Tuesday morning starts off with the final GDP report for the third quarter, and it looks like there won’t be any changes to the figure since the last report. As it stands, the report will likely show a contraction of a half-percent for the quarter. In my opinion, with everything that has transpired in the market, that isn’t so bad. If you think about all the job losses, failed businesses, etc. it seems like it could have been much worse.

The other big reports on Tuesday are the Existing Home Sales and New Home Sales reports for November. The Existing Home Sales report is expected to show a drop of 50k units, and the New Home Sales is likely to report a drop of 13k units. Without being able to see the breakdown per region, it is tough to say if this shows the further decline of the housing market, or if it is simply a seasonal slowdown in the Midwest and Northeast. I would tend to believe it is the latter.

Wednesday sees all three reports announced simultaneously at 8:30 am. The Durable Goods report for November is likely to show another dip of over three percent. Without sounding like a broken record, this shouldn’t surprise anyone. No one has money to purchase big-ticket items, Christmas discounts or not.

The other two announcements on Wednesday are the Personal Income and Personal Spending reports for November. Personal Income is expected to hold steady from last month, while the Spending report is likely to show another decline. Since the holiday shopping season really kicked off at the very tail end of last month, it probably didn’t boost the Spending report last month, but I definitely expect it to boost the December report.

Have a safe holiday break.

Source: GDP and Home Sales Highlight A Short, But Very Busy Week

While this week’s data from the manufacturing and housing sectors will be eagerly anticipated, nothing compares to Friday’s reports on unemployment and the picture of the ailing labor market.  After nine consecutive months of job contraction, few analysts hold out much hope for optimism.  In fact, some believe the jobless rate will climb to 7.5% during 2009.

Clearly the new president will have some major problems to solve, perhaps the biggest being that he’ll have to find a way to restore investor confidence.

After all that’s happened in the global economy and in the stock market in recent weeks – with the tremendous whipsaw volatility, that will be easier said than done.

Even so, watch this week as Money Morning carries several investment reports that will tell you what to expect, what to avoid, and where you may potentially profit.

Stay tuned.

Market Matters

For most investors, Halloween was a welcome treat from the haunted trickery of the markets over prior few weeks.  In fact, despite some frightful economic releases that virtually confirmed recession (as already noted), the major equity indexes received a nice reprieve this past week as investors moved beyond mass hysteria and found bargains in the carnage.  On Tuesday alone, the Dow Jones Industrial Average and Standard & Poor’s 500 Index each shot up more than 10%, and then proceeded with their remarkable (if not illogical) runs as the week continued.

Despite the positive moves, the Dow plunged by 14% in October, while the S&P 500 lost about 17%, making it among the worst performing months in over two decades.  The volatility was almost too much for investors to bear as the Dow experienced triple digits moves from open to close on all but three trading sessions.  Global markets underwent similar gyrations, with Hong Kong’s major index – the Hang Seng Index, for example, plunging 12.7% one day before soaring 14.4% the very next session.

The recent panic seemed to have subsided as some of the stimulus packages began to take effect.  The credit markets have thawed as corporations took advantage of the Fed’s decision to buy short-term commercial paper, thus, providing them much needed liquidity.  Major banks began receiving capital injections from the government as part of the bailout package and were “told” (in no uncertain terms) by their new “partner” to re-initiate lending programs.

Capital One Financial Corp. (COF) and Sun Trust Banks Inc. (STI) chose to be participate in the government’s generosity by selling preferred stock and warrants, though both were rumored to be eyeing weaker institutions as acquisition targets – a a strategy that may have differed from the Bush Administration’s goal of enhanced lending. [Editor’s Note: For an in-depth report on U.S. bank’s using government  money to mount takeover campaigns – instead of for increased lending --  please click here. The report is free of charge].

The week’s quarterly earnings releases were mixed at best though companies continued to warn about future weakness (which will hopefully lead to some positive surprises).  Exxon-Mobil Corp. (XOM) reaped another record quarter and rival Chevron Corp. (CVX) – the subject of a recent “Buy, Sell or Hold” featurue here at Money Morning just saw its profits double during the period.  Bear in mind, crude has plunged over 50% since mid-July (and suffered its worst monthly decline on record) so their future results may not be as strong.

United States Steel Corp. (X) announced favorable earnings, athough it also warned that weakness in commodities could impact its operations. The Procter & Gamble Co. (PG) experienced a better-than-expected quarter, though management reduced its sales estimates for the remainder of the year.  Motorola Inc. (MOT) announced a quarterly loss and laid off 3,000 workers to cut expenses. General Motors Corp. (GM) and Honda Motor Co. Ltd. (ADR. HMC) both reported poor quarters, as automakers struggled worldwide.

Economically Speaking

For days, weeks, months, maybe even years, analysts warned about the dreaded “R” word and, with each new report, the inevitability of such a downturn became more and more possible.

The afore-mentioned third-quarter GDP report confirmed that the economy actually contracted by 0.3% during the period, the worst results in seven years.  By definition, two straight quarters of negative growth translates into a recession, so the economy is officially halfway there (especially since the fourth quarter data is shaping up to be just as depressing).

Sluggish consumer activity highlighted the GDP report, as consumer spending plunged by 3.1% during the quarter. Such activity accounts for about 70% of the growth of the economy, so the ongoing concerns about future employment, market losses, and housing valuations (among others) have kept consumers out of the malls. And those reports now to significantly hinder the upcoming holiday season.  In fact, a recent BDO Seidman survey showed that retail-marketing execs believe their November and December sales will fall by 2.7% from the same periods last year.

On an even more pessimistic note, consumer confidence in October fell to its lowest level ever reported.

Almost lost in the negativity was the fact that new home sales actually climbed by an unexpected 2.7% in September, as bottom fishers found some bargains within the worst housing market in decades.  Still, sales remained more than 30% behind last year’s levels.

The central bankers continued their (somewhat coordinated) efforts to stem the global economic slowdown.  U.S. Federal Reserve Chairman Ben S. Bernanke and friends announced a half-percentage-point cut in the Fed Funds rate, reducing its target for that benchmark for U.S. interest rate. It was the second such move in October.

Some Fed watchers believe that policymakers could drop the rate even lower as conditions seem worse today than when that rate touched this level – in 2003.  Others feel that such moves have become more symbolic than substantive, and believe the Fed needs to halt future actions to let the lower rates work their ways through the system and begin impacting the economy over the next six to 12 months.

In other moves, central bankers in South Korea, China, and Norway each reduced their respective rates, and the European Central Bank (ECB) appears to be leaning toward a similar cut next week.

Weekly Economic Calendar

Source: Uncertainty Escalates as Tomorrow’s Presidential Election Looms

Indeed, the interest-rate reduction could set in motion a series of diverse global events that will impact such seemingly unrelated areas as European inflation, global food prices, the U.S. dollar, American exports, and the already chilly relationship between the European Central Bank (ECB) and the government of France.

For any of this to happen, however, the Fed first has to act. Most observers believe the U.S. central bank’s policymaking Federal Open Market Committee (FOMC) will reduce the Federal Funds rate for the seventh time since mid-September, dropping the benchmark borrowing cost from 2.25% to 2.0%.

According to many experts, the Fed’s timing will be excellent. Economists have increasingly come to believe that the U.S. economy is probably in a recession already, although most await more-certain evidence before actually making the pronouncement.

Some of that evidence could come out today. U.S. stocks traded in a narrow range yesterday (Tuesday) as the market awaited two important announcements: The advance estimate of U.S. Gross Domestic Product (GDP) and the central bank’s rate-reduction decision – both due out today.

“Another large batch of companies has reported quarterly earnings results, but overall, they have failed to move the needle that much as the market is in a wait-and-see mode ahead of the GDP data and the FOMC decision on Wednesday,” Patrick O’Hare at Briefing.com Inc. told the AFP news service.

There are some strong dissenters.

“There is no reason why the Fed should be cutting rates right now,” Richard Yamarone, director of economic research at Argus Research Corp., told MarketWatch.com.

What Tales GDP Doth Tell

Although GDP is a lagging indicator, analysts anxiously await the report since it will demonstrate whether the U.S. economy is as weak as many believe. According to a Reuters‘ poll, first quarter GDP is expected to clock in at a sluggish 0.2%, down from a 0.6% growth rate in the fourth quarter. Reuters developed the consensus estimate by averaging 89 predictions, which ranged from contraction of 0.8% to growth of 1.5%.

Most analysts, including those at UBS AG (UBS) and Lehman Brothers Holdings Inc. (LEH), felt March’s surprisingly strong durable goods orders and an increase in inventories would tip the balance in favor of slim growth in the first quarter. However, analysts did note that inventory increase could signal weakness ahead, especially if not supported by the accompanying increase in sales needed to create the “sell through” that would keep additional inventories from piling up.

“A $5 billion accumulation of [inventories] would add almost a full percentage point to GDP growth and, in our forecast, constitutes the difference between a positive and a negative result,” RBS Greenwich Capital said in a note to clients.

A positive GDP estimate, however slight, could mean the U.S. economy is poised to skirt a true recession. The textbook definition of a recession is two consecutive quarters of negative GDP growth.

But the weak GDP estimate, which will be announced early this morning, could prove the justification the FOMC needs to recommend another rate reduction this afternoon.

CME Group Inc.’s (CME) Chicago Board of Trade futures are pricing in an 82% chance that the FOMC will recommend the U.S. Federal Reserve make a quarter point cut, bringing its key interest rate down to 2.0%. When the Ben S. Bernanke-led central bank started its rate-cutting campaign last year, the Fed Funds rate stood at 5.75%.

And if policymakers do order the rate-reduction, most analysts believe it will be the last one for awhile; those same CBOT futures indicate a 71% chance that the Fed will hold the line on interest rates when the committee meets again in June.

“The direction of Fed policy hangs in the balance, and there are people like me that hope the central bank quits sooner rather then later,” Jack A. Ablin, chief investment officer at Harris Private Bank, told The New York Times.

But here’s where the global wild cards come into play.

When Everything’s Wild

With its ambitious rate-cutting strategy, the Fed has stoked domestic inflationary pressures and helped accelerate the decline of an already-sinking dollar.

Officially, the U.S. inflation rate stands at about 4%, though many experts – including Money Morning Contributing Editor Martin Hutchinson – believe the actual U.S. inflation rate is much higher. In fact, anyone who studies the sharp increases in energy, food prices, commodities, healthcare, and a university-level education may find it tough to argue that prices aren’t headed higher.

Even with a bit of a rebound, of late, the dollar is down more than 7.3% against the euro in the past six months, 12.35% in the past 12 months and nearly 28% in the last 54 months. The greenback is down substantially against other key currencies, too, and that’s helped fuel a massive run-up in the cost of energy and food-related imports – all highly inflationary for U.S. consumers.

At the same time, however, the cheap dollar has made U.S. exports very competitive abroad. Indeed, for foreign buyers of such big-ticket products as Boeing Co. (BA) jetliners, the plunging dollar has served as a global blue-light special. Boeing’s bureaucratic arch-rival, Airbus SAS, hasn’t been able to compete, and a week ago was actually forced to raise prices on two of its commercial jets – citing rising steel prices and a falling dollar as the two key causes.

On Sunday, French Economy Minister Christine Lagarde said the gap between the U.S. and Eurozone interest rates was way too large, and called for a change in interest-rate policies – either by the Fed or the European Central Bank (ECB).

The U.S. Fed has been slashing rates to jump-start economic growth while also keeping a horrid housing market from putting the entire economy to sleep. The ECB, by contrast, has kept rates high to combat inflation – even though that strategy is pushing Europe into an undesirable slowdown.

“We are in a delicate situation where we have, on the one hand, an American Federal (Reserve) which has a policy of very low rates and a European Central Bank which has maintained high interest rates,” Lagarde told LCI Television and RTL Radio, the global wire service Reuters reported. “The differential in interest between the two, it seems to me, is a little too big at the moment.”

Paris has long been a vocal critic of what French President Nicolas Sarkozy has termed the ECB’s overly narrow focus on fighting inflation. But Sarkozy and Co. have been criticized by both Germany and the ECB for attempting to meddle in the business of a supposedly “independent” central bank.