MarketView for November 14

Summary 

 

It is an annoyance but a least it is predictable, up one day, down the next, that has been the story on Wall Street recently and today was not exception. The only bad part is that this was a down day. Stock prices fell on Friday after a record drop in retail sales last month heightened fears that the downturn in consumer spending will push the economy into an even deeper downturn than currently expected.

 

An attempt at a rally in the last hour of trading fell apart, leaving the market unable to build on Thursday's dramatic rebound due to the negative economic and corporate data. The looming November 15 deadline for hedge fund redemption calls, a key date for investors to pull their money out of hedge funds, added to the selling

 

Meanwhile, it was another week of gloomy economic news as world leaders headed to Washington to address the worst financial crisis in 80 years. Retail sales dropped 2.8 percent in October as consumers cut back amid recession fears, a government report showed. Consumer spending is a key driver for both economic growth and corporate profits.

 

Adding to the day’s negative atmosphere, both J.C. Penney and Abercrombie & Fitch announced disappointing outlooks and said shoppers look like they will be reining in spending this holiday season. J.C. Penney's shares were down 10.4 percent to $17.27, while Abercrombie sank 20.7 percent to $17.79. Their weak results echoed those a day earlier from Kohl's and Nordstrom, both of whom cut their full-year forecasts.

 

Boeing ended the day down 4.9 percent to $41.04 after the company announced another delay in its latest version of its 747 jumbo jet by several months.

 

Freddie Mac posted a $25.3 billion quarterly loss, signaling no let-up in the troubled housing sector. The Dow Jones home construction index fell 3.04 percent.

 

Technology shares were lower after Nokia issued an earnings warning, although Apple was the largest drag on the NASDAQ, falling 6.4 percent to $90.24, while Qualcomm shed 5.4 percent to $32.94.

 

For the week, the Dow Jones industrial average lost 4.99 percent, while the NASDAQ skidded 7.92 percent and the S&P 500 lost 6.16 percent.

 

The dollar rose, aided from its role as a safe haven in a deteriorating global investment climate, while U.S. Treasury notes advanced in price for the same reason and because a weaker economy theoretically favors such fixed income assets.

 

World leaders vowed to work together in overhauling the global financial system as they headed to Washington on Friday for a summit on wresting the global economy from recession and avoiding future meltdowns.

 

Economic News Is Mixed

 

According to a report released by the Commerce Department on Friday, retail sales saw a record decline in October as fears of recession sapped spending, but part of the decline was due to slumping gasoline prices which helped buoy consumer confidence. The report indicated that

retail sales were down 2.8 percent in October to a seasonally adjusted $363.7 billion, the largest decline since the department's current methodology was adopted in 1992, as mounting unemployment hit sapped consumer strength.

 

While lower gas prices were welcome, declines in a broad number of retail sales categories showed consumers were still on the defensive. Consumer spending is a crucial driver of economic growth. Retail sales last month were down 4.1 percent from a year ago.

 

Retail sales, excluding autos, fell a record 2.2 percent in October, versus a forecast of a 1.2 percent decline. Lower gasoline prices, as crude oil retreated sharply from a July peak around $147 a barrel, helped depress sales at gas stations by a record 12.7 percent in October. As a result, a closely watched core measure of retail sales excluding autos and gasoline fell 0.5 percent in October. The sharp drop in gasoline station sales may also have reflected fewer miles driven by Americans last month.

 

Individual car makers have reported a collapse in sales since mid-September after auto-loan terms tightened sharply in the aftermath of investment bank Lehman Bros failure. The Commerce Department said motor vehicle and parts sales slide 5.5 percent in October after a 4.8 percent September fall. October's performance for the category was the weakest since August 2005, when car sales were off 10.3 percent.

 

A report from the Labor Department showed U.S. import prices posted the largest monthly drop since 1988 in October as the cost of imported oil slid. Separate Commerce Department data showed that stocks of unsold goods at U.S. businesses unexpectedly fell a seasonally adjusted 0.2 percent in September.

 

A separate Reuters/University of Michigan November survey of consumers showed that confidence unexpectedly rebounded from a record October drop as tumbling gas prices offset worries about the economy. The survey’s confidence index edged up to 57.9 in November from 57.6 in October. Despite the rise, sentiment remains at depressed levels, with the index below the lowest levels hit during the depths plumbed during the last two recessions.

 

Paulson Says We Made A Mess Of It

 

Treasury Secretary Henry Paulson said on Friday recapitalizing banks is the most effective use of a $700 billion financial bailout war chest but acknowledged the United States' reputation has been tarnished as a result of the financial crisis that has spread worldwide.

 

"We have in many ways humiliated ourselves as a nation with some of the problems that have taken place here," Paulson said in an interview with CNBC television.

 

Leaders of major industrial and developing economies are meeting in Washington on Friday and Saturday to discuss how to move forward from a financial crisis that began with the collapse of the U.S. housing market under a load of toxic debt and is now pushing economies around the world into recession.

 

Paulson won approval from Congress in early October to spend up to $700 billion to calm financial markets and revive lending, but has ruffled feathers by changing the focus to bolstering bank capital from buying mortgages.

 

The Treasury Secretary defended his decision to switch the focus of the rescue package, the Troubled Asset Relief Program, from buying unsellable mortgage-related assets to injecting capital into banks, saying market conditions had worsened.

 

"The major purpose of the TARP was to stabilize the financial system; first and foremost, to prevent a collapse ... number two is to get lending going. I think the system has been stabilized," Paulson said. Government purchases of capital in healthy banks are likely to restore lending, he said.

 

"By the time the process with Congress was completed, it was clear we were facing a much worse situation than we had envisioned earlier on," he said. "We have this limited pool of resources, big but limited ... it just goes farther by purchasing capital," he said.

 

Paulson said he is likely to return to Congress to ask for the remainder of the $700 billion fund after he has used the first tranche of $250 billion.

 

"I'm not saying we're going to need more," he said. "Let's get this program done. Let's get the $250 billion out the door, let's see how it's working ... and it's highly likely the right thing to do will be at some time in the not too distant future to have another capital program," he said.

 

Automotives To Be Next At The Trough

 

It appears that the Senate is ready to take up a $25 billion bailout bill for distressed domestic automakers on Monday, but it remains unclear if proponents can muster the support necessary to pass the legislation.

 

Democratic Majority Leader Harry Reid of Nevada said on Friday that he "plans to press forward" with emergency aid to automakers and a plan to extend unemployment insurance, even though Republican backing is not assured. Reid plans to begin debate on Monday and hopes the Senate will conduct procedural votes early in the week.

 

It will be difficult for Democrats to push through an auto bailout if minority Republicans object and throw up procedural roadblocks. In a letter to Republican Minority Leader Mitch McConnell of Kentucky, Reid said the legislation was needed to protect millions of workers "at risk from the possible collapse" of carmakers and companies that depend on their business.

 

General Motors, Ford and Chrysler are furiously lobbying for $25 billion in immediate bailout money to help them survive the industry's worst financial crisis. Analysts have warned that any government assistance, which they say is imperative for GM to survive through early 2009, would come at a significant cost to existing shareholders.

 

Sen. Debbie Stabenow, a Michigan Democrat and a leading architect of bailout strategy, told CNBC that failure of one or more of the domestic automakers would rock the nation's manufacturing economy, already reeling from downsizing.

 

"What is being talked about now is bankruptcy," Stabenow said.

 

GM, Ford and Chrysler have all said Chapter 11 bankruptcy restructuring is not an option.

 

On Thursday, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, said he did not see enough support in the Senate to approve any auto bailout now and would be hesitant to bring it up if there was a chance of failure.

 

Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, said in an interview on MSNBC that a bailout would not help. "It's going to be money down a rat hole," he said. Detroit needs a plan and new models to reverse its sinking fortunes, he said.

 

Leaders in the House of Representatives have been working to craft legislation that would allow the Treasury Department to extend emergency assistance to Detroit under its $700 billion rescue program for the financial industry. In return, the government likely would take an equity stake in the automakers and impose conditions, including limits on executive compensation.

 

The House would take up a bailout bill if it first clears the Senate. Congress is only expected to meet for a matter of days during its post-election session and will not reconvene until early January.

 

The White House does not favor using the Treasury's rescue program to help automakers or other industries outside the financial sector. Bush administration officials point to other steps Congress could take to help Detroit, including amendments to $25 billion of factory retooling loans approved in September to help the industry make more fuel-efficient cars.

 

Automakers do not favor that approach, saying the retooling assistance has too many strings attached and will be needed later anyway. Auto bailout hearings are scheduled for Tuesday in the Senate and Wednesday in the House. The chief executives of GM, Chrysler and Ford are expected to testify.