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Economic/Market Highlights 11/10/08

Posted by Larry Doyle on November 11, 2008 2:30 PM |

I will admit that, given the current dynamics at work in the economy and the markets, I have become somewhat numbed as to the magnitude of some of the developments. Many of the highlights that I will offer from yesterday’s news would be enormous stories in and of themselves. Taken collectively, they do become overwhelming if we let them.

The markets are down 5-6% on the month. Given the stream of negative news, one might think that the market could be even lower. The fact that markets aren’t even lower is testament to the trillions of dollars that have been put to work by governments around the world.

Let’s review the major stories of November 10, 2008:

1. China implemented a $563bln economic stimulus plan primarily to further develop infrastructure in the country. That figure represents 1/5th of their total GDP. I was surprised to hear that, but it also indicates to me how much growth potential that country possesses. This package had an immediate impact on our equity markets this morning when our markets were up 3%. This package also supported commodities, especially copper which bounced about 5% on the day. Aside from infrastructure, China directed this stimulus package to an area that was badly damaged in a recent earthquake. Last but not least, China offered “tax deductions” on the purchase of certain hard assets. (Are you listening, Barack??)

This stimulus package though indicates to me that it is not likely that many of our domestic companies will likely be receiving capital injections from sovereign wealth funds. With oil at $60, oil producing countries (such as Dubai) may need to support the real estate developers and exporters in their own countries.

2. Fannie Mae reported a loss of $29bln (I’m not going to say earnings when companies lose money) which equates to $12.96 a share vs an expected loss of $1.40 a share. (How can Wall St. analysts maintain credibility when they miss a call by almost 1000%?).

It is amazing how Fannie can rack up losses like this when their own incentive bonuses are not on the line and when collectively Uncle Sam owns them. Aside from this loss, Fannie did announce that they expect losses to continue and to increase into 2009. This to me means they see foreclosures increasing over the next 6 months. More than likely Fannie will have a negative net worth by the end of 2008 requiring an increased capital injection by the U.S. taxpayer. Where does it end!!

Again, this model is broken. The American consumer who is able to get a mortgage is being subsidized at the expense of the taxpayers. Let the private market set the mortgage rates and if the housing market re-prices, so be it. Enough socialized housing finance.

3. AIG has already been covered on a separate thread so we do not need to repeat that pain here. Suffice it to say, though, that if they effectively burned through $100bln dollars, give or take, in the course of 6 months, the price tag for this entity could possibly be upwards of $300-500 bln dollars with pressure on a wide array of assets owned by other entities in the process.

4. How about the auto analyst at Deutsche Bank coming out with a sell rating on GM? The stock is down 90% on the year and now he tells us to sell … in any event, the stock was down 23% on the day to close at 3.25. The Deutsche analyst is bold enough to say the stock is going to “0” !! Look for heavy political posturing between BO/Dems vs the Bush administration as to added bailout funds, terms, timing for the auto industry.

In today’s WSJ editorial section, they write, “[I]f our politicians can’t avoid throwing taxpayer cash at Detroit, then they should at least do so in a way that really protects taxpayers. That means handing a receiver the power to replace current management, zero out current shareholders, and especially to rewrite labor and other contracts. Anything less is merely a payoff to Michigan politicians and their union allies. ”

High time somebody stands up for capitalism!! … Gentlemen … (one of the great movies ever made…)

5. Recession plays in the form of General Mills, Campbell’s Soup, McDonalds, and Wal-Mart continue to out-perform.

6. Google trades down sharply today on anticipation of slowing in internet advertising.

7. Goldman Sachs (the boy wonders of Wall St.) also trade down sharply (down 8% on the day, 70% on the year and down a full 40% from just 6 weeks ago when Warren Buffett made a 5bln equity investment … a cool $2bln loss for Warren). Concerns about Goldman center on their private equity investments with their own capital.

8. Speaking of Warren Buffett, Berkshire Hathaway announced earnings after Friday’s close and they were down 77%. Berkshire Hathaway is still only down app 23% on the year so as a stock it has handily outperformed the market.

9. The top-rated bank analyst on Wall St. is Meredith Whitney at Oppenheimer. She is beholden to nobody and truly tells it like it is. She was quoted recently as saying that she is particularly pessimistic about the U.S. government’s historic actions to bail out banks with massive capital injections. Such plans have little hope of improving core fundamentals.

Again, in the face of this massive flow of bad news, the market was only down 1-2% on the day. That said, the real economy is going to get worse before it gets better so be cautious about putting money to work in situations that are dependent on borrowed financing.

Heck, even my neighbor who runs a family business (guessing 3-5mm in annual earnings with significant real estate holdings) that has existed for 75 years and is an institution in our town, was turned down for a modest-sized loan by a money center bank to settle an estate.

That, to me, is the definition of a “credit crunch.”

Last but not least, I want to comment on a story that has been making the rounds about the “lack of transparency” in some of the government programs that have been put to work in the markets.

Specifically, the program in question focuses on the Fed backstopping the short-term lending markets. The Fed has provided $2 trillion in money/loans to a wide array of banks and has not provided info on just which banks have participated.

I can understand that the taxpayers want to know, but you have to understand that in the market if other players (dealers, hedge funds, et al) find out which entities are borrowing, then it is very likely that that info will be used against those borrowers. Their stocks and bonds trading in the market will likely get punished.

By not sharing this info, the Fed is actually protecting the banks and the taxpayers at the same time. Think of it from the standpoint of a card game. if you know what somebody else is holding, you can obviously change the way you play your own hand.

10. I almost forgot to post that Circuit City folded for Chapter 11 on Monday. Retail, especially any form of higher end retail, is going to be in for a very tough time. Shopping malls will lose some key tenants as well.

11. I also almost forgot to post that American Express filed to become a bank holding company (just like Morgan Stanley and Goldman Sachs) in order to receive a cheaper source of funding. This indicates that they know their credit card delinquencies and defaults are getting ready to move higher very quickly!! Pay off your credit cards !!

In summary, it is truly amazing when I review these 11 highlighted stories. (Of those, each of the 10 would provide enough ammo for a full-blown front-page article all by itself.)

I hope that people can fully appreciate the gravity of the current situation. This turmoil will not turn around soon. Nothing is served by being alarmist but nothing is served by not treating this fiasco with the respect it deserves.

I wish you all the best.


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