MarketView for December 1

Summary 

 

Wall Street was certainly not in any sort of a holiday mood on Monday, as we kick off the last month of this year and the first day after a holiday shortened week. Actually, the Street is holding an end-of-the-year deep discount holiday sale of its own but that is a topic for this weekend’s column.

 

Meanwhile, Scrooge was the name of the game today as stock prices hit the as signs of a deepening economic slump around the world erased much of last week's sharp gains. Banks and retailers were among the day’s worst casualties as investors feared the dramatically slowing economy will undercut their businesses as the credit crisis simmers.

 

Adding to the woe, The National Bureau of Economic Research, the arbiter of business cycles, declared that the United States entered recession in December 2007, thereby ending 73 months of economic expansion. To make matters even worse, Fed Chairman Ben Bernanke said the economy remained under considerable strain. Monday's sharply lower close snapped a five-day winning streak for the S&P 500 with the Dow Jones industrial average posting its second-worst daily percentage loss this year.

 

The Dow Jones Wilshire 5000, one of the widest measures of U.S. stocks, fell 9.15 percent in its worst daily percentage slide since October 19, 1987, when the stock market crashed on a date that became known as Black Monday. On the first day of December 2008, the drop in the DJ Wilshire 5000 represented a paper loss of approximately $1.0 trillion.

 

The Chicago Board Options Exchange Volatility Index, which is Wall Street's favorite barometer of investor fear, jumped 22.69 percent to end at 68.51. at the same time, the Institute of Supply Management (ISM) reported that factory activity fell in November to its lowest level since 1982. The data jolted investors already disappointed by earlier news of weaker Chinese and European manufacturing activity.

 

Black Friday, the traditional start of the holiday shopping season when retailers wrack up their biggest sales of the year, began with a whimper, despite the fact that consumers made repeat trips to stores and spent more on bargains over weekend. The small blip is sales is unlikely to translate into a much needed profit boost. The concern is that retailers may chalk up their worst sales record in 20 years. As a result, Macy's, that icon of the Thanksgiving Day parade in New York City, fell 3.6 percent to close at $6.41.

 

In the tech sector, a report showing global semiconductor sales fell 2.4 percent in October certainly did nothing for chip stocks. An index of chip stocks sank 7.6 percent. Among the techs, Qualcomm was the biggest loser, falling 10.8 percent to $29.96.

 

Now It Is Official – The Recession Is Here

 

The economy has been in a recession since December 2007, the National Bureau of Economic Research said Monday. According to the NBER, a private, nonprofit research organization comprised of academic economists who determine business cycles met, the recession began last December.

 

The White House commented on the news that a second downturn has officially begun on President George W. Bush's watch without ever actually using the word "recession," a term the president and his aides have repeatedly avoided. Instead, spokesman Tony Fratto remarked upon the fact that NBER "determines the start and end dates of business cycles."

 

Many economists believe the current downturn will last until the middle of 2009, and will be the most severe slump since the 1981-82 recession.

By one benchmark, a recession occurs whenever the gross domestic product, the total output of goods and services, declines for two consecutive quarters. However, the NBER's dating committee uses broader and more precise measures.

 

The GDP did contract by 0.2 percent at an annual rate in the fourth quarter of 2007. However, that drop was followed by a 0.9 percent rate of increase in the first quarter and a 2.8 percent spurt in the second quarter, when the economy felt the effects of the distribution of millions of economic stimulus payments. However, employment, one of the measurements tracked by the NBER, has been falling since January.

 

The GDP turned negative again in the July-September quarter of this year, falling at an annual rate of 0.5 percent. Many economists believe the GDP is falling in the current quarter at an even sharper rate of 4 percent, and that the economy won't begin to rebound until late 2009.

 

In a news release, the NBER said its cycle dating committee held a telephone conference call on Friday and made the determination on when the recession began.

 

Founded in 1920, the NBER has more than 1,000 university professors and researchers who act as bureau associates, studying how the economy works.

 

The NBER decision means that the economic expansion lasted from November 2001 until December 2007. Economic expansions peak and recessions begin in the same month, according to the NBER's dating methods.

 

The decision on the recession means that during the eight years that Bush has been in office, the country has seen two recessions. The first downturn lasted from March 2001 until November of that year.

 

Fed Still Has Options

 

Fed Chairman Ben Bernanke said on Monday that decisive action must continue to protect the economy and that the Fed had alternative tools it could employ to help as interest rates approach zero. "Our nation's economic policy must vigorously address the substantial risks to financial stability and economic growth," Bernanke said.

 

Even as the NBER announced that the economy officially fell into recession last December, Bernanke said that he was still under the opinion that the economy was under "considerable stress" and had slipped further since markets crumbled anew in September. "Households have continued to retrench, putting consumer spending on a pace to post another sharp decline in the fourth quarter," the Fed chief warned.

 

Bernanke said further cuts in overnight interest rates beneath the Fed's current target of 1 percent were "certainly feasible," but he suggested the Fed would also use other unconventional measures to spur growth.

 

"Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver, the provision of liquidity, remains effective," he said.

 

He said the Fed could directly purchase "substantial quantities" of longer-term securities issued by the U.S. Treasury or government-sponsored agencies to lower yields and stimulate demand.

 

Bernanke also said the Fed could side-step institutions that are reluctant to lend and pump money directly into specific markets. The Fed has already done this in the market for commercial paper, short-term debt companies use to finance day-to-day operations, and last week it announced a program to push funds into markets for consumer-related debt as well.

 

U.S. Treasury prices rose sharply, pushing yields to their lowest in five decades, as expectations built the Fed would become a large buyer. The Fed is widely expected to lower the Fed funds rate by a half-percentage point to 0.5 percent at its next scheduled meeting on December 15-16. It is also expected to discuss what other policy tools could be used, and Bernanke's speech was seen as a game plan for likely next steps.

 

At 0.5 percent, the overnight federal funds would be the lowest on records that date back to mid-1958. Bets on a zero rate by January are also increasing. In calling for vigorous action to support the economy, Bernanke said the economy was likely to be sluggish for some time. "The likely duration of the financial turmoil is difficult to judge, and thus the uncertainty surrounding the economic outlook is unusually large. But even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time," Bernanke said.

 

But he said there was no comparison between the current downturn and the Great Depression, when the economy contracted for over a decade, one in four U.S. workers was unemployed and bank failures were rampant. "Let's put that out of our minds. There is no comparison in terms of severity."

 

Bernanke drew a distinction between the aggressive actions he and his colleagues have taken and blunders by the 1930s-era Fed, including excessively tight monetary policy and inaction as the financial system collapsed. He said he was being guided in part by his reading of history. "I made my own mistakes, but I don't want to make someone else's mistakes," he said.

 

Manufacturing Level Falls

 

Factory activity dropped in November to its weakest level since the 1981-1982 recession and construction spending slumped in October, data showed on Monday, fanning fears of a protracted economic downturn. A similar grim economic picture also emerged in Europe, where factories across the continent recorded their worst performance in November since private survey records began more than 10 years ago. In China, manufacturing tumbled, reflecting declining new orders.

 

The Institute for Supply Management's index of factory activity fell to 36.2 in November from 38.9 in October. It was the weakest since 1982. A reading below 50 shows contraction. Highlighting the deepening slump, an inflation gauge within the ISM report hit its lowest in nearly six decades, new orders dropped to their lowest level since 1980 and an employment index was at the weakest level since 1991.

 

Retail Stocks Fall Despite Reasonable Black Friday

 

Retail stocks were hammered on Monday over concerns that deep discounts offered during the year's first holiday shopping weekend could sap profits and would not save a bleak season.

Major department stores were hurt the worst with shares of Macy's Inc down 8.8 percent, Saks Inc down 10.7 percent and JC Penney Co Inc down 6 percent.

 

Black Friday, the day after U.S. Thanksgiving, is the traditional start of the holiday shopping season and once marked the day retailers would turn a profit, or “get into the black,” for the year. A calendar shift this year resulted in a shorter period between Thanksgiving and Christmas.

 

Apparel chains also suffered, with Abercrombie & Fitch down 7.7 percent, Aeropostale down 7.9 percent, and Urban Outfitters down 5.3 percent. Best Buy saw its share price fall 5.7 percent despite signs that shoppers bought electronics over the weekend. Even the shares of discounters Wal-Mart, Big Lots and Target fell, although they may come out ahead this season as cash-strapped consumers look for bargains. Shares of Wal-Mart fell 3 percent to $54.05, Big Lots fell 7.4 percent to $16.22 and Target was down 7 percent to $31.41.

 

Early results from the Black Friday weekend showed that sales grew both in stores and online, fueled by repeat trips, heavier online sales and deep discounts from retailers across the price spectrum. Many shoppers said they were spending less on gifts this year, but more of them completed their holiday purchases over the weekend than in the past.

 

According to the National Retail Federation (NRF), shoppers spent an average of 7.2 percent more per person to nearly $373 during the four-day weekend from U.S. Thanksgiving on Thursday through Sunday. Total spending was $41 billion. However, the NRF kept its overall holiday season forecast for 2.2 percent growth unchanged, signaling that a sharp drop-off in sales is expected for the coming weeks. That would represent the slowest growth in six years, as measured by NRF.

 

Retail promotions, such as American Eagle Outfitters' buy one top, get one half-off on another or the Aeropostale 50 percent to 70 percent discount off all merchandise, are meant to drive customer traffic. Unfortunately, such deep discounts eat into store margins, causing analysts to worry about quarterly profits. Investors will get a better view to that performance when some retailers report November same-store sales on Thursday.

 

Crude Continues To Fall

 

The price of crude oil fell more than 9 percent to $49 per barrel on Monday after OPEC deferred a decision on new supply cuts at a meeting over the weekend. OPEC delayed a decision on output until later this month as Saudi Arabia and other Gulf members called for greater compliance with existing cuts designed to help stem oil's fall from highs over $147 a barrel struck in July.

 

Domestic sweet crude for December delivery settled down $5.15 per barrel at $49.28, the lowest settlement since May 2005. London Brent crude settled down $5.52 per barrel at $47.97.

 

Surging demand from emerging economies sent oil and other commodities on a six-year rally, but prices have tumbled since July as the economic crisis erodes demand in the United States and other big developed consumer nations.

 

The OPEC meeting last weekend indicates that there's not a lot the group can do to stop the free-fall in oil prices without a massive cutback in production that could result in the cure killing the doctor. Nonetheless, OPEC's secretary general said the cartel is ready to cut production by a significant amount when the group next meets on December 17 in Algeria.

 

Saudi Arabian Oil Minister Ali al-Naimi told Saudi-owned al-Hayat newspaper that OPEC would not need to make a further cut in oil supply when it meets in Algeria if producers comply with previous curbs and fuel stocks decline. The group has agreed to trim 2 million barrels per day (bpd) from production since September.

 

Saudi Arabia over the weekend said $75 a barrel would be a "fair" price for oil, the first time in years that the world's biggest exporter has identified a target for crude prices.