Good Evening: After probing the bottom end of the 820 to 840 range I mentioned yesterday, the S&P 500 and other major stock market averages rallied back to finish higher today. Whether this reversal of fortune is either lasting or temporary cannot be known in advance, but it was a welcome sight for many investors as we head into next week’s presidential transition.
Stock prices were weak overnight, with declines approaching 5% in both Japan and South Korea. Japan saw a record drop in machinery orders (see below), while market participants in South Korea were unhappy about early hints of protectionism emanating from the imminent Obama administration. Weakness among the bourses in Europe was somewhat contained by the ECB’s decision to lower its policy rate from 2.5% to 2%. U.S. stock index futures were also under pressure due to two disclosures: Bank of America announced it might have to rip off another piece of the TARP, and Apple announced that its CEO, Steve Jobs, would take a medical leave for the next six months.
U.S. futures were thus down 1% or so when the first of today’s economic data hit the tape. At -1.9%, December’s PPI figure was just about in line with expectations, while jobless claims ticked back up over the 500K mark to 518,500. It was the two regional manufacturing surveys, however, that seemed to garner the most attention in the early going. The Empire manufacturing number came in at -22.2, but it was less awful than had been expected. Likewise the Philly Fed survey “rose” to -24.3, versus expectations of -35. The major averages opened only slightly lower, but they were soon down 2% or so. After meandering sideways for a few hours, they set marginal new lows just after lunchtime. A 3.5% rally then erupted during the afternoon, one that carried the averages all the way back into positive territory. A late dip and last second rally left the indexes ahead between 0.13% (S&P) and 2.1% (Russell 2000). Treasury prices, which were up in the early going, retreated to finish mixed (though TIPS were hit). Credit spreads widened in the morning (see below) and never did seem to firm very much along with equities. The U.S. dollar finished flat on the day, while commodities were able to withstand another large drop in crude oil (-5%) to finish mixed. The CRB index lost a mere 0.1% today.
Any recovery in stock prices from levels where they threaten to completely break down should be greeted warmly, and Thursday was just such a day. If an airplane can safely land in the Hudson river, then perhaps our capital markets can safely negotiate the bottoming process they’ve been wrestling with since last autumn. But, as difficult as it is for even a skilled pilot to land an A-320 in a river without losing a single life (see below), it will be much harder for President-elect Obama and others in Washington to manage the same feat with our nation’s economy. Given that Mr. Obama and team will have to share space in the cockpit with Chairman Bernanke and leaders in Congress, it might be a next to impossible task for the talented former senator from Illinois. Perhaps part of today’s rally expressed hope for next week’s inauguration and inaugural address. Given the tales of woe surrounding our nation’s largest banks, Mr. Obama will need all the help Mr. Market can give him.
The major banks, as we saw with Citi and Bank of America today, are on TARP-support just to stay alive (see below). Our government shoves taxpayer money in the front door, only to watch in frustration as it exits out the back door in the form of rising loan loss provisions due to the faltering economy. The major banks can’t lend enough to make a real difference to businesses that need credit, and the price of free-market capital is still punishingly high. And lenders and borrowers both lack the confidence they need in each other to make private transactions flow the way they otherwise might. It’s quite a task being handed our new president. Let’s hope he finds a way to bring Air Force One in safely. We all have a lot riding on it.
— Jack McHugh