Stocks began the session lower and the selling accelerated to round out the morning session, but an afternoon rally allowed the broad market to close slightly to the upside. The tech-laden NASDAQ Composite posted a more meaningful gain.
The main news of the day was that Bank of America is seeking more TARP funds and loan guarantees, specifically related to the Merrill Lynch acquisition since its is those assets that are taking the brunt of the write-downs.
On a larger scale, there was a general concern that certain banks could be nationalized. This, of course, would be highly unlikely as the entire system could not be nationalized, and if the government took control of just a few of the big names, then it would basically wreck the rest of the industry as you’d have runs on banks as individuals and small businesses shifted deposits to the government entities. But when people begin to raise the subject, it just adds one more uncertainty into the mix. So this is part of what was going on yesterday to cause a wide swing between peak and trough.
By the back-half of the session, as the chart illustrates, it became clear the likely action would take place – the government would assist BofA by using a Citigroup-type takeover – and stocks rallied. The fact that this needs to be done is not good, but it’s by far better than some of the alternatives.
Market Activity for January 15, 2009
The government will give BofA $20 billion in TARP funds – in exchange for preferred shares yielding 8% -- and guarantee $118 billion of assets. The bank will cut their common dividend to a penny per share.
So, we continue to count the number of times the government will offer assistance (remember though these are investments, so from a taxpayer perspective there will be a return here) to the same institutions. Say what you want about BofA’s purchase of Merrill – yes, they should have demanded Merrill enter receivership before taking them over, which would have cleansed the investment bank of troubled assets. That notwithstanding, until mark-to-market accounting is eliminated the risk remains that these institutions will need assistance again. This accounting rule, put in place little more than a year ago, makes stability impossible whether assets prices are moving up or down. Banish it!
Crude-Oil
Crude price tumbled another 5% yesterday to close the session at $35.64. This is great news for consumers as real incomes are boosted by the continued move lower. However, everyday crude decline it also illustrates the market’s view that global economic activity is in trouble, and based on what we see in the trade figures that’s a reality.
Jobless Claims
The Labor Department reported initial jobless claims rose 54,000 to 524,000 for the week ended January 10. A 36,000 increase was expected.
This followed two weeks in which claims fell below the 500k mark, which seemed to be due to a number of factors – seasonal adjustments, winter weather that closed unemployment offices and several states that saw their electronic filing systems crash. The Labor Department called last week a “straight forward” week, referring to the inadequate seasonal adjustments to the holiday shortened weeks of the prior two readings, and therefore that those declines in unemployment claims could not be trusted.
Still, we had all but hit the 600k mark in the week prior to Christmas as claims touched 589K, so the fact that we’re in the low 500k handle may be some sort of silver lining.
The hardest hit state was New York, reporting 24,000 initial claims – this illustrates the retail and financial sectors are currently driving job losses.
The four-week average of initial claims, a less volatile measure, fell for the third-straight week to settle in at 518,500.
Continuing Claims, those accepting jobless benefits for more than a week, fell 115,000 from a 26-year high to come in at 4.497 million in the week ended January 2. The insured unemployment rate (the jobless rate for people eligible for benefits) – which tends to track the overall unemployment rate – held at 3.4%. Both of these readings have a one week lag to the initial claims figure.
I’m going to assume the decline in continuing claims was due benefits expiring.
Next week’s claims data will be the most important of the month as it aligns with the employment survey week. The Labor Department will count those that are not employed next week (and were actually looking for a job) as unemployed for the month. Initial indications are that January will post another large job loss; the next jobless claims number will help to confirm or deny that.
Producer Price Index
In a separate report the Labor Department announced producer prices slid 1.9% in December and moved to negative territory on a year-over-year basis, coming in at -0.9% after a reading of +0.4% in November.
The index has been driven lower by declines in the price of energy, which has plunged from the spike we endured last summer – oil, gasoline and natural gas are all down roughly 65% from the July peak.
The PPI core rate (which excludes food and energy) actually accelerated in December, up 4.3% from the year ago period following the November reading of 4.2% -- and remains elevated.
This is why we continue to caution against the conventional wisdom that believes we’re in a deflationary cycle. We are not. It can always turn into one, but based on the data we’ve seen over the past few months and the huge degree to which the Fed has injected money into the system -- using both conventional and quantitative easing techniques – the chances of an inflationary event occurring several months down the road is much greater than prices continuing to spiral lower.
Empire Manufacturing
The NY Federal Reserve Bank’s index of factory activity within the region improved during December to post a reading of -22.2 after a downwardly revised -27.8 for November. A reading below zero represents a contraction in activity, so even though the survey improved, one can see things remain depressed. (The fact that a reading below zero marks contraction is intuitive, but we mention it because there are factory surveys, such as the ISM indexes, in which the line of demarcation is set at 50).
Stock Futures
Stock-index futures are up this morning on the heels of the BofA news and a statement out of Intel that profitability may rebound.
The House also unveiled the details of its stimulus package, and while we’re going to assume there will be a lot of senseless spending in the program higher current-year write-off allowances and bonus depreciation remained in the plan. This should boost business spending once things calm down. That is so long as firms do not hold off on spending plans for fear higher deficits give politicians an easier sell at raising tax rates and thus curtails economic growth. If firms do not feel a sustained rebound is likely, they will remain very cautious.
Have a great weekend!
Brent Vondera, Senior Analyst
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