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Dec 01
2008
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December 1, 2008 -
The
stock market today suffered one of its worst days since the financial meltdown
began, slicing 680 points off the Dow Jones industrial average as Wall Street
snapped out of its daydream of a rally and once again faced the harsh reality
of a recession.
Not only did stocks end their five-day winning streak, they erased more than half the gains. The Standard & Poor's 500 stock index, one of the broadest market gauges, lost nearly 9 percent.
Erasing any lingering doubts, there was also finally an officially declared recession — in progress in the United States since December 2007, according to the National Bureau of Economic Research, the nonprofit group of economists that classifies business cycles.
Retail Holiday Outlook Bleak!
Concerns that the 2008 holiday shopping season could cap off the bleakest year-end season for retailers contributed to the negative tone, along with a slide in financials and energy stocks. Black Friday sales were up from a year ago, but sales tailed off over the weekend as the door-buster promotions ended. More than 70% of shoppers said they were out over the weekend specifically to take advantage of the big-ticket promotions and beyond that they were not buying heavily this year. Adults indicated they would buy for the kids, but were keeping the adult purchases to a minimum. This is not great news for retailers this year and the shopping discounts might continue to increase as desperate retailers try to liquidate inventory.
"We thought mall traffic was good but lines were not as impressive as shoppers cherry-picked the best deals," said UBS analyst Roxanne Meyer. "We thought promotions would have been steeper, given retailers' inventory issues. The new reality is that 25 to 30 percent off is not going to cut it." Look for more retail discounts as retailers try to liquidate inventories before the year end. After Christmas sales should also include steep discounts. Retail stocks were down significantly on Monday in early trading.
Manufacturing Falls
Manufacturing in the U.S. contracted in November at the steepest rate in 26 years, leading Europe and Asia into a global industrial slump as the credit continued to be tight worldwide.
The Institute for Supply Management’s factory index dropped to 36.2, below economists’ forecasts, and its gauge of raw-material costs plunged to its lowest in sixty years, the Tempe, Arizona-based group reported today. Factory indexes in China, the U.K., euro area, and Russia all fell to record lows.
Stocks worldwide tumbled and yields on U.S. Treasury securities fell to the lowest ever on concern a lack of credit will shut down consumer and business spending. The deepening recession and a non-inflationary environment with oil falling is pressuring policy makers to keep lowering interest rates and implement new consumer stimulus plans.
The ISM index was projected to drop to 37, according to the median of 61 economists’ forecasts in a Bloomberg News survey. Estimates ranged from 33.5 to 40. A reading of 50 is the dividing line between expansion and contraction.
A report from the Commerce Department also showed construction spending fell 1.2 percent in October, a bigger drop than forecast, as a slump in homebuilding spread to non- residential projects such as power plants, churches and highways.
The U.S. ISM’s purchasing managers’ gauge of new orders for factories decreased to 27.9, the lowest since 1980, from 32.2 the prior month. The production measure fell to 31.5 from 34.1.
“These are all recession readings,” Mark Vitner, a senior economist at Wachovia Corp. in Charlotte, North Carolina, said in an interview on Bloomberg Television. “There is widespread weakness within the manufacturing sector.”
Less Inflation
The index of prices paid dropped to 25.5, the lowest level in six decades, from 37. Oil has dropped from a peak in July at $147 to just above $50 per barrel today and nationwide gas prices have dropped to just under $2 per gallon.
Wholesale and retail prices are starting to retreat due to diminishing demand domestically and internationally. That also means that manufacturers are not able to hold their pricing as well.
The U.S. economy shrank at a 0.5 percent pace in the third quarter, with business spending on equipment and software declining at a 5.7 percent rate, the biggest drop since the first quarter of 2002. Economists at Goldman Sachs Group Inc. and Morgan Stanley in New York are among those projecting the economy will contract at a 5 percent pace in Q4.
Auto Manufacturers are Among Hardest Hit
Automakers are among the hardest hit by the slump in demand. New sales data is due tomorrow are forecast to show November auto sales dropped to a 10.5 million annualized rate, the weakest pace since April 1991, a Bloomberg survey shows.
Automakers may be facing several years of lower demand as the credit squeeze, unemployment, foreclosures, weak housing markets and sluggish retail take their toll. Companies are cutting payrolls and investments after consumer spending in the third quarter plunged by 3.7 percent, the most in 28 years.
Automakers are due to submit their revised business plans to congress by Tuesday and are due on Capital Hill on Thursday and Friday to present their plans in congressional hearings and to ask for a financial aid package to allow them to survive their impending liquidity crisis.
General Motors Corp. Chief Executive Officer Rick Wagoner and his counterparts at Ford Motor Co. and Chrysler LLC will put their jobs on the line this week when they try to convince Congress they can save their companies.
U.S. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid gave them a pretty clear plan for what they expect, and their focus had better be on coming in with a solid plan.
GM’s board met in Detroit to consider the rescue plan that may determine Wagoner’s fate. The directors started reviewing the automaker’s proposals yesterday in a 10-hour meeting and will continue today, people familiar with the plans said.
Bernanke Says Fed May Buy Treasuries to Aid Economy
The U.S. economy “will probably remain weak for a time,” even if the credit crisis eases, Bernanke said today in a speech in Austin, Texas.
Bernanke has created more than $2 trillion of emergency lending programs in the past year, using the Fed’s balance sheet and money-creation authority to cushion the economy from the worst financial crisis in seven decades. The central bank may lower its benchmark interest rate to zero and pump even more funds into the banking system, economists said.
“Although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited,” Bernanke said in prepared remarks to the Austin Chamber of Commerce.
One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”
Treasury Secretary Henry Paulson also spoke on Monday and said that the Bush administration is looking for more ways to tap the $700 billion financial rescue program and will consult with Congress and the incoming Obama administration.
Bulls are saying that we are in what may be a protracted bottoming process while bears say that there is yet more downside yet to come and the market will likely test recent market lows again and might continue it's downward trend for a time to come.
One thing is for sure, no one is starting to sing "Happy Days are Here Again" just yet!
Stay Tuned!
On Wednesday Oct 29, the Federal Reserve slashed a key interest rate by half a percentage point as it seeks to revive an economy rocked by the worst financial crisis in the better part of the last century. U.S. stocks dropped in the final minutes of trading on concerns that the Federal Reserve's sixth interest- rate cut this year isn't enough to rescue the economy. 
Prices at the pump fell for the 42nd-straight day to levels not seen since March 2007. The national average price for a gallon of regular gas fell another 4 cents overnight to $2.589, according to a daily survey by the American Automobile Association.
U.S. regulators are supposedly working on a new program that could provide government guarantees for up to $600 billion of home mortgages to help prevent foreclosures and it might fall under the control of the Federal Deposit Insurance Corp and the U.S. Treasury Department. This program could provide guarantees for some 3 million at-risk mortgages. This program has not yet officially been announced, but the Treasury Department said on Wednesday that it is working with the FDIC and other policymakers on foreclosure-prevention measures but that no detailed plan has been reached.
