Less Than Surprising

by Michael Panzner, Financial Armageddon. December 3, 2009

According to the Institute for Supply Management, economic activity in the non-manufacturing (i.e., services) sector shrank in November. While the news unsettled economists and Wall Street strategists, who’ve been focusing on ivory tower theories and the spin coming out of Washington, those who’ve been paying attention to what is actually happening on the ground were not surprised.

In fact, based on the (admittedly short) history of the ratio of the services index to the manufacturing index, one might even conclude that both measures -- along with the overall economy -- are poised for another big leg down.

1203.01

If and when things do fall apart, it will no doubt provoke another round of bloodletting for the corporate sector, especially the beleaguered financials. Since the crisis began, banks and other financial institutions worldwide have written off or lost a staggering $1.7 trillion, though that has been partly cushioned by capital-raising to the tune of $1.5 trillion. However, that $200 billion differential -- which doesn’t include losses for the current quarter, among other things -- could easily expand to far more worrying levels amid a renewed downturn in the economy and an abrupt return to reality in the equity market.

1203.02

All eyes were on Washington today, where the Senate Banking committee was considering Ben Bernanke’s nomination for a second four-year term as Federal Reserve Chairman. The hearing is a prelude to a vote by the full Senate, which is expected to take place sometime before Christmas. While most commentators expect Bernanke’s tenure to be extended, polls suggest that a growing number of Americans are losing confidence in “Helicopter Ben.” In fact, based on the latest Rasmussen Reports national telephone survey, “only 21% of adults believe the president should reappoint Bernanke to another four-year term.”

1203.03

Although share prices came under a bit of pressure today, Wall Street and Main Street remain disconnected. But there are signs of trouble lurking below the stock market’s surface. For one thing two sectors that had been at the forefront of the rally early on, financials and technology, have not made any headway in comparison to the overall market since the summer. In addition, the group that many view as the poster child of what has transpired over the past few years, the homebuilders, just hit a new relative low for 2009.

1203.04

And finally, while gold has rallied sharply over the past month or so, it still has some way to go before it catches up with the moves that have occurred in other commodities. So far, at least, the clear winner since the CRB index (and the stock market) bottomed in March has been copper, with oil and other energy sector constituents also performing strongly. The nine-month gain in the yellow metal, by comparison, has been less impressive.

1203.05

Stocks reversed an early rally to new highs for the year and ended broadly lower, dragged down by weakness in financials and economically-sensitive shares.

At the close, the Dow Jones Industrial Average fell 86.53 points, or 0.8%, to 10,366.15. The S&P 500 Index shed 9.32, or 0.8%, to 1,099.92. The Nasdaq Composite Index slipped 11.89, or 0.5%, to 2,173.14.

February gold futures slid $4.40 to $1,208.60/oz., while the U.S. Dollar index ended slightly higher. Ten-year Treasury yields rose six basis points to 3.37%, while January WTI crude oil futures dropped $0.85 to $75.75/bbl.

Michael Panzner

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