One Stop Market

The Thanksgiving holiday made for a short week of trading, yet the major indices still made huge moves that no doubt left investors something added to be thankful for when the closing bell rang Friday.

Government action was a key catalyst for this week’s rally, as a rescue of Citigroup (C), the unveiling of President-elect Obama’s economic team, and an $800 billion plan of attack for getting credit flowing smoothly again for consumers drove a continuation of buying efforts that perked up in the prior week after the S&P 500 hit a new low for this bear market and touched levels seen in 1997.

The gains were extreme in many cases.  The market itself soared 12%; however, it ended the week at a level that was 21% higher than the low seen only five sessions ago.

The financial sector played a huge part in the big gains. 

Buyers returned to the beaten-down area after the government said it would provide a guarantee for the bulk of $306 billion of troubled assets identified at Citigroup.  In turn, the government also said it would take an additional $20 billion of TARP funds and inject it into Citigroup by purchasing the bank’s preferred stock.

While there were other provisions for the relief the government provided to Citigroup, the main thrust for the market was (a) that Citigroup wasn’t going to be allowed to fail (b) that Citigroup wouldn’t have to sell core assets at distressed prices to raise capital (c) that common shareholders were spared in the rescue plan and (d) that it was reasonable to expect other financial companies would get similar guarantees if need be.

On the heels of the Citigroup rescue, the Federal Reserve, in conjunction with the Treasury Department, announced Tuesday that it is creating a new $200 billion facility focused on getting liquidity flowing in key asset-backed securities markets that help facilitate auto loans, student loans, credit card loans and small business loans.

In addition, another $600 billion will be allocated for the purchase of direct obligations of government-sponsored enterprises and mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae in an effort to help drive down mortgage rates and improve conditions in the housing market, which lies at the heart of the financial crisis.

Word of the latter initiative did help drive down mortgage rates and improved the general tone of the market, as there was a measure of relief in the thought that the government is finally concentrating its attack in the right place.

Even so, there remained an underlying sense of skepticism with respect to the stock market rally given that more bad economic news was heard and knowing that past rally attempts following government rescue plans have all failed.

Furthermore, there was reason to question the sustainability of the rally considering the 10-year note yield reached its lowest level on record (2.91%) in the midst of it and that Libor rates went up across a number of time horizons, including the widely-watched overnight and 3-month rates.

If there were strong conviction behind the idea that the latest initiatives were going to be successful in getting banks to lend willingly again, it seems that Libor rates should have come down. 

The wrinkle here in assessing the situation is that banks typically aim to bolster their cash holdings to meet increased year-end funding needs, so it is too presumptuous at this juncture to think the bump in Libor rates meant there wasn’t confidence in the government’s efforts to inject liquidity into the financial system.  That could be the case, yet there won’t be a better understanding of the matter until after the new year.

For this week anyway, participants largely set aside such concerns and took advantage of deeply marked-down equity prices.  To wit, Citigroup surged 111% this week while General Motors (GM) jumped 71%.  Pulte Homes (PHM) and Goldman Sachs (GS), up 50% and 48%, respectively, were examples of other big gainers.

From an economic standpoint, there wasn’t much good news.  Q3 GDP was revised down to -0.5% from -0.3%, durable orders slumped 6.2%, existing home sales fell 3.1%, new home sales dropped 5.3%, personal spending declined 1.0%, and weekly initial claims, while improved from the prior week, continued to register a reading above 500,000.

The consumer confidence report, remarkably, showed an increase from the prior month as falling gas prices helped sentiment, yet the confidence reading remained at historically depressed levels.

That the market managed to look past any worrisome news, including a well-orchestrated terrorist attack in Mumbai, India, suggested it had gotten to a point where prior selling efforts had been exhausted.

The selling this month has been significant, too.  Despite the big gains in this final week of trading, the market still declined 7.5% in November.

The coming week is sure to bring more Christmas music… and a test of the newfound bullish bias.

The stock market has traded in choppy fashion as investors digest several economic reports and news that the government is taking steps to shore up consumer lending.

At midday, the stock market is posting a modest gain as strength in financials (+1.5%) helps to offset weakness in tech (-1.2%).

The Federal Reserve created a program that will purchase direct obligations of housing-related government-sponsored enterprises, such as Fannie Mae (FNM 0.51, +0.17) and Freddie Mac (FRE 0.60, +0.15).  The Fed is taking this action to reduce the cost and increase the availability of credit to purchase houses.  The Fed will purchase up to $100 billion in direct GSE obligations and up to $500 billion in mortgage-backed securities.

In addition, the Fed created a Term Asset-Backed Securities Loan Facility so market participants can meet the credit needs of households and small businesses by supporting asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration. The New York Fed will extend $200 billion in loans for the consumer credit facility, while the Treasury will extend $20 billion in TARP funds.

In economic news, consumer confidence rose in November, but remains at extremely depressed states as the economic turmoil takes a toll on sentiment. November consumer confidence rose 6.1 to 44.9 from October when confidence fell to an all-time low of 38.8, according to the Conference Board.  Economists expected confidence of 39.5.

The preliminary GDP report revised the contraction in the economy during the third quarter to 0.5% from 0.3%, which matched expectations. Third quarter consumption was revised to -3.7% from -3.1%, which was a larger decline than the expected reading of -3.2%.

The November Richmond Fed Manufacturing Index, a regional manufacturing survey, fell to -38 from -26 in October, which was worse than the expected reading of -27.  This represents contraction in manufacturing in the Richmond region.

Home prices continue to show weakness, with prices in 20 major metro areas falling 17.4% in September compared to the previous year, according to S&P/CaseShiller.

In corporate news, BHP Billiton (BHP 38.58, +5.16) withdrew its $68 billion hostile takeover bid for Rio Tinto (RTP 99.07, -46.92) due to global events and fall in commodity prices and deepening global crisis, according to the Wall Street Journal.

Hewlett-Packard (HPQ 34.77, -0.93) is a laggard despite posting fiscal fourth quarter results and fiscal year 2009 earnings guidance that met its preannouncement made earlier this month.

Oil prices are under pressure, dropping 5.9% to $51.30 per barrel.  Commodities as a whole are down 1.8%.

President-Elect Obama is currently hold a news conference on his economic plans.

Stocks and commodities soared Monday on news of a government rescue plan for Citigroup (C 5.85, +2.08) that includes a direct $20 billion investment and $306 billion in asset guarantees.  The S&P 500 rose 6.4%, with gains exacerbated by short-covering and bargain hunting.

Shares of Citi plunged 60% last week, sparking the need for a bailout. The Treasury will buy $20 billion in Citigroup preferred stock using TARP funds, bringing the Treasury’s total investment in Citi to $45 billion. In addition, the Treasury, Fed and FDIC will provide guarantees for up to $306 billion of troubled assets in exchange for $7 billion in preferred stock and warrants for 254 million shares of common stock at a strike price of $10.61. Citi will absorb the first $29 billion in losses on the troubled assets and then 10% on any remaining losses, while the government will cover the remaining 90% in losses. 

Under the deal, Citi must get an executive compensation plan approved by the government and must not pay a quarterly dividend larger than $0.01 without government consent.

President-elect Obama unveiled his economic team, confirming that New York Fed President Tim Geithner is the Treasury Secretary nomination.  Obama said that a “big” economic stimulus package is needed, but did not give any specific numbers.  Obama did not say he would postpone raising taxes on the richest Americans as some had hoped for, but will listen to what his economic team says about letting the Bush tax cuts expire.

In economic news, existing home sales continue to show signs of stabilization at very depressed levels. October existing home sales fell 3.1% month-over-month on a seasonally adjusted annual basis to 4.98 million, which is close to the consensus estimate of 5.00 million.  The median home price decline of 11.3% year-over-year to $183,300 is the largest on record.

All ten sectors posted a gain. The financial sector rose the most, spiking 18.5% — the most in its 20 year history — with Citi climbing 55%.  Defensive sectors underperformed on a relative basis as utilities rose only 1.3% and Treasuries fell as investors showed an increased willingness to take on risk.

Meanwhile, commodities rallied 5.4% as oil prices spiked 9.1% to $54.48 per barrel and gold rose 4.0% to $823.70 per ounce.  The strength in the stock market and a 2.4% decline in the dollar fueled the buying interest.

The S&P 500 is now up 14.9% from its more than 10-year low reached on November 21, but is still down 42.0% year-to-date.

  S&P futures vs fair value: +13.60. Nasdaq futures vs fair value: +21.30.  Futures suggest the stock market will extend Friday’s rally.  The big news this morning is that Citigroup (C) will be receiving government guarantees, liquidity access and capital.  As part of the plan, Citi will get $20 billion in exchange for preferred stock and the Treasury and FDIC will guarantee against the possibility of unusually large losses up to $306 billion in troubled assets in exchange for $7 billion in Citi preferred stock.  Citi had already received a $25 billion investment from the Treasury following the first round of TARP purchases.  Citi is up 26% in premarket trading. Meanwhile, President-Elect Obama will lay out his economic plan, including a fiscal stimulus package, later today, according to reports. Separately, oil prices are up 3.6% to $51.71 per barrel as the dollar falls 1.5% against a basket of currencies.