For optimists, the message here is that all hope for holiday retail sales is not yet lost. A National Retail Federation survey showed that only 47% of consumers have finished their holiday shopping and another 19% have not even started.  As a dismal 2008 comes to a close, the last die-hard eternal optimists are calling for a year-end Santa Claus Rally, as the government bailouts and U.S. Federal Reserve actions give investors some hope for 2009 and beyond.

But such blind optimism too often ignores a key point or two. The Dallas-based Neiman Marcus, for instance, just announced that its third-quarter earnings plunged 84% because of its aggressive discounting, the Dallas Morning News reported. And since the discounting will continue, so will the decline in profits, the high-end retailer conceded.

With even luxury retailers discounting to try and salvage something from the holiday shopping season, the outlook for lackluster sales and even-more-lackluster earnings feeds into an already dour outlook for the U.S. economy.

And if that doesn’t squelch the optimists’ ardor, then a looming revision in the third-quarter gross domestic product (GDP) – last reported as minus 0.5% – will almost certainly bring them back to the realities of the sluggish economy.

It may even force those optimistic economists to finally say: “Bah Humbug.”

That GDP report is due out tomorrow (Tuesday).

Market Matters

Though perhaps it’s wishful thinking, there are some analysts who point out that one or more of any number catalysts could jump-start the economy and the financial markets in the New Year, putting the past few miserable months in the rearview mirror.  They argue that the trillions of dollars in bailout money pumped into the financial system should finally start to provide badly needed liquidity; the Fed seems intent to do “whatever it takes” to reverse, or at least blunt, the current downturn (even if runaway inflation may be a repercussion down the road); an “Obamanomics” stimulus plan could create new jobs, while enhancing the country’s aging infrastructure; risk-free Treasury yields at 0.00% should start to look less and less attractive, prompting investors to look into stocks and non-government bonds again. Just a few last minute items to add to the holiday investment-shopping wish list.

Sadly, Bernie Madoff saw to it that his investors will have a holiday season to forget as the list of prominent victims grew each day: Real estate mogul Mort Zuckerman, U.S. Sen. Frank R. Lautenberg, D-N.J., Hollywood movie mogul Steven Spielberg, Spanish bank Banco Santander SA (ADR: STD), France’s BNP Paribas SA, Nomura Holdings Inc. (ADR: NMR), and many charitable foundations and non-profit organization were among the people and institutions victimized.

Plenty of finger-pointing has been directed at the U.S. Securities and Exchange Commission (SEC) for failing to uncover some rather obvious signs of wrongdoing through the years. As Money Morning reported even before the official announcement was made, U.S. President-elect Barack Obama tapped FINRA Chief Executive Officer Mary L. Schapiro to head the SEC during this time of turmoil. Congrats on the appointment, I guess?

The Detroit Big Three automakers received early holiday cheer as the U.S. Treasury Department will release $17.4 billion of Troubled Asset Relief Program (TARP) money in return for potential equity stakes and other concessions from management and unions.  General Motors Corp. (GM) and Chrysler LLC will be the recipients, while Ford Motor Co. (F) pursues – for now – the go-it-alone strategy. Meanwhile, Chrysler will be shutting down all of its North American production plants for at least a month and also will begin charging dealers large fees on unsold cars that remain on their lots after prolonged periods.  In perhaps a sign of things to come, a consortium of 14 companies – including 3M Co. (MMM) and Johnson Controls Inc. (JCI) – have asked for $1 billion in government funding to begin manufacturing state-of-the-art batteries for electric cars.  The move is reminiscent of action taken by computer chip firms decades ago that helped make the industry more competitive domestically. (Johnson Controls also announced last week that it would invest $90 million to open a lead-acid-battery-production plant in China’s green-power energy industrial center in Changxing Economic Development Zone of Zhejiang province, Alibaba.com reported).

Energy traders disregarded the decision by the Organization of Petroleum Exporting Countries (OPEC) to cut production by a record 2.2 million barrels a day, fearing lack of compliance by its members. Instead, traders chose to focus on the shrinking demand in the sluggish economy as oil prices briefly fell below $35a barrel to levels not seen since 2004.

Goldman Sachs Group Inc. (GS) reported its first-ever quarterly loss and Morgan Stanley (MS) followed with a shortfall of its own.

FedEx Corp. (FDX) posted a higher profit, but gave a dire outlook and announced major compensation cuts for senior management (and benefits cuts for the rank and file).  Stocks were relatively flat as investors digested the latest on Madoff, the auto bailout, and significant Fed actions.

Economically Speaking

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

Too bad Fed Chief Ben S. Bernanke couldn’t punctuate that last statement with a hearty “Ho, ho, ho – happy holidays.”

After setting the target for the Federal Funds rate at 0.00% to 0.25%, the Federal Open Market Committee (FOMC) policymakers revealed they are studying other measures and may purchase U.S. Treasuries at some point in an effort to stimulate the financial markets.
There are already some signs that the central bank’s action already are working. Mortgage rates have dropped dramatically and borrowers are taking advantage of refinancing opportunities to save on future interest payments.  Investors are finding value in corporate and municipal securities, as certain high-quality issues are yielding more than 6% more than comparable Treasuries. Meanwhile, Japan’s central bank followed suit with a rate cut (to 0.1%) of its own.

More details of the Obama stimulus plan emerged during the week and his economic team pegs the total package at about $800 billion (or more than $1 trillion by the time Congress adds its required “pork.”).  Tax cuts of up to $100 billion will serve as the most immediate stimuli, with construction (infrastructure), energy and healthcare among the industries that will benefit the most over time.

The data of the week revealed that his package can not arrive soon enough.  Housing starts fell by 18.9%, to a record low, and declining building permits did not offer much promise for future construction. Another forecasting release, leading economic indicators, fell for the second consecutive month; in fact, over the past six months, the index has experienced its worst decline since 1991.

The inflation picture remains favorable, though naysayers find pessimistic views in that data as well.  The November consumer price index (CPI) fell 1.7%, the largest decline on record (since 1947), as gasoline prices plummeted by 29.5%. While the deflation-mongers claim that falling prices will force consumers to delay purchases (for when they become even cheaper), others point out that gas purchases can not be delayed, as people have to get to work (and few are choosing to ride their bikes or shift into mass transportation).  In reality, plunging gasoline serves as a stimulus package without any government interaction (though OPEC is getting involved).

Weekly Economic Calendar

Source: If Holiday Retail Stats Don’t Have Economists Saying “Humbug,” Tuesday’s GDP Report Certainly Will

So the question no longer seems to be whether the Fed will ease, but whether the move will make any difference.

The Fed has been hamstrung by a credit-market double-whammy: borrowers who are in limbo due to fears of soaring unemployment, and banks that have turned off the lending spigot. Even so, a U.S. economy facing its worst financial crisis since the Great Depression demands the central bank take decisive action.

That has led to a strong undercurrent of opinion among analysts that the Fed will pursue other measures to spark a moribund U.S. economy.

“We look for the accompanying statement to highlight that the main nexus of policy in the coming months will be quantitative easing operations, and we expect these operations to be aimed at lowering borrowing costs for households and businesses,” Dean Maki, economist for Barclays Capital Management (ADR: BCS), told MarketWatch.com.

In other words, get ready for another attempt to kick-start bank lending by injecting more federal cash into the U.S. financial system.

One move the Fed could make is to buy massive amounts of U.S. Treasuries in an effort to keep yields from rising. Fed Chairman Ben S. Bernanke suggested in a Dec. 1 speech that the central bank might buy “longer-term Treasury or agency securities on the open market in substantial quantities.”

Bond market traders seemed to confirm that notion yesterday (Monday) by driving the price of 10-year Treasuries higher for a third straight day. The yield curve, the difference in yield between two-and 10-year notes, flattened as the difference between the two narrowed.

Driven lately by uncertainty over the Bush administration’s handling of the Big Three automakers’ bailout, investors have pushed yields on Treasuries to record lows. Treasury security yields last week reached the lowest levels since the U.S. started selling two, five, 10- and 30-year securities.

In a report issued last week, JPMorgan Chase & Co. (JPM) predicted the yield on Treasuries in 2009 will be driven as low as 1.65% (from about 2.65% currently) amid “high uncertainty.”
Unloading stocks, corporate bonds and debt from mortgage-finance companies Fannie Mae (FNM) and Freddie Mac (FRE), investors purchased $34.6 billion of Treasury securities in October, up from $20.7 billion in September, according to the U.S. Treasury Department.
“You still have a massive paranoia in the marketplace and you’ve got that safety-at-any-cost mentality,” Jay Mueller of Wells Fargo Capital Management (WFC) told Bloomberg News. “People are not buying Treasury bills because they think the yields are attractive. They are buying them because they are afraid to put money anywhere else.”

According to Merrill Lynch & Co. (MER), U.S. government bonds have returned 12.4% so far in 2008. That’s the best return since 2000, when they gained 13.4%. Meanwhile, the Standard & Poor’s 500 Index is down 40%, and the Dow Jones Industrial Average has lost 35%.

The Fed’s Arsenal

The Fed is pulling out every weapon in its arsenal to avoid deflation.  A sustained drop in asset prices is the central bank’s worst fear since it could lead to more foreclosures and heightened economic chaos.

One undesirable side effect of the numerous economic stimulus packages is the potential for inflation and a decline in the dollar.  Based on its actions, the Fed is apparently willing to take that risk.

In fact, speculation around the probable Fed interest rate cut knocked the greenback down to a two-month low against the euro, touching $1.3703 yesterday, the lowest it’s been since Oct. 14.  With reduced demand for the dollar as a safe haven, the greenback dropped to a 13-year low against the Japanese yen and also lost ground to the British pound.

“We will stay in a low-interest-rate environment for some time,” Fabian Eliasson, vice president of currency sales at Mizuho Corporate Bank Ltd. in New York, told Bloomberg. “That will take away interest-rate play, and the dollar will suffer.”

After a four-month rally of 24%, consensus estimates for the dollar issued last week by Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), BNP Paribas SA and Bank of America Corp. (BAC), predicted further weakness against the euro.

After strengthening from July to November, the U.S. currency has retreated by 6.6% from a two-year high on Nov. 21, as measured by the trade-weighted Dollar Index. The dollar has fallen against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona since peaking three weeks ago.

Source: Fed Policymakers to Cut Rates Today … But Does Anyone Really Care?

Nickel declined until nearly mid-morning, then rose, but not enough to take it back to break-even as it closed at $4.449/lb., down 9 cents. Zinc mirrored nickel’s performance, also ending down in the red at $0.5337/lb., down 2 2/3 cents. Aluminum had another weak day, giving up just over 2 cents to $0.7725/lb., while lead, despite a strong rally late, dropped 3½ cents, to $0.4946/lb.

Copper was little changed, but wound up November down 9.8% for the month. It was the fifth straight month of declines for the metal, marking the longest such streak since early 1999.

“Markets are under pressure on account of the bearish macro backdrop, which is directly manifesting itself through rising LME stock levels,” said Edward Meir, of MF Global (NYSE:MF).

That was certainly the case yesterday, as inventories monitored by the LME rose 1%, to 291,650 metric tons, the highest level since February 25, 2004.

Forecasts have gotten very gloomy indeed. Copper supplies are expected to exceed demand next year by 250,000 metric tons, RBS Global Banking & Markets wrote yesterday. And that’s the good news, as the surplus will then widen to 500,000 tons in 2010, the bank estimates.

The situation appears equally bad concerning aluminum, whose losing streak equals that of copper’s. Aluminum supply will outpace demand by 1.4 million metric tons next year, or double this year’s surplus, according to BNP Paribas SA.

Traders are concerned that China may reduce or even cancel taxes on primary aluminum exports. That was the word from unnamed sources in the China Nonferrous Metals Industry Association.

Said Michael Widmer, a BNP Paribas analyst in London, “If more metal found its way outside China we would have an even bigger oversupply in the global aluminum market.”

On the other hand, Reuters reported that, “China is looking at buying base metals as state or commercial reserves to take advantage of the lowest prices for years and bolster weak demand, industry sources said on Friday.”

In addition, Reuters wrote, “Beijing, keen to help strengthen smelters as it looks to bolster the economy, is changing a long-established policy of restricting expansion in the resource-intensive metals industry.”

Source: Base Metals Sag