MarketView for December 23

 

Summary  

 

Stock prices were lower again on Tuesday as further deterioration in the housing market and concerns over weak consumer spending that has hurt retailers in the final stretch of the Christmas shopping season took its toll on a day that was characterized by light volume due the holiday shortened week.

 

Nonetheless, the Treasury Department managed to sell $28 billion worth of 5-year notes, after a $38 billion 2-year note auction on Monday. Both drew bids worth about twice as much as the amount on offer, suggesting that at least for now there were enough willing buyers to soak up the growing debt supply.

 

General Motors saw its share price tumble again on Tuesday over concerns that last week's $17.4 billion bailout package will not be enough to keep the automakers from bankruptcy. GM ended the day down 14.8 percent at $3.00. GM, which helped drag the Dow Jones industrial average to its fifth straight daily decline, has lost a third of its value since last Friday, when the bailout was announced.

 

On Monday, an analyst at Credit Suisse said the automaker's equity could be largely, if not entirely, wiped out as it complies with the restructuring targets outlined in the government's rescue package. Ford ended the day down 15.4 percent at $2.19.

                                                                                                                      

Meanwhile, day’s economic data indicated that sales of new and existing homes fell again, and the economy contracted in the third quarter, primarily due to the most substantial decline in consumer spending in more than 28 years.

 

The latest retail data appears to indicate that in the last weekend before Christmas, stores are seeing their lowest turnout of shoppers in at least six years. A survey released on Tuesday showed just 38.7 percent of Americans went shopping during the final weekend before Christmas. That last weekend is traditionally one of the busiest times of the year.

 

With just five trading days remaining in the year, the S&P 500 index is down more than 41 percent for the year. The annual decline is surpassed only by the 47.1 percent fall in 1931, when the country was mired in the Great Depression. Both the Dow and the S&P 500 closed at their lowest levels in nearly three weeks. Volume was expected to be light throughout the week. Markets will close early on Wednesday for Christmas Eve.

 

In more evidence of the deteriorating housing market, data showed the pace of existing home sales plunged a record 8.6 percent in November and new-home sales fell 2.9 percent last month.

 

The final reading on third quarter gross domestic product figures reaffirmed that the economy contracted at an annual rate of 0.5 percent. The market's focus has now shifted to the current fourth quarter, which is expected to be much weaker.

 

Crude Down Again

 

The price of crude oil fell below $38 per barrel on Tuesday as recent economic data continued to point to a worsening recession. Light sweet crude for February delivery fell nearly 5 percent, or $1.89, to $38.02. Prices fell as low as $37.79 earlier in the day. Overnight, the February contract fell $2.45 to settle at $39.91 per barrel after Toyota projected its first-ever operating loss since it began reporting such numbers in 1941. In London, February Brent crude tumbled more than 4 percent, or $1.73, to $39.72 a barrel on the ICE Futures exchange.

 

OPEC said last week it would slash production by 2.2 million barrels a day, its largest cutback ever, reducing the amount of oil produced each day by 4 million barrels in all when earlier cuts are included.

 

Although there is a lag before the recent OPEC supply cuts are felt, there is always the real possibility that some cash strapped suppliers will comply fully. Furthermore, it is likely that OPEC will cut supply again in January or February due to the deterioration of demand for crude.

 

Meanwhile, Iraq's Oil Ministry announced it will open its second licensing round for developing its vast oil and gas fields. Iraq sits on more than 115 billion barrels of oil, but decades of war, U.N. sanctions, violence and sabotage have battered its oil industry.

 

Oil's downward curve has brought down gasoline prices, providing consumers with one of the few bright spots in a deteriorating economy. Retail gasoline prices have now fallen for the 23rd week since the July 4 weakened, reaching a national average of $1.653 a gallon as of Monday, according to the U.S. Energy Information Administration.

 

Gasoline futures on the Nymex tumbled 5.3 cents to 83.3 cents a gallon. Heating oil fell 2.7 cents to $1.3141 a gallon while natural gas for January delivery rose nearly 17 cents to $5.462 per 1,000 cubic feet.

 

Major Stimulus Bill Close to Reality

 

The incoming Obama administration is nearing agreement with congressional Democrats on a huge emergency spending bill intended to stimulate the economy and create 3 million jobs over two years, Vice President-elect Joe Biden said on Tuesday.

 

Asked whether an agreement on the shape of a massive economic stimulus bill would be reached by Christmas, Biden said, "I think we're getting awful close to that."

 

But he refused to say what the program will cost taxpayers. Some government sources have talked about moving a bill through Congress next month with a price tag in the range of $675 billion to $775 billion. There has been other speculation that the price tag could go higher as more programs, such as road and bridge rebuilding, investments in mass transit systems, middle-class tax cuts and expanded aid for states and the poor, are included.

 

Reacting to the worsening economy, which the government on Tuesday said shrank by an annual rate of 0.5 percent in the third quarter; Biden noted that the incoming administration has had to raise its job-creation goals to 3 million, from earlier projections of 2.5 million, over the next two years. Biden added, "We don't think it's going to require any significantly larger increase in investment to do that."

 

In upbeat comments about the outlook for the economic stimulus legislation Congress will consider when it convenes on January 6, Biden said, "It's clear that we're all on the same page, including our Republican colleagues" on the need for a "substantial" bill to create jobs.

 

He added, "We're all getting very close to an overall number and we're getting close to the specific kinds of investment."

 

Barack Obama will take office as president on January 20 with the economy in a year-long recession that has brought a rising jobless rate and with the expectation that things will get worse for at least the next several months. Therefore, Obama has vowed to place top priority on trying to right the economy by having a stimulus bill on his desk by January 20 or shortly thereafter.

 

Obama's chief White House economic advisor, Lawrence Summers, told reporters that without action, "We will almost certainly face the worst economic downturn since the second World War." Biden and Summers made their remarks to reporters before a meeting of top advisors on the economy, health care and energy.

 

While there appears to be widespread backing for a large stimulus bill, there is also a need for both the new Administration and the new Congress to demonstrate that they are serious about tackling the government's huge budget deficits that will only get worse with the additional emergency spending being contemplated.

 

Therefore, the stimulus bill is likely to have provisions making it tougher for the government to deficit-spend in the future with language that would push Congress and Obama toward taking on reforming the Social Security, Medicare and Medicaid retirement and health programs that are costing more and more as the population ages.

 

Final Look at Third Quarter GDP

 

The economy shrank at a 0.5 percent annual pace in the third quarter as expected after consumers and businesses cut spending and the country's recession gathered steam, government data showed on Tuesday. The economy entered a recession last December which deepened after the failure of Lehman Brothers in September, which froze credit and sent households and firms into a defensive crouch.

 

The Commerce Department, in its final revision, said the decline in gross domestic product in the third quarter versus the previous three months was the steepest since the third quarter of 2001, in the aftermath of the September 11 attacks on the United States.

 

Consumer spending fell at a 3.8 percent pace for the sharpest pull-back since 1980, when a global oil crisis tipped the economy toward a prolonged slowdown, while investment in equipment and software slumped 7.5 percent for the largest decline since early 2002.

 

Corporate profits fell 0.5 percent in the third quarter versus a previously reported 0.4 percent decline and forecasts for a 0.6 percent fall.

 

The residential housing market, after years of soaring prices, contracted 16 percent at an annual pace in the third quarter, which was slightly less than previously estimated and subtracted 0.6 percentage points from overall growth.

 

The dependence on rising home prices to support other expenditure came unglued as the property market turned down with a magnified impact on the rest of the economy.

 

Expenditures on durable goods fell 14.8 percent, subtracting 1.16 percent from growth. A large chunk of this fall was due to declining demand for motor vehicles, which reduced overall growth by 0.83 percent in the third quarter.

 

Recession Deepens

 

Existing home sales fell by a record amount last month as the recession picked up pace although a collapse in gasoline prices gave consumer sentiment a rare lift, data on Tuesday showed. The recession began last December and data from the Commerce Department confirmed expectations that output shrank at an annual rate of 0.5 percent in the third quarter as consumption and investment slumped.

 

Conditions are expected to get worse before they get better, with the economy predicted to shrink by as much as 6 percent in the fourth quarter and with the decline continuing for the next six months before a tepid recovery takes hold later in 2009.

 

One economist at the San Francisco Federal Reserve Bank has said the recession would likely last 18 months, making it the longest since World War II, with unemployment peaking at a 25-year high of 8.4 percent.

 

The Richmond Federal Reserve's manufacturing survey echoed the gloom, falling to -55 in December from -38 the previous month. Its services sector survey declined 8 points to -30. However, housing is at the heart of the problem with existing home sales falling a record 8.6 percent in November to a 4.49 million-unit annual rate, while new homes sales were down 2.9 percent.

 

The median existing home price fell 13.2 percent on an annual basis, down for a fifth straight month to $181,300. It was the largest drop since the current data series began in 1968 and probably the largest since the Great Depression, said Lawrence Yun, the chief economist for the National Association of Realtors.

 

On the positive side, the lower prices for homes will improve affordability and help work off the overhang of unsold homes accumulated since the property market began its decline last year.

Inventories of new homes declined 7 percent to 374,000 in November but actually increased 1.4 percent for existing single family homes, to 3.550 million.

 

Meanwhile, president-elect Barack Obama is expected to announce a government spending program when he takes office next month to reinforce the actions that have been undertaken by the Fed, which has pumped over $1 trillion into credit markets.

 

No Relief for the Big Three

 

General Motors and Chrysler CBS.UL may have received a $17.4 billion gift from Uncle Sam a week before Christmas, but in their showrooms, barely a creature was stirring as financially strapped consumers remain reluctant to purchase a big-ticket item such as a car at a time of massive job cuts and the near-absence of vehicle financing.

 

Despite last week's emergency federal bailout of GM and Chrysler, real concerns remain about the possibility of bankruptcy at both automakers as sales continue to sink despite some generous offers being made available to buyers by all three domestic car manufacturers. Sales are expected to fall more than 35 percent in December when compared to a year ago, ending the year on a dismal note.

 

Based on the seasonally adjusted sales rate, December sales are expected to come in at 9.8 million units. That would represent a further decline from 10.2 million units in November, which marked 26-year lows. In October, the rate was 10.6 million.

 

Ford's Americas chief Mark Fields said last week that U.S. auto sales through the first half of the December was "about the same level" as October and November. Fields said typically most of the vehicle sales in December come in at the last few days of the month.

 

Chrysler, seen as the weakest of Detroit's three automakers, is expected to lead the industry decline with a more than 45 percent sales drop in December, while GM could be down 39 percent and Ford down 34 percent. Toyota, Honda and Nissan are all expected to report declines of about 40 percent.

 

GM and Chrysler are being viewed with great interest because both companies must show the government by the end of March that they can turn themselves around as a condition of the $17.4 billion bailout.

 

Housing Sales Continue Downward

 

The housing market remains in the doldrums as existing home sales and prices both fell at a record pace last month, according to a report released on Tuesday by the National Association of Realtors, further evidence that the financial turmoil which intensified in September was driving consumers deeper into retreat.

 

"The quickly deteriorating conditions in the job market, stock market and consumer confidence in October and November have knocked down home sales to another level," said Lawrence Yun, chief economist for the NAR.

 

Sales of new homes slowed to the weakest level since 1991, according to separate figures from the Commerce Department.

 

Housing is at the root of the current recession and ensuing global malaise, with little hope of a lasting recovery until the housing market stabilizes. If it continues to deteriorate you will see an ongoing increase in foreclosures and bank losses, putting greater strain on government efforts to revive growth.