Market Summary: Mon. Jan. 26, 2009

Something I noticed today that was not talked about too much in the news was the significant amount of job cuts announced.

1)      Home Depot will lay off about 7,000 workers (2% of workforce), and it will exit its EXPO business.

2)      Caterpillar will eliminate 20,000 jobs (almost 18% of workforce).  The company also reported earnings that missed expectations.  Q4 net income was $1.08 per share (compared to $1.50 per share a year earlier) while analysts were expecting $1.30 per share.   

3)      Sprint Nextel will cut 8,000 jobs (about 15% of workforce).  The job cuts will save the company about $1.2 billion each year.

4)      GM will cut 2,000 jobs (3% of 64,000 employees) at plants in Ohio and Michigan.  The last time GM made a profit was in 2004 when the company employed 111,000 workers.

5)      Deere will cut about 700 jobs (just over 1% of workforce) at factories in Brazil and Iowa.

6)      ING, a Dutch financial company, will lay off 7,000 workers (about 5.5% of workforce).

7)      IBM reported that it eliminated 1,400 sales jobs (about 3.5% of workforce) last week.

Companies are going to great lengths to lower costs and the easiest and fastest way is to reduce the number of employees.  Obviously, these companies are behind the curve, but I look at it as a positive sign. 

I became much less bearish on my outlook for the economy and the stock market after I attended University of Illinois’ town hall meeting where the school’s budget and plan to cut cost and over the next few years was discussed.  It takes a great deal of time for large institutions to make changes (especially financial ones), and when these big institutions finally realize they need to make changes the worst is already behind them.  In no way am I saying that the economy will bounce back and the stock market will zoom higher, but for now, people know things are bad and they are finally making the appropriate decisions to deal with the stagnant economy.   

Re-inventing economics: Part 1

One of my favorite bloggers, Fred Wilson, recently questioned the relevance of economists, especially after their inability to predict, as well as (arguably) correct this current global economic crisis. Fred cites Umair Haque, who griped that “We can't fix today's problems unless we change yesterday's rules. But economists -- and the models they rely on -- are bounded by yesterday's rules.”

Now I’ve got no patience for people who try to ignore the past because they of sensationalism or some naive idea that this time it’s all different. However, we can always improve on the past, so in this post is the first of two very potent ideas I’ve read about recently pertaining to a shifting opinion in modern economics.

Nobel Laureate Joseph Stiglitz (well, Economics isn’t one of the REAL Nobel Prizes, but everyone treats it that way) has put out a paper with a handful of other clever clogs describing a fresh look at economics based on modern networks theory. They developed their paper using data pulled from banks and certain firms in the 2004 Japanese credit market.

The paper basically argues that the old way of looking at markets through “the average, or most probable, behavior of the constituent” does not best describe the true “dynamics of the system,” when that system is made up of autocatalytic processes.  Autocatalytic processes are simply processes that grow on their own (self-perpetuating), and in this case, they become very important when they grow faster than the average, or most probable process. This type of growth can be “scale-free” or “scale-invariant,” which means the bits and pieces that make up the whole all grow at different rates, so after time some processes become more important than others.

So to put it simply, Stiglitz & co basically said that we should use a theory that doesn’t ignore the rare (i.e. not average or most probable) processes, when those processes can grow at astonishing rates, and become very important (e.g. processes that caused this crisis). “The real world is controlled as much by the tails of distributions as by means or averages” (page 2).

And not that this is new: apparently “the relevance of scale free distributions in economics (e.g. of firm size, wealth, income, etc.) is now extensively recognized, and has been the subject of thorough investigation in the econophysics literature” (page 2). I don’t even want to imagine what econophysics is. Regardless, people apparently haven’t given much consideration to how this type of thinking relates to credit markets, UNTIL NOW! The authors purport “…Japanese credit market shows that the credit relations between banks and firms are scale-free, and the standard representative agent plus normal distribution framework is badly equipped for dealing with it” (page 2).

I could be wrong, but I’m pretty sure this is basically chaos theory (which has been around for decades) meets the credit market.

An example the authors give is “the failure of a firm heavily indebted with a bank may produce important consequences on the balance sheet, or the financial status, of the bank itself. If a bank’s supply of credit is depleted, total supply of loans is negatively affected and/or the rate of interest increases, thus transferring the adverse shock to the other firms. Therefore the study of structure of the links and their weights allows to gain some insights in the financial stability of the economic system and to develop new economic policy tools” (page 2). This all looks to be pretty obvious – surely anyone with a passing interest in economics or finance recognizes the interrelatedness of these processes. Joe and Co just look like they’re one of the first guys to decide to map out and measure those links and their weights, this time in a controlled experiment (2004 Japan).

Network theory is an analysis of the interrelationship between nodes and links. In the case of this paper, nodes are banks and firms, while links are debt/credit contracts those banks and firms hold.

I don’t have the patience (or probably the intelligence) to wade through the actual research, but the conclusion offers some interesting opinions on how lessons learned from this data can maybe produce useful tools to stem future crises.

Basically Joe & Co think that “instead of a helicopter drop of liquidity, one can make “targeted” interventions to a given agent or sector of activity.” Presumably, if you use network theory to understand how problems of, say, liquidity arise, then you can surgically fix the problem at its source. Of course, in order to put this into practice, economists would both need to satisfy a tall list of demands:

1. 1.      Have at hand all of the relevant data (this probably means every balance sheet for every relevant institution as well as every debt contract [both of which of course must include homeowners’ personal finances and their mortgages]
   
2. 2.      Intimately understand all of these autocatalytic processes (of which in a modern economy there must be potentially millions)
   
3. 3.      Be able to act quickly enough to solve the problem before it gets out of hand
   

Sounds like the job for a totalitarian, dystopian, and super-intelligent government. But let’s be honest, wouldn’t access to that degree of information be every economist’s dream? Or perhaps this will all be possible, now that we are building petaflop computers that can probably manage the work, and we own all of the banks anyway…

 

Market Summary: Fri. Jan. 23, 2009

Capital One (COF), a credit card company, reported poor fourth quarter earnings and gave a very negative outlook.  For the quarter, COF lost $3.74 per share while analysts were expecting a profit of $0.33.  The company set aside $1 billion for bad loans, and expects unemployment to rise to 8.7% and home prices to decline another 10%.  The company’s CFO said that “the really big risk to our outlook isn’t 2009, but it is what 2010 might look like.”  The company also said that 7.08% of its credit card and auto loans were in default.  During the third quarter, this figure was only 5.85% (Source: WSJ).      

Based on what Capital One said, we should not expect a quick recovery anytime soon.  2009 just began and COF is already preparing for a bad 2010.  Many analysts are expecting credit cards and auto loans to be the next shoe to fall.

Citigroup tapped the government’s Temporary Liquidity Guarantee Program for $12 billion.  This money is guaranteed by the Federal Deposit Insurance Corp. (FDIC) making it the highest rated debt.  This is the largest debt offering under this program since its inception on November 25, 2008.  When will the government just cut its losses and let Citigroup go under?

Freddie Mac also announced it will need $35 billion of government TARP money. 

Market Summary: Thurs. Jan. 22, 2009

Negativity returned to the market today, but stocks managed to finish well off their lows.  Stocks were down more than 3% this morning, but only finished down 1.5%.  Even though stocks lost ground, there was no flight-to-quality trade as investors actually sold Treasurys today (yields up).  When investors are willing to take on more risk – financials, growth names (infrastructure, energy, and materials), and emerging markets – the market will turn higher.

Down-beat news from Microsoft set the tone for the markets today.  The company announced that it “will cut as many as 5,000 jobs, the first companywide firings in its 34-year history.”  Net income for the fourth quarter was $0.47 per share, but analysts were looking for about $0.50.  Revenue also fell short of expectations by about $500 million.  The stock finished down 12% and did not rally when the market turned higher in the afternoon.  It actually closed near its lows.   

Recently, there has been a clear divide between the tech winners and losers.  Winners: Apple, IBM, Google, Hewlett-Packard, and Research In Motion.  Losers: Microsoft, Intel, Dell, and Yahoo. 

Worse-than-expected economic data also weighed on the markets.  Initial jobless claims were 589,000 last week – 46,000 more than expected.  Also, continuing claims increased to 4.61 million.  December housing starts and building permits were both below expectations.  Crude oil inventories increased 6.1 million barrels last week – 4.7 million more than expected (Source: Briefing.com).      

The most surprising news story of the day was John Thain, the former Merrill Lynch CEO, getting fired from Bank of America.  Much controversy has surrounded the Bank of America acquisition of Merrill Lynch because Merrill reported a $15.4 billion fourth quarter loss.  What problems did Merrill Lynch have that Bank of America did not know about?  Was Merrill hiding something?  On top of his firing, it was reported that Thain spent over $1.2 million to redecorate his office when he became CEO.  He spent $87,000 on area rugs and $25,000 for a table.  Ridiculous!  He deserves to get fired.     

After hours Google reported stellar earnings that handily beat expectations.  

Market Summary: Wed. Jan. 21, 2009

We saw a relief rally from yesterday’s massive sell-off, although stocks are still down over the two-day period.  Stocks got a little over-sold yesterday (especially the financials), and investors went bargain hunting today to buy the stocks of good companies on the cheap.

Here’s the news: 

1)      FDIC Chairman Sheila Bair commented that “banks are solvent” and “well-capitalized overwhelmingly.”  Either she is lying to assuage Americans’ concerns or she does not know what she is talking about.  Banks are in desperate need of capital, especially the large institutions with lots of mortgage-related securities, as they are rapidly burning through the TARP funding that was just distributed.

2)      Talks of forced nationalization of UK banks continue to scare investors.  Barclays was down 19% and Lloyds was down 12.5%.  The UK government owns a 70% stake in Royal Bank of Scotland and a 43% stake in Lloyds.

3)      Financials led the market higher after news broke that several bank insiders purchased shares.  JPMorgan’s Jamie Dimon bought $11.5 million of stock, and Bank of America executives purchased about $3 million of stock.  Insider buying is considered a bullish sign for a stock.   

4)      Shares of Wal-Mart were downgraded because “the incremental benefit it realized from consumer trade-down in 2008 might not repeat itself in 2009.”  I agree with this analyst.  Wal-Mart has rallied significantly from its September 2007 lows even though its earning have not kept pace.  When the market turns Wal-Mart will be left behind along with many of the defensive stocks.

5)      Warren Buffett purchased another $272.2 million of Burlington Northern (BNI) shares.  Buffett’s 21.75% ownership in BNI makes him the company’s largest shareholder.

6)      US Bancorp reported quarterly profit of $0.15 per share, which fell short of the $0.18 estimate.  During the quarter the bank quintupled the amount set aside for loan losses.  Shares were down 20% in the morning, but actually finished the day in the green.  This is one financial company that actually made money in the fourth quarter.  Pretty impressive!

7)      Apple reported quarterly results after the bell that handily beat estimates.  Despite Steve Jobs’ illness, the company is still performing and remains a “buy.”  The company reported earnings of $1.78 per share.  Analysts were expecting $1.40.  Revenue also beat expectations and rose 5.8% year-over-year.  Quite impressive numbers given the state of the consumer and economy.

8)      Intel announced it may cut up to 6,000 jobs. 

9)      Hedge fund investors withdrew a record $152 billion in the fourth quarter of 2008.  

Market Summary: Tues. Jan. 20, 2009

As I said in my last post, as the financials go so does the market.  Stocks finished the day down 5.3% and the financials (XLF) were down 16.5% (when I say stocks I am referring to the S&P 500).  Today’s news simply reiterated the fact that all financial institutions are in trouble (at home and abroad) and remain a “sell.”  They are simply not investable.  How are they going to make money in the future?  Will they even be public companies?

 The big losers:

-         State Street Corp  -59.04%

-         Barclays  -42.62%

-         PNC Financial Services  -41.40%

-         Bank of America  -28.97%

-         Regions Financial  -24.22%

-         Wells Fargo  -23.82%

-         JPMorgan  -20.73%

-         Citigroup  -20.00%

-         Goldman Sachs  -18.96%

European banks have been under pressure too.  Concerns are mounting that Royal Bank of Scotland may be nationalized by the British government.  The company lost $41 billion in 2008 and the British government is exchanging its preferred shares of common shares that could give it 70% ownership in the bank.  Because of this news the British Pound was crushed today.  It trades at its lowest level versus the Dollar in almost eight years. 

The U.S. government is way ahead of European governments in terms of financial aid and bailouts.  Look for weakness in Europe, specifically Britain, to continue.  

-         Fiat is in talks to acquire a 35% stake in Chrysler.  There is no cash involved with this transaction, and it is not a merger.  The companies would get access to each other’s plants and technology. 

-         Meredith Whitney explained what is going wrong at Citigroup.  Its “core problem is that it simply doesn’t make money in any of its businesses except Smith Barney, which it is in the process of selling.”  After the bell, Citigroup announced it is cutting its dividend to $0.01 from $0.16.  

-         Here is a good article that discusses the oil market.  There is an estimated 80 million barrels of oil being held on offshore tankers in order to take advantage of the steep crude curve.  That is, buying cheap crude today (spot market), storing it on these tankers, and then selling it in the future at a higher price. 

-         After hours, IBM reported earnings that beat estimates.  Shares are up 4% in after hours trading.

-         Obama took office today.  But guess what?  Nothing changed about our economy.  It still stinks!

-         The government has given Citigroup $45 billion in loans, but the company’s market cap is only $15.3 billion.  The government should just buy the company outright, do what it wants with the good and bad assets, and avoid all the added uncertainty and fear that is plaguing the financial markets.

Market Summary: Fri. Jan. 16, 2009

Citigroup and Bank of America led the markets lower in the morning; however, a midday reversal (for the second day in a row) helped stocks finish in the green.  The financials are to blame for the steep declines in the stock market as concerns mount about the health of these large institutions.

Let’s wind the clock back to November 4 when the S&P 500 closed at 1,005.75.  Everyone was concerned about Citigroup’s capital position, and on November 21 when the government finally stepped in to help Citigroup the market bottomed at 741.02 – a 26.3% decline.  During this same time shares of Citigroup were down 74.3%.

We have recently found ourselves in a similar situation, this time it involves Bank of America and its need to raise more capital to help with its acquisition of Merrill Lynch.  Also, concerns at Citigroup about selling assets to raise capital have weighed on the market.  On January 6, the S&P 500 closed at 934.70.  On Thursday the market bottomed at 820 – a 12.3% decline.  During this same time shares of Bank of America were down 49.7% and shares of Citigroup were down 53.1%.

Here’s the news:

-         Citigroup announced that it will split into two companies, Citicorp (good bank) and Citi Holdings (bad bank).  “Citicorp will be home to the company's retail banking and credit card businesses, its corporate and investment bank, Citi Private Bank and a transaction services unit.  Citi Holdings would house brokerage and asset management units…and a 49 percent stake in a new brokerage venture with Morgan Stanley. It would also hold local consumer finance operations…Citi Holdings would house $301 billion in assets that received government backing in a November rescue package.”

-         Citigroup also reported a quarterly loss of $1.72 per share.  Analysts were predicting a loss of $1.32 per share.

-         Bank of America (BAC) received $20 billion in TARP money and a guarantee from the government on $118 billion of its assets.  BAC received this money to help with its Merrill Lynch acquisition.    

-         Bank of America reported a quarterly loss of $1.79 billion and Merrill Lynch (B of A’s newest acquisition) reported a quarterly loss of $15.31 billion.  BAC also reduced its quarterly dividend to $0.01 from $0.32 to preserve cash.  Some are questioning whether or not the CEO’s knew that the Merrill results were going to be horrific and why they would let the acquisition get done.  Merrill lost $16.4 billion in failed hedges.     

Is the worst behind us?  Or is there more pain to come from the banks?  The talk is that Wells Fargo (WFC) will need to raise more capital to help with its acquisition of Wachovia.  WFC reports its quarterly results on January 28.  On December 1, the well-renowned analyst Meredith Whitney was asked if she could sell one bank which one would it be.  Her response was Wells Fargo.  On January 14, Whitney reiterated her negativity towards the financials. In other news…

-         Chrysler Financial received a five-year $1.5 billion loan from the government in order to entice buyers with no-interest financing.

-         Circuit City will close all of its stores after it failed to find a buyer.

Market Summary: Thurs. Jan. 15, 2009

The Dow and the S&P 500 finished up a few points, but the tech-heavy NASDAQ was the winner finishing up 1.5%. Stocks reversed on little news midday after being down about 2%.

Here’s the news:

1) JPMorgan reported fourth quarter income of $0.07 per share. Not including a one-time gain, the company actually lost $0.28 per share. JPM wrote down $2.9 billion worth of assets and tripled its loan-loss provisions for bad debt. CEO Jamie Dimon said the company remains committed to paying its dividend. Shares finished the day down 6%.

2) Bank of America is close to receiving $15-20 billion in TARP funds from the government. The company could also receive $120 billion in guarantees on losses from bad assets. When Citigroup received its bailout money, it got $20 billion and $306 billion in guarantees. Shares of BAC were down 18.5% on the day.

3) As expected, the European Central Bank cut its benchmark interest rate 50 basis points to 2%. President Jean-Claude Trichet said inflation risks are “broadly balanced” and he does not expect rates to go to zero. The Euro was unchanged on the day as this move was expected.

4) General Motors lowered its U.S. auto sales estimate to 10.5 million units in 2009 from its previous estimate of 12 million. GM will receive a $5.4 billion loan from the government on Friday as part of a previously announced rescue package.

5) Shares of Wells Fargo finished the day down 12.5% after an analyst said the company may need to raise $10 billion and cut its dividend in order to complete its acquisition of Wachovia.

6) Shares of Citigroup were down as much as 25% today on concerns the company might need more government assistance. Citi has already received $45 billion from the TARP.

7) Apple was only down 2.3%, much less than some people thought, after CEO Steve Jobs announced he will be taking a leave of absence until July. There was a report that Jobs may be having his pancreas removed. Jobs had pancreatic cancer in 2004. Here is an article that discusses the premium built into Apple stock because of Steve Jobs.

8) Crude oil for February delivery fell below $34, but March crude oil (the more frequently traded contract) finished at $43.50. Crude oil futures are at about the same prices as they were one month ago when the January contract was expiring.

9) Mortgage foreclosures were up 81% in 2008.

10) Motorola announced it would cut another 4,000 workers.

11) The Senate voted 52-42 in favor of releasing the second $350 billion of TARP funds.

12) House Democrats are planning an $825 billion stimulus package which includes $275 billion of tax cuts.

Market Summary: Wed. Jan. 14, 2009

Stocks had their worst day of the year finishing down just about 3%. Continued worries about financial companies’ health dragged the markets lower. The decline was broad based as 95% of the S&P 500 stocks were lower on the day. The majority of commentary I hear on CNBC is now bearish (finally) and stocks are at a much fairer value today than they were early last week. I have begun to make my “wish list” of stocks I want to buy on any further weakness – you should do the same. I do believe, though, that stocks will continue to decline as more and more companies report poor earnings, give cautious 2009 guidance, and lay off more workers. Nothing new, but the market needs to do a little catching up to the downside.

Here’s all the bad news from today:

1) December retail sales fell 2.7%. Analysts were expecting a decline of 1.2%. Everyone knows retail sales have been weak, so this really should not have been that big of a surprise.

2) Crude oil dipped below $36 per barrel. Once again, today’s inventory report was bearish, that is, it showed signs of increased supply.

3) Nortel Networks filed for Chapter 11 bankruptcy. “Nortel Networks Capital has more than 100 creditors owed $100 million to $500 million.” Watch out for companies with too much debt. With expensive credit any company that has debt coming due this year should be sold.

4) Deutsche Bank announced it lost $6.3 billion in the fourth quarter and will only issue a $0.50 dividend compared to 2007’s $4.50 pay-out. Shares of DB were down over 9% on the day. Barclays, another European bank, was down 14.5% after announcing 2,000+ job cuts.

5) Shares of Citigroup were down 23% today! There is talk that the company will get broken up even further, and investors are becoming more and more displeased with CEO Vikram Pandit.

6) After the bell, there was a report that Bank of America is close to receiving a second round of TARP funds from the government. The reason? BofA needs more cash to help with its Merrill Lynch acquisition. Shares are down more than 25% in the last five days.

7) After the bell, Apple announced Steve Jobs will be taking a leave of absence until July because his health problems are “more complex” than he had thought. Shares are down about 7% in after hours trading. Some are saying Apple mishandled this situation because just last week Jobs was healthy but had a treatable hormone imbalance.

8) Under Armour, Tiffany, and Bunge issued earnings guidance that was below analysts’ estimates.

Market Summary: Tues. Jan. 13, 2009

Stocks were flat on the day, but energy and financial names were the leaders. Morgan Stanley agreed to pay Citigroup $2.7 billion for a 51% stake in Smith Barney. After the market close, Citigroup announced it is also considering selling CitiFinancial, its consumer lending unit. Citigroup is slowly shedding assets to raise much needed cash.

In a speech today, Federal Reserve Chairman Ben Bernanke said “more capital injections [into banks] and guarantees may become necessary to ensure stability and the normalization of credit markets.” He also explained that “fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.”

Let’s go back to “The Dollar versus the Euro (and Yen)” from my January 4^th post. So far the Dollar has rallied significantly against the Euro. The Euro finished the day at 1.315, well off its December 18^th high of 1.4687. During that same time, gold (a hedge against inflation) is down $55. In regards to pumping trillions of Dollars into the economy, people are focused on the near term effects (economic stimulation) rather than the long term effects (inflation).

According to Treasury Inflation Protected Securites (TIPS), traders are expecting consumer prices to only increase 1.66% over the next five years. That is, they expect minimal inflation. How can you figure out this number? A 5-year US Treasury note yields 1.46%. A 5-year TIPS yields 1.13%. The difference between the two yields is the expected annual inflation rate over the duration of the securities. Right now traders believe we are in and will remain in a deflationary period.

I heard some CNBC commentators debating about Obama’s stimulus package and the proposed tax rebates/credits. Obama believes these tax rebates/credits will stimulate spending, but I do not think so. The recipients have two options – spend it or save it. I would bet that the majority of the baby boomers will be saving their tax rebates/credits. They need to make up for the 30-40% decline in their retirement portfolios. Sorry, Barack, saving the economy is not as easy as you think!

After Hours: Alcoa's Earnings Report

After the bell Monday, aluminum producer Alcoa reported earnings that missed expectations. AA reported a loss of 28 cents; Analysts had predicted a loss of 11 cents. Shares are down 1% in after hours trading.

Market Summary: Mon. Jan. 12, 2009

Financial stocks as well as the commodity-related stocks led the market lower today. With today’s 2% decline, stocks are down about 3.5% year-to-date. The talk on the street has reverted back to a prolonged recession. Just two weeks ago everyone was optimistic for a big market rally and an economic recovery in the second half of this year…not so fast though!

Commodities were the biggest losers. Crude oil futures for February delivery fell 8%. The futures curve continues to steepen as traders are getting paid to wait to sell their oil as demand wanes. The difference between the February and March contracts is 16% and between the Feb ’09 and Feb ’10 contracts 56.5%. Wheat, soybeans, and corn were limit down (the maximum amount by which the price of a futures contract may decline in one day) thanks to a bearish crop report. Fertilizer, infrastructure, and steel stocks were also very weak. Natural gas futures actually finished the day up as the nation is being hit by a severe cold front. Gold and silver were also down big.

Money flowed back into the Treasury market as the flight-to-safety trade resumed. The yield on the 10-year note fell to 2.31% from 2.41%, and the yield on the 30-year bond fell to 2.99% from 3.055%. As yields decrease, prices increase.

In my opinion, as well as many of the analysts, the three financial companies with the fewest problems are JPMorgan (JPM), US Bancorp (USB), and Wells Fargo (WFC). However, these three names have led the market lower recently. USB actually made a new closing low today. Since the December 8^th highs, JPM is down 34%, USB is down 27.5%, WFC is down 27.3%, and the XLF (financial ETF) is only down 20.75%. Is this decline in the best-of-breed companies telling us something – that the worst is yet to come? Or is the market wrong?

After the bell, JPMorgan announced it will release its fourth quarter results this Thursday instead of next Wednesday. I see this as a positive. JPMorgan might surprise investors with better-than-expected results and to prevent a further slide in its stock price it will report sooner rather than later.

The big financial news, though, had to do with Citigroup and Morgan Stanley. The two companies are near a deal that would involve Citigroup selling a majority stake of Smith Barney, its brokerage division, to Morgan Stanley for $2.5-3.5 billion. Why is this big news? Why did shares of Citi fall 17%?

Citigroup is in desperate need of more capital. The company has already tapped the federal government for $45 billion, and some are saying it will need more money to cover future losses. From this deal, Citigroup may recognize a gain of $10 billion after taxes.

What does not make sense, though, is why has Citigroup decided to sell its best business at the market bottom? Just a few weeks ago, CEO Vikram Pandit said Smith Barney would not be sold. It seems as though someone, most likely the government, is holding a gun to Citi’s head and forcing it to sell Smith Barney in order to improve its cash position. Morgan Stanley, on the other hand, is getting an absolute steal. The newly converted bank holding company is expanding its clientele and diversifying its business model. Last quarter, Smith Barney generated $2.576 billion in revenue which is about the price Morgan Stanley will pay for the business. A pretty sweet deal if you ask me.

Weakness in the financials could also be attributed to President Elect Obama asking Congress for the second $350 billion of TARP money. Stocks reacted negatively because the conditions for using the second allotment of TARP money will be very restrictive and unfavorable for the financial companies. In the letter to Congress, Obama’s team explained that there will be: 1) strict and sensible conditions of executive compensation and dividend payments, 2) full accounting of how money has been spent, 3) more transparency to measure lending by firms receiving financial rescue funds, and 4) sweeping efforts to address the foreclosure crisis (Source: CNBC TV). Obama also explained that he wants to enter his presidency with “ammunition” if problems were to arise.

An interesting piece of information: Today’s change in JPMorgan’s and Well Fargo’s market caps – 3.85B and 4.46B, respectively – exceeds General Motor’s total market cap of 2.5B. Market cap is the value of a company.

Market Summary: Fri. Jan. 9, 2009

Stocks traded lower all day thanks to a dismal unemployment report. The non-farm payroll number was not as bad as some people were expecting. 524,000 jobs were lost in December while some people were calling for 700,000+. However, downward revisions for the October and November reports subtracted another 154,000 jobs. The unemployment rate rose to 7.2% from November’s 6.7%. The average estimate was for 7.0% unemployment in December.

The growth stocks that led the market higher the last few weeks as people were optimistic about a recovery – materials, energy, commodities – were the laggards today as the unemployment data suggested it might be longer than people think before a recovery occurs.

Oil stocks were weak thanks to oil dipping below $40 per barrel. Just one week ago oil was trading at $50. On top of falling oil prices, Halliburton and Schlumberger, two of the biggest oil services companies, announced they will be cutting jobs. SLB will cut 1,000 North American jobs - more than 5% of its domestic work force. HAL did not disclose how jobs will be cut.

Continuing with the job loss theme, Boeing announced it will cut about 4,500 jobs which is about 3% of its global work force. Boeing also reported a 15% decline in passenger jet deliveries for 2008.

On the earnings front, some notable companies disappointed:

1) Coach lowered its profit expectations. It now sees Q2 profit of $0.67 per share. Its previous estimate was $0.77 per share. Comparable store sales for December declined 13%.

2) Best Buy narrowed it full-year profit expectations. The company now sees profit of $2.50-2.70 per share. The previous estimate was $2.30-2.90 per share. December same store sales declined 6.5%.

3) CVS was down 12.5% on the day after the company forecasted 2009 profit of $2.35-2.43 per share. This range is below analysts’ average estimate of $2.56 per share.

Market Summary: Thurs. Jan. 8, 2009

Stocks opened lower this morning after Wal-Mart announced its fourth quarter earnings will miss analysts’ forecasts. The company expects profit to be $0.91-$0.94 per share. This range is down from the company’s November estimate of $1.03-$1.07 per share. Also, Wal-Mart’s December same store sales disappointed investors. Analysts were expecting an increase of 2.6%, but Wal-Mart only reported a 1.7% increase. Over the last year, Wal-Mart has been the quintessential recession-proof stock, exceeding expectations nearly every quarter. Wal-Mart remains the premier retailer in these tough times – I’d use this weakness to buy.

A better-than-expected initial jobless claims number gave reason for investors to turn positive, and by the end of the day stocks closed near the unchanged mark.

Other news:

1) The Bank of England cut its benchmark interest rate 50 basis points to 1.50%.

2) The Treasury sold $16 billion of 10-year notes at 2.419%

3) Financial stocks were mixed on the day, but for the third day in a row JPMorgan was the laggard finishing the day down 3%.

4) Walgreen's announced they will cut 1,000 management jobs in 2009.

5) The Federal Reserve purchased $10.2 billion of mortgage-backed securities to help the ailing housing industry. The Fed plans to buy $500 billion of these securities by June 30^th. Here is a very good explanation of why the Fed is buying these bonds.

6) Citigroup announced they will “support legislation that would let bankruptcy judges cut mortgage rates for at-risk borrowers.” If Citigroup wants more of the TARP money they better publicly “support” the government’s proposal.

7) After the bell, Chevron announced that its fourth quarter earnings would be “significantly lower” than the third quarter’s earnings because of lower oil and gas prices.

8) Here’s the full text of Obama’s stimulus package speech.

Market Summary: Wed. Jan. 7, 2009

Another set of bad news sent the markets lower and took some of the euphoria out of the bulls’ sails. It was about time we saw a significant pull back after a 27% rally from the November 21^st bottom.

Why did the market sell-off 3%?

1) Intel led tech stocks lower after it warned revenues will come up short of expectations. The company said fourth quarter sales declined 23% which was more than predicted (and more than in 2001 when the tech bubble burst). This is the second time Intel has cut its fourth quarter revenue estimate. Intel is absolutely dominant (80% market share) in the chip space and this warning does not bode well for the tech sector.

2) The ADP employment report showed that 693,000 private sector jobs were eliminated in December which was far worse than expectations. The government will report non-farm payrolls on Friday (private sector plus government jobs) and I have heard one “expert” on CNBC say that this number could be 1 million!

3) Crude oil fell 12% after an extremely bearish inventory report. The estimate was for a supply increase of 800,000 barrels, but the actual increase was 6.68 million barrels. Simple supply and demand here – more supply equals lower prices.

4) Meredith Whitney, an influential analyst who covers financial stocks, said banks will need to raise more capital because she estimates $40 billion of write-downs due to downgrades of mortgage-backed securities last quarter. JPMorgan and Wells Fargo were once again the laggards in the sector. Financials (XLF) were off about 5% on the day.

5) Time Warner announced it will have an annual loss due to a $25 billion write-down. In November the company anticipated a profit of $1.07 per share. How quickly things can change! The company also noted that the slowing economy hurt advertising revenue more than expected.

How about some good news? Monsanto surged almost 18% after reporting earnings that beat analysts’ expectations and raising its full-year guidance. Profit increased to $556 million ($1 per share) last quarter. This compares with $256 million in profit the same period a year earlier. Estimates called for earnings of 60 cents per share.

Even though money came out of the stock market, there was no flight-to-safety bid in the Treasury market. This action is a bearish sign for Treasuries. Here’s the catch 22 for the government: As the Treasury Dept. continues to issue more debt (increase supply) to pay for all its bailout and stimulus packages, Treasury prices will decline (yields increase). However, as yields increase so do the interest payments that must be paid to the bond holders. This increase in interest payments is very unfavorable for the government and will result in more debt issuance to pay for the higher interest payments. Quite the vicious cycle! The budget deficit will exceed $1 trillion sooner than people think.

Market Summary: Tues. January 6, 2009

What has changed fundamentally about the economy and prospects for growth in the last few weeks? NOTHING! The only thing that has changed is people are more optimistic and therefore bidding up stock prices. Just two months ago people were predicting Armageddon, and now everyone is ignoring all the negativity that is still out there. We went from too pessimistic two months ago to too optimistic.

Once again, all the early cyclical stocks (the growth stocks that thrive during economic expansion) were the leaders – technology, energy, commodities, and materials. The safe, defensive stocks (the ones that fare well during slowdowns) were the laggards – Coca Cola, McDonald’s, Altria, Pfizer, Proctor & Gamble, AT&T, and Wal-Mart. The market has this one wrong. I’m a buyer of these strong names on any further pullback.

Reality check – the worst is not behind us…

1) Alcoa: After hours the company announced it will lay off 13,500 workers (about 13%), reduce capital expenditures by 50%, cut metal production by 18%, and incur a $950 million restructuring charge.

2) Bank of America: Ken Lewis, the CEO, announced his company will not meet its 2008 profit forecast. Currently, the average estimate is 15 cents per share. This number is down from 69 cents per share just three months ago. Look for more loan loss provisions. BAC reports quarterly results January 20^th.

3) Even Ben Bernanke and Co. believe the economy will sputter for some time. According to the FOMC minutes from Dec. 15-16, “the economic outlook would remain weak for a time and the downside risks to economic activity would be substantial.” Some Fed officials saw “the distinct possibility of a prolonged contraction.”

4) Mosaic, a fertilizer company and one of the hottest growth stocks in 2007 and early 2008, provided a pretty dismal outlook. Here’s a comment from the CEO:

“Toward the end of the quarter…worldwide crop nutrient sales activity dropped sharply, and it is expected to remain weak through at least the third quarter. Because of these conditions, we are reducing our production to manage excess inventories, reducing capital expenditures, and working to maintain financial strength and flexibility.”

Just like yesterday, the economic data was dismal, but nothing too surprising to move the markets significantly. The market mover will be Friday’s unemployment data, which is expected to be very poor.

Market Summary: Mon. January 5, 2009

Uncertain Apple investors, including me, finally got some clarity when it comes to CEO Steve Jobs’ health. Many have been concerned that Jobs’ cancer has returned, but fortunately, his recent weight loss has been caused by a hormone imbalance. So far in 2009 shares of Apple are up almost 11%.

Money continued to flow out of the Treasury market. The 30-year Treasury yield finished the day at 3.04%, up from last Tuesday’s close of 2.58% (bond prices move opposite of yields). However, demand for short-term Treasuries remains high as seen by today’s auction of three- and six-month T-bills. The bid-to-cover ratio, which measures the demand versus supply, was 3.11 for three-month bills and 3.26 for the six-month bills. Fixed income trading desks need to put their money somewhere, and right now the U.S. government is the only institution that is issuing debt.

December auto sales were extremely poor, but that was not really news because the market was expecting poor numbers. GM’s sales dropped 31%, Ford’s fell 32%, Chrysler’s fell 53%, Toyota’s fell 37%, Honda’s fell 35%, Nissan’s fell 31%, and Hyundai’s fell 48%.

The energy, commodity, and material stocks were the market leaders today, while the big money center banks – JPMorgan, Wells Fargo, and USB – were the laggards. AT&T and Verizon were also weak after a downgrade to “market perform.”

The Dollar rallied on reports that President Elect Obama will include $300 billion worth of tax rebates in his stimulus package. Gold finished the day down 2.5%.

Even though stocks finished the day modestly lower, there were twice as many advancers on the NYSE as decliners.

What to Watch for in 2009

Don’t read too much into the 3% rally we saw on the first trading day of the new year as volume was very light. Look at any chart – it was a trader’s dream. Stock charts went from the bottom left to the upper right in a near-perfect line. A better indicator of which way stocks will trend in the near term will be Monday’s action. Personally, I think people are a little too optimistic about a recovery.

Here’s what the market is pricing in: Basically, everyone on CNBC is expecting the economy to turn mid-year (I should really say “hoping” instead of “expecting”). That means the stock market should begin to trend upward as it anticipates the future. If you think the economy will be better six months from now, then you should be a buyer of stocks. However, if you disagree with the majority you should be a seller of stocks on any rallies. I see the market rallying in January and peaking in February when the stimulus package is finalized. Companies will continue to lay off workers left and right and many more businesses will disappear. Unemployment will continue to rise and we will be stuck in this sideways market.

What to watch for in 2009:

The Dollar versus the Euro (and Yen):

The trillions of Dollars the U.S. government is pumping into the economy will eventually cause inflation, but at what point will inflation kick in as we are still in a deflationary period? Will gold be the beneficiary (however, according to the charts gold is still in a bearish trend)? Much more downside risk remains in the Eurozone and the ECB will have to cut rates further creating relative Dollar strength.

Crude Oil:

The bubble has been broken. Don’t expect oil to be at $147 anytime soon. Many of the speculators that bid up oil have been washed out of the market. When all the so-called experts were calling for $200 per barrel, oil peaked. Now I see the reverse happening. These same experts have recently called for $20 per barrel and OPEC has pledged to significantly reduce output. Oil looks as if it might be bottoming. However, there is ample supply waiting to flood the market. Because of the steep contango in the futures market, the big oil players have been buying oil at very low prices ($30-40), storing it on tankers, and waiting to sell it at higher prices ($50-60) in the future.

TARP $ and The Banks:

Where will the government allocate its remaining $350 billion (assuming Congress approves)? How much consolidation in the banking industry will occur? Will small, regional banks go bankrupt? Will the banks begin to lend to the average, everyday consumer again?

The Big Three:

It is just a matter of time before these jokers are back in Washington asking the government for more money. Will a merger occur? Will they file for chapter 11 bankruptcy protection? Will they stop making cars that no one wants to buy?

Obama’s Stimulus:

I’ve been hearing $750 billion. I’ve also heard $1 trillion. Either way, it will be a lot of money. Pay attention to his tax cuts and infrastructure plans. Look for the commodity/material/energy names to continue to rally into Obama’s inauguration. Sell the news! What happens if the stimulus doesn’t work? What does the government do then?

Mortgage Rates & Housing:

What will the government do to lower mortgage rates and stimulate home buying? Will any homebuilders go out of business (I hope so)?

The Bond Market:

Toward the end of 2008 everyone wanted to own Treasuries (the safest investment out there because they are backed by the U.S. government). Interest rates on short-term maturities were and still are near zero. Cash flooded into this market in recent months. Will a mass exodus occur in 2009 to the stock market? Or will interest rates remain at historic lows? If the latter, don’t expect any significant or sustainable rally in equities.

Employment:

Watch the weekly initial jobless claims number to gauge the strength of the economy. This is the most up-to-date metric. Will unemployment tick up to 8-9% like some people think? Or will Obama’s pledge to create 3 million jobs prevail?