The gains came on very light volume and we’ll see how traders react to geopolitical events that have intensified over the past week. Some are suggesting we can jump to the pre-Lehman collapse levels, which would be nice (1260 on the S&P 500) but is highly unlikely with events we face – both inside and outside of the economy. We think 1050 on the S&P 500 is quite possible, but probably not without another move lower. From there is all depends on how geopolitical events unfold, and we remain in a secular bear market so we shouldn’t expect stocks to magically move higher without bouts of weakness.
Also helping the benchmarks advance was a statement out of the Treasury Department that a Citigroup-style rescue package would be used to help other financial institutions if needed – this is a confidence booster for investors.
Many, including us, had assumed this to be the case but the government has been so capricious regarding its decision-making process it has caused additional uncertainty over the financial markets.
Bank preferred shares rallied on the statement as it signals the government will not render these shares worthless in place of new super-senior government securities if some assistance is required.
(The Citigroup plan involved pumping liquidity into the bank and backing potential losses. This too can bring problems down the road, obviously the government can’t back everything, but at least investors can have a little more certainty their positions will not be driven worthless if some assistance is deemed necessary.)
Again, today will be an important one as traders come back from vacation and we see how they react to Israel’s incursion into Gaza, Iran’s call to cut oil exports to the West and Russia feeling things out to possibly do the same regarding Europe.
Market Activity for January 2, 2009
And speaking of oil, prices extended upon Wednesday’s 14% advance, adding 3.7% on Friday. Wednesday’s gain was on the heals of the weekly Energy Department report that showed stockpiles rose less than expected.
On Friday, the price began the session lower after the release of that very weak manufacturing report, which we’ll get to below, but reversed course as stocks gained ground on supply concerns related to the Russia-Ukraine dispute. Crude is up another 1.2% this morning, and looks headed for $50 per barrel. Not a big deal whatsoever, but the issues driving the price higher are.
Economic Data
The Institute for Supply Management (ISM) reported their manufacturing index continued to slide in December, blowing past the 1982 nadir to hit the lowest reading since June 1980. The December reading came in at 32.4, down from an already very weak 36.2 in November.
None of the 18 manufacturing industries surveyed reported growth in December, which is down from 11% for November and October and 33% in September. The ISM stated that based on the historical relationship between the manufacturing data and the overall economy the average readings for 2008 – 45.6 – suggests a 1.4% real annual increase in GDP. If activity for December were annualized it would correspond to a 2.7% decline in real GDP annually.
I don’t like annualizing extreme lows as it is unlikely activity will remain this soft for long; nevertheless, found it worthwhile to mention the comment from the ISM Chairman
All of the sub-indices within the report deteriorated, which isn’t a surprise based on the weakness of the overall survey. However, the degree to which some indices fell, from already low levels, took me by surprise.
The new orders index dropped to 22.7 from 27.9 – remember a reading below 50 marks contraction; the production index hit 25.5 after posting 31.5 in November; the export index came in at 35.5 from 41.0; the employment index hit 29.9 from 34.2 in November.
And it is this employment index that most are focused on considering the state of the labor market. People are looking for clues of a bounce, but they may need some patience as this is unlikely to occur for a few months.
The report in total shows that the recession continued to deepen in December and the forward-looking sub-indices suggest more of the same for January.
This report is going to augment what’s going to be a massive stimulus program, and it will approach $1 trillion. My wish is for a tax-rate response that provides incentive effects to producers and kicks disposable income higher for consumers, but this is not in the cards as politicians are myopically focused on a government spending related response. That’s what we’ve got to go on for now. The goods news is the next administration is considering higher current-year write-off allowances on business equipment purchases. This would be a very smart decision, let’s see if they do it.
Have a great day!
Brent Vondera, Senior Analyst
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