We are not getting much in terms of follow-up on a yesterday’s rally, which was the biggest rally of the year. The promises to fix the broken banks helped the battered sector, as did the news from Citigroup who said it was having the best quarter since 2007 so far. This, and the fact that the market was deeply oversold, helped to ignite the rally. But those factors won’t be enough to sustain the buying. The market will need to see more assurances that the actions being undertaken to deal with distressed assets are truly helping the banks.
Consider just one company, the once great conglomerate General Electric, which lost three quarters of its value in the year prior to yesterday’s rally. Its first dividend cut since the Great Depression—which came just one month after CEO Jeffrey Immelt announced that he saw no need to cut the payout—and worries about its financial arm, GE Capital, sent its stock to under $6 at one point last week and its credit default swap rate soaring to record highs before rebounding somewhat in the last few days. A credit rating downgrade from GE’s Aaa rating is now likely and it would cost GE about $8 billion on their financial contracts and make access to capital more expensive. Perhaps in anticipation, GE Capital raised about $8 billion in capital selling government-backed debt this week. However, indicative of the market’s lack of faith in the company, GE’s non-FDIC-backed long-term debt issued in January was going for about 70 cent s on the dollar.
In the meantime, the global economy is still weakening at the fast pace. Economic numbers indicate, for example, that German factory orders declined 38 percent in January year-over-year. And with Germany being the biggest economy of EU, the economic situation across the continent is likely to worsen. Japan’s machinery orders also fell for a fourth month in a row, another negative for that Eastern giant.
Here, in the U.S., yet another dismal job report came out last Friday. It showed that 651,000 more jobs were lost in February and that the unemployment rate had climbed to 8.1%, already equal to the rate projected by the Obama Administration for the entire year. The report also revised the jobless numbers for December and January upward; in the last four months alone, about 2.6 million jobs have been lost. The gloomy unemployment situation suggests that the economy is in for more rough times ahead as consumer spending will likely remain very depressed.
This is why Treasury Secretary Geithner said today that the actions of all major nations are needed to fight the deepening recession. Not an individual country alone, nor a single company is immune from the downturn, and more joint actions are needed.
We also think that the record amount of monetary stimulus thrown at the economy will result in growing inflationary pressures. We now have Warren Buffett in our camp; the legendary investor spoke to CNBC this week and warned of high inflation risks once the economy begins its recovery.
Until Next Time,
Your ETF Trader Team
