January 12, 2009……..Comments by Tom Robinson, President

Spooked by the deteriorating employment situation and the judgment of a deepening global recession, the equity markets did not do well last week. The Dow and S&P were both off well over 4% and Nasdaq by 3.7%. Europe tumbled 1.7%, and Asian markets were flat, although Japan was modestly positive. Treasuries were virtually flat, although munis continued to do well.

Clearly one of our two themes, namely global economic weakness continued to be confirmed, although there were some few signs that things may be getting better in some respects.

  • Housing remains a problem in the US. New home sales in November dropped 2.9% to a 17-year low. Existing home sales declined even more, 8.6%. This is the biggest decline since the start of the series in 1968. Pending home resales dropped 4% in November, and week before last mortgage applications fell 8.2%.
  • Construction spending overall fell only about 0.6% in November as commercial and government building cushioned the slump in residential construction. It should be noted that commercial and industrial construction are in the early phase of a contraction in the opinion of many experts in the industry. The new stimulus package being considered by the incoming Administration in Washington should, however, support government construction.
  • Of course the big news was the rise in the unemployment rate in December to 7.2%, a 15-year high. Payrolls fell 584,000 in the month and for all of 2008 2.6 million jobs were lost, the most in a year since 1945. The only slightly positive news on employment was that initial claims the week before last fell by 24,000. Initial claims were below the serious recessionary 500,000 number. While unemployment is a lagging indicator, initial claims are robust predictors of recoveries.
  • The ISM non-manufacturing index, a proxy for 90% of the economy, continued to decline but at a slower pace than in the previous month.
  • November factory orders declined by 4.6%, but what was interesting was that nondefense capital goods orders, excluding aircraft, actually increased a tick below 4%, and shipments were almost flat.
    Same store retail sales in December fell 1.7% from a year ago, although total sales fell by less, some 1% year on year. Drug, discount, and wholesale clubs (ex their fuel sales) faired better, actually increasing. December consumer confidence rebounded in the month.
  • Consumers continued to repair their balance sheets in November with a record fall of $7.9 billion in their outstanding credit. This may in part reflect an inability for many to get new loans, but whether the drop is due to an intent to save more or an ability to get more, the balance sheet repair is a positive.
  • The PMI composite for activity in the EC in December was flat and inflation was way down. There is little reason to believe the European economic activity is stabilizing, though, and we can expect further deterioration going forward. The Eurozone economic confidence data for December show further deterioration. The Bank of England certainly confirmed this for the UK with a drop in its rate to the lowest level on record. The European Central Bank is expected to ease aggressively over the next weeks ahead.
  • Japan’s leading and coincident indicators for November told the story for the economy and the expectations for it ahead, with both showing further weakness.

Clearly there is no shortage of bad news at home and abroad, but as noted in the above commentary the US is actually doing a bit better than many other nations. In fact, there are some hopeful signs that the rate of descent in the economy may be showing early signs of stabilizing.

Our second big theme, the massive deficit spending about to embarked upon by the US and by others in industrial world and in some parts of the developing world, shows that governments have stopped playing the blame game and are attacking along a broad front.
If they are successful-and they will be unless the world is totally different this time in every respect-then we are going to see more positive signs for the global economy over the coming months. The stock market and early cycle stocks, especially infrastructurerelated names, should begin to show some sustained life.

 The information and statistical data contained herein have been obtained from sources that Oppenheimer Asset Management Inc. believes to be reliable. The opinions expressed are subject to change without notice. Any securities discussed should not be construed as a recommendation to buy or sell and there is no guarantee that these securities will be held for a client’s account nor should it be assumed that they were or will be profitable. Past performance does not guarantee future comparable results. Oppenheimer Asset Management Inc. and Oppenheimer & Co. Inc. are both indirect wholly owned subsidiaries of OppenheimerHoldings Inc. Securities are offered through Oppenheimer & Co. Inc., a registered broker dealer and investment adviser. 


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