With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.

Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”

While CIT is not nearly the household name of Citigroup Inc. (NYSE: C)or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”

Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.

An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO),McDonalds Corp. (NYSE: MCD), and Amazon.com Inc. (Nasdaq:AMZN) join the mix.

U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await.  As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days.  Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.

Market Matters

The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street.  Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.

Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.

Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations.  After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out.  CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others.  But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.

Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations.  A CIT failure could prove devastating for those firms considered the lifeblood of American business.

In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters.  Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq:DELL) warned that lower margins are impacting its operations andGoogle Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.

The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE:MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (07/10/09)	Current Week (07/17/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	8,146.52	8,743.94	-0.37%
NASDAQ	1,577.03	1,835.04	1,756.03	1,886.61	+19.63%
S&P 500	903.25	919.32	879.13	940.38	+4.11%
Russell 2000	499.45	508.28	480.98	519.22	+3.96%
Global Dow	1526.21	1,629.31	1,561.11	1,664.23	+9.04%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.30%	3.65%	+141 bps

Economically Speaking

The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul.  Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.

Investors shrugged off the CIT developments and focused on positive earnings and economic data.  Stocks surged early on the Goldman news and soared right through the technology reports.  Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts.  Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades.  Oil rebounded on the favorable market and economic signs.

While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending.   Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.

But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges.  Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.

Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.

On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.

Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength.  Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.

The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year.  Most Fed watchers do not see any change in the funds rate for the foreseeable future.

On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal).  The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.

Weekly Economic Calendar

Source: Market Recoils as CIT Edges Toward Bankruptcy

Documents brought to light by key by congressional investigators hightlight real disagreement between top-level U.S. Federal Reserve officials about how it should address the Bank of America Corp.(NYSE:BAC) acquisition of Merrill Lynch & Co. Inc. are almost certain to fuel the ongoing congressional debate over the central bank’s push to expand its authority over the U.S. financial system.

This growing concern manifested itself Thursday, when Fed Chairman Ben S. Bernanke; was grilled by Capitol Hill lawmakers during a congressional hearing looking into the central bank’s conduct in BofA’s buyout of Merrill Lynch. Bernanke’s failure to resolve some of the most-pointed questions posed by congressional leaders – (especially Republicans) who wanted to discover whether the Fed overstepped its authority and interfered with merger-related decisions – may undermine a proposed financial system overhaul that would imbue the central bank with broad authority over big U.S. financial institutions. One example: In the Bank of America deal for Merrill Lynch, lawmakers felt that Bernanke & Co. should’ve required more concessions in return for the taxpayer-supplied financial aid, Bloomberg News said.

The bottom line: The additional oversight powers that Bernanke is seeking – and that are part and parcel of the proposed Obama administration financial-system overhaul may prove to be one very tough sell.

Both parties are likely to find fault with U.S. President Barack Obama’s plan to put the Fed on the point, positioning it as the single agency responsible for supervising the U.S. economy’s largest and most-interconnected banks and financial institutions, giving the central bank the power to dictate financial standards on capital, management of risk and even liquidity requirements.

“It may be more important for us to find another systemic risk regulator,” U.S. Rep. Paul Kanjorski, D-Pa., who is a member of the House Oversight Committee where Bernanke appeared, told Bloomberg TV. Congress should “hesitate to put any more authority on the back of the Federal Reserve.”
The internal central bank documents – e-mails, written notes and even official memos paint a picture of a government institution that’s “wrestling” with how tough it should be on BofA and other big banks,The Wall Street Journal reported. In December, Bank of America told federal officials it was looking to possibly end the deal, and current and former bank officials contend that the Fed and former Bush administration officials pressured BofA to go through with the deal, which has turned out to be much-less beneficial than hoped for.

On the other hand, these disclosures could bolster the argument by Fed officials that the central bank needs these powers to address future financial crises. The reason: These  disclosures show that it lacked the “tools” (the legislated power and authority) needed to tackle the problems as soon as they surfaced. The inability to do so probably lengthened the crisis and exacerbated both the damages – as well as its ultimate cost.

Market Matters

In non-financial news, U.S. commercial aircraft giant The Boeing Co. (NYSE: BA) struggled through a miserable week as it postponed testing of the new 787 Dreamliner aircraft and also lost orders from Qantas Airways Ltd., as the entire industry continued to suffer the ill effects of the economic downturn on travel.

Apple Inc. (Nasdaq: AAPL) reported better-than-expected early salesof its new iPhone 3G and appeared close to welcoming its fearless leader, Chief Executive Officer Steven Jobs, back to work.  Tech giantOracle Corp. (Nasdaq: ORCL) announced declining profits, but offered favorable forecasts for the current quarter and beyond.  Likewise, retailer Bed Bath and Beyond Inc. (Nasdaq: BBBY) experienced a surprisingly strong quarter, a nice sign that the ailing consumer may be showing renewed life.  State-owned Sinopec Shanghai Petrochemical Group (NYSE ADR: SHI) is attempting to purchase Swiss-based Addax Petroleum Corp. for $7.2 billion in what would be the largest global acquisition by a Chinese company.

Investors breathed a collective sign of relief when the final leg of the record $104 billion U.S. Treasury auction came to a close and interest rates had not soared through the roof.  Instead, institutions and sovereign funds seemed to maintain a hearty appetite for U.S. government securities, despite rumors to the contrary.  In recent weeks, naysayers have been predicting that foreign buyers would shun domestic fixed income as the ballooning U.S. deficit spiraled out of control with expensive new programs to cure all that ailed the country.  For the time being, at least, Treasuries remain a safe-haven investment, and the yield of the benchmark 10-year bond even fell to around 3.5%.

From an equity standpoint, investors remain confused about the future direction of the markets and whether to ride the prior upward trend or take profits from the rally that exceeded 30% in anticipation of a return to the lows set in early-March.  Some believe the indexes will trade sideways for the foreseeable future.  The Dow Jones Industrial Average lost ground (thanks in large part to Boeing), while other major indexes closed relatively flat from the prior week’s levels.  Despite a bit of volatility, oil hovered neared $70 a barrel level and gasoline prices fell slightly for the first time in two months.

While the economic numbers appear to be getting stronger (see below), many investors want to see more than just “less” contradiction or “slower” weakness in the economy and various sectors.  Many believe that the “worst of times” may be over, but the “best of times” may still be far away.  Some even approve of the job Bernanke is doing (despite what their elected reps are saying).

Economically Speaking

A Congressional tongue-lashing didn’t keep Bernanke and Fed policymakers from completing their business at hand.  Last week’s policy meeting provided few surprises as the Fed left the benchmark Fed Funds rate unchanged at (virtually) 0% and announced that no rate changes seem likely in the near-term.  The Fed also confirmed its intent to buy $1.45 trillion in mortgage-related securities and $300 billion in Treasuries, though made no commitment to purchase more than that previously announced amount.  The accompanying statement depicted an economy that remained weak, but seemed to be exhibiting some signs of rebounding (ever so slightly).  For the time being, inflation (or even deflation) does not appear to be of major concern.  The policymakers also continued to apprise the public on the success of the various “stimulus” actions and announced the closing of several lending programs that they no longer deem necessary.

The World Bank said the worldwide slump would be worse than it has previously projected, boosting its forecasted slump to 3% from the previous forecast which called for a slump of 1.75% – and claimed that activity would be the worst on record.  By contrast, the Paris-based Organization for Economic Cooperation and Development reported that the “worst may soon be over” and revised its economic forecast to more favorable terms for the first time in two years.

Among weekly releases, new home sales declined in May and existing home sales rose less than expected as much of the buying centered around distressed sales and foreclosures.  The median price of an existing home purchased in May was more than 16% below last year’s level.

Higher durable goods orders lent some confidence to manufacturers, as activity rose for the second consecutive month.  Personal income and spending both increased in May and the administration was quick to praise the benefits of the stimulus package.  However, the savings rate also climbed to its highest level in 15 years as consumers remained uncertain about the economy in general and their job situations in particular.  On a bright note, the Reuters/University of Michigan Sentiment index increased to its highest level since February 2008. Gross domestic product (GDP) in the first quarter was revised again – to minus 5.5% (from minus 5.7% reported last month), a positive sign, though impatient economists and investors alike seem ready for even better (positive) data in the quarters to come.

Weekly Economic Calendar

Source: Will Week of Controversy Undermine Financial System Overhaul That Calls for Broad Expansion of Central Bank’s Power?

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Goldman Sachs Group Inc. (GS) reports tomorrow (Tuesday), while JPMorgan Chase & Co. (JPM) reports Thursday, and Citigroup Inc (C) reports on Friday.

While the chief executives of several of the largest U.S. banks were quick to announce favorable showings for the first two months of the year, analysts are concerned that the strong showings may not have carried over into March, and that the performances of some of these money-centered banks may disappoint.

Contradictions hit the financials last week as diverse reports about Morgan Stanley (MS) and Wells Fargo brought even more confusion to a sector that cannot seem to stay out of the daily headlines. On one hand, analysts expect Morgan Stanley to write down an additional $1.2 billion worth of bonds; subsequently, the firm may suffer its second straight quarterly loss.

On the other hand, Wells Fargo expects earnings to far surpass Wall Street’s projections as its Wachovia Corp. acquisition has enhanced its mortgage-lending capabilities at a time when rates are at historic lows and when the U.S. housing market is showing some signs – be they ever so slight – of rebounding [Indeed, a Money Morning report from just last week made this same point].

Bear in mind that since the financials have led the charge in equities during the past five weeks, investors may be looking for any excuse to take some recent profits.  Intel Corp. (INTC), which reports tomorrow, Google Inc (GOOG), which reports Thursday and General Electric Corp. (GE), which reports Friday, figure to be crucial announcements.

The March inflation gauges highlight the economic calendar, and economists hope that price pressures remain far off of their radar screens.  The retail sales data should lend a bit more insight into the current plight of the consumer.

Market Matters

Alcoa Corp. (AA) kicked off earnings season with more of whimper than a bang.  While the aluminum producing giant lost about $500 million during the quarter, the company expects to benefit from the infrastructure programs promoted in the economic stimulus package – key areas that could enhance demand for its products.  Bed Bath and Beyond Inc. (BBBY) reported better-than-expected quarterly results and even received a favorable analyst upgrade.

With the season set to kick off in a big way in the weeks to come, Thomson Reuters has called for a 37% drop in profits at Standard & Poor’s 500 Index companies, the eighth consecutive quarterly decline (though that prediction came before the Wells announcement).

Economically Speaking

A light week on the calendar still provided plenty of headlines on the economic home front last week.  Corporate executives painted a rather bleak picture of the short-term future for U.S. industry as the Business Roundtable issued a quarterly outlook that turned negative for the first time in its survey’s history.  The majority of those participating expect their companies to experience layoffs and reductions in business spending during the coming six months.

However, Roundtable Chairman Harold McGraw III, who is also the CEO of The McGraw-Hill Cos. Inc. (MHP), expressed confidence in the Obama administration’s ability to generate renewed business activity. McGraw said he also believes the economy may be close to a bottom.

On the other hand, minutes from the latest U.S. Federal Open Market Committee policymaking meeting that U.S. Federal Reserve Chairman Ben S. Bernanke and friends revised their expectations (to the downside) for the economic recovery. While they anticipate that gross domestic product (GDP) will flatten (from its current contraction state) by the end of the year, unemployment is expected to continue its downward spiral well into 2010.

Though initial claims for unemployment benefits surprisingly fell last week, they remain at very high levels, and total claims (those looking for jobs over extended periods) jumped to a record high. While the trade deficit narrowed to its lowest level since November 1999, the improvement is more indicative of the sluggish economy and the reduced global demand for any and all goods and services.

Retailers posted their results of March sales and the numbers were mixed at best.  While Wal-Mart Stores Inc (WMT) had long been the one “steady Eddie” during this economic downturn, the world’s largest retailer reported March sales that missed expectations (though the company does expect its quarterly results to be strong, thanks to a stellar February).  Stores that target teens like Abercrombie & Fitch Co. (ANF), Aeropostale Inc. (ARO) and American Eagle Outfitters (AEO) each posted disappointing numbers, though analysts point out that Easter (and many spring breaks) fall later in the 2009 calendar (April 12 this year versus March 23 a year ago) and most holiday shoppers are waiting until the last minute these days.

Still, more than 50% of those retailers reporting beat Wall Street expectations, and some even issued favorable guidance for the quarter as a whole.  Of note, The TJX Cos. Inc. (TJX) (TJ Maxx and Marshalls) and Penney Co. Inc. (JCP) both posted better-than-expected sales results and increased their outlooks for the three-month period.

Weekly Economic Calendar

Source:  As Earnings Season Heats Up, U.S. Banks Will Make or Break the Stock-Market Rally

Tomorrow morning the Factory Orders report for November is released, and things might get better. The report is expected to show a decline, but not as large of a decline as the previous month. Whether or not this means that factories are starting to get more orders on a consistent basis remains to be seen, but anytime a decline is shrinking, it seems like a small victory.

The final report I wanted to touch on this week is the December Non-Farm Payrolls report. This will be the final report for 2008, and will allow us to look at the overall loss for the year. As it stands, the country has lost just over 1.3 million jobs this year. The expected loss for December is another 475k jobs, which will put us over 1.8 million jobs lost for the year. The scary thing is that the job losses have increased every month for the last four months, so December may be worse than expected. I remember back in mid-summer when some of us were wondering if we would see one million jobs lost this year. Now we are looking to nearly double that amount.

Earnings:
Wed: BBBY, MON

Thurs: BLK, MER

Source: Employment Data Dominates Calendar, Earnings Season Starts Again