The Fed extended the lives of recently initiated programs (lending facilities for investment firms, for instance) and is exploring additional moves (like Treasury purchases) aimed at reviving the credit markets.  Bernanke believes more needs to be done to slow the pace of foreclosures, especially since they jumped another 10% in September.

Meanwhile, the U.S. Treasury Department is working on a plan to rejuvenate the housing market by slashing mortgage rates to 4.5% on new purchases.  Experts say that at some point these stimuli must take hold, but that’s not necessarily true.

This week’s economic calendar is highlighted by two late-week releases that are sure to garner much analysis.  The producer price index (PPI) brings another look into the inflation picture, though the dramatic decline in energy prices may renew “premature” talks of deflation.  And November retail sales should offer few positive surprises for the holiday season.

Are there any 12-step programs for overcoming “gloom and doom?”

Market Matters

Black Friday has passed. And so has Cyber Monday (the Monday after Thanksgiving when online shopping begins in earnest).  So let the analysis begin.

While retailers continued to cry “gloom and doom,” the so-called experts did not appear to be quite as pessimistic.  According to National Retail Federation, holiday sales will climb by 2.2% from last year’s levels.  Research firm ShopperTrak claimed that sales on Black Friday rose by 3%, and ComScore Inc. (SCOR) said Monday’s online activity soared by 15% from 2007. Toys “R” Us Inc. execs “were definitely pleased with sales” during the initial holiday shopping weekend, and Internet data collector, Hitwise, revealed that web traffic increased by 21% at Amazon.com Inc. (AMZN).

While November sales remained bleak (see below), analysts point out Thanksgiving came late in the month (Nov. 27) and Cyber Monday actually fell in December.  The optimists (rare as they are) are hopeful holiday activity may be skewed with December faring far better than November.

Automakers returned to Capitol Hill. But for “Begging for a Bailout II,” the “Big Three” CEOs were smart enough leave their corporate jets at home and arrive in hybrid sedans.  Maybe next time they can carpool. But there’s a problem: Combined, the Big Three are this time are requesting $34 billion in loans, which is $9 billion more than they’d been lobbying for all along. Ford Motor Co. (F) implied its situation may be less dire and a mere $9 billion standby line of credit would suffice (assuming the others don’t fail).  The execs also expressed a willingness to operate under a federal oversight board, and even the unions offered concessions regarding health plans and the jobs bank.  While some politicos used scare tactics to predict even greater economic hardships should relief not be granted, others remained skeptical of the unlimited bailouts.  Mostly, they chose to grandstand and politicize the tragic times to win support at home (as if their constituents even watch C-SPAN).  Stay tuned…

In other corporate news, Goldman Sachs Group Inc. (GS) may be forging more into the banking world as it considers launching an Internet operation to increase its deposit base.  Meanwhile, analysts predict its fourth quarter loss could skyrocket to $2 billion.  Beezer Homes USA Inc. (BZH) and Blackberry-maker Research in Motion Inc. (RIMM) both lowered their quarterly outlooks and AT&T Inc. (T) became the latest domestic giant to announce layoffs.  While General Electric Co. (GE) believes its earnings will be weaker than initially expected, the company plans to maintain its dividend and solid commitment to shareholders.  Merrill Lynch & Co. Inc. (MER) shareholders approved its sale to Bank of America Corp. (BAC), though total valuation plunged to $20 billion (from $50 billion at announcement) as a result of the stock market decline.

Oil continued its never-ending decline below the $41 a barrel level, a point not seen in four years, while gas fell below $1.80 a gallon nationally. While winter weather generally means higher energy prices, the economic doldrums have more than offset the traditional trend.

Treasury yields plunged to historic lows on speculation that the Fed may purchase government securities to support the credit markets (as well as the ongoing “flight-to-quality” moves).  Stocks resumed their overall bearish ways on dramatic volatility, as investors grew more fearful about the economy before totally disregarding the awful unemployment data (see below) and staging a late-week “illogical” rally.  Then again, since when have markets been considered logical?

Economically Speaking

In what could one of the worst kept secrets of the year, the National Bureau of Economic Research (NBER) revealed the domestic economy has been in a recession since December 2007.  In the post-World War II era, the average length of recession has been 11 months, with the downturns of 1973-74 and 1980-81 lasting 16 months.

And the current recession will likely surpass the norm.  As the data gets weaker with each passing release, most economists expect this recession to last beyond the next four months and to set a new duration record in post-World War II times.

Then again, each new month means we are getting closer to the end; additionally, equity markets typically serve as leading indicators and begin to rebound months before a recovery starts – meaning we’ll see a bull market get under way while the economy is still in the depths of recession.

The weekly releases revealed that any pending rebound should remain on the back burner for some time.  In November, the unemployment rate jumped to 6.7% as the U.S. economy lost more than 500,000 jobs, the largest monthly decline in 34 years.  In the last three months alone, more than 1.2 million individuals have moved into the ranks of the unemployed.

November represented the 11th straight month of labor contraction.  Both the manufacturing and services sectors continued to struggle according to Institute for Supply Management and factory orders plummeted by the largest amount in eight years.  Retailers reported weak same-store sales numbers, with only Wal-Mart benefiting from the dire times.  Even Costco Wholesale Corp. (COST) experienced a steeper than expected decline.   And of course, dismal auto sales brought more ammunition to those Congressional hearings as General Motors Corp. (GM) (-41%) and Ford (-31%) were joined by Honda Motor Corp. (ADR: HMC) (-32%) and Toyota Motor Corp. (ADR: TM) (-34%) in the “if misery loves company” category.  Meanwhile, Bernanke and friends are hard at work dreaming up creative ways to shore up the economy, particularly after the Beige Book reported softer activity across the country.

Weekly Economic Calendar

Source: Fed Looking at Another Rate Cut, While Treasury Has New Plan for Housing

It sounds like retailers may be disappointed with the results of this years biggest shopping day, as there really isn’t any ‘must have’ items, and consumers are being a little tighter with their wallets.

Consumer spending as reported in the US on Tuesday slid the most in seven years last month. Another report released by the Commerce department showed business investment also tumbled last month. Orders for US durable goods fell twice as much as forecast. And spending in Europe, the UK, and Japan is also dropping. UK consumer spending dropped the most since 1995 and business investment also fell. The global slowdown has hit consumer and business confidence, encouraging them to reign in their spending. This can become a vicious cycle, as the slowdown in consumer and business spending causes the global economy to continue to slow, bringing confidence levels down even more. I expect the global slowdown to intensify, and look for a major drop in US GDP over the next few quarters.

Leaders hope to break this pattern by increasing government spending and stimulus packages. The European Union proposed $259 billion in stimulus measures and President-elect Barack Obama is pushing for another stimulus package here in the US. While I am talking about Obama, did you see he announced former Fed Reserve Chairman Paul Volcker as his main economic advisor? Both Chuck and I are fans of Mr. Volcker, but then we both figured Paulson and Bernanke were good choices also. I guess we will have to see if Volcker can resurrect another ‘magic bullet’ to get us out of this vicious cycle. Things are just about as bad as they were back in the 70’s and 80’s, but he has ‘been there, done that’. Hopefully his past experiences will help him steer the new administration in the right direction.

Chuck was watching the data print Wednesday morning, and left me these thoughts:

“New-Home Sales Sink 5.3% to Lowest Level in 17 Years U. Mich. Confidence – new low since ‘80 Chicago PMI collapses Consumer Spending Fell to 7-Year Low in October Americans’ Food Stamp Use Nears All-Time High

And can’t imagine what in the world the people that make the official call on a recession the NBER (National Bureau of Economic Research) are thinking… I called this a recession back in January, and they have yet to make the call… Amazing!

Of all that bad data, the only one that will have a good outcome in the end, is the Consumer Spending falling to a 7-year low. We’ve gone on with this spending more than we make, for far too long! Now, if we could just get the Gov’t to do the same!

And I would imagine that course of action for Consumer Spending will be staying steady Eddie for some months to come, and more and more we see +500K numbers each week on the Initial Jobless Claims… It’s going to get ugly folks… And I’m afraid that a lot of pain is going to have to be suffered before this ship gets straightened out… So, be careful out there!”

I agree with Chuck, the decline in consumer spending is actually a good thing. The only problem is that our economy depends on consumers to borrow and spend, so the belt tightening is going to really drag this slowdown out. Even if Obama convinces congress to spend another couple hundred billion, the government can’t make up for consumers who have decided to shut their wallets.

This is what happened in Japan over the past several years, as Japanese consumers stopped spending. This created a deflationary spiral as prices of consumer goods continued to fall, encouraging Japanese shoppers to just wait a while longer, as they were able to purchase goods cheaper in the future. While this helped move Japanese consumer balance sheets back into the black, it was a major drag on the Japanese economy. The BOJ fought against this deflationary spiral by bringing interest rates down to zero and holding them there for a number of years. Japan is still in a low inflation environment, and the Japanese continue to have one of the best saving rates in the world.

But I just don’t think the US consumer will stay away for too long. Sales, offers of ‘lay away’ plans, and spend now pay later programs will likely lure shoppers back into the stores. But I do believe retail sales will continue to be weaker than in the past, and the slowdown of consumer spending will continue to be a drag on the US recovery. Again, I don’t expect the US to recover for a number of years. The US slowdown will continue through 2009 and into 2010.

Chinese officials made the biggest interest rate cut in 11 years in an effort to keep their economy from slowing below their goal of 8%. The interest rate cut follows the announcement of a 4 trillion Yuan ($586 billion) stimulus package earlier this month. There have been some civil unrest and protests by unemployed workers, so this is an attempt by the Chinese leaders to get the economy moving in the right direction again.

I read a story on Bloomberg this morning which predicted China’s foreign exchange reserves would top $2 trillion for the first time later this year. China’s holdings have increased 25% this year, while those of Japan and Russia shrank. Apparently, Russia has been selling off its currency and gold assets in an attempt to prop up the ruble. China continues to build up their reserves, and the huge amount is concerning to the currency markets. China will not hesitate to use these reserves to stimulate their economy, and what currency are a majority of these reserves held? US dollars!! In order for China to put these reserves to work, they will need to sell the dollars and get the money pumped back into the Chinese economy. These reserves are a major risk for holders of US$.

Currencies today 11/28/08: A$ .6528, kiwi .5481, C$ .8073, euro 1.2766, sterling 1.5336, Swiss .8257, ISK (No Quote), rand 10.135 krone 6.9762, SEK 8.0655, forint 203.165, zloty 2.9574, koruna 19.717, yen 95.34, baht 35.53, sing 1.5108, HKD 7.7504, INR 50.10, China 6.8306, pesos 13.243, BRL 2.3274, dollar index 86.49, Oil $53.50, Silver $10.23, and Gold… $813.00

Source: Black Friday