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.

It’s pretty well accepted that capitalism is the most functional economic idea man has ever had and enacted upon, so we don’t have to go back and question capitalism on the whole as an economic system as our newest president elect would desire.  However, there are aspects of it’s ways that (as in any economic system) cripple the poor and make a few people extremely rich — the people that devote their time to figuring out how the system works and then putting all they have into manipulating it for their own gain.

Sometimes this involves stealing, but it never has to involve stealing.  Like Warren Buffet you can just study hard, read up on the right economic thinkers, and move to Omaha, Nebraska — the financial hub of the world (not).  But there is the possibility that you can “figure it out.”  That’s a very capitalistic idea.  In any other system you can easily label that “selfish” and even “illegal” to manipulate the system.  Here in the good old U.S. of A. it’s known as being really smart and savvy but that’s because there aren’t that many rules that can hold you back from “figuring it out.”  But there could be, and that’s what the regulators and those in power for regulation are working at this very moment. 

In a way, regulation takes all the fun and hope out of capitalism and makes democracy seem less cool.  Eventually, with enough regulation you end up with socialism (which would be the new Senate and Obama’s dream come true) and socialism is not capitalism.  In that case, I’m heading to Canada.  I don’t want to be rich but I am an entrepreneur and I do think capitalism is the only place where the term “entrepreneur” makes any sense. 

But let’s point out some ironies before we continue loving on capitalism.  First, the essence of capitalism lies in a big, fat gamble on yourself, the future, and your ability to adapt to whatever the future throws your way (such as an economic crisis).  The bank signs a few papers and you have a house that you’ll need to work and produce and profit year in and year out for the next 30 years to pay for, but you’ll pay for it twice over since the bank charges interest and the system supports itself from there.  However, gambling is illegal in Massachusetts.  Yet, I did take a trip to Suffolk Downs last weekend where you can bet (gamble) on a horse race or two. 

I gambled by going college.  I threw $100K on the table (that’s what it cost for a 4-year educated back in those days believe it or not) hoping that when I came out in four years the economy would be in a place that would value my education and therefore I could get a job that would earn enough money to pay back the loan and more! 

I will gamble when I purchase a home.  This is more obvious but if the market tanks, I can lose more money than my house is worth and my loan becomes stupid and I easily fall into negative equity (which is why people in this situation have no problem foreclosing).  I literally walk out of my house every day and bet that I’m not going to get fired or hit someone while driving or lose my wallet or be taken advantage of by the government.  

Shall we keep placing our bets?  I guess so unless you have any better ideas. 

WASHINGTON (AP) — Barack Obama isn’t president yet, but his must-do list just got longer.

The newest addition to the lengthy list of tasks after taking office: helping oversee the overhaul of the world’s financial regulatory system. That is one of the assignments to the president-elect from current global leaders after their weekend summit, where they pledged action to avoid a repeat of the financial mess that has caused worldwide economic chaos.

“Obama has a tall order,” said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics who spent years working at the International Monetary Fund, the world’s financial firefighter.

“He has a lot of things he has to do quickly in a number of areas and doesn’t have a lot of time to think about them,” Goldstein said in an interview Sunday.

That will put a lot of pressure on Obama. He did not participate in the emergency two-day summit that concluded Saturday, instead sending representatives to meet with leaders on the sidelines.

After taking the oath of office Jan. 20, Obama will have to figure out in short order how far his administration is willing to go in revamping oversight of financial companies and products, in the United States and abroad, and nailing down the crucial details.

“Obama has an incredible mountain to climb in the way of the economic and financial situation,” said Richard Yamarone, economist at Argus Research.

President George W. Bush hosted the summit, where nearly two dozen foreign leaders endorsed broad goals to fend off any future calamities and to revive the global economy.

It will be up to finance ministers to flesh out the details to put such changes in place by the end of March. Leaders plan to hold the next summit by April 30 — just months into Obama’s term.

“I think this puts Obama and a new administration in a very difficult position,” said Steven Schrage, a former Bush administration trade official now at the Center for Strategic and International Studies.

“It’s really going to be up to the next administration to figure, do they breathe life into this? Does this go forward? Do they take it in a different direction?”

All the while, the new president will be under immense pressure to bring relief to millions of Americans who have watched jobs disappear, nest eggs shrink, home values plunge, foreclosures zoom upward and banks — along with storied Wall Street firms — laid low by the financial and economic crises.

“Make no mistake: This is the greatest economic challenge of our times,” Obama said Saturday in the weekly Democratic radio address. “And while the road ahead will be long and the work will be hard, I know that we can steer ourselves out of this crisis.”

The president-elect himself did not weigh in after the summit about whether he agreed with the thrust of the leaders’ broad goals. But he indicated the global gathering was a good idea because “our global economic crisis requires a coordinated global response,” he said Saturday.

Translating the leaders’ sweeping principles into specific actions will be difficult. “That’s the rub. That’s where you really see the differences across countries in what you want to do,” Goldstein said. “In the coming months, we’ll see to what extent Obama’s agenda will conflict with the Europeans.”

Leaders pledged to make the global financial system more accountable to investors and less vulnerable to risky investing. But there are sure to be differences of opinion on exactly how to accomplish that, which could impede progress at the next summit in the spring.

To provide relief from the current woes, the leaders supported the benefits of enacting government spending plans to stimulate their economies. But they stopped short of a commitment for all to act at the same time, as some Europeans had favored.

The Bush administration has reacted coolly to the idea of a second U.S. stimulus plan.

For Wall Street, the leaders’ talk about ways to provide relief probably will be of more importance than efforts to prevent another financial fiasco, experts said. Even without new concrete commitments for government spending, tax cuts or interest rate reductions, the fact that leaders came together to address the crisis and did not let it become a blame game should help bolster some confidence on Wall Street, according to Goldstein, Yamarone and others.

Commerce Secretary Carlos Gutierrez, appearing on CNN’s “Late Edition” on Sunday, warned against the making any new financial rules of the road too restrictive.

“There is an inclination, when you get into problems like this to go to an extreme, to over regulate, to think that we’re going to have a worldwide compensation system. How is that going to be done? I think we have to be careful, we have to find a balance and we can’t over regulate so that five years from now we’re trying to claw our way back because we overdid it,” he said.

This week had its ups and downs; unfortunately for investors, there were more downs than ups.  The end result was another week of sizable losses for the major indices.

There was a fundamental perspective at the root of the losses as a slate of disappointing earnings news and economic data raised concerns that the market, down 32% since the end of August, may not have already adequately discounted the bad news.

Best Buy (BBY), the leading consumer electronics retailer, and Intel (INTC), the world’s largest semiconductor company, were key contributors to the concerns as both companies reduced their forecasts in dramatic fashion.

Briefly, Best Buy said Wednesday that rapid, seismic shifts in consumer behavior since mid-September have created the most difficult climate it has ever seen.  As a result, the company slashed its earnings guidance for the fiscal year ending in February to a range of $2.30 to $2.90 from prior guidance of $3.25 to $3.40 per share.

As for Intel, it lowered its fourth quarter revenue outlook to $9.0 billion, plus or minus $300 million, from a prior range of $10.1 billion to $10.9 billion that was provided only a month ago!  

The limited remarks provided by Intel highlighted the fact that revenue is being affected by significantly weaker demand in all geographies and all segments.

The magnitude of the revisions from these industry leaders goes to show how quickly business deteriorated in the wake of the turmoil seen in the capital markets this fall and ratcheted up the concerns about this being a very weak holiday spending season.

Lowered earnings guidance from several other retailers, including Wal-Mart (WMT), Kohl’s (KSS), JC Penney (JCP), Nordstrom (JWN) and Abercrombie & Fitch (ANF), as well as weekly jobless claims reaching a 25-year high of 516,000 and a report that October retail sales declined 2.8% from September, validated the perspective on holiday spending.

The retail sales report was among the more telling reports this week as the decline set a very poor foundation for the PCE component of the fourth quarter GDP report and substantiated the belief that fourth quarter GDP will be well below the 0.3% decline originally reported for the third quarter.

Interestingly enough, the market, which had dropped 15% in the six sessions leading up to Thursday, registered a net gain of 2.5% over the course of the final two sessions of the week, which covered the period in which the Intel warning, Wal-Mart’s warning, and the initial claims and retail sales reports were digested, not to mention reports of the Euro zone entering a recession and Cleveland Fed President Pianalto predicting the U.S. will be dealing with more than a garden variety downturn.

The improved showing followed a violation of the Oct. 10 low of 839.80 in Thursday’s early afternoon trade.  The S&P would eventually slip to 818.69 that day before a furious short-covering rally fueled an 11.3% move from that low to the S&P’s close on Thursday.  The Dow for its part experienced a near 900-point swing from its low to its close on Thursday.

Friday’s session was another roller coaster ride.  The S&P dropped as much as 4.5%, rallied back to register a modest gain, and then sold off 4.8% in the final hour of trading.

No week on Wall Street seems complete anymore without mention of the dealings in Washington since the two are so interconnected these days.

The debate over whether to provide the U.S. auto industry government aid was a hot topic all week.  No decisions were made, although reports Friday indicated the matter will garner Congressional deliberation in the coming week.

The key happening out of Washington this week wasn’t so much what did happen, but what didn’t happen. 

Specifically, Treasury Secretary Paulson told the world Wednesday that it was determined that purchasing illiquid mortgage-related assets is not the most effective way to use TARP funds and that he had essentially reached that decision by the time the TARP plan was agreed to by Congress on Oct. 3.

It was a stunning revelation given how much emphasis had been placed during the hearings on how effective that approach would be for stabilizing the financial system. 

In the two weeks Congress took to consider the legislation, though, Secretary Paulson said market conditions worsened considerably.  Consequently, it was determined that the best use of the TARP funds would be to strengthen bank balance sheets by making direct purchases of equity in banks.

Strengthening the capital base of our financial system was held out as the first priority for the remaining TARP funds.  The second priority is to provide support for the credit securitization market outside of the banking system, which encompasses items like credit card receivables, auto loans, student loans and similar products.  The third priority is to continue to explore ways to reduce the risk of foreclosure.

The market wasn’t enamored with the shifting priorities for the use of the TARP funds as it did little to inspire confidence in the idea that the current administration has a strong handle on the situation.

To be sure, the U.S. will have its share of explaining to do at the G20 meeting this weekend where heads of state are convening to discuss ways to tackle the current financial crisis and to prevent such a thing from happening again. 

While there was a lot of fanfare leading up to the meeting, it is unlikely that any monumental agreements will be reached given the lame duck status of the Bush administration and the sheer difficulty of 20 members reaching a consensus in such a short period.

Separately, it is worth noting that China kicked off the week with an announcement that it is going to implement a $586 billion fiscal stimulus plan over the next two years.  That produced a brief rally Monday morning, but like other government relief efforts, the market was reluctant at this point to place a lot of faith in its effectiveness.

The essence of this week’s market was that there was a lack of faith. 

There was a lack of faith in earnings estimates, a lack of faith in economic prospects, and a lack of faith in the government’s leadership.   Fittingly, market gains were also lacking.

WASHINGTON (MarketWatch) — First-time filings for state unemployment benefits hit their highest level since September 2001, rising to 516,000 in the latest week, a further sign of how the U.S. labor market’s struggling, the Labor Department reported Thursday.

For the week ended Nov. 8, initial claims climbed by 32,000 from last week’s revised figure of 484,000.

The four-week average of new claims — which measures the underlying trend in joblessness — also hit a historic high, shooting up to 491,000. That’s the highest since March 1991.

There was more gloomy news in continuing claims, which rose to 3.89 million in the week ended Nov. 1, up 65,000.

The level of continuing claims indicates how difficult it is for displaced workers to find new jobs. Initial claims represent job destruction.

The four-week average of continuing claims was 3.79 million.

Both the figures for continuing claims and four-week continuing claims stood at the highest since 1983.

Unemployment benefits typically run out after 26 weeks for those who are eligible. A new law extends jobless benefits for an additional 13 weeks under a separate federal program.

Thursday’s claims data are the latest gloomy indicator for the labor market.

In October, the nation’s unemployment rate tipped 6.5% — the highest in more than 14 years.

Some economists are expecting the picture to worsen further, perhaps considerably.

On Wednesday, economists at Wachovia said they don’t expect the unemployment rate to peak until late in 2010 and at 9%. This would be the highest since 1983.

The Wachovia economists said the U.S. economy’s likely to experience a recession as long and severe as the downturns seen in 1973-75 and 1981-82.

Nov. 12 (Bloomberg) — General Motors Corp. rose in New York trading after House Speaker Nancy Pelosi urged Congress to pass an auto-industry bailout, embracing the premise that GM is too big to be allowed to fail.

In calling for an emergency aid plan, Pelosi rejected calls to let GM collapse and sided with the largest U.S. automaker and its allies in trying to prevent a “devastating” domino effect that would cost millions of jobs.

“Trying to reorganize the auto industry in bankruptcy would be as close to reorganizing the whole U.S. economy as you could get,” said Alan Gover, a bankruptcy lawyer with White & Case LLP in New York. “The vast supply chain involves thousands of businesses, millions of existing jobs and just as many retirees, as well as whole communities and states.”

Passage of an industry bailout plan may keep GM from running out of operating cash by year’s end, which it says may happen without U.S. help. GM is the second-biggest provider of private health-care benefits and was the third-biggest advertiser in this year’s first half.

“It’s truly one of those companies that’s too big to fail, and everybody understands that,” said Nariman Behravesh, chief economist at IHS Global Insight Inc. in Lexington, Massachusetts. “If it does collapse, it could make the recession deeper and longer.”

Recession Fallout

Behravesh said a GM bankruptcy could send the U.S. jobless rate as high as 9.5 percent, up from a 14-year high of 6.5 percent in October, and produce a recession comparable in length to that of 1980-82.

Ford Motor Co. and Chrysler LLC both likely would be forced into bankruptcy eventually if GM were to fail, Mark Oline, a Fitch Inc. credit analyst, said in an interview.

GM climbed 32 cents, or 11 percent, to $3.24 at 9:40 a.m. in New York Stock Exchange composite trading. The shares tumbled to a 65-year low yesterday, extending a slide that chopped their value almost in half in the past week.

GM’s 8.375 percent bond due in July 2033 fell 2.75 cents to 23 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bond yielded 36 percent.

GM, Ford and Chrysler want $50 billion in loans to boost liquidity and cover union retirees’ medical costs, people familiar with the matter have said. That would be on top of $25 billion in low-interest borrowing Congress approved in September to help retool plants to build more-efficient vehicles.

The trio employs 240,000 people in the U.S., or about 70 percent of U.S. auto workers, according to the Automotive Trade Policy Council in Washington, the industry group for the U.S. companies. Health insurance for 2 million people is tied to auto workers’ jobs.

Job Losses

Another 5 million jobs at dealerships, suppliers and service providers are supported by the automakers, the council estimated. The companies spent $156 billion on auto parts in the U.S. in 2007.

Job losses would total 2.5 million from an automaker failure in 2009, including 1.4 million people in industries not directly tied to manufacturing, according to a Nov. 4 study by the Center for Automotive Research in Ann Arbor, Michigan.

Those disruptions would cost $125.1 billion in lost personal income in the first year, and $275.7 billion over three years, the study concluded. The “unimaginable consequence” of a bankruptcy “motivates us to really come up with cash in every way possible,” GM Chief Executive Officer Rick Wagoner said in a Nov. 7 Bloomberg Television interview.

`Devastating Impact’

While Pelosi, a California Democrat, didn’t cite GM by name in her statement yesterday, she said an automaker collapse would have a “devastating impact on our economy, particularly on the men and women who work in that industry.”

She didn’t specify the size or the rules for the aid package she is seeking for the industry, whose 2008 U.S. sales are headed toward a 17-year low. That slump is overwhelming cost-cutting efforts including elimination of 46,000 U.S. jobs at GM since 2004, when the company last posted an annual profit.

President George W. Bush hasn’t said whether he supports more automaker aid. The administration is awaiting details of Pelosi’s plan before responding, White House spokesman Tony Fratto said. President-elect Barack Obama talked with Bush on Nov. 10 about the urgency for an assistance package.

Treasury Secretary Henry Paulson has resisted a proposal by Pelosi and Senate Majority Leader Harry Reid to tap the $700 billion bank-rescue fund to help automakers, and investors including New York-based hedge-fund manager Bill Ackman have said GM should reorganize in bankruptcy, not receive a bailout.

“Let the company default, maybe manage the process a little,” said Martin Fridson, chief executive officer of investment firm Fridson Investment Advisors in New York. “There’s no reason for taxpayer dollars.”

`Textbook’ Versus Reality

Such an approach is too risky, said Gary Hindes, managing director of distressed investments at Deltec Asset Management in New York. His firm doesn’t own GM bonds.

“With all due respect to the free-market, or moral-hazard types out there, it’s all wonderful in a textbook,” Hindes said. “But in a real world this would be disastrous.”

A GM failure would ravage an auto-supply base battered by bankruptcies or companies nearing failure, said Maryann Keller, an automotive consultant in Greenwich, Connecticut.

Delphi Corp., GM’s largest supplier and former parts unit, has been in court protection since 2005. Automakers and suppliers cut 140,000 jobs in the past 12 months, according to the U.S. Labor Department.

`Nobody’s Healthy’

“At the current level of production nobody’s healthy, nobody’s making money, and many are running out of working capital just like GM,” Keller said.

Suppliers such as American Axle Manufacturing Holdings Inc. and Lear Corp. would suffer the most in a failure at GM, because it’s their largest customer. They also make parts for automakers including Ford, Chrysler and Japan’s Toyota Motor Corp.

“We’re worried. We’re concerned about it,” said Mike Goss, a spokesman for Toyota’s North American manufacturing unit in Erlanger, Kentucky. “The vehicles we build in North America use about 75 percent local content, and much of that is coming from the same companies that supply the Detroit Three.”

It was a tremendous week in our country’s political and social history, even if it wasn’t a tremendous week for the stock market.

On Tuesday the United States made history, electing its first African-American president in Barack Obama while holding true to the longstanding, democratic principle of a peaceful transition of power. 

As remarkable as that proud fact is, it unfortunately doesn’t change the fact that the U.S. economy is in a slump that is pressuring earnings prospects and stock prices.  Accordingly, the stock market didn’t spend any time basking in the monumental history that was made Tuesday, which also included the biggest Election Day rally ever in the stock market when the S&P 500 surged 4.1%.

It became evident in no time at all that the market’s economic concerns weren’t assuaged in the voting booth.  Over the course of the two trading sessions on Wednesday and Thursday the S&P 500 dropped 10.0%.

The decline followed an 18% gain over the preceding six sessions, so it was understandable that there would be some retracement of those gains.  However, the scope of the pullback made it clear that there was more behind the selling than simple profit taking.

The item that got the market’s attention turned back so quickly to the ailing economy was Wednesday’s ADP employment report, which estimated 157,000 jobs were lost in the private sector in October, the largest decline since November 2002.

This report followed some dismal auto sales reports for October on Monday and set a very nervous tone ahead of the government’s employment report for October on Friday.

Several other economic reports compounded the selling pressure in the middle of the week.  In particular, September factory orders declined 2.5%, the October ISM Services Index at 44.4 slipped below 50.0, which is viewed as the dividing line between expansion and contraction, Q3 productivity slowed to a 1.1% growth rate from 3.6%, and continued jobless claims of 3.843 million were at their highest level since 1983.

The disappointments weren’t confined solely to economic news either.  Another wave of cautious-sounding guidance from corporate America also factored heavily in the action.

Tech bellwether Cisco (CSCO) led the pack of disappointments with a warning that its fiscal second quarter revenues were expected to decline 5% to 10% as most enterprise customers across all industries it serves are facing a very challenging business environment.

Separately, influential banking analyst Meredith Whitney of Oppenheimer & Co. suggested in a CNBC interview Wednesday that she felt big banks were going to be in the position of having to complete more capital raises in coming months and that she felt many of their stocks still had a lot more downside risk in them.  She feels that Citigroup (C), for one, could trade into the single digits.

On the heels of her bleak assessment, retailers on Thursday posted some lousy same-store sales results for October, with the exception of price leader Wal-Mart (WMT), which reported a 2.4% gain.  Overall, same-store sales declined 0.9% (and 4.2% excluding Wal-Mart), according to the International Council of Shopping Centers.

In the midst of the reports from the retailers, it was learned that the European Central Bank cut its key borrowing rate 50 basis points to 3.25%, as expected, but that the Bank of England stunned everyone by cutting its key rate 150 basis points to 3.00%.

The move by the Bank of England was so aggressive that it was scary.   Central banks simply don’t cut rates in this fashion, unless they feel they are way behind the curve with the appropriate monetary policy as it relates to economic prospects. 

The Bank of England for its part said there has been a marked deterioration in the outlook for economic activity at home and abroad and that it took the action it did to guard against inflation undershooting its 2.00% target. 

It deserves pointing out that the annual rate of consumer price inflation in the U.K. was 5.2% in September or just ahead of the 4.9% growth rate in the U.S. where the fed funds rate is now 1.00%.  From the market’s vantage point then, the Bank of England, as well as the ECB, still hasn’t cut rates enough to help forestall a protracted, global economic slowdown.

This brings us to Friday’s employment report, which didn’t contain any good economic news. 

Nonfarm payrolls declined 240,000 (consensus -200,000) and the prior month was revised to show a decline of 284,000 positions versus an originally reported loss of 159,000.  Job losses were seen in all areas in October, with the exception of modest gains in education and health services and government. 

The unemployment rate rose from 6.1% to 6.5% (consensus 6.3%).  Hourly earnings were in line with expectations, up 0.2%, as was the average workweek at 33.6 hours. 

1.2 million jobs have been lost over the first 10 months of 2008, but tellingly, over half of those losses have occurred in just the past three months.

Ironically, in the wake of the worst economic news of the week, the stock market rallied on Friday, jumping 2.9% in a broad-based effort.  The upside move was even more striking considering Disney (DIS) had disappointing earnings, Qualcomm (QCOM) provided fiscal first quarter revenue and earnings guidance well below current consensus estimates, and both Ford (F) and General Motors (GM) posted massive third quarter losses while showing they were burning through their cash.

Ford used $7.7 billion in cash in the quarter while GM used $6.9 billion.  GM went on to say that, looking into the first two quarters of 2009, the company will fall short in capital unless economic conditions improve, it can gain access to capital markets, can sell assets, or can secure government funding.

That the market would rally on this battery of bad news indicated it had already accounted for it in the prior two sessions when it fell 10%.

It would be remiss not to add that President-Elect Obama gave his first press conference during afternoon trading Friday in which he summarized a discussion he had with his economic advisory team.  He mentioned four initiatives he would pursue immediately upon entering office in January: (1) a rescue plan for the middle class that would include a new fiscal stimulus package, which will be his first priority (2) working to stem the spread of the impact of the crisis on other sectors of the economy (3) reviewing the current administration’s implementation of the financial program and (4) laying out policies that grow the middle class and strengthen the economy for the long term.

When Obama acknowledged that he doesn’t officially take over until January and will stand by to let the current administration see things through to the end of its term, the stock market gave back over half of the day’s gains.  However, the session ended on a positive note as a late rush of buying interest left the indices near their highs for the day, which were seen just before President-Elect Obama started his press conference.

So, while President-Elect Obama has made it clear that he wants to bring change for the country, it was clear that things remained the same for the stock market, which had another volatile week of trading.

The volatility is a by-product of the uncertainty about the timing of an economic recovery and a nettlesome belief that consensus earnings estimates for the fourth quarter and 2009 still haven’t been lowered enough to reflect the economic deterioration.

In brief, there was a lot of emotion during this historic week, yet it was fundamentals — or the perception at least that fundamentals are weakening – that seemed to be driving the market.

Nov. 7 (Bloomberg) — The U.S. unemployment rate rose to the highest level since 1994 as companies slashed payrolls, setting the stage for the steepest economic decline in decades and a tough start for Barack Obama’s presidency.

The jobless rate rose to 6.5 percent in October from 6.1 percent the previous month, the Labor Department reported today in Washington. Employers fired 240,000 workers after a loss of 284,000 in September. Revisions to the previous month added 25,000 more to the jobless lines than previously reported.

The surge in unemployment, coupled with other signs the economy nosedived last month, puts pressure on Obama to quickly name his economic team and spell out his planned remedies. It may also spur congressional Democrats to enact in coming weeks a second fiscal stimulus package.

“The economy has entered the very deep portion of the recession and should remain there over the coming six to nine months,” said John Herrmann, president of Herrmann Forecasting LLC in Summit, New Jersey. “These numbers imply a stimulus package of closer to $500 billion, ranging over the remainder of this year and through 2009.”

Obama may address today’s report after meeting with his transition economic advisers, including billionaire investor Warren Buffett and former Federal Reserve Chairman Paul Volcker. The incoming president holds his first post-election press conference at 1:30 p.m. in Chicago.

25-Year High

The total number of unemployed Americans jumped to 10.08 million last month, the highest level in a quarter-century, today’s report showed.

Economists had anticipated a 200,000 drop in payrolls after a previously estimated 159,000 decline in September, according to the median of 78 estimates in a Bloomberg News survey. The median forecast for the unemployment rate was 6.3 percent.

“We’re heading for a deep recession,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts. “Banish the word mild from your vocabulary. It’s big, it’s bad and it’s broad-based.”

Stocks today recouped some of their losses from the past two days, when benchmark indexes plunged the most since 1987. The Standard & Poor’s 500 Stock Index was up 1.2 percent at 915.85 at 11:37 a.m. in New York. Ten-year Treasury note yields rose to 3.76 percent from 3.69 percent late yesterday.

“The evidence is more than compelling” that a recession is under way, Robert Hall, who heads the National Bureau of Economic Research’s panel that dates economic cycles, said in an interview following the jobs report. “It’s conclusive, in my personal opinion.” Hall is an economics professor at Stanford University.

Goldman’s Forecast

Goldman Sachs Group Inc. analysts downgraded their projections for the economy after today’s report, foreseeing the biggest contraction since 1982 in the fourth quarter. Goldman also projects that the unemployment rate will soar to 8.5 percent by the end of next year.

Job losses for August and September were revised up by 179,000. The economy has lost 1.18 million jobs so far this year.

The rise in jobless rolls was just the latest statistic suggesting that the economy gave way in October. U.S. auto sales plunged 32 percent, manufacturing contracted at its fastest pace in 26 years and consumer confidence fell by the most on record during the month.

The gathering gloom may prompt Federal Reserve Chairman Ben S. Bernanke and his central bank colleagues to reduce interest rates further at their next meeting on December 16. The Fed cut its benchmark rate a half percentage point last week to 1 percent, matching a half-century low.

Another Fed Move

“We will see another easing of 25 or 50 basis points in December,” said John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, adding, “We may go for a very long time before the Fed is in a position to be raising rates again.”

Central banks throughout Europe slashed rates this week as the economic slump that began in the U.S. spread overseas, crimping consumer and corporate confidence. The International Monetary Fund this week projected the first simultaneous economic contractions in the U.S., Europe and Japan in the postwar era.

U.S. factory payrolls fell 90,000, the biggest monthly loss since July 2003, after decreasing 56,000 in September. A strike by 27,000 machinists at Boeing Co., which was resolved earlier this month, contributed to the drop, the Labor Department said.

Economists had forecast a drop of 65,000 manufacturing jobs. The decrease included a loss of 9,100 jobs in auto manufacturing and parts industries.

Today’s report also reflected the housing slump and credit crunch. Payrolls at builders dropped 49,000 after decreasing 35,000. Financial firms reduced payrolls by 24,000, after a 16,000 decline the prior month.

Loss at Retailers

Service industries, which include banks, insurance companies, restaurants and retailers, subtracted 108,000 workers after dropping 201,000 in the previous month. Retail payrolls decreased by 38,100, led by a loss of 20,300 jobs at auto dealerships, after a decline of 44,800.

Government payrolls increased by 23,000 after a loss of 41,000.

American Express Co., the largest U.S. credit-card company by purchases, said Oct. 30 it would eliminate 10 percent of its workforce, or about 7,000 people, to cut costs amid rising defaults as consumers fail to repay their debts.

The job cuts “will help us to manage through one of the most challenging economic environments we’ve seen in many decades,” Chief Executive Officer Kenneth Chenault said in a statement.

Workers’ average hourly wages rose 4 cents from the prior month, or 0.2 percent, to $18.21, the jobs report also showed. Hourly earnings were 3.5 percent higher than in October 2007.

The loss of jobs, plunging home prices, and a record tightening of bank lending may cause consumers and businesses to keep retrenching.

Gross domestic product shrank at a 0.3 percent annual pace in the third quartet and consumer spending fell at a 3.1 percent pace, the most since 1980.