Friday, March 27, 2009

Financial Crisis, 27 Mar 2009: Weekly Wrapup

The Dow Jones Industrial Average (DJIA) roared back over the past week. Monday saw the Dow rise to 7,775. The rest of the week challenged that level of support, which seems to be holding strong. Wednesday saw the Dow drop to around the 7,550 level in intraday trading, but by the close that day the Dow was back to 7,749.

Thursday saw the highest level of support, closing at 7924.56. Friday’s close reflected some profit-taking for a generally good week for Wall Street. For the week, the Dow was up nearly 500 points.

Weekly Closes
March 2009

06 March : 6,626.94
13 March : 7,223.98
20 March : 7,278.38
27 March : 7,776.18

The economic news was not uniformly good. United Nations Secretary-General Ban Ki-Moon warned that the global recession could lead to instability and social unrest around the world. Dominique Strauss-Kahn of the International Monetary Fund (IMF) made the prospect for the world even more dire, citing millions dropping into poverty and the spectre of war breaking out.

The contraction of the world’s markets will take months to shake out across the globe. Yet for this week the U.S. economy rebounded dramatically, producing one of the best single-month rises in many years.

Friday, March 20, 2009

Financial Crisis, 20 Mar 2009: Weekly Wrapup

The market’s corrosive slide has had a surprising bounce over the past weeks. In fact, had you picked the bottom of a few weeks ago, and you would have been part of the best 2-week run of the S&P500 since 1974.

A cursory look at the last week’s close to this week’s close alone would not show that. The week-to-week change in the Dow was a modestly buoyed 54-point rise: from 7,223.98 on the close of 13 March to today’s close of 20 March at 7,278.38. That modest rise does not tell the complete story of the volatile market for the week.

Just as one comparing the present day’s close to the close of 7,270.89 on 25 February would have left out the volatile weeks in between.

Wall Street began with a rocky Monday, which saw an up-and-down day nearly as high as 7,400 and then falling back to near 7200. The Dow then had strong positive days Tuesday and Wednesday, including cresting over the 7,550 mark on Wednesday, 18 March, before it eroded, giving back nearly all the gains over Thursday and Friday. Friday alone the Dow sank back 122.42 points or –1.65%. The NASDAQ and the S&P500 were likewise off –1.8% and –2% respectively.

The rise of the Dow from less than 6,500 on 9 March to the over 7,550 intraday high on Wednesday represented a 16.15% rise in value. In the short term, that is a very bright reversal of the downward plummet of stocks. However, the Dow is still down 17% on the year.

AIG Bonus Pay — Cherry on Top?

The week’s financial news was filled with the comments about the AIG bonus pay of $165 million to its financial products unit managers and the government’s demand that it be returned, either voluntarily or through a special tax that sailed through Congress. Tim Geithner and Senator Christopher Dodd were both hammered and taken to task for letting provisions for such bonuses slip into the Congressional bailout package in the first place.

The bonuses were simply the “cherry on top” of a terrible heart-stopping dessert for the American tax payer. All of it is relative mountains-and-molehills compared to the amount of money already plowed into AIG. $182.5 billion of public money was invested into the company. The company is going to be forced to repay the costs of the bonuses to the taxpayers, and, on top of that, the individual compensation will now face a specially-passed 90% tax. As will any bonus compensation made to individuals with incomes greater than $250,000 working at companies that received $5 billion or more in federal bailout funds.

A Trillion Here, A Trillion There...

The U.S. Federal deficit for 2009 is likely going to be $1.8 trillion, and another $1.4 trillion for 2010. The Congressional Budget Office (CBO) announced that it projects Federal deficits to accrue another $9.3 trillion in debts between 2009 and 2017. The national debt already stands over $11.0 trillion (specifically $11,039,686,130,898.10 as of 19 March 2009).

The Federal Reserve waded into the situation by offering to buy back $300 billion of Treasury bills, and to acquire $750 billion of Fannie Mae and Freddie Mac mortgage-backed securities, and another $100 billion of their outstanding debts.

The gross U.S. debt had been as low as 58% of Gross Domestic Product in 2000. By the time of the end of the Bush administration, that had risen to about 75%. This year’s deficit alone will amount to 11.9% of GDP. The next year deficit will be an estimated 7.9%.

As the national debts pile on, so do the unemployment figures.

Job Losses Mount

The national average for unemployment in Febrary was measured 8.1% by the Bureau of Labor Statistics. However, that rate may rise given new information out of leading industrial states like California and Ohio.

In California, the unemployment rate rose in February to 10.5%, the highest since April 1983. The 116,000 Californian jobs shed in February were the most lost in a single month in 19 years. Even the normally ebullient Silicon Valley has been hard hit. Last year, the unemployment rate was 5.1%. Today it is over 10%.

Likewise, Ohio faces a 9.4% unemployment rate, up from 8.4% in January — the worst situation since 1984. A year before it had stood at 5.9%. There were well over a half-million unemployed in Ohio in February 2009 — 566,000 — versus 349,000 unemployed a year ago in February 2008.

Global Setback

The U.S. economic recession is not a localized market issue. The International Monetary Fund acknowledged today that the entire global economy is now in a recession. The overall world’s production will slump 1% over 2009. Some economies will grow, but not as fast as they used to. Most will be in recession, and some be hit far harder than others. Japan, for instance is expecting a retraction of 5.8% in its GDP. Europe will be down 3.2% on average. The U.S. will have a relatively mild 2.6% retraction.

The question will be how fast the global economy can spring back after sustaining such precipitous losses. It also doesn’t mean that the problems will go away. Even if the market sprang back 16% over the past few weeks trading, there are still tremendous problems to be burdened, including the incurred national debts of various stimulus packages which were used to get the market moving again.

Sustainability is not done by simple means and gross averages. One cannot water a plant “on average” by drowning it one day after weeks of drought. Likewise, the instability of the present up-and-down market is not a sign of good health. It came at a price, which will be burdened for years and decades to come.

Friday, March 13, 2009

Financial Crisis, 13 Mar 2009: Dow 7,223.98, +53.92 (+0.75%)

Today the market rose to close the week up, with the Dow Jones Industrial Average back over 7,200. It was up 53.92 points on the day (+0.75%), ending at 7,223.98. For the week the Dow bounced back nearly 600 points over the prior week’s close of 6,626.94, recovering all the losses of the prior week and well over its close at 7,062.93 of two weeks ago. That is a rise of over 9% for the week, and a net rise for March of 2.28%.

Though this is welcome news, having a “two-week high” is nothing to really get complacent about. World Bank President Robert Zoellick warned of all economic stimuli giving the world economy a “sugar high” speaking in London before the start of the G20 Summit.

Another bit of good news for the “buy American” crowd was that the U.S. trade deficit fell 9.7% to $36 billion for the month of January. This was down $2 billion compared with expectations. Adjusted for inflation, the real trade deficit was $41 billion. However, this news must be couched in the fact that all global trade is significantly down for the year. And in the long run, it could hurt many industries and international relationships that rely upon global trade for their success.

Many elements of the world economy are still shaking out after the downturn. European powers are considering protectionism. They are still in a great deal of insecurity over their eastern European debt obligations. Austria, which had extensive dealings with eastern Europe after the fall of the Iron Curtain, now finds itself in a greatly insecure position.

China is trying to avoid having its trade deficit with the U.S. shrink, and is mulling over the security of U.S. Treasury bonds. Meanwhile, the U.S. has dispatched a Navy destroyer, the USS Chung-Hoon, to protect a maritime surveillance ship, the Impeccable, off the Chinese coast. Along with the other issues, a prognosis of uncertainty is developing between the U.S., the present pre-eminent world power, and China, the developing powerhouse of Asia.

So while the news for the week is extremely good for the short term, there remains a great deal of uncertainty for the coming year ahead.

Thursday, March 12, 2009

Financial Crisis, 12 Mar 2009: Dow 7,170.06, +239.66 (+3.46%)

For the third straight day, the Dow Jones has ended higher. For the first time this month, the Dow closed above the 7,000 mark at 7,160.06.

A Dimmed Light Shines Brighter

General Electric, even though it was downgraded by Standard & Poor’s from AAA to AA+, jumped up $1.08 a share, up 12.72%, to $9.57. Investors had worried the downgrade would have been even worse.

If Not a Bottom, a Ledge

Meanwhile other aspects of the economy looked to be settling according to the U.S. Department of Commerce. Retail spending in February, though still down slightly by 0.1%, was not as bad off as some forecast. Excluding automotive industry, it was actually up 0.7%. Overall retail spending in January, even including the automotive market, was actually up 1.8%. Unemployment remains a chief worry to the sustainability of the consumer spending rate.

The present week has been a welcome relief to a market that has seemed nearly in free-fall since October of last year. While prospects are still too murky to determine if this is a bottom to the crevasse, it is possibly at least a ledge that the market has landed safely upon.

Madoff Guilty

Today also marks the day that Bernie Madoff pled guilty to running a massive corrupt investment scheme that lost billions. “I operated a Ponzi scheme,” he told the U.S. District Court judge.

Go to G20

The leaders of the G20 are preparing to meet this week. The U.S. is proposing two major initiatives:
  • Push for a 2-year stimulus plan from all G20 nations equal to 2% of that nation’s GDP. The U.S. stimulus plan signed by President Obama is already equivalent to 3% of GDP.
  • Expand the IMF’s emergency fund for developing nations from $50 billion to $500 billion. The U.S. would contribute $100 billion to that fund and would seek other nations to underwrite the other $400 billion in necessary funds.
Many of the nations, however, are so strapped for cash and credit that they are not willing to make such a commitment.

Stay tuned for the news from the G20 summit later this month.

Wednesday, March 11, 2009

Financial Crisis, 11 Mar 2009: Dow 6,929.68, +3.19 (+0.05%)

Today the market flirted with the 7,000 mark, crested it, and then spent the day in up-and-down trading. A late-in-the-afternoon rally almost brought the Dow to a close at the 7,000 mark, before a final tumble to close just 3 points higher than the previous day.

The intraday low was 6,867.55, meaning that the present support for this level is not firmly established. With the Dow plunging and rising hundreds of points per day, we will likely see a great deal of volatility yet to come.

The general trend for the day was a rapid peak in the AM, followed by a long steady decline. The reversal of that trend to the end-of-the-day rally somewhat mirrors the experience of 6 March 2009, when the market hit new recent lows.

The good news is that at 6,929.68, the Dow has recovered 7.6% from the low of
6,440.08. The unknown propositions are whether it will be able to remain above that point, and whether we have reached a valley, or a bump on the downward slope.

The airline industry, for one, sees that there may be some fair weather flying ahead. Delta, for one, saw “revenue trends stabilizing and not getting worse.” BofA-Merrill Lynch even upgraded JetBlue.

The issue about whether we’ve reached bottom requires everyone to consider “capitulation.” When some people simply abandon their positions in the market and take their losses. Mark Hulbert of MarketWatch is not convinced we’ve reached a point of capitulation yet, and warns that to be too overly bullish at present may be mistaking a bear market rally for the real McCoy of a reversal of a down trend.

Financial Crisis, 10 Mar 2009: Dow 6,926.49, +379.44 (+5.8%)

Yesterday the Dow Jones Industrial Average (DJI) roared back up 379.44 points to close at 6,926.49, up 5.8% on the day. This raised the Dow to close to its February close, just above 7,000.

The good news in perspective shows how far the market has yet to recover. It was still down over 2,000 points on the calendar year 2009, which it began over 9,000. For the full twelve month proceeding period, it is far off the 13,000+ value it held back in May 2008. It is estimated by Stephen Schwarzman of Blackstone Group LP that 40-45% of the world’s wealth has been destroyed by the downturn.

Yet for Wall Street and for those dependent on their portfolio, 10 March 2009 was a welcome relief.

The market cited the reason for the significant uptick was surprising news from Citibank, which internally shared a memo it had made a profit in the first two months of 2009. That message leaked to the market, and there was a definite bounce.

Other good news included Rep. Barney Frank, Chairman of the House Financial Services Committee, saying that the “uptick” rule, which curbs short selling, may be reimposed by the Securities and Exchange Commission. While in prior days many free market philosophies would have seen this as government interference, in today’s market active involvement of watchdogs is seen as a healthy thing for all parties.

Monday, March 9, 2009

Zimbabwe: Once a Breadbasket, Now a Basketcase

Back in 2002, Robert Mugabe ordered 2,000 white farmers to cease production on their farms. The Economist and The Atlantic began speaking about changing the nation from the Breadbasket of Africa to the Basketcase of the continent. The Atlantic’s December 2003 article is particularly damning, and the news has only grown grimmer since.

Just today, the World Health Organization released information that over 4,000 people have died of cholera, and and another 89,000 have been infected. The “good news” is that the number of diagnosed cases has dropped to 4,000 - 4,500 per week, down from a peak of 8,000 per week at the height of the crisis. However, the casualty figures are still likely to continue, especially in the hinterlands of the nation, where the death rate is far higher than in the urban areas due to lack of water treatment and medicine.

The GDP per capita for the nation was $2,400 in the year 2000. By 2004, it had fallen to $1,700 (as per the 2004 CIA World Factbook). In the latest reports, GDP per capita had plunged to $200. While we may rue our financial crisis, in Zimbabwe in 2008, inflation had driven prices up by 11.2 million percent.

All forms of social services are collapsing, from education to healthcare to basic security. Human rights are in shambles. Corruption is rampant. Arrests of dissidents and opposition figures, disappearances as well as torture, remain a daily factor of life.

A possible positive sign of economic change was mentioned today. Representatives of the International Monetary Fund (IMF) met with representatives of the Zimbabwe government to begin talks about restoring ties to the nation, which nearly had its membership in the IMF revoked in 2006.

However, whatever path Zimbabwe will take out of its current predicament will be a long road, simply trying to restore itself to a level of peace, productivity and prosperity it once knew years ago.

Financial Crisis, 9 Mar 2009: Dow 6,547.05, –79.89 (–1.21%)

Another down day for the Dow. The index tried to rise in early trading to an intraday high over 6,700 right after 10:00 AM, then eroded all the rest of the day.

Today the Dow closed at 6,547.05, down nearly 80 points over the close of Friday, 6 March 2009, but still higher than Friday’s intraday low — which was below 6,500.

With the crisis occurring to the traditional Dow leaders, new names are starting to be elevated to the venerable list of top 30 “blue chip” stocks. Names being put forward in a report from Reuters include Cisco Systems and Google. Visa, with a market capitalization of $42 billion, has also been put forth as a contender to replace Citibank.

The market is already going through a shakeup. It it likely time to reflect the new reality of the market, and also give some thought to the shape of things to come.

Friday, March 6, 2009

Financial Crisis, 6 Mar 2009: Dow 6,626.94, +32.50 (+0.49%)

The Tao of Dow

The week ended on a massive rally. An brisk morning start began Wall Street’s day 50 points higher than the prior evening’s close, and a quick surge led the Dow Jones Industrial Average (DJIA) to an early intraday high of 6,755.17.

However, the swift exuberance was extinguished shortly after 9:45 AM, and the rest of the day was a rocky decline, dipping below the 6,500 level before before 3:00 pm. The intraday low of 6,470.11 was hit right around 3:24 pm. Then, something sparked in the market, and the last half-hour was filled with a massive upsurge to close at 6,626.94. For the day, the Dow was up +32.50 (+0.49%).

It was the silver lining to a terrible week. Had the last half-hour not occurred, the market would have been down over 400 points on the week. As it was, it was “only” down a little over 300 points, from 6,932.23 Monday’s opening to Friday’s close at 6,626.94. This is net drop of 4.4% for the week as a whole. Except for one thing.

The prior week’s Friday close was 7,062.93. Given a Friday-to-Friday analysis, the week was down just shy of 436, or –6.17%.

The market had held up reasonably well for the first half of the week, cresting the 6,950 point twice in the week (Monday and Wednesday). Yet resistance collapsed on Thursday and Friday with the terrible economic news of more job losses and talks of insolvency for General Motors.

Unemployment Rate Crests 8.0%

As reported by Madlen Reed of the Associated Press, the U.S. government’s Bureau of Labor Statistics released figures that the economy has been shedding well over 600,000 jobs each month for the past quarter:

Month Job Losses Jobless %
December 2008681,0007.2%
January 2009655,0007.6%
February 2009651,0008.1%

One can read the Bureau’s report directly online. The release of the Employment Situation begins grimly:
Nonfarm payroll employment continued to fall sharply in February (-651,000), and the unemployment rate rose from 7.6 to 8.1 percent… Payroll employment has declined by 2.6 million in the past 4 months. In February, job losses were large and widespread across nearly all major industry sectors…

The number of unemployed persons increased by 851,000 to 12.5 million in February, and the unemployment rate rose to 8.1 percent. Over the past 12 months, the number of unemployed persons has increased by about 5.0 million, and the unemployment rate has risen by 3.3 percentage points.

Among the unemployed, the number of job losers and persons who completed temporary jobs increased by 716,000 to 7.7 million in February. This measure has grown by 3.8 million in the last 12 months.

The number of long-term unemployed (those jobless for 27 weeks or more) increased by 270,000 to 2.9 million in February. Over the past 12 months, the number of long-term unemployed was up by 1.6 million.
As major corporations continue to have unstaunched losses, and as Wall Street melts, the possibility is for small corporations and individuals to move into market segments to compete — if, and this is a big if — they are able to free their own capital or to raise funds from other sources, and if market conditions and regulations allow them to enter business unfettered.

Otherwise, key opportunities will pass for small businesses and individuals too, causing markets to shut down completely.

The stimulus bill, ideally, is geared to address joblessness immediately. Without a change in the current economy, joblessness will rise to well over 10-12% in the span of the next quarter or two, causing even more chaos.

Rent and Torn

While everyone is focused presently upon the home buyers fiasco, increasing unemployment can also lead to massive disruptions to renters also. Property management companies are being hit as people have to leave their present rentals as jobs dry up, or they may decide to room together to save rent, Many newly completed apartment complexes or recently purchased properties are finding they are already underwater and priced out of the present market.

The UK is seeing a rapid decline in rental values over the past year, upwards of 11.7% in areas around London, and 14.3% around Manchester, as the economy tightens and more home owners put unsold properties out for let.

New York City is likewise seeing a decline in rentals, too. Given various incentives being offered by landlords, rates have been calculated to have dropped upwards of 10-15%, as reported by the New York Times on 30 January 2009.

The word “recession” has been used so far, though the use of the term “depression” is now starting to be considered, such as by this article in the Salt Lake Tribune. We would have to reach an unemployment rate of 10% and be in this crisis for three years before it formally qualifies according to technical definitions. The old joke cited by Amity Shlaes indicates the key difference: “A recession is when you lose your job. A depression is when I lose mine.

Yet for many in the United States today, the symptoms already clearly indicate the condition. Such patients cannot afford to wait for the formal diagnosis. And for millions this is not an easy joke to laugh off.

Thursday, March 5, 2009

Financial Crisis, 5 Mar 2009: Dow 6,594.44, -281.40 (-4.09%)

Wednesday, 4 March 2005 was an up-day in the market. The Dow Jones Industrial Average rose in intraday trading nearly to the 7,000 level. All of that was erased on 5 March, opening below 6,800, and plunging all day long in a frenetic sell-off. The Dow closed lower than 6,600, establishing a new low that hasn’t been seen since 1997.
The financial system, indeed the "civilized" world, is undergoing a massive unwinding of a multi-decade debt orgy. The process is painful and shows no signs of letting up anytime soon, even as many on Wall Street continue to try and pick the bottom, including erstwhile bears like Doug Kass and Steve Leuthold.
— Aaron Task, TechTicker,
Key companies that comprise the Dow were hammered. Citibank (C) dipped momentarily below $1 a share, closing at $1.02, with an Earnings Per Share over the past year of –3.88. It was down –9.73% on the day. General Motors (GM) closed at $1.86, with an Earnings Per Share (EPS) of –38.74, making holding onto the shares practically toxic. It plummeted –15.45%.

The technical analysis is important to listen to. There is no predictive bottom.

The Russell 2000 continues to get destroyed here… There’s clearly nothing at all to suggest anything bullish on any of these charts on any of these time frames…

Don’t get locked into any one belief. Especially when you look at every objective fact on every single one of these time frames that just continues to scream “bear market.”

There’s nothing fundamental here to suggest a turnaround. It’s, you know, it’s, it’s basically as I said, a bad bet.
– Brian Shannon,

Tonight, many are wondering where the bottom may be. 6,500? 6,000? 5,000? Even predictions of 4,000 are starting to be heard. It will be difficult, if not impossible, to predict what will happen when we hit any fathomable bottom. By then, what is certain is that the Dow Jones Industrial Average will likely need to reconsider what the top 20 “blue chip” stocks are in the modern economy. The world will likely be reeling for the better part of the next decade from the destruction of value measured in the trillions.

This is not to act as a prophet of doom or pray for the worst. The worst is happening, regardless of our collective desires. Partially because of our unsustainable collective desires of the past.

Tuesday, March 3, 2009

Financial Crisis, 2 Mar 2009: Dow 6763.29, -299 (-4.26%)

On Monday, the Dow Jones Industrial Average was hammered for another drop of 299 points, or 4.26% of its value.

I’ll leave commentary and analysis to the folks at Minyanville: Market Still in the Maw of the Bear.