One Stop Market

There was no mistaking the fact that global recession concerns unsettled the market this week.

How do we know?  Let us count the ways:

Closely-watched Libor rates, which is what banks charge each other for dollar loans, continued to come down across all terms, yet the market showed little regard for this improvement other than in Monday’s session 30-year bond yields hit their lowest level (3.87%) since regular issuance began in 1977 Oil prices plunged 11% to $64.50 per barrel even as OPEC agreed to cut production by 1.5 million barrels per day The dollar index surged nearly 5% in a flight-to-relative safety trade Foreign markets unraveled Friday after Sony issued a profit warning and the U.K. reported a 0.5% decline in third quarter GDP An increasing number of companies communicated plans to cut the size of their workforce Companies reporting third quarter earnings were united in their cautious outlook; Dow Chemical went so far as to say it will likely see a global recession through most of 2009.

There are other items one could point to, yet no matter where fingers are pointed, the fact remained that the prevalent order of the week was to sell stocks.

A factor that weighed heavily on the major indices was the idea that a lot of the selling was forced selling by hedge funds needing to meet margin calls and redemption requests.  Their forced selling presumably fueled more selling by sound accounts anticipating redemption requests of their own, as well as selling by individual investors who simply couldn’t tolerate the continued volatility, which spiked to another record high this week.

The earnings results for the third quarter were almost completely dismissed as the market, in its forward-thinking ways, fixated on repeated reminders that there was a lack of visibility into the fourth quarter and that companies were looking to preserve cash to navigate their way through an indeterminate period of uncertainty.

Earnings and/or revenue guidance ranges, when provided, were typically wide as companies concluded the uncertain economic environment meant there would be a good deal of variability in their reported results.  Apple (AAPL) and Amazon.com (AMZN) provided cogent examples of that stance.

The fourth quarter EPS guidance range provided by Apple was $1.06 to $1.35.  Amazon.com, meanwhile, said its fourth quarter operating income should be anywhere from $145 million to $305 million.

Separately, Fed Chairman Bernanke contributed to the sense of uncertainty about the timing of an economic recovery when he told the House Budget Committee Monday that the economy is likely to be weak for several quarters and that there was some risk of a protracted slowdown.  He said this when casting his support for the idea that Congress should consider a second stimulus package.

On the heels of Bernanke’s testimony, the Federal Reserve announced the creation of a $540 billion Money Market Investor Funding Facility to complement other funding facilities aimed at increasing liquidity in the important commercial paper market.

The new facility is a worthwhile add-on to the mass of initiatives that have been put in place in the effort to stabilize the financial system.  Still, it did little to shift the market’s negative perspective on the near-term economic outlook.

Testimony late in the week from former Fed Chairman Alan Greenspan, which included his belief that a further significant rise in layoffs seemed inevitable given the damage done by the financial crisis, didn’t help matters. 

General Motors (GM), Chrysler, Yahoo! (YHOO), Merck (MRK), and Xerox (XRX) were among the notable companies that announced plans to cut staff.  Separately, The Wall Street Journal said Goldman Sachs (GS) was preparing a plan to cut about 10% of its workforce as it deals with a pronounced industry downturn.

On a related note, the market had to contend with a pronounced downturn at the start of Friday’s trading.  In a stunning turn of events, the futures for the major indices were “lock limit” down before the start of trading Friday, meaning they had hit a 5% threshold that prevented them from trading any lower until the stock market opened Friday.

The aggressive selling of futures followed sharp declines in major foreign indices that were a by-product of economic slowdown concerns. 

Sure enough, the S&P opened Friday’s session approximately 6.0% lower, but having held above its Oct. 10 low, buyers emerged to pare the losses.   The market never managed to see the light of positive territory and ended the day down 3.5%.

It’s a sign of the times that some pundits would make it sound as if a 3.5% loss isn’t that bad given the extent of early declines.  One should feel good about that, though, for just about as long as it takes to consider the fact that the market was down 38% for the year entering Friday’s trading.

Any way you slice it, neither Friday’s session nor the week as a whole were good for investors who need, and deserve, a lot more than moral victories at this juncture.

–Patrick J. O’Hare, Briefing.com

**For interested readers, the S&P 400 Midcap Index, which is not included in the table below, declined 9.6% for the week and is down 41.6% year-to-date.

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