price Index being released the following day. Retail sales data for March will also hit the wires on Tuesday, while we’ll get housing starts and building permits data later in the week. The Federal Reserve’s “beige book” may be the centerpiece of the week though, as analysts and investors will be looking for further signs that at least the speed of economic degradation has slowed.
The importance of those economic reports, however, will pale in comparison to what we have ahead on the earnings calendar. Tuesday we’ll hear numbers from Goldman Sachs, Intel, and Johnson & Johnson. Wednesday and Thursday will bring Abbott, Progressive, Gannett, Google, Illinois Tool Works, JPMorgan, Nokia, and Southwest Airlines. And Friday we’ll hear from BB&T, Citigroup, General Electric, and Mattel.
I’m sure I don’t have to tell you that Goldman Sachs, JPMorgan, BB&T, Citigroup, and General Electric (because of its GE Capital division) will be the most important earnings releases for the week. However, there are also quite a number of smaller financial institutions — Bank of the Ozarks, Commerce Bancshares, Piper Jaffray, and Umpqua Holdings, for instance — that the market may also pay attention to for a further reading on the banking system’s health. Wells Fargo set the bar pretty high at the end of this past week, but it was also one of the healthier banks to begin with, so we very well could be set up for disappointment from Citigroup as it continues to wrestle with its demons.
Of course, as we look over the major market movers from the past week, it was events that weren’t scheduled that had the largest impact on the market. So though we do have quite a schedule heading into next week, be sure to expect the unexpected.
