The song remains the same with another late in the day market sell-off yesterday (how many times have I typed that of late?). It has almost become a self-fulfilling prophecy at this stage. Yesterday’s culprits included news of mass layoffs from Citibank (NYSE:C) as floundering CEO Vikram Pandit sought belatedly to cut costs (but not his bonus!) and weak guidance from retailers Lowe’s (NYSE:LOW) and Target (NYSE:TGT).
Banking stocks bore the brunt of the selling pressure because of the recurrent worries of their need to raise more capital to offset losses and the prospect of no dividend payouts. Insurance stocks also struggled on fears of ratings downgrades linked to the need for capital raising driven by the equity market return market guarantees embedded in annuities that they have sold. Insurers cannot access the TARP but Hartford (NYSE:HIG) and Aegon (NYSE:AEG) look to be acquiring small banks to get around this bar!
Looks like we are set for a fresh test of the 8,000 level and if we break that, then the Oct. 2002 low of 7,286 comes into play. Look out below?
Today’s Market Moving Stories
- The overnight news was dominated by two broad themes. First, the political brinksmanship on the format of the seemingly inevitable auto industry bailout and second a selection of officials from around the globe falling over themselves to tell us what we already know i.e. that we’re in more of a mess than we thought and that it’s going to take longer than we thought to pull ourselves out of the mire.
- With the auto industry staring into the abyss due to its monthly cash & burn (remember all those dot bomb internet stocks that had the same issue?), the lame duck White House has opined that Congress should only amend the existing $25bn hand out for Detroit if they are willing to radically restructure. This comes after senior Republicans have been digging in their heels on the Hill to stymie Democratic efforts for a quick-fix-let's-throw-money-at-the-problem-as-it’s-a-political-hot-potato. Hank and Ben testify before the House Financial Services Committee on financial rescue measures today. Paulson said overnight that his department and the Fed are working on a new plan to ease strains in the markets for cars and student loans as well as credit card debt! Now that’s quite a shopping list. With an eye to the lengthening queue at the Treasury’s door Paulson has opted to leave $410bn in the kitty for the incoming administration.
- French ECB vice president Christian Noyer said that money market tensions persist and are “affecting non financial corporations” (so much for J.C. Trichet’s observation but two weeks ago that “we see no credit crunch”) while his German colleague and reformer arch hawk Axel Weber foresaw a “dramatic weakening of the economic outlook and considerably weaker inflation rates in mid-2009”. So the cake is well baked for a 1/2% (50bp) rate cut next month with the risk being for something even more festive. Trichet speaks in London today and hopefully some of that Bank of England boldness will rub off on him.
- Compare and contrast. While Vikram Bandit, sorry Pandit at Citibank (C), missed a PR trick by holding onto his bonuses, over at Goldman Sachs (NYSE:GS) they have decided to forgo theirs in a clear cut case of no bonus, less onus, methinks.
How Many Economists Does It Take To Change A Light Bulb?
One of the key themes I’ve tried to articulate of late has been that we are still being subjected to “downside surprises” in both economic data and corporate earnings (guidance) versus what the market consensus had been for these numbers. My view is that one of the keys to finding the bottom of the market will only come when we cease to be surprised i.e. when macro economists and equity analysts adjust their perceptions to such a degree that even bad data looks a tad more rosy because it wasn’t as dire as the market expected it to be.
It is with considerable disappointment and frustration then that I read that most economists seem to think that Q4 will be the nadir of this recession and that unemployment will peak at 7.5%. This is just pure bone headed lunacy driven by vanity i.e. they have to adjust their previously, crazily, over-optimistic and plain wrong views by an embarrassingly large mark to recognize reality. They look likely to be surprised again as they aren’t even playing catch-up yet.
Big picture is that governments seem to be running out of ideas and are unable to agree about much in terms of coordinated cooperation. The US is increasingly now in a state of hiatus or limbo until the new administration takes over and the markets don’t like a vacuum. In sum, this makes for an environment where markets can go significantly lower and the recession (depression) can last much longer than is currently forecast.
It’s all about CPI and PPI (wholesale prices) today with UK numbers due at 09.30 GMT and US PPI at 13.30 GMT. The American numbers look set to tumble possibly hinting at the risks of a deflationary spiral in 2009, while the UK numbers should prove a relief after some 5% plus prints of late.