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

Often at the end of the year there’s a substantial surge in stock markets. It’s a phenomenon known as the Santa Claus Rally, on account of it occurring between Christmas and New Year. You can see it on this chart.

Some say this rush of buying is to do with people investing their Christmas bonuses. Others say it’s because the market bears are away on holiday this week – or just that there’s a general feeling of seasonal good will and happiness at this time of year.

Whatever the reason for this year-end excitement, it could be off this year.

You see, Bad Bernie Madoff has just thrown a huge spanner in the works. Or, to be more accurate, he threw it in some years ago. It’s just that it was only last Thursday that his spanner really jammed in the gears of the market machine.

Don’t stand too close, because the sparks are about to start flying… and the wheels of the machine could be about to come off. This could be what really starts the next leg off the great bear market of 2008.

It really looked like the stock market was going to end the year on a positive note – that we were in for a decent Santa Claus Rally. Since the low on 21 November at 3,734, the FTSE has staged an impressive rally of 14.5%. It’s the same for the American Dow Jones, which has notched up 13% in the last four weeks.

But now, what could be the largest financial scam in history has begun to unravel. It was designed and directed by Wall Street veteran, Bernard Madoff and his company Madoff Investment Securities LLC. He stands accused of running a multibillion-dollar fraud scheme. In fact, he admitted as much to his two sons, who went ahead and reported him.

When you look at what Madoff did, there’s nothing too sophisticated about it. He took money in from gullible investors, by promising high returns, for little risk. Then he paid existing investors out of funds provided by new investors. It’s your common or garden ‘Ponzi’ scheme or pyramid scam.

The only reason he’s managed to get away with it for so long is that we’ve been in a major bull market in stocks. With this cheery investment climate, people didn’t find it difficult to believe that Madoff was able to consistently deliver returns.

The problem was that when the whole sub prime mortgage time bomb blew up – and the current bear market took hold – investors started losing money. What did they do? They started taking money out of successful positions to pay for their losses. And they started to withdraw from Madoff’s fund. That’s when the scam started to unravel.

What’s particularly worrying about this mess is that Madoff managed to do business with large numbers of prestigious financial institutions worldwide – guys who really should have known better.

Royal Bank of Scotland is in for £400 million, HSBC have a billion-pound exposure and Spain’s Santander Group is in to the tune of £2.1 billion – although not of its own money… the money of clients it introduced to Madoff.

High profile investors were totally sucked in. “Superwoman” fund manager, Nicola Horlick, of Bramdean Asset Management, had 9% of her fund’s assets with Madoff.

“He is very, very good at calling the US equity market.” Horlick once said of Madoff. “This guy has managed to return 1 per cent to 1.2 per cent per month, year after year.”

Not this year, Nicola. And not ever again.

But of more immediate concern to us now is what is this going to do to the markets. So far, the impact has been minimal. The markets have shrugged off the implications. Maybe that’s because investors believe that the Federal Reserve’s interest rate cut later today will win the bull/bear tug of war. Maybe it will, temporarily.

Sooner or later, though, the full extent of this scam will be clear. Investors will start panicking about what other “good time” scams are about to go bad. It will become apparent that Madoff’s sons and a host of other conmen were in on it too (how could the old man possibly have done it all on his own?)

Investors will start pulling their money out of the stock market. That’s when the markets will start their next leg down. That’s when the Madoff effect will derail the Santa Claus Rally.

Source: Derailing the Santa Claus Rally

Make sure you have your stock market hedges in place. Until next time,