The steady stock market uptrend since the November lows was broken last week as the bad economic data and bailout uncertainties continued. Market action was dominated by news in the financial sector. JP Morgan (JPM), Citigroup (C) and Bank of America (BAC) all announced more writeoffs last week although JP Morgan at least was able to report a profit after an extraordinary gain from the Washington Mutual acquisition. Without the gain, JP Morgan would have reported a loss as well.
Citigroup reported a loss of $8.29 billion and announced it would split into two seperate companies, effectively ending the financial supermarket approach of Sandy Weill. Bank of America’s acquisition of Merrill Lynch caused significant indigestion in the quarter as it reported a loss of $2.39 billion due to trading losses at Merrill among many other things. Bank of America returned to the taxpayer bailout trough, getting a Citi-like deal with the taxpayer backstopping its future losses. Both stocks declined significantly on the week, but at least recovered some from their lows.
It is becoming obvious that the first $350 billion of TARP money has not solved the problem and the second tranche was approved by the Senate last week. The House will take up the measure soon and will likely allow the second tranche to be released to the Treasury, but with significant conditions attached.
Whether there will be a Treasury Secretary to apply the funds is something that became a little less clear last week as Tim Geithner, the Obama nominee, came under pressure last week due to some tax irregularities. Mr. Geithner apparently failed to pay self employment taxes while working for the IMF. The law is a bit complicated but the gist of it is that Geithner was reimbursed by the IMF for taxes he failed to pay. It would seem a requirement that the man who will be in charge of the IRS would have a grip on his own personal taxes, but with Charlie Rangel, head of the House Ways and Means tax writing committee, having his own problems, maybe it's not that unusual. Apparently, the political elite plays by different rules. When politicians get hoisted by their own loopholes, it might just be time to consider simplifying the tax code. Just a thought…
The economic news didn’t improve last week, but as usual one can find some glimmers of hope in most of them. The Trade Deficit fell in November, mostly due to the falling price of oil as imports fell faster than exports. The new age mercantilists who obsess about this statistic are presumably pleased, but I would point out that the only reason the trade deficit is falling is because we are in recession. The trade deficit is really a meaningless statistic that provides ammunition for businesses seeking protection from overseas competition. If a lower deficit convinces the Obama administration to tread lightly in trade policy this recession might even be worth it. By the way, just to reinforce how meaningless this statsitic really is, we ran a trade surplus throughout the Great Depression.
Retail sales continued to cliff dive in December, down 2.7%. Price declines distort this somewhat, but even excluding gas and automobiles, sales were down 1.5%. Producer and consumer prices both fell in December and for the deflation worrywarts, this is probably seen as bad news. I find it hard to lament falling prices though. Falling prices are the cure for falling sales and should be seen as good news. That’s how capitalist systems are supposed to work.
Jobless claims rose last week, but remain well below the peak of December. Whether that trend lasts is doubtful though as layoff announcements continued apace last week. Employment is a lagging indicator. The last report of the week was possibly the most disconcerting as Industrial Production fell 2% in December. The only bright spot I could find was an uptick in business equipment that was primarily a result of Boeing (BA) increasing production after their recent strike. That’s not much to hang your hat on.
Markets last week broke the uptrend in place since November although the mid-day reversal on Thursday and the modest rally on Friday limited the damage somewhat. On the week, the S&P 500 fell 4.5% and the Dow 3.7%:
The technical damage was significant and a return to the November lows cannot be ruled out. However, with sentiment remaining very bearish and credit market conditions improving, I don’t think it is likely now. The big problem last week was the financial sector and the bottom line is that the government will keep throwing money at the sector until things improve. While I abhor the method, in the end if we give the banks enough capital, they will improve.
The US dollar continued its countertrend rally last week, but I believe the move is about over. The dollar has reached the downtrend line and the 50 day Moving average:
It is significant, I think, that commodities did not make new lows last week with the dollar rallying. Gold, in particular, looks to be ready to make another move to the upside after a rally on Friday:
I reviewed the proposed stimulus plan last week and while it certainly has something for every political constituency, I am not impressed with its value as a stimulus to the economy. The tax cuts are not likely to help and the spending is more likely to cause problems than solve them. As I’ve said many times, our problem is too much debt and you can’t solve that by borrowing and spending. The economy will recover on its own given time and a removal of the uncertainty surrounding the government’s plans. I suspect that we have already seen the trough of the recession and the recovery may come sooner than expected. If that turns out to be true, the adding spending of the “stimulus” plan will just add to the inflation surge I already expect.
This week is a short week with the market closed on Monday for the Martin Luther King holiday. Tuesday we get the inauguration and the hope of a new administration. While I am very skeptical of the economic plans of the incoming administration, most people are not and that optimism may be reflected in the stock market over the coming weeks. A resolution of the Geithner situation is likely next week and with his team in place, Mr. Obama will get a honeymoon. Let’s hope the market lets him enjoy it for a while.
Disclosure: Alhambra Investment Mangement and its clients may have positions in securities mentioned in this report. AIM has positions in the S&P 500 (via various ETFs) and gold (via IAU and diversified commodity ETFs).