Okay – this might be a bit long but there are a lot of new developments coming from Capitol Hill and they are driving stock market sentiment on a minute by minute basis this week!
There is a little bit of optimism and confidence back in the market after a hard week likely attributable to bargain hunting and rumors regarding the Obama administration’s housing plan. The latest whisper to hit Wall Street is that the government will use some of the money in order to help reduce interest rates for struggling borrowers, while asking lawmakers to approve more ways to modify mortgages.
In Canada, stock markets fought back from a 1.7% initial decline to end the day higher by 0.47% led by RIM and the materials sector. In the United States the Dow Jones Industrial Average Index dropped by 0.09%, rebounding from a 3% drop earlier in the day. The Standard & Poor’s 500 Index added 0.17% and the NASDAQ Composite Index rose 0.73%. A little positive sentiment can take stocks a long way in very short order.
U.S. Treasury Secretary Timothy Geithner intends to make the plan public in coming days, possibly within a week, said the person close to the “matter”. Some elements can begin immediately, and others must be considered by Congress.
Foreclosure filings in the U.S. surged 81% last year to 2.3 million, the highest on record, as home prices fell and tighter mortgage standards made it harder for homeowners to sell or refinance. The administration has pledged to use $50 billion to $100 billion for housing relief, taken from the $700 billion bank rescue package.
“Our focus will begin on using the full resources of the government to help bring down mortgage payments and help reduce mortgage interest rates,” Geithner told the Senate Banking Committee on Wednesday. In short, if you give money to a bank but they don’t lend it out then the government might as well first give the money to the home owner and then the homeowner can give the money to the bank (but this way Main Street wins before Wall Street wins but they both win versus the current scenario).
Geithner and Housing Secretary Shaun Donovan courted banks and housing industry groups in an effort to gather support ahead of the housing policy announcement. The new plan will make use of interest rate reductions, loan extensions and principal forbearance, in which part of a mortgage’s principal is deferred to the end of the loan’s term.
All these measures will be used to help homeowners reach an affordable monthly payment versus foreclosure. That monthly housing payment, compared with their income, will be the focus of the program, rather than achieving a target interest rate.
Senate Banking Committee Chairman Christopher Dodd told reporters that using $50 billion to $100 billion of the $700 billion bank rescue fund to stem foreclosures will create “a tourniquet” for the housing crisis and help families stay in their homes.
Home prices dropped the most on record in the 4th quarter of last year as foreclosures dragged down values and the recession pushed buyers out of the market. The median price of a U.S. home declined 12% to $180,100 from a year earlier and sales of properties with mortgages in default accounted for 45% of all transactions.
The worst U.S. housing slump since the Great Depression is deepening as foreclosures “drain” value from neighboring homes and the economic recession worsens. The number of Americans collecting unemployment benefits rose to a record 4.81 million in the last week of January as companies such as Caterpillar and Home Depot slashed jobs. The U.S. lost 2.6 million jobs last year in the biggest workforce reduction since 1945.
The world’s largest economy will contract 2% this year, 0.50% more than last month’s forecast, according to the median of 50 projections for Bloomberg News. The U.S. unemployment rate may climb to 8.8% this year.
In short, the new administration knows that they can make a difference if they use the appropriate tools at the right time but it is not easy and it is still politics.
The next big challenge will be the auto industry. GM received $13.4 billion in government loans, which the company has said it needs to stay out of bankruptcy. To keep the loans, the carmaker has to report progress in negotiating a debt restructuring with bondholders and union officials to the U.S. Treasury on February 17th. Chrysler received a $4 billion loan and faces the same deadline.
Credit default raters are demanding as much to protect against a Ford Motor default as they are for General Motors, a sign investors are convinced the automaker will need to follow its bigger rival in seeking government aid. The cost to protect Ford debt for five years has jumped; the current price increase means that to protect $10 million of Ford bonds for five years would cost $8.3 million upfront in addition to $500,000 annually.
Ford expects Americans to buy 11.5 million to 12.5 million cars and light trucks this year. GM forecasts auto sales of 10.5 million units and Chrysler is assuming U.S. auto sales may stay at about 10 million annually for 4 years. It will be interesting to see who is right and wrong on these estimates.
“It would be a mistake to assume that a 10 million market is an aberration,” said Jim Press President of Chrysler. “Instead, we need to accept and come to grips with it. We feel good about our plan and we’re confident we can meet our needs and the requirements will be met.”
There are 3 key pillars that will drive stock markets up or down in the short-term: 1) stimulus package or the overall health of the economy; 2) auto-industry; and 3) banking & housing stability.
Once you see some stability in these key areas you will see some more stability in stock markets. Markets in Europe this morning are up following yesterday’s late day rally on Wall Street and U.S. futures are pointing to a slight higher open.
Have a great long-weekend (in Ontario for family day)!
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
