Tuesday, November 25th, 2008

Tuesday: 11/25/08 10:30 AM EST:
Market Update:

New government programs designed to support consumer lending were announced today and this gave an initial boost to stocks. But the indices have fallen back in recent trading following two strong rallies. While the Fed measures are meant to address the issues in the credit and financial markets, they also underscore the severity of the problems. Treasuries are up this morning after two days of strong losses.

Today's economic data was mixed. The Commerce Department reported that according to additional data, its latest calculation of gross domestic product (GDP) indicated that the economy contracted by 0.5% last quarter instead of the 0.3% cited in last month's advance report. The figure was in line with predictions.

GDP is the market value of all final goods and services produced by labor or property in the country in a year?s time. Quarterly data is adjusted and annualized and changes from quarter to quarter indicate the strength and direction of the economy. A final report will be released next month.
Today's report indicated a 3.7% contraction in consumer spending versus the 3.1% decline cited in the advance report. The category represented a 2.69% subtraction to the GDP calculation instead of the initially reported 2.25%. In the areas of strength, net exports represented an addition of 1.07% instead of the originally reported 1.13%. Government spending rose by 5.4% instead of 5.8% and represented a 1.06% addition to GDP instead of 1.15%.

The inflation data in the report was positive in relative terms. The GDP price index showed an increase of 4.2% in the quarter. Though this was the largest increase since the first quarter of 1991, it was the same figure as that released in the advance report. What was even better was a revision to the price index for core personal consumption expenditures (consumer spending excluding the volatile categories of food and energy). It showed an increase of 2.6%. Though still the largest increase since the second quarter of 2006, it was lower than the 2.8% reported last month.
Interpreting the implications of today's news is a matter of perspective. Although the latest GDP figure was not a surprise, it was still the first decline since the fourth quarter of last year and the largest since the third quarter of 2001. But most observers are expecting the economy to get even worse. Predictions for the current quarter call for a contraction of between 3.0% and 4.0%.
In the other economic release of the day, the independent research firm, the Conference Board, said that its Consumer Confidence Index came in at 44.9 this month. This was a bounce from October's revised reading of 38.8 (originally 38.0) and it was better than the 39.5 that analysts had predicted. The news release said that the expectations index rose to 46.7 from 35.7 (originally 35.5) but the index of present conditions fell to 42.2 from 43.5 (originally 41.9).

Despite the improvement, November's index was still a reflection of deep pessimism by historical standards. October's index was the lowest in the history of the data series going back 41 years.
A minor release today was even more bearish. The S&P / Case-Shiller report on home prices said that the 10-city index fell in September on a year-over-year basis by 18.6%. This was the largest decline in the history of the data series going back to 1987. The 20-city index fell by 17.4% since the preceding September. This was also a record drop in the series going back to 2000. The decline means homeowners have less equity in their property, a major source of personal wealth. The declines also highlight the weak housing sector in which sales and new construction have fallen sharply.

The Federal Reserve announced today that it was establishing a program to foster the extension of credit to consumers and small businesses. The program is entitled the Term Asset-Backed Securities Loan Facility (TALF). Under the program, the Treasury will lend up to $200 billion to holders of securities backed by consumer and small business loans. (FED TALF ANNOUNCEMENT)

The Fed also announced that it would buy as much as $600 billion in debt issued or owned by Fannie Mae, Freddie Mac, or Ginnie Mae.(FED ANNOUNCEMENT ON GSEs)

This afternoon the Treasury will be auctioning off this month's issue of 5-Year Notes. Last month's auction results were not bad. Bids exceeded the $24 billion offer amount by 2.28 to 1, the highest bid-to-cover ratio in the last three auctions and above the average of 2.18 for the twelve auctions preceding last month's. Individual investor demand was soft, however. Noncompetitive bids, those from individuals and small institutions, totaled just $82 million, the lowest amount in the last six auctions and down from the twelve-auction average of $92 million.

Foreign demand was decent but not spectacular. Indirect competitive bids, which include those from foreign central banks, received 28.1% of the issue, up from the award portion in September's auction of 26.6% and higher than the twelve-auction average of 25.2%.