MarketView for November 19

Summary 

Stock prices hit their lowest level in five-and-a-half years on Wednesday as warnings of a lengthy economic downturn combined with the automotives receiving a less than hospital reception in Congress and subsequently forecasting a far-reaching calamity if they do not receive their requested government lifeline.

Shares of General Motors traded down to the lowest seen in 66 years and Ford hit a 26-year low. GM did manage to cut its loss for the day almost in half, but still ended down 9.7 percent at $2.79 after earlier dropping to a 66-year low. Ford sank 25 percent to $1.26. However, the pain spread well beyond the automotive sector. U.S. auto executives were on Capitol Hill for a second day to plead their case for a $25 billion aid package. Prospects for a bailout getting done this week remained uncertain, even as legislators proposed compromises to the original plan.

Financial shares fell by double-digit margins as a meltdown in the commercial real estate market fanned fears of another wave in the credit crisis. Late in the day, the Federal Reserve slashed its economic growth forecasts through 2009, helping unleash a wave of selling that continued into the closing bell.

For the first time since March 2003, the Dow Jones industrial average closed below the 8,000 level. The S&P 500 and the NASDAQ broke through last week's intraday lows, which were the lowest in more than five years as investors worried about the possibility that there will be no quick proposal from Congress to resolve the problems hounding the auto industry before its session draws to a close. Investors are concerned about how a possible bankruptcy filing by automakers could further hurt an already fragile economy.

In the financial sector, Bank of America, JPMorgan Chase and Citigroup  all slid to multiyear lows on persistent worries about the fallout that worsening credit and a contracting economy will have on banks. Bank of America was down 14 percent at $13.06, JPMorgan shed 11.4 percent to $28.47 and Citigroup lost 23.4 percent to $6.40.

Adding to concerns about the financial sector's health, bonds with exposure to commercial real estate experienced a meltdown on worries that the ailing economy could lead to a round of defaults on loans for office buildings, retail stores and hotels.

The Fed lowered its forecast range for 2008 gross domestic product growth and said the economy could shrink by 0.2 percent in 2009. Minutes from the Fed's most recent policy meeting also showed some officials believed even more interest rate cuts may be needed as the economy falters.

This price moderation is giving the Federal Reserve the room it needs to cut interest rates to battle the economic slump. The central bank is expected to cut the federal funds rate, the interest that banks charge each other, down to 0.5 percent at its December meeting, even lower than the 1 percent where the funds rate stands currently. The 1 percent funds rate ties the record low for the past half century.

Also on the economic front, U.S. consumer prices fell at a record pace in October and home building sagged to new lows, according to data that suggested the economy is already in a recession that could become prolonged.

Yahoo slumped 20.9 percent to $9.14 after Microsoft ruled out an acquisition of the Internet media company, although Microsoft did say it was interested in restarting talks on a Web search partnership.

CPI Down A Record 1 percent For October

The Labor Department reported on Wednesday that its consumer price index fell by the largest amount in the past 61 years during October as gasoline pump prices dropped by a record amount.

According to the Department consumer prices fell by 1 percent last month, the largest one-month decline on records that go back to February 1947. The Street had been expecting a decline of about 0.5 percent.

Core consumer prices, which exclude food and energy, fell by 0.1 percent last month, the first drop in core prices in more than a quarter-century. There were price declines for clothing, new and used cars, and airline fares. Analysts predicted further declines in the months ahead as retailers struggle to attract consumers who are being battered by rising unemployment and the weak economy.

The big retreat in consumer prices represented a remarkable turnaround from just a few months ago when a relentless surge in energy prices raised concerns that inflation could get out of control. Since that time, the economy has been jolted by the most serious financial crisis in seven decades with all the turbulence expected to push the country into a severe and prolonged recession.

Over the past 12 months, consumer prices have risen by 3.7 percent. That is substantially below the 17-year high of a 12-month price increase of 5.6 percent set this summer. Core prices are up 2.2 percent over the past 12 months.

For October, energy prices fell by a record 8.6 percent, led by a record 14.2 percent drop in gasoline prices. Since prices at the pump have continued to fall this month, analysts are looking for a big decline in energy costs in November as well.

Food costs were up 0.3 percent in October, an amount that was just half the increase of September, as dairy products and fruit showed declines. Food prices are still 6.1 percent above where they were a year ago, reflecting big increases in past months as grocery stores hiked costs to reflect the higher cost of transportation.

The drop in inflation meant workers got a break in their discretionary incomes although average weekly earnings, after adjusting for inflation, were still down by 0.9 percent from a year ago. However, that was smaller than the 2.5 percent decrease seen in the prior two months.

New Record Low For Home Construction

The Commerce Department reported on Wednesday that construction of new homes fell again last month to the lowest level in nearly 50 years as builders slashed production. Embattled homebuilders, who enjoyed a five-year boom, are now building new homes and apartments at a record-low pace, according to data released Wednesday. New building permits, a barometer of future activity, also plummeted to the lowest pace on record.

According to the Commerce Department’s report, construction of new homes and apartments fell 4.5 percent in October, the fourth straight monthly decline. Construction sank to an annual rate of 791,000 units from an upwardly revised September rate of 828,000 units.

The results were the lowest on government records dating back to January 1959. Previously, the slowest pace had been in January 1991, when the country was in recession and going through a similar housing correction.

The declines in construction last month were led by a 31 percent drop in the Northeast, where construction of single family homes fell to a new record low. They also dropped 13.7 percent in the Midwest. Construction rose 7.5 percent in the West and 1.5 percent in the South.

Applications for building permits, considered a good sign of future activity, fell by 12 percent in October to an annual rate of 708,000 units, the weakest on records dating to early 1960. New permits for single-family houses fell 14.5 percent to 460,000, the lowest level since February 1982.

Crude Hits 22 Month Low

The price of crude oil futures hit 22-month lows on Wednesday as inventories rose and demand weakened due to the global economic slowdown. Sweet domestic crude for Jan. delivery settled down 77 cents per barrel at $53.62, the lowest settlement price since January 22, 2007. Earlier, prices had risen slightly on forecasts for colder weather. London Brent settled down12 cents per barrel at $51.72, the lowest settlement price for London Brent since May 31, 2005.

Crude oil inventories rose 1.6 million barrels last week, according to data from the Energy Information Administration. Distillate stocks fell by 1.5 million barrels, however, compared with forecasts for a build. Total product demand fell by 7 percent against year-ago levels, the EIA reported, as the growing economic crisis continued to cut consumption.

Falling oil prices have some members of the Organization of Petroleum Exporting Countries (OPEC) to call for further production cuts. OPEC in October agreed to reduce supplies by 1.5 million barrels per day to help counter the price drop.

Oil ministers from OPEC gather for informal talks on a further oil supply cut in Cairo on November 29 and are scheduled to meet again on December 17 in Oran, Algeria.

Fed’s Meeting Minutes Paint A Poor Picture Moving Forward

Federal Reserve officials have pared their outlook for economic growth through 2009 to minimal levels and are prepared to cut interest rates further, while concern has risen that a deflationary spiral may take hold.

The central bank expects growth in the United States to contract in the second half of 2008 and the first half of 2009, with some even were more pessimistic, according to minutes released on Wednesday of the Fed's October 28-29 meeting, when it cut its benchmark interest rate by a half percentage point to a percent.

"Even after today's 50 basis-point action, the committee judged that downside risks to growth would remain," the Fed said in the minutes.

"Members anticipated that economic data over the upcoming inter-meeting period would show significant weakness in economic activity, and some suggested that additional policy easing could well be appropriate at future meetings," the central bank said in the minutes.