Sunday, November 9, 2008

Market Week Wrap-up

Indices began the week on a note of optimism, posting early gains ahead of the end of a very long US election season. The pre-election bounce sent the DJIA up about 3%, although the bounce turned into a bust after Barak Obama's victory, with the index heading straight nearly 900 points over the next two sessions. For the week the Dow, S&P and NASDAQ were each down about 4%. European central banks made noise with multiple rate cuts announced on Thursday solidifying a multi-pronged strategy for fighting the financial crisis. Things could have been worse, considering the torrent of grim economic news: GM and Ford capped a dark earnings season with more massive losses. Same-store sales were very bad. The EU Commission officially declared a recession in the Euro Zone. Front-month crude lost $7 on the week, testing the $60 level. There were a few rays of light: the Baltic Dry Bulk Index finally found a floor after 22 straight declines. The three-month USD LIBOR fell below 3.00% on Monday and was down to 2.29% by the end of the week, bringing the figure within striking distance of normalcy. However, late on Friday the Fed's Lockhart offered some caution on credit, noting that signs of improvement may be a "false dawn" and promising that the problems facing markets will surely get worse.

On Tuesday Barak Obama was elected as the 44th president of the United States in a historic landslide victory, making him the first African American president in US history. The Democrats increased their majorities in both the House and Senate, although they failed to gain a filibuster-proof supermajority of 60 in the Senate. Financial markets are nervously awaiting the selection of President-Elect Obama's choice of Treasury secretary, not to mention the rest of his candidate. In any case the new administration inherits sharply rising unemployment, a threat of a severe recession, a deep housing crisis threatening foreclosures at unprecedented pace, and a record budget deficit.

Ford and GM released grim third-quarter results on Friday. GM's loss was twice the expected figure, while its global market share has slid further to 13%, down -0.7% y/y. Ominously, the company noted that "Even if it implements various planned restructuring actions, its estimated liquidity for the rest of the year will approach the minimum amount necessary to operate." In a sort of ransom note to the Federal government, GM said "Looking into the first two quarters of 2009, the company's estimated liquidity will fall significantly short of that amount unless economic and automotive industry conditions significantly improve." Specific liquidity figures were promised for later this afternoon. Thursday after the close Ford disclosed a larger-than-expected loss, although revenue came in well ahead of estimates. At this point the company's credit reserves are just as important as its earnings figures: Ford said it has available credit lines totalling $10.7B and overall liquidity of $29.6B. The CFO said that he is "comfortable" with this level of liquidity and does not expect to draw on available credit lines. The company also said it would eliminate 10% of global salaried jobs, with the cuts coming via buyouts for 2,600 workers, bringing total 2008 hourly staff reductions to around 7,000 so far. In related news, auto giants BMW and Toyota both lowered their full-year sales forecasts.

The steel industry is under increasing pressure from the global slowdown. On Wednesday the world's largest manufacturer, Arcelor Mittal, reported a quarterly net profit that was nearly one-third lower than expected and slashed its EBITDA outlook for the year. The firm is also reducing production levels significantly, and ominously stated that it is not seeing any recovery in certain steel markets, although it does believe that demand may stabilize sometime in 2009. Meanwhile US producer AK Steel reduced its shipments for Q4 and raised surcharges on December shipments of electrical steel by a large margin.

Tech leaders Cisco Systems and Qualcomm offered a dim picture for tech over the coming several quarters. CSCO beat Q1 estimates on the top and bottom line, but guided Q2 sharply lower, forecasting a 5-10% y/y decline that was said to be 10-15% below street estimates. CEO John Chambers voiced uncertainty over the likelihood of Q1 being the "kitchen sink" quarter. QCOM reported earning in line with expectations but guided lower for the quarter and the year. QCOM's CEO said that Customers and partners are telling the company that demand is dropping.

Google and Yahoo canceled their much touted search deal, citing concerns about a protracted legal battle. In a statement released on their corporate blog, Google wrote that "...after months of review, including discussions of various possible changes to the agreement, it's clear that government regulators and some advertisers continue to have concerns about the agreement. Pressing ahead risked not only a protracted legal battle but also damage to relationships with valued partners." Despite the admission of failure, Google noted it still believes the agreement would have been good for advertisers and users. Later in the week, there were reports of the possibility of a more limited Google-Yahoo seach deal being struck. On Friday Microsoft CEO Balmer insisted that he is still not interested in buying YHOO, that no talks are taking place and that he is not interested in further talks with the company.

The Wall Street Journal reported on Tuesday that the Treasury may open the TARP recapitalization program a broad range of financial companies, not just banks and insurance companies. Specialty GE and CIT Group were mentioned by name in the article; this morning a CIT executive confirmed that the company would participate in the program. The WSJ article noted that the Treasury may scrap early plans to buy distressed assets via auction, purchasing them directly instead. The Treasury's Kashkari said on Friday that the Treasury has not ruled out providing funds outside the financial sector.

October Same-store sales were painful, as expected. Costco surprised with a sales decline of 1% (analysts had expected a 4.3% increase), marking its first negative q/q sales number in memory. Discount giants Wal-Mart and BJ's are holding up their numbers, reported steady sales gains. Leading apparel names were hard hit, with Gap's sales -16%, Abercrombie & Fitch comps -21%, American Eagle -12% and the Limited -9%. Hot Topic was the standout among apparel firms, reporting 8.4% growth versus expectations of a 3% decline. Every major department store reported major sales declines, including many double-digit declines, with Nordstrom -15.7% and JC Penny -13%.

In currencies, November began where October left off with traders obsessing over the global economic crisis, although the fresh face in the White House has raised hopes for a psychological boost. The IMF highlighted growth concerns on Thursday, stating that most G7 economies would contract in 2009, calling the financial crisis "virulent," adding that its outlook was "extremely uncertain." The report contradicted its view from only a month ago when the IMF predicted that the US, Euro Zone and Japan would expand in 2009. Fitch said it expects a severe global recession in 2009 in the US, UK, Euro Zone and Japan, noting that these areas could experience their steepest decline in GDP since World War II. Emerging markets continue to be a concern, especially after Brazil said its trade balance worsened in October. A Citigroup analyst wrote that emerging markets would grow around 4.5%, well off earlier views. Global PMI data was highly negative, with Spain, Italy, Hungary and China logging their lowest PMI readings ever for the month of October. Russian PMI fell to 47.4 from 55.5 in Sept, while the US ISM non-manufacturing number hit the lowest reading on record.

The record low European PMI numbers set markets up for rate cut fever, which arrived in due course later in the week. The Reserve Bank of Australia set the bar high for aggressive interest rate cuts after its steep 75 bps ease on Tuesday. On Thursday BoE made its biggest cut ever, slashing rates by 150 bps to 3.00%. The ECB cut for the second time in a month, taking 50 bps off of its key rate, bringing it to 3.25%. Other European central banks jumped in as well, with the Swiss National Bank cutting its Libor target average by 50 bps to 2.00%, the Czech Central Bank cutting by 75 bps (50 bps expected) and the Danish Central Bank cutting by 50 bps in a completely unexpected move. The ECB's Jean-Claude Trichet noted that the bank's outlook for price stability is improving and that he expects inflation to keep declining over the coming months. Trichet said the decision was unanimous, noting that members also discussed a larger rate cut, including a 75 bps cut as well as a smaller 25bps ease. All the rate reductions resulted in buyers entering into the short end of the curve across a variety of government bond markets. Curves in Germany, UK and the US were noticeably steeper for the week providing continued hope banks will find it pragmatic to put money to work. The US Benchmark curve finished the week 245 basis points. The Jan fed fund future is pricing in better than a 60% chance the Fed cuts the target rate another 50 basis points before year end.

Despite improved funding costs, lending continues to be extremely selective. Trading desks are noting that viewed in terms of margin calls, there continued to be more loans being called than new credit extended. The ECB's October Lending Survey noted that banks have tightened net credit standards, citing economic the negative outlook. The ECB expects this trend to continue into the fourth quarter.

Early in the week the USD benefited from the numerous analyst forecasts for aggressive interest rate cuts at the BoE and ECB. Former Japanese Finance Minister Sakakibara (aka Mr. Yen), noted that the JPY could rise to 80 against USD over the next three or four months, adding that EUR/JPY could fall to 100-110 during the same period. He believes that Japan is tempted to intervene if USD/JPY if it falls into the 80s but suggested that the government shouldn't intervene in the unwinding of the yen carry trade. The USD ended the week with a steady tone despite the highest unemployment report since 1994 and the highest non-farm payroll reading since Oct 2001.

The slowing growth scenario has continued impacting commodity markets. The price action continued to be fixated on risk appetite and leveraging/de-leveraging mentality as year-end approaches with less and less liquidity around making way for choppy price action. In its World Energy Outlook Report, the IEA said it expects global oil demand to reach 106M bpd, down 10M BPD from prior view, although it also noted that oil prices could exceed $200 by 2030.

The IMF spent the week locking in agreements with eastern European countries. The IMF approved $16.4B loan to Ukraine, reached a $6B deal with Iceland, approved a $15.7B loan for Hungary, agreeing to disburse $6.3B of this amount immediately. Turkey could announce an IMF loan of up to $10B in November.

Trade The News Staff Trade The News, Inc.

Legal disclaimer and risk disclosure

All information provided by Trade The News (a product of Trade The News, Inc. "referred to as TTN hereafter") is for informational purposes only. Information provided is not meant as investment advice nor is it a recommendation to Buy or Sell securities. Although information is taken from sources deemed reliable, no guarantees or assurances can be made to the accuracy of any information provided. 1. Information can be inaccurate and/or incomplete 2. Information can be mistakenly re-released or be delayed, 3. Information may be incorrect, misread, misinterpreted or misunderstood 4. Human error is a business risk you are willing to assume 5. Technology can crash or be interrupted without notice 6. Trading decisions are the responsibility of traders, not those providing additional information. Trade The News is not liable (financial and/or non-financial) for any losses that may arise from any information provided by TTN. Trading securities involves a high degree of risk, and financial losses can and do occur on a regular basis and are part of the risk of trading and investing.