Week In Review: Banks In Trouble, Madoff, Paulson, Obama

This was a strange week as the traders were preparing to board the Obama train, but looking back at Humungous Bank & Broker (HB&B), which is just a total mess. Despite a Inauguration-inspired rally underway on Friday, Bank of America (BAC) (BAC -13.7%), Citigroup (C) (C -8.6%) and JP Morgan (JPM) (JPM -6.2%) were getting crushed again, putting the icing on a cake that flattened these banks -44.7%, -48.2% and -12.1% this week alone.

How many hundreds of billions from taxpayer funds were injected from Treasury into these banks to prop them up, and the week prior to the Treasury Secretary leaving his post, these stocks, the pride of America’s financial system, are sold down an average of -35% in five days, ie, in 32.5 hours of trading. Pinch me that I didn’t hear Henry Paulson not tell the media this week he did a great job in saving America.

Henry Paulson ought to be indicted for what he accomplished in two and a half years. Full stop. Well, actually, he had a lot of friends who should be joining him in a place where most of us would like to send him. I told you books would be written about this guy, and I don’t want to say another word about that person.

To top that off, there are now reports that maybe Bernie Madoff thinks he was just a bank for all those years, never having to do a trade - just issuing enough checks to clients from among the gazillions he received daily to ensure they were happy with his so-called +10% annual returns.

Can you imagine; here was a supposedly single individual who ripped off $50 billion from trusting friends and associates who possibly never made a trade. We’re not talking $50,000 here that maybe an honest auditor or an honest FINRA or an honest SEC might have overlooked, but 1 million times that?!!!

Yet, the man stays out of jail. He even gets to tell a judge that he didn’t think there was any problem sending out millions of dollars of “personal” assets to family and friends after he had been arrested, and the judge accepted that explanation.

Tell me, what am I missing here? A Hollywood screenwriter would not have one chance in 50 billion selling that story to a filmmaker. There must be more to this!

With $50 billion in hand, Madoff could have acquired the Big 3 US banks in recent weeks; so maybe the joke’s on us.

And now the US Congress is upset that Tim Geithner may not be acceptable as Treasury Secretary because he had some minor personal issues regarding unpaid taxes and work permit for a foreign domestic. I mean, now the entire US Congress is going to debate Geithner’s suitability as a fit and proper person while they close their eyes to Madoff’s swindle of unimaginable proportions, and Henry Paulson’s magic pencil used to do his tax returns.

Yes, Rome burns as we speak.

Man, this guy Barack, whom nobody had heard about maybe six years ago, is going to come to town and save a country! With that other stuff going on, I don’t see how. With the box they put Obama in, even Houdini would have died.

Talk of hope? The doctors know it as compassionate protocol.

Seriously, this is serious. How is it that a legitimate whistle-blower to the SEC describes in infinite detail how Madoff could not have traded his way to that published performance result, and there was nothing untoward found? Nothing!

Now, it is said there might not have been any trades done by Madoff? What!!!

If true, President Obama had better start from absolute scratch to build a financial system and a capital market and regulators to oversee them because all that’s there today is a JOKE.

What else can I say? This week takes the proverbial cake. I have been skeptical about these matters - sometimes even cynical as you know — for the past (almost) five years, but words now fail me.

If this were a limbo contest, the State of the Union would be the winner.

Having got that off my chest, I believe buying at the bottom, and things cannot get worse than that. Madison Avenue and Hollywood combined could not present a sicklier looking story. So, yes, I am buying. A little here. A little there.

To discover why and where, let’s see how the week went and is likely to go next.

Hint: the Dow Jones World Index ($DJW), which reflects the value of equities worldwide, was up +1.6% on Friday, which follows a double test of the November lows. The US equity market, for all its woes, has outperformed the world since last summer. Let’s watch to see what happens next.

Global Economics Review

Anne Picker of Econoday writes a truly informative, concise, and objective weekly report that I recommend.

Weekly International Economic Report .

That was a very good report.

In my summaries here, I leave the links in because the individual Econoday Reports contain terrific charts and other information, and after the report is published, the link leads to the updated report.

Here are the key US economic reports this coming week on the calendar as well as the Econoday analysis from last week’s reports.

US International Trade for November. Econoday reported, “The U.S. trade gap in November shrank sharply, reflecting both a plummet in oil prices and a drop in demand. Unfortunately, demand is also declining overseas as exports posted another decline. The overall U.S. trade deficit narrowed sharply to $40.4 billion from a revised $56.7 billion shortfall in October. The November deficit was dramatically smaller than the consensus expectation for a $51.5 billion gap… In November, exports posted a 5.8 percent drop while imports plunged a monthly 12.0 percent. The overall improvement in November was led by the oil deficit which narrowed to $19.4 billion from $32.3 billion in October. The nonoil goods deficit also shrank - to $31.4 billion from $35.3 billion the month before… The November decline in exports of goods was seen in all major end-use categories but was led by a $4.2 billion fall in industrial supplies and $1.5 billion decrease for non-auto capital goods… The oil deficit improved on both price and quantity. The average price of imported oil fell to $66.72 per barrel in November from $92.02 per barrel in October. The number of barrels of crude oil imported in the U.S. fell 19.3 percent in November. Again, both the price and quantity fall point to a dramatic softening in demand in the economy… Year-on-year, overall exports fell to down 1.7 percent in November from up 5.2 percent in October while imports dropped to down 10.6 percent from up 3.9 percent the prior month… Today’s numbers actually should cut economists’ forecasts for how deep the fourth quarter decline in GDP is. But looking ahead, the implication is that demand is weak both in the U.S. and abroad. Despite the narrowing in the trade deficit, the recession is still well underway.”

US Treasury Budget data for December. Econoday reported, “Outlays are up 41 percent while receipts are down 14 percent, the central results of the Treasury’s December budget statement that shows an $83.6 billion deficit in the month and a massive deficit of $485 billion just three months into the Treasury’s fiscal year. Much of the jump in outlays is tied to the TARP bailout which totaled $55 billion in December vs. $76.5 billion in November. But the Treasury is also buying agency debt, outlays that totaled a separate $21.8 billion vs. November’s $23.2 billion. Damage to the budget is the new reality as the government, in an extraordinary effort, seeks to stimulate the economy through deficit spending.”

US Retail Sales for December. Econoday reported: “Retail sales sank again in December and far more than expected, putting to rest any doubt that consumers are retrenching over job losses and fears of unemployment. Even though the plummet was widespread, it was led by a drop in gasoline sales - not taking into account price changes. Overall retail sales fell 2.7 percent in December, after a 2.1 percent decline the month before… The headline number was worse than the consensus forecast for a 1.2 percent decline. Excluding motor vehicles, retail sales decreased 3.1 percent, after retreating 2.5 percent in November. The December ex-auto drop was below the market expectation for a 1.3 percent decline. Excluding motor vehicles and gasoline, retail sales, however, declined a less scary 1.5 percent after a 0.2 percent dip in November… The story is getting old - declines were widespread. The largest drop was for gasoline sales-which plummeted 15.9 percent and was price related. The next largest decline was in building materials & garden equipment, down 2.9 percent. Consumers also are cutting back on new clothes and going out to eat - clothing fell 2.5 percent while food services & drinking places dropped 2.2 percent. Incidentally, motor vehicles slipped 0.7 percent… Overall retail sales on a year-on-year basis in December were down 9.8 percent - compared to down 8.2 percent in November. Excluding motor vehicles, the year-on-year pace slipped to down 6.7 percent from down 4.3 percent in November… Overall, nearly every major category fell in December. Yes, the consumer is retreating but December’s number is not as troubling as the headline number because weakness was led by a cut in gasoline prices. But, no doubt, taking into account broad based declines over several months, consumer spending is depressed. We can expect to see the impact on retailer profits.”

US Business Inventory data for November. Econoday reported, “Much of the job losses the nation is now suffering is tied to bloated inventories. Inventories did fall 0.7 percent in November but this is a shadow of the 5.1 percent plunge in sales. October was the same story with inventories down 0.6 percent but with sales down 3.9 percent… Trouble is spread across industries. Retail inventories, the new data in this report, fell 1.3 percent against a 2.5 percent decline for sales. The major declines posted in retail sales for December, data released earlier this morning, point to more of the same for the month’s inventory data. Retailers are desperately trying to destock, cutting prices and feeding deflationary pressures.”

US Producer Price Index for December. Econoday reported, “Producer price inflation in December continued its streak of energy induced monthly declines. The overall PPI fell 1.9 percent, following a 2.2 percent drop in November. The December decrease was close to the market forecast for a 2.0 percent fall in the headline PPI and was the fifth consecutive monthly decline. The core PPI rate rose 0.2 percent after edging up 0.1 percent in November. The market had projected a 0.1 percent rise for December… As in recent months, energy led the headline PPI down. For the latest month energy dropped 9.3 percent, led by a 25.7 percent plunge in gasoline prices. Even food was weak with a 1.5 percent decline… The core rate was moderate despite a 1.2 percent rebound in passenger car prices and a 0.8 percent boost in light truck prices. Within the core, weakness was largely in capital equipment outside of light trucks… For the overall PPI, the year-on-year rate fell to minus 1.2 percent in December from up 0.2 percent the month before (seasonally adjusted). The core rate firmed to up 4.3 percent from up 4.2 percent in November… Overall, prices at the manufacturers’ level are quite subdued. The numbers are close to expectations and are likely to have little impact on markets.”

US Empire State Survey for January. Econoday reported, “The Empire State report showed some improvement in current readings for January but — more importantly — showed a deep breakdown in the 6-month outlook, a breakdown that underscores a deep pessimism among the region’s manufacturers. First a look at the current readings led by a 5 point gain in the general business conditions index to -22.2 vs. December’s -27.9 (-25.8 initially reported). But order readings barely show any improvement, at -22.8 for new orders and -26.1 for unfilled orders. Remember, negative readings indicate month-to-month contraction with improvement here merely indicating month-to-month contraction at a slightly less severe rate. Shipments actually contracted more deeply in the month, at -13.1 vs. -11.3 for an early indication that first-quarter manufacturing output may actually contract more deeply than the fourth quarter. Inventories are contracting at a greater speed, at -19.3 vs. -17.0, but not fast enough given the decline in output. High inventories will mean further job cuts evident in this report with the number of employees index falling 2-1/2 points to -26.1. Price readings were mixed but still show deflation, at -18.2 for prices paid, a nearly 10 point fall from December, a reading offset by a -3.4 level for prices received which is up more than 8 points… The real bad news in the report is the 6-month outlook where readings suddenly and dramatically lurched into the negative column, at -4.0 for the overall index vs. 18.1 in December. Orders across the components show similar results with the exception of prices paid and prices received which were little changed roughly near zero, perhaps a silver lining that suggests manufacturers expect some stability to appear. The Philadelphia Fed’s report on its manufacturing sector follows at 10:00 ET.”

US Pennsylvania Fed Region survey for January. Econoday reported, “The Philadelphia Fed’s report on its manufacturing sector, like the Empire State report posted earlier this morning, shows steep contraction in January but still less severe contraction than December. But unlike Empire State, the Philadelphia report shows an improvement, not deterioration, in the six-month outlook… The Philadelphia Fed’s January index for general business conditions came in at -24.3, up from an upwardly revised -36.1 in December (-32.9 initially reported). Both new orders and shipments are contracting but at slowing rates. One area unfortunately where contraction is deepening is employment where the number of employees index fell more than 10 points to -39.0 — the single worst reading in the report. Price readings show steady and deep rates of deflation… But gains were posted in the six-month outlook where the general business conditions index jumped nearly 18 points to 7.4. A comparison with the Empire State report shows a flip flop, that is gains in one for one month and losses in the other for the other month. Taking both together suggests that the six-month outlook is uncertain. But both reports do show an easing in deflationary expectations… Today’s regional manufacturing reports point to continued contraction for the nation’s manufacturing sector in the first quarter and continued readings in the 30s for the ISM’s manufacturing index to be issued at the beginning of February. Markets are showing no significant reaction.”

US Consumer Price Index for December. Econoday reported, “In December, consumer inflation continued downward. The impact of lower energy prices has been profound as headline inflation fell for the fifth month in a row. The headline CPI fell 0.7 percent in December, following a 1.7 percent decrease in November. Meanwhile, core CPI inflation was unchanged after no change the month before… For the latest month, energy plunged a monthly 8.3 percent, with gasoline prices falling 17.2 percent. Food posted a 0.1 percent decrease… The core was kept soft by several key components. Apparel fell 0.9 percent in December, reflecting discounting by retailers to move merchandise over the holidays. New and used vehicles dropped 0.4 percent. Lodging away from home slipped 0.7 percent as consumers are not traveling much now days. Owners’ equivalent rent edged up only 0.1 percent… Year-on-year, headline inflation is down 0.1 percent (seasonally adjusted) in December from 1.0 percent in November while the core is up 1.7 percent, compared to up 2.0 percent in November… The latest CPI report shows weak demand pulling down oil and gasoline prices and even spreading to core prices. The good news is that for those still employed, real earnings are up. For those unemployed, weak prices are a sign of continuing recession - not a good thing.”

US Industrial Production for December. Econoday reported, “Industrial production in December plunged on lower auto assemblies plus broad-based weakness. Overall industrial production in December dropped 2.0 percent, following a 1.3 percent decline the month before. The December fall was far worse than expected - the market had projected a 1.0 percent decrease. The all-important manufacturing component fell 2.3 percent after a 2.2 percent decline in November. For the other major components in December, utilities slipped 0.1 percent while mining output decreased 1.6 percent… A key part of manufacturing weakness was in motor vehicle assemblies which dropped to an annualized pace of 6.64 million units in December from 7.60 million in November - a 12.6 percent fall. But weakness was widespread. Durables output fell 2.6 percent in December while nondurables dropped 2.1 percent. You have to go deep into the detail to find any positive at all for December - which was in aerospace & miscellaneous transportation equipment (i.e., Boeing production)… Overall capacity utilization in December fell to 73.6 percent from 75.2 percent in November and came in below the consensus forecast for 74.6 percent… On a year-on-year basis, industrial production in December slipped to down 7.8 percent from down 5.9 percent in November… Today’s industrial production report paints a bleak picture for manufacturing. Not much is supporting economic growth and more sectors are pulling growth down further as manufacturing and housing are both very negative. Today’s numbers should be a negative for equities although a government bailout (another one) for Bank of America has equities up.”

Here are the key US economic reports on the calendar this coming week. It’s a very busy week.

US Economic Calendar. As it is Inauguration Week in the US, and it starts with Martin Luther King Jr. Day, a public holiday where markets are closed, there is not a lot on the agenda.

US Housing starts for December. After the November data release, Econoday reported, “Housing starts in November plummeted another 18.9 percent. The November pace of 0.625 million units annualized was down 47.0 percent year-on-year. The decline in starts was led by the multifamily component which dropped 23.3 percent while the single-family component fell 16.9 percent. Starts are not likely to resume an uptrend soon due to continued heavy inventory overhang of both existing and new homes for sale… Housing starts Consensus Forecast for December 08: 0.615 million-unit rate with the Range: 0.575 million to 0.679 million-unit rate.”

US Jobless Claims Report for Week of Jan. 17. Econoday reported a week ago, “Initial jobless claims appear to have gotten past the usual wide swings during the shortened holiday weeks. Initial claims and continuing claims moved toward their 4-week averages, giving a cleaner perspective on a weak jobs market. Initial claims rose 54,000 in the January 10 week to 524,000 from 470,000 in the prior week Now that the depth of the recession has sunk in on management, will layoffs accelerate in the first quarter?… Jobless Claims Consensus Forecast for 1/17/08: 610,000 with the Range: 500,000 to 680,000.”

Most of the economic discussion this holiday-shortened historic week will be focused on all the good stuff to come from the President-Elect Obama Economics Team.

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