Job cut announcements continue to roll on. This event has accelerated over the past couple of weeks, and generally is something that puts pressure on the market as it has an obvious adverse effect on consumer activity and thus profits. However, the market may begin to gain some ground on this news; while it’s a harsh reality, this is also the benefit of economic downturns as firms come out of it more streamlined and powered for increased levels of growth.
Unfortunately, we also have the government in the mix, and well more than is usually the case, so the market is also struggling with having to deal with the whims of Washington
Most sectors gained ground yesterday, health-care, basic materials and financials were the losers.
Market Activity for January 23, 2009
Pfizer officially announced its purchase of Wyeth for $68 billion in order to boost pipeline potential as their biggest products come off patent 2010-2015, the largest being Lipitor. Wyeth’s promise in Alzheimer drugs, along with pneumonia and depression drugs already on the market, were what Pfizer was after.
This looks like a smart deal for Pfizer, although the stock price didn’t exhibit that yesterday, down 10% on news the company will cut its dividend payout in half to save $4 billion per year
And speaking of cash, Wyeth has a net cash position ($14.1 billion cash - $11.5 billion in debt) and Pfizer will use that cash to help finance the deal. Pfizer already has huge cash reserves of $30 billion, but a lot of this is overseas and they simply won’t repatriate the bread because of the harmful 35% tax incursion on doing so.
This is a topic we’ve spent much time on. Many U.S. firms have substantial cash overseas from international operations, but won’t bring it home because of the tax – they have already paid the corporate tax rate levied in the country in which the business occurred, why would they take another 35% hit on top of it? They won’t.
We’ve got to get serious here. There are responses to the current economic environment that can accomplish both short and long-term good. The repatriated tax should be slashed to 5%. This will bring massive amounts of capital back home, boost the economy and increase government revenues too. Five percent of something is a heck of a lot more than 35% of nothing. The sooner Washington understands this the better it is for everyone.
The Economic Data
The National Association of Realtors (NAR) reported existing home sales unexpectedly rose in December. Total existing home sales increased 6.5% to an annual rate of 4.74 million units from 4.45 million in November. Breaking down the two components, single-family resales rose 7.0% and multi-family increased 2.1%.
The median price for a single-family existing home fell 2.8% in December and has been hammered over the past year, down 15% -- nearly all of this damage has occurred since September.
The rise in sales for December was spurred by a 7.4% increase in the South and a 13.6% jump in the West region – NAR noted that distressed properties accounted for 45% of all sales, particularly true for the West.
The West region saw prices plunge 11.6% in December and the Northeast endured an 8.5% drop (although sales still dropped) – that’s for the month! The median price of an existing home in the Midwest and South held steady – up 3.2% in the South and flat in the Midwest.
The inventory of existing homes, relative to the current sales pace, fell nicely last month, which is a good sign.
However, before we get excited about this move, the figure has to trend down close to six month’s worth. When sales bounce back, which will be delayed now due to the weakness in the labor market, this supply figure will fall fast. Unfortunately, we could be a year from this happening based on what is currently known. What we need to see for now is existing home sales to stabilize around these levels. Let’s accomplish that first and then have some patience, additional patience I should say, regarding the rebound.
Our feel is the Obama Administration may attempt to move the 30-year fixed mortgage rate to 4.0%-4.5% -- maybe by issuing Treasury debt and using Fannie and Freddie to write mortgages in this range. They can finance this via the 30-year T-bond, which currently carries a 3.38%. This could help the housing market bounce faster than it would otherwise occur. The Fed is already engages in pushing mortgage rates lower, but some more could be in the works.
This is not the way I would do it; there is no free lunch and every action has its cost, but then no one is really asking my opinion. In any event, the administration may want to lay off on the China bashing, or they could find out quite quickly that that 3% handle on the 30-year becomes 5%.
The Conference Board’s Leading Economic Indicators (LEI) index rose 0.3%, the first increase in six months – a decline of 0.2% was expected. The positive result was due to an increase in M2 money supply for the month. If this component would have been flat, LEI would have been down 0.4%. This is really not a great indicator right now due to the Fed’s aggressive easing campaign.
Have a great day!
Brent Vondera, Senior Analyst
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