MarketView for November 3

Summary 

 

The markets ended the day little changed on Monday, subjected only to some uninspiring bottom fishing by bargain hunters who, while encouraged by signs of further thawing in the credit markets, were nonetheless unwilling to place big bets ahead of the upcoming presidential election. It appears that, that the majority of investors are remaining cautious and on the sidelines ahead of an election that will undoubtedly play a major role in the market's direction in the years ahead.

 

Any losses incurred by the markets on Monday was offset a decline in the rates that banks charge each other for short-term loans, an extension of last week's decline that came in response to measures by the central bank to supply financial institutions with cash. As a result, the three major equity indexes showed roughly a quarter of the volatility that became commonplace after the collapse of Lehman Brothers on September 15.

 

Verizon and AT&T moved a bit higher after Wachovia said the firms were safe havens in an economic slowdown. Verizon was up 3.6 percent at $30.75, and AT&T gained 3.9 percent to $27.81. However, it does not take a genius to comprehend tht the markets are unlikely to see substantial trading until after Tuesday.

 

From session high to intraday low, the Dow and S&P traded in their narrowest range in two months, while the NASDAQ moved in its narrowest band since late August. The mild movements were in stark contrast to the large swings that have become typical in recent months.

 

Volume on the New York Stock Exchange was about 1.02 billion shares, the lowest since August 29, which was the Friday before the Labor Day holiday in the United States, and the 12th-lightest day in terms of volume for the year so far. Last year's estimated daily average volume was 1.90 billion shares.

 

Economic concerns persisted after a report from the Institute for Supply Management showed its index of factory activity fell to 38.9 in October, a 26-year low, from 43.5 in September. The level of 50 separates contraction from expansion.

 

The NASDAQ was boosted by gains in the biotech sector as Biogen climbed 8.8 percent to $46.31 after Deutsche Bank recommended a "buy" on the company. Research firm Robert W. Baird raised its view on Biogen's stock to "outperform" from "neutral." Elsewhere in the biotech sector, Gilead Sciences rose 3.2 percent to $47.31.

 

General Motors fell 2.3 percent to $5.65 after it reported a 45 percent dive in domestic sales for October, blaming the deterioration of consumer confidence, rather placing the blame on the more appropriate and probably considerably more valid position that management is responsible for a host of wrong decisions and the company’s only hope is a rescue by taxpayers, although it is not clear that even an influx of undue cash will be enough to save the company.

 

Chevron, a component of the Dow Jones industrial average, fell 1.2 percent to $73.69 as the price of domestic crude oil fell nearly $4 per barrel to settle below $64 on more indications of eroding global demand in the face of a potential recession.

 

Goodyear Tire & Rubber saw its share price rise after the company reported a smaller-than-expected decline in profit as a result of increased cost cutting.

 

Democratic contender Barack Obama heads into Tuesday's election leading Republican opponent John McCain in six of eight key battleground states, including the big prizes of Florida and Ohio, according to a series of Reuters/Zogby polls released on Monday.

Crude Continues To Decline In Price

 

The price of domestic crude oil futures fell again on Monday; down nearly 6 percent as further indicators of falling demand, linked to a potential recession, offset OPEC plans to reign in output. Domestic sweet crude for Dec delivery settled down $3.90 per barrel at $63.91, after October saw the steepest monthly price decline ever for crude oil. London Brent crude settled down $4.84 per barrel at $60.48.

 

At the same time, domestic factory output, a barometer for future oil demand, contracted sharply in October, falling to its lowest in 26 years as the financial crisis racked the world's largest economy. The Institute for Supply Management said its index of national factory activity fell to 38.9 in October from 43.5 in September. A reading below 40 is exceptionally weak.

 

Meanwhile, the markets have been awaiting for some sort of solid indication that Saudi Arabia has cut back crude production after OPEC agreed in October to reduce output by 1.5 million barrels per day (bpd) to support tumbling prices. Saudi Arabia has yet to inform its customers of any cuts in November oil supply, trade sources in Asia said.

 

OPEC President Chakib Khelil indicated on Sunday that cartel members must implement agreed output cuts and inform customers of the reductions if they want a stable oil price of $70 to $90 per barrel. United Arab Emirates Oil Minister Mohammed al-Hamli said the OPEC member has kept its pledge to cut oil supplies in line with commitments.

 

OPEC has shipped less crude in October, making it the second consecutive month of lower shipments as Saudi Arabia and Iran trimmed production and maintenance curbed supply in the United Arab Emirates.

 

Auto Sales Hit 25 Year Low

 

Automobile sales were at near 25-year low in October, led by a 45 percent decline at General Motors, with no sign the industry's year-long slump had hit bottom and doubts persisting that all the major automakers can survive. Hurt by tighter credit and deepening uncertainty about the strength of the economy, auto sales fell to their weakest monthly level since 1983, based on early sales results.

 

Adjusting the figures for the population of the United States, GM said October was the industry's weakest month since the end of World War II. Ford said it could reduce production of passenger cars and crossover vehicles in the coming weeks by cutting overtime and suspending work at some of its plants.

 

Industry-wide U.S. sales of cars and light trucks were on track to come in below 900,000 units in October after dropping below the 1 million threshold in September for the first time in 15 years, according to initial sales data.

 

That raised the stakes for a more aggressive round of discounting in November and December as automakers prepared to clear remaining 2008 model-year inventory in exchange for cut-rate financing and other incentives.

 

GM said it would roll out a "Red Tag" sale with lower vehicle prices and cash-back offers starting on Tuesday. Chrysler Chief Executive Bob Nardelli said on Monday that while Chrysler had been in talks with other parties, its recent cost-cutting actions were needed to emerge from the downturn. Meanwhile, auto sales were expected to fall by at least 10 percent in Germany, Europe's largest economy, when official figures are released. In France sales fell 7.3 percent.

 

European auto sales were also lower during October, with declines of 40 percent in Spain and 19 percent in Italy. Sales for Toyota were off 29 percent, Honda Motor Co fell 25 percent and Nissan Motor Co tumbled 33 percent. Toyota, which has overtaken GM as the global auto sales leader, launched a zero percent financing offer backed by a high-profile ad campaign aimed to take advantage of the relative strength of Toyota's financing arm. Nissan launched its own zero percent financing offer for November and December, and expressed confidence that would help its own results move higher from October levels.

 

The near-freefall in October sales represented the first results since word emerged last month of merger talks between GM and Chrysler LLC, owned by private equity firm Cerberus Capital Management. GM had sought some $10 billion in government aid to support the merger, a request the Treasury Department rebuffed last week. That put the focus on whatever support the industry can win from the new President.

  

Chrysler – Shopping Itself or Just Adjusting To Business Conditions

 

Chrysler denies vehemently that it is putting itself in position for a sale to the highest bidder, but given that CEO Bob Nardelli has already chalked up a less than envious record at Home Depot, if I had to bet it would be that Chrysler’s current owner, Cerberus Capital, would do anything to get the Chrysler albatross off its neck, I would bet that the For Sale sign has been hung on the front door of corporate headquarters.

 

Chrysler Chief Executive Bob Nardelli said on Monday that while Chrysler had been in talks with other parties, its recent cost-cutting actions were needed to emerge from the downturn.

 

"The difficult actions we have taken in the past, and those that we have just announced, are for one purpose and one purpose only: helping Chrysler survive this economic trough," Nardelli said in a message to his staff.

 

Who Says A Tiger Cannot Change Its Stripes

 

Speaking about inflation, Dallas Federal Reserve President Richard Fisher said on Monday, "I don't see any economic growth through 2009 ... Inflationary forces have just subsided. In fact, they were vaporized.”

 

Fisher, a voting member of the Fed's interest rate-setting committee this year, had been one of the Fed’s most high-profile hawks who had dissented at every meeting against monetary policy easing until September.

 

In September, Fisher switched and began voting for rate cuts that have now brought the benchmark overnight funds rate to 1.0 percent from 5.25 percent in September 2007, as the Fed battles a global credit crisis sparked by bad U.S. home loans.

 

Fisher said his growth forecast was "on the left hand" of the range of policy-makers, hinting he may be more bearish than other colleagues on the Federal Open Market Committee. While Fisher acknowledged that falling energy and other commodity prices might mean that the headline U.S. consumer price index could actually fall. But he did not see that as deflation.

 

"I think we might see some negative numbers in terms of headline inflation for a couple of months. That does not mean we are in a sustained deflationary trend," he said.

 

However, Richmond Federal Reserve President Jeffrey Lacker warned that the Fed must not leave interest rates too low for too long. Lacker said that we are already in a recession, in a rare moment of candor for a policy-maker. But he took little comfort from the ability of the resulting economic slack to keep inflation in check.

 

"It is crucial that we not allow expectations of future inflation to ratchet higher during this recession," Lacker told an audience at the Hebrew University of Jerusalem. Lacker, who will be a voting member of the Fed's interest-rate setting committee next year, has been consistently hawkish on inflation.

 

His remarks also differed sharply in tone from the Fed statement on October 29, at which it clearly dialed-down warnings on price pressures as it cut rates to 1.0 percent. This takes the key funds rate to its lowest level since June 2004. The Fed had held rates at 1.0 percent between mid-2003 and mid-2004 to counter a perceived danger of deflation.

 

The prolonged period of very cheap money was one of the factors inflating the housing market bubble, whose subsequent collapse was directly to blame for the current seizure of credit markets and chilled world growth.

 

Lacker made plain that it would be very tempting for the Fed to fall into a similar trap this time around, with serious potential consequences for future inflation. "As a recovery begins, the path of least resistance is often to hold the policy rate at a low level until it is completely clear that recuperation is complete. The risk associated with that path is that inflation may not moderate obediently during the downturn, and may firm with the ensuing recovery," he said.

 

Lacker also spelled out two factors favoring an economic rebound sometime next year.

 

"First, monetary policy is now quite simulative. The federal funds target rate is 1.0 percent, below the expected rate of inflation. Second, the major shocks that dampened economic activity this past year have already subsided or are in the process of doing so," he said.

 

Updated quarterly FOMC members' forecasts for growth, employment and inflation will be released on Nov 19. There is fear that a global credit crisis will do so much harm to the U.S. economy that it will suffer the same deflationary fate as Japan, when a general and prolonged decline in prices made consumers take fright and caused bank failures soar.