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The Week in Review; Markets, Obama Set Humble Tone

Posted on | November 9, 2008 Time: 10:39 pm |

As we approach the second week in November, the markets are largely as uninformed on the depth of this recession as last week. The only big unknown that’s been removed from the markets is who the next POTUS will be. But President-Elect Obama has inherited one of the weakest economies any of our 44 Presidents has ever experienced.

In his first press conference - as in his acceptance speech - Obama made pains to set the bar at a humble level; our problems are both numerous and entrenched, and it will take time to turn things around. At the end of Obama’s “First 100 Days”, we will likely still be trying to peg the bottom of this recession and quibbling over 2009 earnings estimates for the S&P 500.

There were some half-hearted attempts to make sector rotations in the face of an Obama presidency, as solar stocks sold off on the news (following a big rally in prior sessions). But for the most part, macro issues dominated the equity markets, culminating in an ugly jobs report on Friday. Only the financial sector managed a gain on the week, following a late rally on Friday:

In other government news (unfortunately it’s the source of most market catalysts these days), efforts were made to increase the scope of the existing TARP plan to provide as much as $50 billion in loans/capital injections to the auto industry. This would be in addition to the $25 billion infusion already earmarked for the Big Three to help retool plants and transition to more hybrid production.

I’m not sure where I stand on this, both as free market believer and philosophically. It’s a purely objective point to note that the U.S. auto majors have become little more than consumer finance companies. I know it sounds overly cynical to call U.S. auto sales a loss leader for financing, but looking over the earnings results for the past five years, it’s not far from the truth.

And with the financing divisions now in a tailspin and the companies burning through $2 billion in cash per month, sending capital to GM, Ford, or Chrysler seems like nothing more than a roundabout way of providing consumer stimulus. At the end of the day this is about providing some support to the 2 million plus jobs at stake if any of the three were to go under. Otherwise, no lender in the world would support an ongoing concern with no conceivable path to profitability.

In the long-term, we don’t have a sustainable future making cars in the molds of the past. If there’s any chance at all for their survival, it will be through massive overhauls of the business model with an eye on fuel efficiency, hybrid cars, and a new relationship with labor. But it looks like $75 billion is heading the auto majors’ way, as the Governor of Michigan was standing behind Obama at the podium Friday, and Speaker of the House Pelosi met with auto CEOs the same afternoon.

2 Steps Back, One Step Forward

After seeing the S&P 500 drop by 10% in just two sessions following the election, Friday shaped up to be a real test for the markets. We were awfully close to the October lows by the end of the day on Thursday, so many stocks were (and remain at) crucial inflection points.

Friday gave us a modest rally of 3%, with the majority of those gains following Obama’s press moment in the last hour of the session. The retail sector continues to post poor results, with Costco (COST), BJ’s Wholesale (BJ), and Wal-Mart (WMT) proving that you have to be promoting deep discounts right now to post any same-store-sales gains.

The Week Ahead

In our first glimpse at catalysts for the week ahead, China announced the details of its self-described “massive” stimulus package, which is valued at over $580 billion and will be spent over the next two years. I’ve been waiting for some details on what China will do in what is actually an opportunistic time for the world’s largest nation. They have over $2 trillion in capital surpluses, and they desperately need to make investments in infrastructure as they prepare for the next leg of their inevitable economic expansion.

The stimulus package will be directed towards low-income housing, lowering taxes, and large-scale rural infrastructure projects focusing on water, electricity, and transportation. China will also abolish credit ceilings at its commercial banks, in an effort to encourage lending to what it deems “priority projects”.

The announcement of China’s package and the widespread rumors of a soon-to-come infrastructure package in the U.S. could increase the relative attractiveness and earnings faith in stocks like Caterpillar (CAT) and Fluor (FLR).

Parting Thoughts

It’s all about volumes. While we’re seeing large volumes in specific stocks on specific days, we’re not seeing large volumes across the exchanges. Not large enough to signify major money flows back into the market.

I cringe when I hear folks on Fast Money and other programs say that this is a trading market, that pure long strategies are dead. But through the cringing I look at the daily volatility, where moves up or down of 15% + can happen with no news and little commentary. Moves like that are good returns for a whole year in equity investing; now they come in days.

We need to see volumes get really big on advancing days before we can signal a true bottom. Until the sideline capital commits to earnings estimates, stock valuations, and simply removes its barriers to risk-taking, we are in constant danger of re-testing prior lows.

disclosure: author does not hold positions in the companies mentioned

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Category: Broad Markets, China, Industrials, Investing Philosophy, Solar
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