Chart provided by APEX
After the November 21st intermediate lows were established, futures have been able to partially recover. A good portion of these gains can be attributed to news that there are government plans to establish the largest infrastructure spending package since the early 1950s in an effort to stimulate the economy. On Saturday December 6th it was announced that there will be a new public works initiative that will increase investment in roads, bridges and public buildings in an effort to improve the employment situation. In addition, lawmakers continued to work on an automaker bailout package. Congress continues to meet this week to discuss extending $14 billion in loans to General Motors and Chrysler. There were some follow through gains due to ideas that the U.S. government may take an equity ownership in General Motors, Ford and Chrysler as part of an assistance package.
Some of the gains can be attributed to the growing belief that Group of Seven central banks will increase their efforts to stimulate the global economy. Most of the major central banks have eased credit conditions dramatically recently. Just last week the European Central Bank lowered their benchmark rate by 75 basis points to 2.5% and the Bank of England’s Monetary Policy Committee cut their main interest rate by 100 basis points to 2%. Currently there is mounting pressure on the Federal Reserve to ease credit conditions again. According to the financial futures markets, there is approximately an 80% possibility that that the Federal Open Market Committee will lower their fed funds target by 75 basis points to 25 basis points on or before their next meeting, which is scheduled for December 15th and 16th. While the additional accommodation from the Federal Reserve is well intended, it appears to be too little and too late. It is amazing that it was only a few short months ago that financial markets analysts were almost unanimously predicting tighter credit from the U.S. central bank, when inflation appeared to be the main worry.
Credit Crisis
There are some estimates that global write downs, due to losses in the credit markets, could be as high as $1.3 trillion. Currently financial companies have registered over $980 billion in write downs in the past two years. Already this is substantially more than the International Monetary Fund’s earlier estimate of $945 billion. The president of the Federal Reserve Bank of Minneapolis said in an interview that the credit problems in the U.S. markets might get worse. One money manager said banks are only “one third through their credit related write downs.” Our analysis suggests that there will be more subprime related problems to be revealed later.
Corporate Earnings and GDP
Our research tells us that corporate earnings will remain weaker than analysts’ estimates for the rest of this year and at least through the second quarter of next year. There are an increasing number of analysts that are predicting that the U.S. economy will shrink at an increasing rate in the fourth quarter of this year and also in the first quarter of 2009. Two consecutive quarters of negative economic growth unfortunately meets the classic definition of a recession.
Employment
It is true that many of the bearish factors that have exerted downward pressure on stock index futures this year have taken place during previous bear markets. A weakening employment picture always seems to be a common thread. Recent estimates for nonfarm payrolls have been revised to show larger declines than previously estimated. The most recent report was, in fact, worse than the estimates. November nonfarm payrolls were down 533,000, when a decline of 335,000 was anticipated and October figure was revised to show a 320,000 decline, which compares to the previously reported figure of down 240,000.The increasing rate of shrinking employment numbers is taking place across a wide range of sectors of the economy. The latest jobless claims report showed there were 573,000 initial claims for state unemployment insurance benefits, when 525,000 were anticipated. This is the largest amount of jobless claims since November 1982.
Consumers
Consumers continue to have a difficult time getting credit lines and loans. It appears unlikely that this condition will be remedied anytime soon in spite of the variety of governmental assistance plans. Consumer spending could deteriorate even more as the problems on Wall Street move through the economy. In addition, there are concerns that this year’s holiday shopping season may not be robust. Consumer purchases in the most recent reporting period fell 1.2%, which was the third consecutive monthly decline. This most recent drop in retail sales was the largest decline since August 2005 and it was the worst decline for any single month in the past three years.
Housing Market
Worries remain that any U.S. bank bailout plan will not jump start lending as potential homebuyers continue to remain on strike. Recent housing statistics suggest that the current housing recession is the worst since the 1930’s and there is a growing feeling that there will be more problems related to the precarious housing industry within the next six to twelve months. According to RealtyTrac of Irvine, California 765,558 U.S. properties either received a default notice, were warned of a pending auction or were in foreclosure during the third quarter. This is the most since records began in January 2005. There was one recent bright spot, however. According to a report from the National Association of Realtors in Washington, pending home sales, which are based on signed purchase agreements, fell by only 0.7 percent. This was much better than analysts’ median guess of a 3% decline. Our studies suggest that the housing market will not bottom until the second quarter of 2009.
Automobile Manufacturing
Problems within the automobile manufacturing industry have been in the news lately as auto makers continue to eat through cash reserves as sales fall. This situation is so severe that it is imperative that the industry receives a federally funded aid package in order to avoid a collapse. There are concerns that one of the major U.S. manufacturers may run out of cash reserves before the end of this year. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid encouraged Treasury Secretary Paulson to make some of the bank bailout funds available to automakers. Senator Mel Martinez said, “The United States must have an auto industry. We don’t want to see a loss of over a million jobs.” More recently there has been talk that Republican opposition may delay or possibly kill the emergency loan package, even though on Wednesday the House voted 237 to 170 in favor of granting emergency loans to General Motors and Chrysler. Republican Senator Voinovich said his party may not have enough votes to pass the legislation. Currently it is estimated that one auto maker could be out of cash reserves within three weeks.
Major Bottom in 2009
Not all of the news is pessimistic. It is likely that the simulative efforts undertaken by the Federal Reserve and the Treasury in these times of economic distress will cause the downturn in the economy to be of a shorter duration than it normally would have been. Our latest analysis for the longer term outlook, which is becoming more optimistic, is telling us that we can expect massive buying opportunities to develop in stock index futures early in the second quarter of 2009.
If you have a question or comment about this article, please contact Alan at 1.800.243.2649 or email at alan.bush@archerfinancials.com .
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
