U.S. stocks failed to abide by the script, we’re supposed to feel a sense of optimism with the changing of the guard, focusing on reality instead as stocks got clocked. The damage done to overall earnings as the fourth-quarter was hit hard by the credit-market chaos is hammering sentiment again. Uncertainty over the direction of government policy is also roiling the market.
The decline on Tuesday added to the market’s worst week (last week) since November and has lopped off two-thirds of the late-November/December rally that shot the NYSE Composite 28% from the November 20 low – we’re now just 8.75% above that mark. Talk of nationalizing banks, while this would be a last resort, is also causing major concern.
Financials led the broad-market’s decline after the largest money manager for institutions – State Street Corp. – announced unrealized bond losses nearly doubled last quarter; the stock tumbled 59%.
Telecoms, utilities and consumer staples were relative winners; none of the 10 major industry groups were positive, as the chart below shows.
Decliners trounced advancers by a 17-to-1 margin on average volume.
Market Activity for January 20, 2009
Mark-to-Disaster
We made mention yesterday of how the Treasury’s decision to guarantee, or backstop, loans at Citigroup and Bank of America was smart by half. If they’re going to do something, they need to remove these assets from balance sheets. The idea of backstopping increases the odds that institutions with this guarantee in place may now dump this trouble at even lower prices, which reverberates throughout the sector. It appears there was significant deterioration in asset-backed securities in December even as some of the credit indicators managed to improve a bit.
It’s important to mention, State Street said none of these securities that are taking write-downs are in default, but that doesn’t matter with mark-to-market; this is why it’s so damaging. My fear is as we continue to watch this insane accounting standard wrought its destruction, it will continue to lead to additional government decisions that bring their own consequences. We’re trying nine-gazillion things (in typical government Rube Goldberg machine fashion) with all of the unintended consequences that result when we could have simply ended an accounting standard that was just put in place a mere14 months ago. This is not just insane, it’s an exhibition in self-flagellation.
And on bank nationalization, no one in Washington has the skills to run the banking system – we only need to look at Fannie and Freddie for evidence of that, or most other government programs for that matter. Nationalization is not an option, such a decision would be ruinous. What needs to be done is elimination of pro-cyclical accounting standards. This will stop the bleeding and buy time for private money to eventually flow in.
This is not a bankrupt society, even if a bevy of government action is doing its best to make it so. Corporate America is as streamlined as ever and flush with cash. On the consumer side, the vast majority of people are not broke, let’s not act like the situation is reversed.
The private sector is the savior here, we mustn’t forget that. Nor should we forget that it has been mistaken Fed policy (keeping real rates negative for two years) and a regulatory regime that put in place mark-to-market that has done the most damage. This country has built a level of prosperity the world had never seen, and done so in a very short time from a historical perspective – it hasn’t been accomplished by regulating the hell out of private industry.
Crude-Oil
Oil futures continue to plunge as the spot price closed in on $30 per barrel yesterday morning. Just two weeks ago crude looked ready to move past $50, but had tumbled in the last 10 sessions as global economic concerns crush demand expectations. The price on the February contract rose mid-day (after falling to $33 early morning) as traders covered their short positions or be forced to take delivery of product as the contract expired yesterday.
Crude is higher today as the market is in contango, meaning subsequent-month contracts trade higher. At this rate, however, it should come down to the mid-$30s within a couple of days.
While oil and stocks trade in tandem for now (yesterday notwithstanding due to the contract expiration) this makes the decline tough to deal it. However, a huge benefit to consumers has resulted
Real incomes have received a large boost over the past six months, something in the neighborhood of $300 billion. This will not be enough to completely offset the deterioration in labor-market conditions, certainly this event is weighing on confidence along with the rout in stock prices, but it is helping consumers rebuild cash savings – something they have been focused on as their two main savings vehicles (stocks and homes) fall in value. The sooner cash savings are rebuilt, the sooner consumer activity can engage in a rebound.
That said, for now the economic picture continues to get worse. However, with production horrendously weak, inventories are being drawn down in a manner that will set the stage for a rebound in output – but we must get past this period of full blown pessimism and caution first. Once we do the combination of a small boost in consumer activity along with higher business spending and production should drive GDP higher two quarters down the road. But we’re also at the whim of government, so gauging things is even more difficult than usual.
Futures Higher
IBM and United Technologies – both Dow components – have posted some decent results since the close of trading yesterday, this is helping to boost stock-index futures. However, the relatively good results were a function of cost cutting, fourth-quarter revenue declined for both firms.
But this is what economic downturns do, they force the strong to become more efficient and weed out the weak, setting the stage for a stronger business cycle upswing. Government meddling will curtail the next expansion – all they need to concentrate on is removing toxic assets from bank balance sheets and eliminating mark-to-market to replace it with cash-flow accounting. If they engaged in nothing more from this point, we could really be onto something six months out. That’s a big if.
Have a great day!
Brent Vondera, Senior Analyst
The decline on Tuesday added to the market’s worst week (last week) since November and has lopped off two-thirds of the late-November/December rally that shot the NYSE Composite 28% from the November 20 low – we’re now just 8.75% above that mark. Talk of nationalizing banks, while this would be a last resort, is also causing major concern.
Financials led the broad-market’s decline after the largest money manager for institutions – State Street Corp. – announced unrealized bond losses nearly doubled last quarter; the stock tumbled 59%.
Telecoms, utilities and consumer staples were relative winners; none of the 10 major industry groups were positive, as the chart below shows.
Decliners trounced advancers by a 17-to-1 margin on average volume.
Market Activity for January 20, 2009
Mark-to-Disaster
We made mention yesterday of how the Treasury’s decision to guarantee, or backstop, loans at Citigroup and Bank of America was smart by half. If they’re going to do something, they need to remove these assets from balance sheets. The idea of backstopping increases the odds that institutions with this guarantee in place may now dump this trouble at even lower prices, which reverberates throughout the sector. It appears there was significant deterioration in asset-backed securities in December even as some of the credit indicators managed to improve a bit.
It’s important to mention, State Street said none of these securities that are taking write-downs are in default, but that doesn’t matter with mark-to-market; this is why it’s so damaging. My fear is as we continue to watch this insane accounting standard wrought its destruction, it will continue to lead to additional government decisions that bring their own consequences. We’re trying nine-gazillion things (in typical government Rube Goldberg machine fashion) with all of the unintended consequences that result when we could have simply ended an accounting standard that was just put in place a mere14 months ago. This is not just insane, it’s an exhibition in self-flagellation.
And on bank nationalization, no one in Washington has the skills to run the banking system – we only need to look at Fannie and Freddie for evidence of that, or most other government programs for that matter. Nationalization is not an option, such a decision would be ruinous. What needs to be done is elimination of pro-cyclical accounting standards. This will stop the bleeding and buy time for private money to eventually flow in.
This is not a bankrupt society, even if a bevy of government action is doing its best to make it so. Corporate America is as streamlined as ever and flush with cash. On the consumer side, the vast majority of people are not broke, let’s not act like the situation is reversed.
The private sector is the savior here, we mustn’t forget that. Nor should we forget that it has been mistaken Fed policy (keeping real rates negative for two years) and a regulatory regime that put in place mark-to-market that has done the most damage. This country has built a level of prosperity the world had never seen, and done so in a very short time from a historical perspective – it hasn’t been accomplished by regulating the hell out of private industry.
Crude-Oil
Oil futures continue to plunge as the spot price closed in on $30 per barrel yesterday morning. Just two weeks ago crude looked ready to move past $50, but had tumbled in the last 10 sessions as global economic concerns crush demand expectations. The price on the February contract rose mid-day (after falling to $33 early morning) as traders covered their short positions or be forced to take delivery of product as the contract expired yesterday.
Crude is higher today as the market is in contango, meaning subsequent-month contracts trade higher. At this rate, however, it should come down to the mid-$30s within a couple of days.
While oil and stocks trade in tandem for now (yesterday notwithstanding due to the contract expiration) this makes the decline tough to deal it. However, a huge benefit to consumers has resulted
Real incomes have received a large boost over the past six months, something in the neighborhood of $300 billion. This will not be enough to completely offset the deterioration in labor-market conditions, certainly this event is weighing on confidence along with the rout in stock prices, but it is helping consumers rebuild cash savings – something they have been focused on as their two main savings vehicles (stocks and homes) fall in value. The sooner cash savings are rebuilt, the sooner consumer activity can engage in a rebound.
That said, for now the economic picture continues to get worse. However, with production horrendously weak, inventories are being drawn down in a manner that will set the stage for a rebound in output – but we must get past this period of full blown pessimism and caution first. Once we do the combination of a small boost in consumer activity along with higher business spending and production should drive GDP higher two quarters down the road. But we’re also at the whim of government, so gauging things is even more difficult than usual.
Futures Higher
IBM and United Technologies – both Dow components – have posted some decent results since the close of trading yesterday, this is helping to boost stock-index futures. However, the relatively good results were a function of cost cutting, fourth-quarter revenue declined for both firms.
But this is what economic downturns do, they force the strong to become more efficient and weed out the weak, setting the stage for a stronger business cycle upswing. Government meddling will curtail the next expansion – all they need to concentrate on is removing toxic assets from bank balance sheets and eliminating mark-to-market to replace it with cash-flow accounting. If they engaged in nothing more from this point, we could really be onto something six months out. That’s a big if.
Have a great day!
Brent Vondera, Senior Analyst
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