In a week where change was the word on everyone’s lips, not a lot changed in the economic data. Jobless claims are still rising, housing is still in the dumps and the big financial institutions are still struggling. With the economic dreariness as a backdrop, the stock market fell again, although only about 2%. Earnings reports were generally pretty ugly, but several companies managed to overcome the economic environment to post better than expected results. Volatility spiked higher but remains well below the panic levels of the fall.
The Martin Luther King holiday Monday and President Obama’s inauguration on Tuesday gave all Americans a reason to feel good about things for a little while, but the happy mood didn’t extend much beyond the Mall and didn’t come within striking distance of Broad and Wall. The market greeted the new President with the worst Inaugural day selloff in history, not that that means a whole lot. The selling was fierce in bank shares as the UK plan for essentially nationalizing their banking system put the fear of, if not God, at least the government into bank shareholders. State Street (NYSE:STT) led the selloff after finally fessing up to having some lousy investments on its balance sheet following months of denial, but the selling was widespread with the banking index falling 20% on Tuesday alone.
While the parade of bad news in the banking sector continued for much of the week, there were some bright spots. Northern Trust (NASDAQ:NTRS) and Hudson City Bank (NASDAQ:HCBK) both reported good earnings, proving that not all bankers lost their minds during the housing boom. Maybe the best news of the week came when John Thain, the Merrill Lynch boss, “resigned” from Bank of America (NYSE:BAC) after his extreme office makeover became too much of a public relations nightmare. Unfortunately, he didn’t take Ken Lewis or Merrill’s lousy balance sheet with him.
The earnings news continued in a mixed fashion for the rest of the week with IBM and Apple (NASDAQ:AAPL) reporting better than expected numbers while Microsoft (NASDAQ:MSFT) and GE managed to fall short of already weak expectations. GE was responsible for most of the losses in the Dow on Friday. While GE CEO Jeffrey Immelt insists that the dividend will be maintained, one is left wondering why that seems important to him at this point. GE is one of the few AAA rated companies left (although the credibility of a AAA rating ain’t what it used to be) and one would think the need to conserve capital to cover losses at GE Capital and maintain that rating would take precedence. Indeed, a cut in the dividend might have a positive effect on the stock price at this point.
The economic news was light in volume but not in tone. Jobless claims rose to their highest level in 26 years to 589,000. While the total number matched the level of the 1982 recession, as a percentage of the workforce the numbers aren’t even close yet (chart from Carpe Diem):
There’s no denying that the economy is in pretty rough shape, but the comparisons to earlier bad recessions and the Great Depression need to take a break. The number of jobless claims is indeed high and the absolute number is as high as it was in the early 1980s, but the workforce has grown by 40% since that time, so the numbers aren’t anywhere as dire as that earlier period.
Housing starts and permits plumbed new depths in December. Some of that was no doubt due to the cold weather, but it’s cold every December so it's hard to explain this away so easily. This number was the worst since 1959 and taken as a percentage of the population looks even worse. This is, however, what’s necessary if the overhang of inventory is to be worked off. We still have population growth, so eventually it will be absorbed and the lower the number being built, the sooner that will happen.
The only other economic news of significance was the release of 4th quarter GDP for the UK which came in at an annualized -6%. I don’t think anyone was all that surprised by the drop but the magnitude is jaw dropping. We’ll get 4th quarter GDP for the US this week and while it will almost certainly be negative, I take a little solace from the UK numbers. The UK is widely perceived as being in even worse shape than we are (take a look at what’s happening to the Pound Sterling) and while expectations for the US are in the same range, I think there is a possibility that the numbers won’t be as bad as everyone expects.
Commodities continued their base building last week with gold and oil finishing to the upside:
Gold has been in a bull trend since late October and seems to have broken its downtrend that started last March when it peaked at around $1000. Gold’s performance last week was helped by Tim Geithner’s confirmation hearings when he accused China of manipulating their currency. Earlier he had made the now expected and rote statement that a strong dollar was in the country’s best interests, but it was the later statement that caught market participants' attention. Geithner seems to have caught the same disease as Bush’s Treasury Secretaries who all spoke about a strong dollar but never really seemed to have their hearts in it. In my opinion, the greatest mistake of the Bush administration was their pursuit of a mythical trade advantage through a weaker dollar. In case Geithner is still trying to figure out how to use Turbo Tax, here’s a little bit of news for him. A falling dollar doesn’t help the trade deficit because it makes imports more expensive. The rest of the world isn’t going to take the hit from a falling dollar.
Geithner’s comments also seem to have had an effect in the bond market where yields on Treasuries generally rose. Here’s another bit of advice for the new Treasury Secretary. When you are about to go on the mother of all Keynesian spending sprees and you need to borrow the money to do so, it’s not a good idea to browbeat your largest creditor. Higher interest rates might be a hindrance to your borrowing and spending plans. Not that I think the “stimulus” plan will be all that helpful anyway.
The oil market moving higher is a little harder to explain, but it seems that the forces of supply and demand are coming closer to balance. The contango in the market has started to ease and the market rallied last week even in the face of higher inventories. The narrowing of the spread between the front month contract and those for delivery farther in the future may mean that production cuts are finally having an effect even as demand remains weak.
This week will bring a rash of new earnings reports with McDonald’s (NYSE:MCD), AT&T (NYSE:T), Yahoo (NASDAQ:YHOO), Boeing (NYSE:BA), Pfizer (NYSE:PFE), Amazon (NASDAQ:AMZN), Exxon Mobil (NYSE:XOM), Procter & Gamble (NYSE:PG) and Merck (NYSE:MRK) all reporting. We may also get a look at the Obama administration’s new plan for the banking system which, whatever its form, will likely involve spending oodles of taxpayer dollars to bail out some unfortunate, but politically well connected bankers. At this point, the market just wants a plan, regardless of the moral implications. Removing the uncertainty surrounding the plan will probably be enough to calm nerves for now.
Disclosure: Alhambra Investment Management and/or its clients may have positions in GE, MSFT,BAC,AAPL, IBM, Gold (via IAU),T, BA, PFE, XOM, PG and MRK.