The Dow Industrial Average failed to participate in the rally, held back by shares of Wal-Mart – the most hated retailer on the planet subtracted 33 points from the index.
Bloomberg reported that stocks were also helped by news that Citigroup agreed to back legislation allowing bankruptcy courts to modify mortgage contracts.
We’re not so sure. This may be one of the early signs that government has greater power to force the private-sector’s hand -- after all, Citigroup was opposed to this legislation when it was initially proposed just a few months ago; it didn’t have the numbers to pass Congress back then. If you accept money from the government (such as TARP funds and the rescue package Treasury came up with in early December) then you’ll find the government has more sway in determining business decisions.
I’ll note, these institutions didn’t have much choice in the matter, without the government assistance firms like Citigroup would have gone down as mark-to-market accounting rules greatly exacerbate their over-leveraged troubles. Oh, and that increased degree of leverage was encouraged by a Federal Reserve that kept real short-term interest rates negative 2003-2005, which essentially subsidizes debt
But back to the topic, I don’t necessarily view what’s known as cram down as a good thing, particularly with regard to borrowers that put little if any money down.
For instance, the FDIC’s plan to modify loans is showing that 50% of those with no skin in the game simply live rent-free for another three months only to walk away later. Why would Citigroup’s borrowers be any different? Sure, bankruptcy courts will be able to reduce the principal amounts of mortgage loans along with the rate of interest, which will be helpful to those that put little money down. Nevertheless, I don’t think we should have much confidence in these derelicts (people who simple walk away from their largest financial obligation) to do what it takes to stay in their homes no matter how the loan is modified. Well see.
Market Activity for January 8, 2009
Economic Front
The Labor Department reported initial jobless claims unexpected fell last week, declining 24,000 to 467,000 – three-month low. This was quite a surprise and marks the second week in which first-time claims remained below the 500k level, two weeks ago the number looked as if it would soon blow through the 600k level.
Many seemed to believe the previous week’s decline was due to seasonal adjustments and winter weather that closed unemployment offices. For this latest week, there are reports from several states that electronic filing systems crashed due to volume, so we’ll really need to wait another week to see what is truly going on.
Considering the data we’ve received from a number of economic surveys – ISM , ADP, Challenger and the Conference Board’s net “plentiful less “hard to get” (pertaining to jobs) index – it is very difficult to believe the past two initial claims readings are pointing to an improving employment market. It’s just too early for improvement to occur – in my view we’re still several months away from meaningful reductions in the level of job losses.
The four-week average of initial claims fell for a second week as well.
The continuing claims data, those that remain on jobless benefit rolls for longer than a week, does jibe with other job-market indications. Continuing claims rose 101,000 to 4.611 million in the week ended December 27. This figure is just barely below the 1982 high and more closely resembles the nature of the job market.
This morning we get the official jobs report for December and expect payroll positions to decline 600,000 – the unemployment rate will likely hit 7.0%. If we get a decline of 600k, the economy will have lost 2.5 million jobs in 2008 (75% of which occurred in the final four months of the year). The job losses last year erased 30% of the 8.2 million jobs created 2003-2007.
In a separate report, the International Council of Shopping Centers (ICSC) announced same-store sales fell 2.7% in November from a year earlier. This marks the third-straight month of decline – since the ICSC began reporting on same-store retail sales there has never been back-to-back declines much less three in a row.
Drug and discount store sales have been the least affected, naturally, by the three-month pullback in consumer activity as was the also the case in November falling 0.6% and 1.0%, respectively. Department, luxury and apparel stores were the hardest hit as sales fell 10%-13%.
This is all part of consumers adding to cash savings as the major savings vehicles, homes and stocks, have been hit hard. It has been the damage in the stock market in particularly that has really caused consumers to retrench. No doubt the decline in the labor market has had an affect as well, but in the aggregate most of the damage to confidence has resulted from the plunge in equity prices October-November.
This is why a tax-rate response is the most efficient, and least burdensome to the budget, prescription to the current weakness. Legislation that drives disposable incomes immediately higher via substantial bracket cuts and boosts after-tax return expectations by halving the capital and dividend tax rates would do more than the panoply of programs and facilities delivered by the Treasury and the Fed – and without the unintended consequences. (Although, some of what the Fed has done, such as the commercial paper funding facility, has worked very well and reduced damage immensely. However, in the aggregate their decisions will leave us with an inflation issue to deal with, and I’m not talking 5% on the CPI if they’re not acutely responsive.)
We can engage in $800 billion, $1 trillion, or more in public works programs but this type of stimulus does not only lack staying power it takes 12-18 months to get off the ground. I don’t care how many times politicians state that shovels are already in the ground, they still have to go through federal and state appropriations. While this is good government, it causes a huge lag affect. It may very well prove to be the case that just when the bulk of the public spending is flowing through to the economy the business cycle will have already turned. We shall see.
Correction:
Yesterday, in an attempt to put the labor-market weakness in perspective, I stated the 500k in job losses that occurred in February 1958 accounted for 9% of payroll positions and the 600k in jobs losses that occurred in December 1974 accounted for 7.5% of total payroll positions. Today 600k in losses accounts for just 4.3%.
Those figures are actually 0.9%, 0.75% and 0.43%. Dan Esser informed me of this mistake. I apologize for the carelessness.
Have a great weekend!
Brent Vondera, Senior Analyst
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