Weekly Economic and Financial Commentary

Obama Rolls into Washington

Mon, Jan 26 2009, 06:38 GMT
by Wachovia Research Team - Wells Fargo Investments, LLC | View company's profile

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U.S. Review

Obama Rolls into Washington

The inauguration of Barack Obama dominated was this week’s big economic news. The transition of power was smooth as was expected. Wall Street was not impressed, however, and stocks sold off heavily after the President’s acceptance speech. The new President is expected to give a short-term boost to consumer confidence but have no meaningful impact on the near-term economic outlook.

President Obama is off to a strong start. With both houses of Congress under Democrat control there have been few confirmation battles. Work on the $825 billion stimulus package is rapidly moving forward and the package should be on the President’s desk by February 15.

While the stimulus package may be enacted quickly, the impact will take quite some time to filter through to the economy. The bulk of infrastructure spending will not kick in until late this year or early 2010. Tax cuts and changes in withholding schedules may show up a little earlier but are expected to have only modest impact. The biggest lift to the economy may come from the psychological boost the program likely will engender.

Mamas Don’t Let Your Babies Grow Up To Be Homebuilders

Homebuilders continue to endure a monumental struggle against flagging demand previous overbuilding. The Wells Fargo/NAHB Housing Market Index declined 1 point to 8.0 in January, marking a new all-time low for the series. Current sales activity fell 2 points to 6.0, while the future sales activity rose a point to 17.0. Prospective buyer traffic remains just above its all-time low at 8. The numbers are just plain awful and likely reflect the free-fall in employment that occurred during the fourth quarter, when more than 1.5 million jobs were lost. Employment losses more than offset any beneficial impact from lower mortgage rates, which are having a much larger impact on refinancing activity than sales.

Housing starts continue to plummet. Starts plunged 15.5 percent in December to a 550,000-unit annual rate. Both single-family and multi-family starts fell sharply, with single-family dropping 13.5 percent and multi-family down 20.4 percent. Permits fell 10.7 percent in December and permits are still running slightly below starts. Builders are under intense pressure to work down their inventories and raise cash. Many smaller builders have entered bankruptcy and stopped all new development activity.

As bad as December’s data are, we believe housing starts will fall even further in the first quarter. This winter has been a little colder and wetter than usual, particularly in the South which accounts for more than half of all new home construction. The credit crunch is making it extremely difficult for builders to access credit and should continue to do so through all of 2009. We now expect housing starts to bottom out somewhere around 490,000 units during the first quarter and to total just 580,000 for all of 2009. This would make 2009 the worst year for homebuilders since records were kept back in the 1950s.

First-time claims for unemployment insurance bounced back this week, with claims rising 65,000 to 589,000. The increase brings initial claims to their highest level in 26 years. Continuing claims also trended higher. The drumbeat of layoff announcements grew louder this week, as several major firms, including Intel, Microsoft, and Pfizer, announced cutbacks along with their quarterly earnings announcements.

Container cargo shipments through the Port of Long Beach plunged 11 percent in 2008, marking the single-largest decline in more than 20 years. The sharpest drops occurred during the later part of the year, when consumer spending plummeted. The trade data are a real wildcard for the fourth quarter GDP data. Domestic demand likely fell much more than GDP during the quarter.

Global Review

Storm Clouds Darken in Canada

Cracks are showing up in the Canadian economy and GDP growth probably contracted during the fourth quarter. The Bank of Canada (BoC) is now forced to reconcile the risk of enabling inflation against the reality of an economy falling into recession. What are the challenges facing Canada’s economy today and what can we reasonably expect for the future?

So far in the new year, economic data in Canada have been largely worse than expected. This week was no exception as wholesale sales, manufacturing shipments and retail sales all came in well-below consensus estimates. It appears Canada’s export-driven economy is finally succumbing to the effects of a broader global slowdown and the contraction in spending abroad. While the United States is the primary export partner for Canada, exports to Europe are down as well.

Exports Still Primary Concern, But Domestic Economy also Weak

With just about every developed economy in the world now mired in a recession, there is little hope for a quick turnaround.

While challenges to exports present the greatest obstacle to Canadian economic growth, domestic demand is weakening as well. Retail sales fell 2.4 percent in November, a larger-than-expected decline and the largest monthly drop in more than a decade. Part of the weakness was caused by prices; sales at gas stations led the declines with a contraction of nearly fifteen percent on the month. The other culprit in November was sales of autos, which was off more than seven percent. Other components like food and beverage, supermarkets, and pharmacies actually picked up in November. But we suspect the worsening employment situation in Canada will present significant headwinds to future growth in retail sales across the board. Another sign of softening in the domestic economy in Canada is the index of leading economic indicators which declined 0.6 percent in December, led by declines in stock prices and housing.

The Bank of Canada (BoC) cut its policy rate to 1.00 percent this week, bringing the cumulative policy easing since December 2007 to 350 basis points. The BoC’s primary objective is to maintain a stable inflation rate near two percent. In its official release this week, the Bank acknowledged “significant upside and downside risks to the inflation projection,” essentially recognizing that the inflation outlook is heavily influenced by the state of the global economy. The whipsawing of energy and commodity prices makes it very difficult for central banks to get a handle on inflation. The Consumer Price Index declined 0.7 percent in the month of December, but is up 1.2 percent year over year. We expect Canadian CPI to increase at only a 0.9 percent rate in all of 2009, which will likely include some negative year-over-year numbers during the summer. The spike in oil prices around the middle of July 2008 will present a high basis for comparison in July 2009.

We project the Canadian dollar will weaken a bit further against the greenback as the BoC continues to cut rates in the next few quarters. Further out, however, the loonie could stage a comeback against the U.S. dollar as sluggish economic growth in the United States keeps U.S. interest rates very low for some time.

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Published On Mon, Jan 26 2009, 06:45 GMT

About this Report

Wells Fargo Investments, LLC

https://www.wellsfargo.com/

sam.bullard@wachovia.com

More Reports from this Contributor

Archive

The Moderate Economic Recovery is Still Underway
Fri, Feb 10 2012, 19:23 GMT
Off to a Good Start for the Year in US; Europe Agrees on Fiscal Pact; Manufacturing Improves
Fri, Feb 3 2012, 20:08 GMT
Less Strength Than Meets The Eye
Mon, Jan 30 2012, 05:24 GMT
Good News on Manufacturing, Inflation and Housing
Fri, Jan 20 2012, 20:12 GMT
Week Two Brings a Little Less Enthusiasm
Mon, Jan 16 2012, 06:17 GMT

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For example, you place an order to buy at a stop of $50 which is above the current price of $45. If the price of the stock moves to or above the $50 stop price, the order becomes a market order and will execute at the current market price. Your trade will be executed above, below or at the $50 stop price. In a fast market, the execution price could be drastically different than the stop price. A "sell stop" is very similar. You own a stock with a current market price of $70 a share. You place a sell stop at $67. If the stock drops to $67 or less, the trade becomes a market order and your trade will be executed above, below or at the $67 stop price. In a fast market, the execution price could be drastically different than the stop price. A stop limit has two major differences from a stop order. With a stop limit, you are not guaranteed to get an execution. If you do get an execution on your trade, you are guaranteed to get your limit price or better. For example, you place an order to sell stock you own at a stop limit of $67. If the stock drops to $67 or less, the trade becomes a limit order and your trade will only be executed at $67 or better. Glossary All or None (AON) A stipulation of a buy or sell order which instructs the broker to either fill the whole order or don't fill it at all; but in the latter case, don't cancel it, as the broker would if the order were filled or killed. Day Order A buy or sell order that automatically expires if it is not executed during that trading session. Fill or Kill An order placed that must immediately be filled in its entirety or, if this is not possible, totally canceled. Good Til Canceled (GTC) An order to buy or sell which remains in effect until it is either executed or canceled (WellsTrade® accounts have set a limit of 60 days, after which we will automatically cancel the order). Immediate or Cancel An order condition that requires all or part of an order to be executed immediately. The part of the order that cannot be executed immediately is canceled. Limit Order An order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). Maintenance Call A call from a broker demanding the deposit of cash or marginable securities to satisfy Regulation T requirements and/or the House Maintenance Requirement. This may happen when the customer's margin account balance falls below the minimum requirements due to market fluctuations or other activity. Margin Requirement Minimum amount that a client must deposit in the form of cash or eligible securities in a margin account as spelled out in Regulation T of the Federal Reserve Board. Reg. T requires a minimum of $2,000 or 50% of the purchase price of eligible securities bought on margin or 50% of the proceeds of short sales. Market Makers NASD member firms that buy and sell NASDAQ securities, at prices they display in NASDAQ, for their own account. There are currently over 500 firms that act as NASDAQ Market Makers. One of the major differences between the NASDAQ Stock Market and other major markets in the U.S. is NASDAQ's structure of competing Market Makers. Each Market Maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the Market Maker will immediately purchase for or sell from its own inventory, or seek the other side of the trade until it is executed, often in a matter of seconds. Market Order An order to buy or sell a stated amount of a security at the best price available at the time the order is received in the trading marketplace. Specialists Specialist firms are those securities firms which hold seats on national securities exchanges and are charged with maintaining orderly markets in the securities in which they have exclusive franchises. They buy securities from investors who want to sell and sell when investors want to buy. Stop An order that becomes a market order once the security has traded through the designated stop price. Buy stops are entered above the current ask price. If the price moves to or above the stop price, the order becomes a market order and will be executed at the current market price. This price may be higher or lower than the stop price. Sell stops are entered below the current market price. If the price moves to or below the stop price, the order becomes a market order and will be executed at the current market price. Stop Limit An order that becomes a limit order once the security trades at the designated stop price. A stop limit order instructs a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed. It is a combination of a stop order and a limit order. These articles are for information and education purposes only. You will need to evaluate the merits and risks associated with relying on any information provided. 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