Daily Insight

U.S. stocks engaged in another wild ride yesterday as the broad market moved nearly 4% intra-day peak to trough – the word “peak” is a relative term as the index was never in positive territory, although it came close to moving to the black with about an hour left in the session.

Increased concerns over the outlook for global growth increased investor pessimism. Surely continued talk of the auto market’s struggles and crude-oil’s steep decline help to reinforce that activity has deteriorated in a meaningful way – both from the consumer and business. Weakness on the business side is a fairly new event and occurred very quickly as the credit-market chaos that began in September evoked a high level of caution and halt to business spending plans.

Not helping things is that the filibuster power of the Senate appears to be slipping away. The Minnesota race has tightened in the past few days and the recount hasn’t even begun yet – go figure that one out. The thought of Al Franken actually making it to the U.S. Senate cannot offer investors optimism, and whether the Senate has filibuster ability or not may very well determine the direction of the market.

Basic material, consumer discretionary and energy shares led the market lower as these are the areas that logically get hit the hardest on concerns over global growth. The traditional safe-havens – utility and health-care shares – performed well on a relative basis.

Everyone’s a Bank Now

American Express won approval from the Federal Reserve to become a commercial bank yesterday and is now seeking $3.5 billion in TARP funds. The Fed waived the usual 30-day waiting period on the application because of “the unusual and exigent circumstances affecting the financial markets.” according to a Fed new release yesterday.

Who knows, you could find yourself driving down the road one day, minding your own business, and blow by a billboard advertising CD rates at the First Commercial Bank of U.S. Steel.

The TARP

And speaking of the TARP (you know, the $700 billion Troubled Asset Relief Program), a top Treasury Department official stated yesterday that the program is shifting from buying troubled assets to focus primarily on capital injections into the financial system. Ok.

Sure, it was very much important for the TARP to have flexibility – and it is certainly proving to be flexible – I just hope we don’t wake up one day to find 250,000 new TARP bike paths have been created, 30 TARP “bridges to nowhere” have been built and 50 additional monuments to Senator Robert Byrd have been erected – certainly some of the more favorite earmarks of the past decade.

Crude and the Dollar

Crude-oil prices fell below $60 per barrel on speculation the International Energy Agency will lower its 2009 demand forecast for the third-straight month in its report today – probably not much of a stretch right now, as least regarding the first-half of the year. The IEA has cut its 2008 forecast by 1.3 million barrels a day via seven revisions this year. The world uses roughly 85 million barrels of oil per day in case you were wondering.

Alas, the plunge in energy prices may prove short-lived. We talked about the affect Fed liquidity injections will have on commodity prices in yesterday’s letter. We also see members of Congress have been talking about reinstating the ban on offshore drilling.

My how things have changed; this is quite unfortunate. It appears, well that’s putting it lightly – it’s an overt objective – that the Democrats had planned on doing this all along after what they figured were to be big gains this election – that ban was just lifted a couple of months ago. It seems some people never learn. We could incrementally replace imported oil needs by gathering the low-hanging fruit now that this ban has been lifted. There is enough in the Prudhoe Bay and ANWAR areas, along with spots on the east and west coasts directly offshore to fully replace the energy we import from Chavez’s Venezuela. But no, that would make too much sense. It seems some forms of “change” are not all that new.

The Economy

We have been without any major economic releases for a couple of days and that’s the case again today. However, we did receive a sentiment survey yesterday, one that has gained attention of late.

The Investor’s Business Daily/Technometrica Market Intelligence (IBD/TIPP) index that tracks consumer sentiment showed economic optimism rose this month.

The IBD/TIPP Economic Optimism Index jumped 9.7 points to reach 50.8 in November, the largest one-month increase in the survey’s eight-year history. A reading above 50 indicates optimism, below 50 indicates pessimism among most respondents.

The survey has three components:

Ø The Six-Month Outlook jumped 13.5 points to 55.4.
Ø The Personal Finance Outlook gained 10 points to 60.6
Ø The Confidence in Federal Economic Policies rose 5.5 points to 36.4

Bottom line, this confidence survey made big gains as the price of gasoline plunged and the government’s economic rescue plan may be getting a better reception from the public – although, as the table (via Bloomberg) below illustrates, any increased optimism on this front is purely relative. It remains the low point of the survey’s components.

Credit Markets

As we’ve been touching on, the credit market freeze of the past couple of months continues to thaw. We see this in three-month LIBOR rates, which illustrate an increased willingness from banks to lend to one another, and in the TED Spread – which has narrowed as this shows risk aversion may be on the wane, albeit mildly – we really need TED to get closer to 1.00 for a clear sign investors have embraced risk again.. Commercial paper issuance has also rebounded thanks to the Fed latest attempt to facilitate this vital aspect of business financing.

However, even though the TED Spread has narrowed, it has not come down as the decline in LIBOR rates would suggest because the other component of that spread (three-month T-bills) continues to garner massive demand, which means T-bill rates remain very low – the price and yield are inversely related. We want to see this component of the spread rise (thus causing the spread to narrow further) as it will show investors’ desire for safety has waned. We’re still waiting for this event to take place.

Further illustrating this point, was the huge demand that the Treasury Department’s three-year note auction received on Monday. The bid-to-cover ratio came in at 3.07, which indicates very strong demand. This indicates a massive flood of money to the shorter-end of the curve.

It is good and all to see demand for US Treasuries, but demand of this nature simply shows the degree of risk aversion out there. These three-year notes yield 1.76%. Since inflation is running at 4%, investors are clearly looking for places where they can first and foremost get their money back, forget the return right now. This trend must reverse course in order for the stock market to engage in a meaningful rally, which we’ll see via the three-month T-bill yield.

Today we’ll go another day without an economic release, but will get back to it tomorrow with initial jobless claims and the September trade balance.

Have a great day!
Brent Vondera, Senior Analyst