Avalon Asset Management Company Lexington, Massachusetts Investment Management
Avalon Asset Management Company The Year That Was
“We had everything before us, we had nothing before us.” – Charles Dickens, A Tale of Two Cities
At Avalon’s MarketWeek, it’s that Time of the Year,
For us to take stock of What got us all Here.
The Faces of Finance, the Great and the Small,
Are set down here in our Annual Roll Call.Dear Chairman Ben, once known as the Blest,
How does it feel to have inherited this mess?
From Alan Greenspan, once known as The Maestro,
Who now says to the banks, “Please say it ain’t so.”We’re sorry to say Ben, the whole world’s still steamin’,
Over the mess that was made of the Brothers named Lehman.
You’ve learned the hard way, when judging a bank,
Don’t take any tips from ex-Goldmans named Hank.As you pump out more money, the economy to mend,
Good luck trying to get any bankers to lend.
Those zero rates may, or may not heal the trauma,
Or save you from the wrath of your new boss Obama.The deepest of bows to Secretary Paulson,
Who buried in one year, Bear, Merrill and Lehman.
Your TARP plan shines brightly for the whole world to see,
“Don’t ask any questions, just give us the money.”At first you were mostly defending the Dollar,
And so we all watched it go lower and lower.
When the task came your way, to save the Economy,
You succeeded so well, we’re all out of money.Please excuse Jamie Dimon, he’s still out of breath,
From margin-calling all of his competitors to Death.
The sun shines now brightly, on the House known as Morgan,
Just remember not to cross the Syndicate named Goldman.We can hardly believe the good luck of Ken Lewis,
The NationsBank Chairman who’s been putting it to us.
He stole B of A, Countrywide and Merrill,
Then took fifteen Bill just to keep him from peril.No questions please, about what he does with TARP money,
Though as a taxpayer you may not find it so funny.
No help for Detroit, says the modern-day Potter,
Those Midwestern banks are just cannon fodder.Of Christopher Cox, who heads the SEC,
We hardly know what, and neither does he.
Capitalism has had powerful enemies you see,
Comrades Lenin and Marx, with Cox making three.Tim Geithner was the man at the New York Fed,
Did he try to save Lehman, or leave them for dead?
Our new Prez will make him the head of Treasury,
So will he get the check, or ex-boss Bernanke?The Germans and Japanese do thank Senator Shelby,
Though why he’s a Senator, nobody can tell me.
Mr. Shelby you see, would sell out our Nation,
So anxious is he, for foreign automation.Some silence please, for victims of the turmoil,
Decoupling, Global Growth, Emerging Markets and Peak Oil.
And the benighted clients of one Bernard Madoff,
His statements it seems, were just a tiny tad off.Though he’s not from the Street, we must mention Barack,
Who began with the idea, fix the mess in Iraq.
His first press conference, ‘twas the most amazing feat:
A President who can talk in sentences complete?Since the fourth of November, it’s been something to see,
Such historic uniqueness: he can make markets rally!
We wish him good luck in repairing this drama,
So lift up your glass to President Obama.And yet what would any review of the Street be,
Without mentioning the cast at TV-CNBC?So a glass of the best bubbly, to Miss Erin Barnett,
Smart and sincere, she’s as good as they get.And avuncular Mark Haines, who’s from the old school,
Of people who report, not yell like a fool.For Maria Bartiromo, the channel’s jolliest reporter,
Though she may miss a few, we mostly all love her.For the skinny in depth, we like David Faber,
For exposing the Street, there’s none better than Cramer.No taxes or government for our Melissa Francis
Who asks, "Are there no prisons, nor even workhouses?"To Charlie Gasparino, who’d like to beat everyone up,
As a commentator Charlie, do please just shut up.And who are you channeling, Michelle Caruso-Cabrera,
Marie Antoinette, or Queen Helmsley, Leona?Though Santelli and Liesman hardly ever agree,
We listen most carefully to their thoughts about Money.And when we want to know what the Traders do see,
Who better to tell us, than good Bob Pisani?For Larry Kudlow, raise a glass with good cheer,
He’s not always there, but at times he is near.Reporters Olick, LeBeau, Goldman and Epperson,
May you rise to the top with bonhomme Dylan Ratigan.And to the lightweights who people the show “Power Lunch,”
From TV-Bloomberg comes a warm, “Thanks a bunch!”Now ends our review of Two Thousand and Eight,
We wish we could say it was all a Mistake.
Your indulgence we beg, for the Verses seen here,
Thank you for reading, and a Happy New Year!Although retail sales got a weekly bounce, the year-on-year decline for the month deepened to about 2.5% (excluding gasoline), making it one of the worst holiday seasons ever. One small bit of consolation is that given that the inflation rate for the period is about zero, with deeper discounts, that would imply that unit sales were actually up a bit. Unfortunately for the retailers, it came as the result of smaller average ticket prices (people are buying less expensive items) and smaller margins (they had to be pushed).
The final tally for third-quarter GDP came out (final, that is, until maybe it gets revised some other time) and the official verdict is in: nobody cared. The Bureau of Economic Analysis revealed no change in its earlier estimate of a drop of (-0.5)%, while tweaking the PCE (inflation measure) and consumer spending totals a little bit down.
The housing news that came out later that morning was more meaningful, which was too bad. Existing and new-home sales both fell sharply in November, with the former hitting its slowest rate in forty years, the latter in eighteen years (the S&L crisis). Inventories in both categories swelled back up over eleven months, while pricing continued to decline sharply. The credit situation continues to be difficult, with a UBS survey of banking CEO’s indicating that 90% plan to tighten standards in 2009.
The reports showed that the Fed-induced lower rates are giving a big lift to refinancing applications, which will put more money into homeowner pockets. Anecdotally, at least, the difference will mostly be absorbed by an increased savings rate. It appears that buyer traffic is picking up and credit is available to people with excellent credit scores – but it’s also hard to convince buyers to catch that falling knife when the knife is so large.
Housing analyst Ivy Zelman pointed out that even if mortgage rates fell to the government target of 4.5%, only 67% of Americans could afford a house while U.S. home ownership is currently at 68%. That doesn’t exactly argue for pent-up demand. Purchase applications also jumped last week, though not as much as re-fi’s, and to levels that are still quite low.
The commercial real estate group queued up for bailout money, opining that as long as the money is being handed out could you please send $200 billion our way? One thing to be said about TARP is that it is certainly keeping a great many lobbyists and consultants busy. It reassures us that there is no shortage of people willing to be ridiculous on the public stage, so long as they are paid.
While some commentators indulge in righteous moral spasms at the growing queue of groups raising their hands for government funds, it isn’t so bad. What it really shows is the strength of our service industry. The armies of lawyers, lobbyists and professional lickers that ply their trade in the D.C. area are at least bucking the recessionary trend. For good or ill, it’s one group that can’t be outsourced.
The rate of redefaulting, or restructured troubled loans that go into default again, caught a lot of attention last week. It is a problem, though probably less so as evidence that it’s useless to restructure, as the hard-core liquidationists would argue. It’s a reflection of how poorly the bulk of early restructuring has been done.
Rather than put people into more affordable payment situations, many lenders do little more than add back all the missed payments, tack on a fee or two or three, and then reset the clock. It allows the banks to say that they’re restructuring and to push some non-performing loans into another quarter, but all it really amounts to in the end is more snake oil from the back of the wagon.
The rate on the two-year Treasury bond fell to below 1%, while the ten-year dropped to 2.14%. To be sure, the flight-to-safety bubble is peaking, but notwithstanding that it cannot be said that the bond market has priced in any whiff of expansion. The poor gold bugs are beside themselves, but there isn’t much concern about inflation either.
Certainly the initial claims rate isn’t going to worry the fixed-income market. Claims surged during the week to 586,000, with the four-week averages moving ever higher into the 1980-1982 zone. At least today’s larger population means that the rate is lower. Though few are predicting a return to the double-digit levels of that era, the estimates of the peak rate have been steadily moving higher, and few are confident that we won’t hit double-digit levels. It’s just too difficult to say.
Durable goods orders in November were reported to have fallen (-1.0)%, which was better than expected, though the improved results were due mostly to defense orders. Non-defense capital goods fell another (-0.8)%, continuing the decline in business investment.
The personal income and spending reports brought little surprise to the markets. Income slipped a bit more than expected, while spending a bit less, though consumption fell for the fifth month in a row. Still, durable goods spending was flat and services increased slightly. Inflation continues to be muted, with another zero month in the PCE core rate and another energy-led decline in the total numbers.
The energy markets remained weak, with oil trading in the mid-thirties and wholesale gasoline falling below ninety cents a gallon. Despite the cold weather, even natural gas can’t get going, due to the sharp contraction in industrial usage.
Next week will get into gear on Tuesday, when the latest measurements from the Case-Shiller Housing Index, Chicago PMI and consumer confidence (Confidence Board) are posted. Estimates for the latter two are set to easily beatable levels, but at least the Chicago reading will give us a good indication of where the ISM manufacturing number is headed on Friday.
Wednesday will be like last week, with extra reports packed into a shortened day. There are no monthly reports due, but we will see the weekly reads on mortgage applications, oil, natural gas and initial unemployment claims. Friday, the last day of the official “Santa Claus Rally” period, will bring us December motor vehicles sales along with the ISM data.
We wish our readers a Happy New Year and the observation that for the markets at least, 2009 will almost certainly be better than 2008.
StockWatcher's Corner
In the spirit of annual predictions, StockWatcher’s prediction is that investmentgrade corporate bonds are likely to outperform equities in 2009. That said, we also cheerfully confess that annual predictions are something of a mug’s game. Nevertheless, we will make some general recommendations in the ensuing weeks.
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