Market update

Weekly Recap - Week ending 23-Jan-09

It was an historic week for the country with Barack Obama being inaugurated the 44th President of the United States. For the stock market, though, it was another bewildering week that was governed with a sense of uncertainty about the financial sector and the timing of an economic recovery.

Various forces combined to cause second-guessing with respect to the conventional wisdom that the recovery will round into form in the next six months. We won't capture them all, but some of the bothersome developments included the following:

1. A disappointing earnings report from Microsoft replete with an indication that market volatility left it unable to provide quantitative revenue and EPS guidance for the balance of its fiscal year
2. The UK reporting a 1.5% decline in Q4 GDP that was its biggest contraction since 1980
3. A deceleration in China's Q4 GDP growth to 6.8% from 9.0% in the preceding period
4. South Korean company Samsung reporting its first quarterly loss ever
5. Royal Bank of Scotland triggering nationalization concerns in the UK with an indication its 2008 loss could be as much as $41 billion
6. A slew of banking industry earnings reports that contained sharp increases to loan loss reserves
7. A growing threat of competitive devaluations that was fed by further strengthening in the yen and the view from soon-to-be Treasury Secretary Geithner that China is manipulating its currency
8. Housing starts falling to an annualized rate of 550K units that is the lowest on record dating back to 1959 and initial jobless claims returning to a level (589K) seen Dec. 20, which matched a 26-year high
9. Rumblings in D.C. that partisan politics could delay the passage of a massive stimulus bill
10. A clear sense of skepticism about GE's ability to maintain its annual dividend of $1.24 per share

All told, the events of the week fed the bearish bias that has persisted since the close of trading Jan. 2. The end result is that the market slipped another 2.1%, bringing its year-to-date decline to 7.9%.

One of the sobering reminders the market provided participants this week is that seemingly cheap stocks can indeed get cheaper. Microsoft was the main case in point, followed by GE and any number of financial issues, like Bank of America, Wells Fargo and State Street.

The residual message is that the risk premium tied to stock selection continues to be high. Stocks can, and will, move to new lows on further earnings estimate cuts and poor outlooks. In turn, it was evident in the better-than expected earnings reports from IBM and Apple that good earnings news these days is a company-specific happening.

In general, companies continue to bemoan the lack of visibility, which leaves any earnings guidance that is offered in question. Accordingly, we expect the bear market tendency of selling into strength to continue.

One item that could certainly stem that reaction is a stabilization of the financial sector, which dropped another 7.1% this week and is the core driver of the market's frenetic behavior. What that stabilizing factor is remains to be seen, although we suspect a refocused effort by the Obama administration to get toxic assets off banks' balance sheets at market prices would be viewed as a step in the right direction.

The financial sector is sure to be a focal point in the coming week, which will be a busy one with 137 members of the S&P 500 due to report their earnings results, an FOMC meeting Wednesday, and a barrage of economic releases that are likely to contain more bad news.

The Q4 GDP report is the main event on the economic calendar (just how bad were things?), which also features reports throughout the week on existing home sales, consumer confidence, home prices, durable orders, initial jobless claims, new home sales, and manufacturing conditions in the Midwest region.

--Patrick J. O'Hare, Briefing.com