Stock Market

The bears seem to be winning over the bulls in 2008, and Tuesday’s Intel results did nothing to change the perception that the U.S. stock market is in very bad shape.  With the financial industry having to be bailed out by Asian and Middle Eastern money, and the housing market still in total capitulation, the U.S. tech sector has been one of the only domestic industries to still turn a profit.  Now, with Intel missing earning on Tuesday, traders are asking themselves whether or not the last bastion of security has been compromised.

Intel didn’t necessarily have a bad quarter, though.  Earnings were expected to be at $.40 per share, and came in at $.38, while the profit margin grew to the largest level in 2 years.  According to an article in thestreet.com:

In a post-earnings conference call, Intel CEO Paul Otellini stressed that the company wasn’t seeing any signs of an economic slowdown. And he said Intel’s plans for 2008 assumed that the global PC market, to which Intel is the No. 1 supplier of microprocessors, would continue to grow at a low-double-digit clip.

“At this point we don’t see anything on the horizon; our customers don’t see anything on the horizon,” Otellini said regarding a slowdown in spending on PCs.

Intel lost about 14% after the conference call.

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The first week in 2008 ended on an extremely down note, as the DOW dropped 256 points to close at 12,800.  The government’s jobs report was released in Friday, stating that December hiring was off, adding to an already unstable economy.  Quoting an article on thestreet.com:

 The pullback came after the Labor Department reported that 18,000 jobs were added in December, well short of economists’ expectation of 70,000. The unemployment rate jumped to 5% from 4.7% in November, surpassing forecasts of 4.8%. Average hourly earnings rose a greater-than-expected 0.4%.

Not good news for an economy already low on confidence and expecting more bad news when the next round of quarterly reports come out in the coming months.  The U.S. isn’t the only economy feeling the squeeze.  Japan’s Nikkei was down a whopping 4% the day before, although other major Asian markets were up.  Europe’s major markets were down as well.

In the U.S. financials and tech stocks were the hardest hit, as Google, Apple, and Oracle were all down substantially.  Intel was among the hardest hit, as it was downgraded to overweight by JP Morgan Chase.

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2008 started off the same way that 2007 ended as far as the stock markets were concerned.  On the first day of trading in the new year, the DOW dumped 220 points, and at some points during the day, was below the 12,000 mark.  It did rally a bit to close at 13,043.  On the NASDAQ, losers were at a 2:1 ratio over advances, and the market closed down 1.61%.

There were plenty of bad omens during the day: oil broke through the $100 a barrel price, before closing at $99.62, and gold finished at $857 per ounce, up over $22.

The Fed offered up its minutes from its Dec. 11th meeting, and it was not full of holiday cheer either, stating:

Financial stresses could increase further, intensifying the contraction in housing markets and restraining other forms of spending, and . . .the economic outlook unusually uncertain.  Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy.

It sounds like more cuts may be on the way when the board meets later in the month, but whether the Fed has many more magic bullets left in its arsenal remains to be seen.   Unfortunately, flipping the page in the calandar doesn’t wipe the slate clean for troubled economies.

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Google is one step closer to becoming an even more powerful player in the online advertising business.  The FTC last week ruled in favor of the search giant’s acquisition of DoubleClick, the biggest display advertiser in the business, valued at roughly $800 million.  Google still has to wait for EU approval, but with the FTC already giving the deal the thumbs up, the chances for the EU doing the same have increased.

With DoubleClick in the fold, Google will be able to sell advertisers both search and online ads together for the first time.  Microsoft and Yahoo! both already offer members this feature, but aren’t close to having the same market share as Google.  According to an article on Thestreet.com:

DoubleClick would make Google the overnight leader in the display ad serving market.

DoubleClick is currently the biggest player in the roughly $800 million display ad-serving market with a 40% market share, according to Oppenheimer analyst Sandeep Aggarwal. That will complement Google’s strength in the search market, where the company commanded a 59% market share of search queries in November, according to ComScore.

Analysts have been calling for Google stock to approach the $1000 per share mark in the future, perhaps as soon as the upcoming year.  Adding display ads will boost Google’s advertisers selling power, the article states, because:

…users who saw both display and search ads from the same advertiser were 22% more likely to click on an ad than users who saw only one form of advertising.

Google is already the king of online advertising, and the newest addition, will only help to strengthen the kingdom.

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SLM Corp., better known to most as Sallie Mae, is in the process of attempting to raise $2.5 billion through a new stock offering. The company plans on using the money generated to buy back 44 million in old shares. The company has a deal in place with Citigroup to purchase the old shares by Feb. 22. Currently, the company is in dire straits, as a buyout bid from outside investors fell through last summer, and sent stock prices plummeting. The shares have lost over 60% since then, and most recently closed at just over $22 per share, down from summer highs that were in the high $50s.

Unfortuately for SLM, the bad news may just be getting started. Analysts at Friedman Billings, just downgraded the stock from Outperform to Market Perform and now, according to an article on Bloomberg.com, more downgrades may be on the way. The article states:

Moody’s Investors Service in New York said last week that it was continuing to review Sallie Mae’s debt for possible downgrade. Moody’s, which had been concerned that a takeover would hurt Sallie Mae’s ability to repay debt, said it was examining the company’s “weakening financial fundamentals.’

The article also states that an outgoing VP of sales will be assured of a smooth landing, via his golden parachute, as Kevin Moehn will be getting a $1.5 million cash payment, a $285,000 bonus and a $16,500-a-month consulting contract for a job…well…done.

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The week started off the same way the last one ended–with lots of selling.  Asian equities were especially hit hard in the sell off, with index funds FXI (China) and INP (India) taking the brunt.  INP, the ETN which tracks the Indian index, had risen dramatically in recent weeks, shooting up to about 20% higher than its net asset value, recently setting a new high of over $110.  It didn’t last.  Monday’s selling sent the ETN down over 13%.

FXI tracks a basket of Chinese stocks, and is likely the best indicator of the strength of the Chinese economy overall.  The past few years have seen this ETF roughly double each year and, until a couple of months ago, was set to repeat this year as well.  At Monday’s close FXI was down over $10 per share, closing at $161.25.

These two had been some of the best ETF performers over the year, but the market turmoil has erased gains of a few months in each case.  Of course, for believers in the stories of China and India, the recent problems are just bumps in the road, as two giant emerging markets grow into their own.  SeekingAlpha.com has a comparison of the recent performances of the two stocks here.

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The markets have been extremely choppy recently, and investors were looking to Tuesday’s Fed meeting for a rate cut to boost liquidity in the markets, and boost stocks.  A .25% cut was expected, but more was hoped for.  Unfortunately for investors–at least in the short term–the markets were less than thrilled with the results, and plunged on the news.  In the hours leading up to the announcement, American markets were up slightly, as investors tentatively awaited the news.  As soon as it broke, the selling began.  The Dow finished down almost 300 points, the Nasdaq down 66, and the S&P was off by 38.

Hit especially hard were homebuilders and lenders.  In the homebuilders sector, LEN, DHI, and HOV were all slammed with double digit losses.  Financial institutions such as MER and LEH fell significantly also.

If investors can take any good news from the meeting, it’s that the Fed all but stated that more cuts were on the way in the next meeting.  Unfortunately, that meeting isn’t until late Jan.

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The government has stepped in with a plan to freeze certain ARMs for 5 years.  The DOW responded with a gain of 175 points and the gains were felt across the market.  The decision of the government to step in is a big one, and especially strange for a Republican president to take.  As far as free markets are concerned, the decision of the government to step in and bail out people who took out bad loans to buy homes, and now are in danger of losing them and sending the country into a recession, is a big one.  Of course, losing one’s home is a terrible thing, but when the government steps in, a dangerous precedent is set.

One would hope that in the future, the government will be more proactive and create laws in advance to keep bad mortgages and loans from being packaged in the first place.  Borrowers also need to be more aware of what they are getting involved in before signing anything.

According to an article on thestreet.com:

Under the plan, devised by mortgage industry leaders led by Treasury Secretary Henry Paulson, the government will assist struggling homeowners by helping them either refinance their existing loans, moving into loans backed by the Federal Housing Administration, or by freezing adjustable-rate mortgage interest rates for certain borrowers for five years, Bush said during a briefing.

Not everyone will benefit from the strong hand of the government, as it is not designed to help out speculators responsible for ‘flipping’ houses, lenders, and “those who made the reckless decision to buy a home they knew they could never afford,” according to Bush. 

One thing is sure, the markets responded well to the news, with financial service companies like Lehman Bros,  Bear Stearns, and homebuilders such as Lennar, and Hovnanian posting huge gains on the news.  Whether the upsurge represents a sea change in the market, or is just reactionary remains to be seen.

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Treasury Secretary Henry Paulson has announced that a plan is in the works to relieve homeowners who are trapped in the subprime fallout and who are in jeopardy of losing their homes to foreclosure.  Each month, roughly 100,000 people’s interest rates on their subprime loans reset from the initial rate to a much higher one, which is causing foreclosures across the country, and driving down, not only the US markets, but is also having an effect around the world.

Paulson’s plan is to work out a deal between banks, lenders, and securities companies to draw out the initial rate for several more years, and allowing local and state governments to slide on bond taxes in order to help the homeowners.  If nothing is done, the subprime disaster has the ability to go on and on sucking the life out of the markets, driving the dollar down further, and leaving people with bad credit and no homes.  Bloomberg has the article here.

As far as the markets are concerned, although there have been losses, especially in the financial sector recently, there as still plenty of bulls out there, and the markets aren’t ready to turn yet.  Last week’s buying was a sign that, while things are far from perfect, it’s far from time to liquidate all holdings and bury the cash in the backyard.  Depending on whom you talk to, it could be a perfect opportunity to buy.

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Sometimes you wish the Federal Reserve Chairmen and members would either make up their minds or just be quiet.  A couple of weeks ago, Bernanke and other chairmen insinuated that more rate cuts wouldn’t be coming at the end of the year meeting in December, and the market responded by tumbling sharply with several days of triple digit losses.  Now, the recent news from Bernanke is that due to weakness in housing construction and sales combines with weak consumer spending may have put another rate cut back on the table.

Bernanke also mentioned the recent volatility in the markets as a contributing factor, stating that his thinking “has also been importantly affected over the past month by renewed turbulence in financial markets, which has partially reversed the improvement that occurred in September and October.”  The chairman also stated that, “the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.”

When the words of the chairman got out last week, investors responded with buying, which sent most markets up higher on the week.  Of course, no one is doubting that there are big problems with the American economy–the subprime mess is dragging financials down, while most people believe that there is still more bad news to come, the housing slump is entering Year 3, and there is still a war going on, an election year coming up, and American confidence is extremely low in all branches of government.  Not to mention that the dollar is at a 30 year low against most major currencies.

If Bernanke is planning on cutting again, the markets will no doubt respond by ending the year on a high note, and by fueling speculation, the Fed chairman is driving the markets higher.  However, if there is no cut in December, traders and investors won’t be having a very Merry Christmas.

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