My, How the Mighty Have Fallen

From 2002 to 2006, General Electric and Exxon Mobil went back and forth as the largest company by market cap before Exxon finally pushed GE off the side of the cliff in 2007. As shown in the chart above, there is no comparison between the two companies anymore, as Exxon is worth $366 billion and GE is worth just $96 billion. GE has a lot of work to do before it gets back in the hunt as the world's largest company.

Oversold

Here we go again testing another 52-week low in the S&P 500. I hope by now we have all learned to tune out the terms "this is THE bottom", "this is a bottoming process," and, my favorite, "buy now because in 10-20 years you will wish you had done so." The one piece of punditry that intrigued me starting into 2009 was that it seemed even bears expected a big rally to start the year that would then produce a huge opportunity to re-open shorts between March and May. Instead, the big rally of 2009 was squashed right after the first week.

Now that we have essentially retested the 2008 lows, it is a tough determining whether we break them here or bounce a few more times before the lows break decisively. Time will certainly tell. But we are oversold enough for it to make sense to begin positioning for some kind of near-term (sharp?) bounce by reducing shorts and increasing long exposure.

Be careful out there!

Worst First Month For A President Since Ford

When President Obama was elected last November, many in the press said the new President would instill a level of confidence not seen since the Administrations of FDR and JFK. However, after his first full month in office, the market hasn't embraced Obama in anything resembling the way it initially embraced FDR, JFK, or even Bill Clinton. During the first months of FDR's and JFK's Presidencies, the Dow Jones Industrial Average (DJIA) rose by 4.18% and 3.04%, respectively.

President Obama's first full month in office has been accompanied by a 7.34% decline in the DJIA, which since 1900 is the second worst first month for a President behind the 14.71% decline under Gerald Ford, who came into office following the resignation of Richard Nixon.

Just as Gerald Ford wasn’t necessarily to blame for the market’s performance during his first month in office, the declines we are seeing in the market now are not necessarily due to President Obama. However, we would recommend that he take the advice of former President Clinton, who suggested in an interview with ABC News this week that rather than taking every opportunity he can to talk down the economy, the President should begin to show “that he's confident that we are gonna get out of this and he feels good about the long run."

Investors are looking for leadership, not only in the market, but out of Washington. Unfortunately, this week it was lacking. How confident can Speaker Pelosi be about the stimulus bill she spearheaded when she wasn't even in the country when it was signed into law? Also, at a time when the entire banking sector was on the verge of collapse (once again), the Treasury Secretary seems to have gone into hiding.

Oh No, Timmy!

And by Timmy, I presume you mean Tim Geithner, Treasury Secretary?

The market (down 382 points) was not very impressed with the new treasury secretary's overview of TARP part Deux. Buy on the rumor, sell on the news...

Job Losses - Comparing Recent Recessions

The current contraction is far far worse than the prior downturns: 3.6 million — and counting — job losses as of January 2009 is worse than the 2.7 million jobs lost in the 2001 recession, and far worse than the 1.6 million job losses in the 1990-1991 recession.

January Unemployment Report Friday

We are likely to see another ugly unemployment report on Friday. The early data points are not pretty:

Layoffs: Challenger job layoffs surged to 242,000 in January — the highest level for a month since 2002. The monthly rise was +75,000 and, year over year, the increase in layoffs was 165,000.

ADP Report: 522,000 jobs lost in January, consistent with consensus expectations.

I am looking for another 500,000 plus job loss (potentially over 600,000) and unemployment ticking up to 7.8%.

So, is this expectation baked in the cake, or will the financial markets drop hard if in fact this type of number comes to fruition?

Consumers Are Doing The Right Thing

Consumers are correct to increase savings while spending less. No one will save them, so they must save themselves. Bravo.

The issue of toxic bank assets is THE big sinkhole swallowing up global capital markets. There seems to be something in the air, a feeling that before rushing into “fiscal stimulus”, something has to be done about this. And contrary to official propaganda, banks ARE lending.

Risks are vast in revaluing tainted assets
Example: The financial institution which owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S&P estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

The bond analyzed by S&P is just one of thousands that the government might buy or guarantee should it go forward with setting up a “bad bank” that would acquire $1 trillion or more of toxic assets from banks.

The idea is that, free from the burden of carrying these bad assets, banks would start lending again and bolster the faltering economy. The bad bank set up by the government would, over time, sell the assets and recover some or most of what it had paid.

While the government is considering several approaches to helping the banks, including more capital injections, buying or insuring toxic assets is likely to be a centerpiece. Determining the right price for these assets is crucial to success. Placing too low a value would force institutions to sell and others holding similar investments to register crushing losses that could deplete their capital and make it harder for them to increase lending.