Week ahead: Black Friday OUT; Terrific Thursday IN

Consumers surprised economists by shrugging off the government shutdown and hitting the stores with gusto in October. Now the question is whether they will continue to open their wallets for the all-important holiday season. The NRF (formerly known as the National Retail Federation) predicts that holiday sales will rise 3.9 percent, a touch higher than the 3.5 percent growth seen last year. Because NRF is a trade group, many analysts discount the optimism. Scrooge alert: Economists at IHS Global Insight and Morgan Stanley believe that 2013 could be the weakest holiday season since 2008 and considering that holiday sales can make up one-fifth or more of annual sales, that would be bad news for the entire industry.

Retailers themselves are all over the map - Macy’s and TJX, the parent of TJ Maxx, HomeGoods and Marshalls, anticipate a solid quarter, while Best Buy and Wal-Mart are not so sure. One thing is clear: there will be fierce competition for consumers’ hard-earned dollars this holiday season, which due to a quirk in the calendar, is six days shorter than usual.

Retailers are offering holiday deals and layaway offers earlier than last year, hoping that this year’s trend of consumers spending on large ticket items, will spread across other categories, like clothing, toys and general merchandise. And by now, the idea of “Black Friday” seems positively passé, with Wal-Mart, KMart and Best Buy opening at 6pm on Thanksgiving Day; and Target, Sears, Macy’s, JC Penney and Kohl’s opening at 8pm. “Terrific Thursday” doesn’t have the same ring as “Black Friday”, but you get the gist – despite everyone complaining that it is sacrilege to open on Thanksgiving Day, consumers are rewarding retailers for rescuing them from those turkey-induced L-Tryptophan highs.

For those who don’t partake in the sport of fighting crowds in the physical stores, don’t worry -- the brick and mortar retailers have fully embraced their online competitors to provide shoppers with ample opportunity to escape their families without leaving their homes.

And a final bit of good news for the 38.9 million road warriors out there, who AAA expects will travel by car this week: gas prices are about $0.20 cheaper than they were a year ago.

MARKETS: Milestones abound! The Dow and S&P 500 closed above big, round numbers last week (16,000 and 1800), as stocks enter the final stretch of the year with tailwinds.

• DJIA: 16,064, up 0.7% on week, up 22.6% on year (7^th straight week of gains)
• S&P 500: 1804, up 0.4% on week, up 26.6% on year (on pace for its biggest annual gain since 1998, when it climbed 31%)
• NASDAQ: 3991, up 0.1% on week, up 32.2% on year
• 10-Year Treasury yield: 2.75% (from 2.71% a week ago; Treasurys have lost 2% on a total-return basis this year)
• Dec Crude Oil: $94.84, up 1.1% on week
• Feb Gold: $1244.60, down 3.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.26

THE WEEK AHEAD:

Mon 11/25:

10:00 Pending Home Sales Index

NY bankruptcy court considers merger of American Airlines and US Airways

Tues 11/26:

8:30 Housing Starts

9:00 FHFA House Price Index

9:00 Case-Shiller Home Price Index

10:00 Consumer Confidence

Weds 11/27:

8:30 Durable Goods Orders

8:30 Jobless Claims

9:45 Chicago Purchasing Managers Index

9:55 Consumer Sentiment

10:00 Leading Indicators

Thurs 11/28: US MARKETS CLOSED FOR THANKSGIVING

Fri 11/29: BLACK FRIDAY

1:00 US Markets close early

Week ahead: Will Yellen Pump or Pop Bubbles?

Is Janet Yellen a bubble pumper or bubble popper? That’s what some lawmakers wanted to know when the presumptive heir to the Fed Chairmanship appeared before the Senate Finance Committee last week. Considering that the S&P 500 is up 166 percent from the March 2009 lows, some are worried that the Fed’s aggressive monetary policies are far more responsible for boosting stocks than the recovering economy and improving corporate profits. To her credit, instead of pulling out the Greenspan/Bernanke mantra of “we can’t identify bubbles, but we will clean up after they burst,” Yellen said that nobody, including any of the fed officials, wants to go through another 2008 again. While she does not currently see evidence of a bubble-like environment “that threatens financial stability…I think it is important for the Fed, hard as it is, to attempt to detect asset bubbles when they are forming.”

Senator Bob Corker (R-TN), who is no fan of the Fed, Bernanke or the current central bank policies, asked Yellen whether she would have the guts to prick a bubble. Yellen said that the central bank could let the air out of the bubble by employing regulatory measures, like restricting leverage, and, if necessary, it could raise interest rates. Corker interrupted her and asked the money question: With a bull market raging, would you have the mettle to use these unpopular measures? “I believe that I would,” Yellen said. “I believe that is the most important lesson learned from the crisis.”

Bubble popper it is!

The rest of the Senate appearance was pretty much what you would expect: a defense of the monetary policy that Yellen helped create. She said that the Fed’s bond buying program had “made a meaningful contribution to economic growth and improving the outlook” and said that when there has been progress in labor market, the Fed would reduce its purchases.

As the confirmation process continues, investor attention will shift to the current chair, Ben Bernanke this week. He will deliver a major speech on Tuesday night, which along with the release of the minutes from the last policy meeting could contain clues about future central bank actions. Specifically, everyone wants to know whether there are specific metrics that would lead to a change in policy.

While the central bank maintains that the current game plan is necessary, there are risks to the strategy. At every meeting, Fed officials weigh the benefits of quantitative easing (QE) versus the costs, which include managing a ballooning balance sheet and the threat of higher inflation in the future. The Fed’s purchase of mortgage-backed and treasury securities, has so far left the central bank holding $3.86 trillion in assets. Defenders of the policy say that the Fed can simply sell those assets in the future, but doing so could mean absorbing significant losses, since the Fed would likely be selling as bond prices were falling. In theory, the Fed has other policy options, but they have never been tested, which makes economists a bit nervous about their efficacy.

One group not showing signs of nerves is investors. All of the sudden, Mom and Pop are getting back in the game. According to Strategic Insight, inflows into stock mutual funds and Exchange-traded funds are on track for a total of $450 billion for 2013, which would be more than the last four years’ inflows. Of course, the idea that regular people are jumping back in after 56-month, 166 percent bull-run may mean that the market could be setting everyone up for a correction (a pull-back of more than 10 percent). Then again, the technology bull market lasted from October 11, 1990 until March 24 2000, resulting in a 417 percent gain, so maybe the bull has more upside.

MARKETS: For the sixth consecutive week, the Dow and S&P 500 closed higher and at new all-time nominal high levels.

• DJIA: 15,961, up 1.3% on week, up 21.8% on year
• S&P 500: 1798, up 1.6% on week, up 26% on year
• NASDAQ: 3986, up 1.7% on week, up 32% on year (briefly touched 4,000 for the first time since Sep 2000)
• 10-Year Treasury yield: 2.71% (from 2.75% a week ago)
• Dec Crude Oil: $93.84, down 0.8% on week (6^th consecutive losing week)
• Dec Gold: $1287.40, up 0.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.21

THE WEEK AHEAD:

Mon 11/18:

10:00 NAHB Builder Index

Tues 11/19:

7:00pm Bernanke speech to NABE

Weds 11/20:

8:30 Retail Sales

8:30 CPI

10:00 Existing Home Sales

10:00 Business Inventories

2:00 FOMC Minutes

Thurs 11/21:

8:30 Jobless claims

8:30 PPI

10:00 Philadelphia Fed Survey

Fri 11/22:

10:00 Job Openings and Labor Turnover (JOLTS)

Week ahead: Strong jobs report before Yellen Hearing

The government shutdown was no biggie, at least according to the October jobs report. The economy added 204,000 jobs during the month and the two previous months were revised higher by a total of 60,000. In the blink of an eye, the three-month average increased from a paltry 143,000 to a respectable 202,000. The Labor Department noted that "there were no discernible impacts" of the government shutdown in the survey that measures payroll numbers, wages and hours worked. However, the shutdown impacted the household survey, which showed a 448,000 increase in the number of temporary layoffs, a category under which furloughed government employees fall. (To put that number into perspective, the rise in temporary layoffs in September was just 25,000.) As a result, the civilian labor force tumbled by 720,000 and the labor force participation rate fell by 0.4 percent to 62.8 percent, a rate last seen 36 years ago in 1977.

While the government shutdown negatively impacted the unemployment rate and the participation rate, there is reason to believe that the trend will be reversed in the November report. And there was another positive indicator, buried in the report: the nation’s retailers hired 159,500 seasonal workers in October, the highest number since 1999. (These figures are not seasonally adjusted.)

The better than expected jobs report immediately increased speculation that the Fed will begin to taper its $85 billion monthly bond purchases at the December 17-18 FOMC meeting. Lawmakers will be able to ask the Fed Chairman nominee more about central bank strategy, when Janet Yellen's Senate confirmation hearing begins this week. While it is anticipated that the Committee will approve her nomination, market watchers will be listening for any clues about future policy action (or inaction). She will like quote from the Bernanke playbook: the Fed will begin pulling back from purchasing bonds when the economic outlook improves.

MARKETS: It was another record-breaking week for large stock indexes.

• DJIA: 15,761, up 0.9% on week, up 20.3% on year
• S&P 500: 1770, up 0.5% on week, up 24.1% on year (5^th consecutive weekly gain)
• NASDAQ: 3919, down 0.1% on week, up 29.8% on year
• 10-Year Treasury yield: 2.75% (from 2.62% a week ago)
• Dec Crude Oil: $94.60, down $0.01 on week
• Dec Gold: $1289.20 down 1.8% on week
• AAA Nat'l average price for gallon of regular Gas: $3.20

THE WEEK AHEAD:

Mon 11/11: Veteran’s Day: Banks and bond markets closed, stock markets open

Tues 11/12:

7:30 NFIB Small Business Optimism Index

8:30 Chicago Fed National Activity Index

Weds 11/13:

2:00 Monthly Budget Statement

Thurs 11/14:

8:30 Jobless claims

8:30 International Trade

8:30 Non-Farm Productivity and Labor Costs

10:00 Fed Nominee Yellen's Confirmation Hearing

11:00 Report on Household Debt and Credit (Q3)

Fri 11/15:

8:30 Import Prices

8:30 Empire State Manufacturing Index

9:15 Industrial Production

9:15 Capacity Utilization

10:00 Monthly Wholesale Trade

Week ahead: Weak growth propels stocks, not jobs and incomes

If you want to know how the economy is doing, this is a good week to pay attention. Two important reports will help provide a snapshot of the state of the economy. The first estimate of third quarter growth is likely to show that the economy increased at a 2 percent annualized pace. Since the official end of the recession in June 2009, the US economy has expanded by 2.25 percent -- that’s is a full percentage point less than the post Word War II average. This year’s sluggish growth is partially due to the fiscal drag created by the anxiety over the fiscal cliff, higher payroll taxes and sequestration. Q3 was supposed to be the last quarter that the effects would be felt: Economists were predicting that growth would reaccelerate into the end of the year and then would move even higher in 2014.

That was until the government shutdown put a dent into the rosy picture, but all may not be lost. Most are anticipating a gradual pick-up in 2014, presuming that lawmakers can avoid another battle over a shutdown and raising the debt ceiling. If Washington keeps quiet, a couple of positive trends could continue to improve: (1) Global manufacturing is strengthening. In the US, the ISM manufacturing index reached a two-year high in October, suggesting that manufacturers took the government shutdown in stride. (2) Retail sales growth appears to be picking up.

While is expected to improve, is not happening nearly as fast as anyone would like. The persistent weakness in the recovery is blamed for the nation’s continuing struggle to get more of the 11.3 million unemployed Americans back to work. During the summer months of July through September, job creation averaged just 143,000 per month, lower than the 177,000 per month seen throughout the year. This week’s October jobs report, delayed by a week due to the shut down, is expected to show that just 130,000 jobs were created during the month.

The unemployment rate could be more unpredictable this time around. The two main employment statistics, job creation and the unemployment rate, come from separate reports. The number of jobs added comes from a survey of businesses. For the October report, Federal employees who were not at work during the survey week will be put into the “on temporary layoff” section of the “unemployed” category. So for the jobs created category, furloughed employees will not affect the number.

The unemployment rate is calculated from a survey of households and is based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force. That’s why sometimes when the unemployment rate drops, it does so for the “wrong” reason: when unemployed leave the labor force.

In the October report, furloughed government employees will be counted as unemployed for the purposes of determining the unemployment rate. That’s why the prediction for the rate ranges from 7.2 to 7.5 percent. Any sharp increase in the rate would likely be reversed in the subsequent November report.

While the nation needs more robust job creation and a lower unemployment, a more virtuous cycle would include middle class wage growth. According to recently released data from the Census Bureau, median household income, income growth, and share of the total national income all continuing to decline. While the Great Recession contributed to the slide, the trend has been forming over a much longer period of time. According to the liberal think tank Center for American Progress, the typical American household’s annual income peaked in 1999 at $56,080 and has since declined by 9 percent to $51,017.

MARKETS: While growth may not be strong enough to create jobs and not weak enough to cause a recession, it’s just right to maintain a year-long Fed induced stock market rally. Investors have jumped back in with gusto: through October 25, $277 billion has flowed into stock mutual funds and exchange-traded funds – the most since the technology stock bubble 13 years ago, according to TrimTabs.

• DJIA: 15,615 up .3% on week, up 19.2% on year
• S&P 500: 1761, up 0.1% on week, up 23.5% on year (new all-time closing high)
• NASDAQ: 3922, down 0.5% on week, up 30% on year
• 10-Year Treasury yield: 2.62% (from 2.50% a week ago)
• Dec Crude Oil: $94.61, down 3.3% on week
• Dec Gold: $1313.20 down 2.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.26 (new low for 2013—AAA predicts that prices are expected to fall to $3.10 by year’s end, which would be the lowest since Feb 2011.)

THE WEEK AHEAD:

Mon 11/4:

10:00 Factory Orders (both August and Sep released)

Tues 11/5:

AOL

10:00 ISM Non-Manufacturing Index

10:00 Consumer Confidence

Weds 11/6:

Toyota, Time Warner, Twitter prices IPO

10:00 Leading Indicators

Thurs 11/7:

Disney, Groupon

7:30 Challenger Job Cut Report

8:30 Q3 GDP (1^st estimate)

8:30 Jobless claims

3:00 Consumer Credit

Fri 11/8:

8:30 October Jobs report

8:30 Personal Income and Spending

9:55 Consumer Sentiment

10:00 Job Openings and Labor Turnover (JOLTS)

Week ahead: Fed fuels stock market rally

With the government shutdown and debt ceiling debate postponed until after the New Year, the Fed is once again in control of investors’ fate. The central bankers will convene the penultimate policy meeting of the year this week and there is almost a zero probability that the Fed will change either its short term interest policy, which has kept overnight lending rates at 0 to 0.25 percent for nearly five years; or its $85 billion worth of monthly bond purchases, which is intended to keep longer term lending rates low. In just five weeks, investor sentiment shifted from “The Fed will almost certainly taper bond purchases at the September meeting” to “There’s no way that the Fed will change a thing until the March 2014 meeting.” The change of heart resulted from a combination of weaker than expected jobs data, leading up to the Congressional standoff and the government shutdown itself, which likely shaved 0.5 percent from Q4 economic growth. Short of a major growth spurt by the end of the year, it’s hard to see why the Fed would shift policy this year.

The primary issue is that data is likely to be distorted for a couple of months, which makes the Fed’s job pretty tough. And even if there were great year-end progress, Congress may drag us down the fiscal rabbit hole come January, so why mess with policy until Chairman-in-waiting Yellen takes over the reins at her first meeting as Chairman on March 18-19?  The folks at Capital Economics have warned, “The Fed has missed its window of opportunity. If it's waiting for some degree of fiscal certainty, this really could turn into QEternity.”

The concept of unending Fed support may create anxiety for those who are worried about future inflation and asset bubbles, but the stock bulls are cheering central banker action. It has been almost exactly a year since the Fed announced this current round of bond buying - “Quantitative Easing” or “QE3” was launched in Q4 2012. Since then, the S&P 500 has soared 25 percent. The rally shows few signs of abating, despite the lackluster recovery, valuations being stretched and revenue growth slowing to a creep, because as every trader knows, one should not fight the Fed.

That said, markets have a funny way of turning when investors least expect it. As Edwin Lefevre reminds us in the 1923 trading classic Reminiscences of a Stock Operator, “There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”

MARKETS:

• DJIA: 15,570 up 1.1% on week, up 18.8% on year
• S&P 500: 1759, up 0.9% on week, up 23.4% on year (new all-time closing high)
• NASDAQ: 3943, up 0.7% on week, up 30.6% on year (13-year high)
• 10-Year Treasury yield: 2.50% (from 2.59% a week ago)
• Dec Crude Oil: $97.85, down 3.2% on week
• Dec Gold: $1352.50 up 2.9% on week
• AAA Nat'l average price for gallon of regular Gas: $3.30

THE WEEK AHEAD: Reports in BOLD are rescheduled releases of reports that were on hold until the government reopened. Although the October jobs report will be delayed by a week, the ADP private sector employment report is expected to show a drop off in hiring due to a reduction from government contractors.

Mon 10/28:

Merck, Apple

9:15 Industrial Production

10:00 Pending Home Sales

10:30 Dallas Fed Survey

Tues 10/29:

BP, Pfizer, LinkedIn, Yelp

FOMC Meeting begins

8:30 September PPI

8:30 Retail Sales

9:00 Case Schiller Home Price Index

10:00 Consumer Confidence

Weds 10/30:

GM, Facebook, Starbucks, Visa, Kraft

8:15 ADP Private Jobs

8:30 CPI (SS COLA announced)

2:00 FOMC Announcement (No press conference)

Thurs 10/31:

Conocco Phillips, ExxonMobil, Mastercard, AIG

7:30 Challenger Job Cuts

8:30 Jobless claims

9:45 Chicago PMI

Fri 11/1:

Chevron

Motor Vehicle Sales

10:00 ISM Manufacturing

10:00 Construction Spending

Week ahead: Debt Deal Done, Data Dump Due

After three weeks of political wrangling, the federal government is open and the debt ceiling has been increased. The good news/bad news is that there’s a 90-day grace period before the next potential round of budget/debt ceiling debates recurs. So, now the fun begins: parsing the deluge of delayed economic reports and trying to figure where the economy stands. Global/US Growth: Before the shutdown, there was ample evidence that the global economy was picking up steam. The rebound in China helped alleviate worries over a “hard landing”, the euro zone finally emerged from recession, Japan remains relatively strong and the slow down in emerging markets is picking up as worldwide demand increases.

In the U.S., the recovery was gaining momentum, until the two-headed monster of the government shut down and debt ceiling debate reared its ugly head. Moody's Analytics estimates that the whole fiasco cost $22 billion dollars and Standard and Poor’s estimates that the closure has shaved 0.6 percent from fourth quarter growth. As a result, Q4 should expand by just 2 percent, though analysts are hopeful that the hit to growth will be a blip and 2014 will make up for the short-term damage. That said, if Congressional fighting recurs in January and February, there could be more “blips” on the radar screen. Additionally, if the next round of sequester cuts go into effect, U.S. growth could be hampered in 2014.

Jobs: There will be two employment reports released within a short period of time: September will be released this Tuesday, with expectations that 180,000 jobs were created and the unemployment rate will remain at 7.3 percent. Then just 2 ½ weeks later on November 8th, the October report will be available. Over the first eight months of the year, the economy has added an average of 180,000 non-farm positions per month, but the August and July numbers were weaker than expected. The economy has added 6.8 million total jobs (7.5 million private sector jobs) since employment bottomed in February 2010.There are still 1.4 million fewer private sector jobs now than when the recession started in 2007.

Housing: The increase in mortgage rates combined with rising inventories will likely slow down the sizzling pace of the housing recovery, but should not snuff it out. Housing should continue to be a positive force in the economy.

Consumers: It was hard to hit the stores with gusto when the government was shut down and the U.S. was on the verge of defaulting on its obligations. ShopperTrak said that total retail store shopper traffic during the week of Sept. 29-Oct. 5 decreased 7.5 percent compared to the same time period last year. During the week of Oct. 6-12, foot traffic decreased 7.1 percent compared to 2012. But consumers are a mercurial bunch - visions of sugarplums may help them forget about Washington and engage in a bit of retail therapy during the holiday season.

Federal Reserve: Remember way back in September when Ben Bernanke raised the concern over “fiscal uncertainty”? (See: Congress is the biggest near-term risk to the U.S. economy) Well, that fear was well founded and probably the main reason that the central bank kept its current policies in place, including the $85 billion worth of monthly bond purchases. There are two more policy meetings before the end of the year, in October and December. It is almost a certainty that the Fed will do nothing in October, but if the economy were to pick up substantially, there is a chance of a small pull back in bond purchases at the December meeting. It is more likely that Bernanke would use his last FOMC meeting in January to change course, unless fiscal uncertainty returns to the fore. If things heat up in Congress, Janet Yellen may use her first FOMC meeting to announce the reduction in bond purchases.

Congress: Are we in for déjà vu all over again (h/t Yogi)? The agreed upon three-month time horizon has invoked a chorus of “kick the can down the road”, but wait - it could last even longer! The debt ceiling date of February 7^th could be extended when Treasury Secretary Jack Lew invokes extraordinary measures.

MARKETS: Investors typically do not like uncertainty. Except last week, when they brushed aside worries over the debt ceiling and then celebrated when the deal was sealed. With indexes up sharply on the year, optimists are touting a resurgent economy,  decent earnings and a Fed policy that will remain market-friendly. Pessimists argue that the bulls are confusing the avoidance of disaster with real economic progress...it is October, after all!

• DJIA: 15,399 up 1% on week, up 17.5% on year
• S&P 500: 1744, up 2.4% on week, up 22.3% on year (new all-time closing high)
• NASDAQ: 3914, up 3.2% on week, up 29.6% on year
• 10-Year Treasury yield: 2.59% (from 2.68% a week ago)
• Nov Crude Oil: $100.83, down 1.2% on week
• Dec Gold: $1314.60 up 3.6% on week
• AAA Nat'l average price for gallon of regular Gas: $3.36

THE WEEK AHEAD: Get ready for a “Jobs Tuesday”! Reports in BOLD are rescheduled releases of reports that were on hold until the government reopened. It is possible additional data will be released later this week by other government entities.

Mon 10/21:

Halliburton, McDonald’s, Netflix, Texas Instruments

8:30 Chicago Fed Nat’l Activity Index

10:00 Existing Home Sales

Tues 10/22:

Coach, DuPont, Kimberly Clark,

8:30 September Jobs Report

10:00 Richmond Fed Manufacturing Index

Weds 10/23:

AT&T, Boeing, eTrade

8:30 Import/Export Prices

9:00 FHFA Housing Price Index

Thurs 10/24:

3M, Altria, Amazon, Ford, Colgate, Palmolive Microsoft, Zynga

8:30 Jobless claims

10:00 Job Opening and Labor Turnover (JOLTS)

10:00 New Home Sales

Fri 10/25:

P&G, UPS

8:30 Durable goods orders

9:55 Consumer Sentiment

Week ahead: Debt Ceiling Thaw Warms Traders’ Hearts

Traders seemed convinced that Congress will come to an agreement on the debt ceiling, which propelled stocks higher on Thursday and Friday, and saved what was starting to look like an ugly week. Presuming that the collective wisdom is correct, then fears of financial catastrophe and recession will recede and everyone can start chewing on the boring old stuff: the pace of economic growth and corporate earnings. Of course it’s difficult to analyze the economy while the government is shut down. Menzie Chinn of EconBrowser notes that even the Fed is forced to conduct “macroeconomic policymaking with increasingly sparse or mis-measured data. If one doesn’t believe in expertise and information, then this is not a problem. If one believes that knowledge should inform decision-making, it is.” (You can almost hear Larry Summers saying, “Good luck with the new gig, Janet Yellen!”)

While Wall Street was instantly soothed by the thaw in Congressional relations, Main Street was not yet convinced. Beyond the massive reputational damage lawmakers have inflicted on themselves, many Americans are now worried that the economy will be harmed. Consumer sentiment fell in October to its weakest level in nine months, according to the Thomson Reuters/University of Michigan preliminary sentiment index.

Additionally, a recent Wall Street Journal poll showed that 42 percent of Americans think the economy will worsen over the next year, which is double the amount observed in September, and the number of those surveyed who think the country is on the right track has fallen by half. The WSJ results jibes with Gallup, which showed that consumer confidence now measures at the same low levels as that of the 2008 economic collapse.

Suffice it to say, if political gridlock goes on too long, then consumer confidence could drop, which could lead to slower than expected spending during the holiday shopping season. To underscore the risk of sliding consumer confidence, the Leaders of the National Retail Federation sent a letter to Congress, warning:

“For retailers – who represent the sector of the American economy most closely tied to consumer attitudes – these numbers are deeply disturbing…Moreover, since the very modest growth the U.S. economy has experienced following the 2008 recession has been attributed to the willingness of the American consumer to keep shopping, a lasting decline in consumer confidence is likely to translate into increased unemployment and slower growth in coming months.” The NRF also detailed practical problems the shutdown has created for retailers – from the lack of economic data and reports to concerns over processing of imported merchandise.

If the economy were to slow, it would be bad news for companies, which were at the precipice of doing something that have not done in a while: spending some of the piles of cash they have accumulated. As a reminder, non-financial companies held a record $1.78 trillion in cash and other liquid assets as of the first quarter of the year. Many analysts thought that the companies would start to spend money in order to expand their businesses and drive more sales. If Congressional bickering drags on too long, some companies may rethink those plans.

MARKETS:

• DJIA: 15,237 up 1.1% on week, up 16.3% on year
• S&P 500: 1703, up .7% on week, up 19.4% on year
• NASDAQ: 3791, down 0.4% on week, up 25.6% on year
• 10-Year Treasury yield: 2.68% (from 2.65% a week ago)
• Nov Crude Oil: $102.02, down 1.7% on week
• Dec Gold: $1268.20, down 3.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.34

THE WEEK AHEAD: Government reports in italics are due to be released, subject to the status of the shutdown. Reports that were delayed over the past two weeks, including the all-important jobs report, could be released this week, if a deal is reached. Q3 earnings season gets into full swing, with a slew of S&P 500 companies reporting this week.

Mon 10/14: Columbus Day: US stock markets open, bond markets and banks closed

Tues 10/15:

Citigroup, Intel, Johnson & Johnson, Coca Cola, Yahoo, Schwab

8:30 Empire State Manufacturing Index

Weds 10/16:

AMEX, Bank of America, BNY Mellon, Pepsi, IBM, eBay

8:30 CPI

10:00 Housing Market Index

2:00 Fed Beige Book

Thurs 10/17: DEBT CEILING D-DAY

Capital One, Goldman Sachs, Verizon, Google

8:30 Jobless claims

8:30 Housing Starts

9:15 Industrial Production

10:00 Philadelphia Fed Survey

Fri 10/18:

GE, Honeywell, Morgan Stanley, Schlumberger

10:00 Leading Indicators

Week ahead: Will a government shutdown delay jobs report?

Usually, a jobs report week dominates investor psyche, but this week is different. As traders turn on their computers Sunday night when Asian markets open, they will have to decide whether or not Congressional paralysis will shut down the government as of Monday night at midnight. Most analysts believe that a short shutdown will not derail the economy, unless of course you are not deemed an “excepted” or “emergency” federal worker (note: the word “essential” seems to be very un-PC this time around) and would are put on unpaid leave. If that’s the case, any shutdown will be significant to your life.

If the government were to shut down, here’s what will NOT be immediately affected: Social Security payments, Medicare, air-traffic control, immigration, border security, emergency and disaster assistance, federal law enforcement, IRS processing of electronic returns and payments, mail delivery and active-duty military will keep working, but will NOT get paid until the funds are available.

NOTE: The October 1 roll out of the Affordable Care Act’s Marketplace’s would not be affected by a government shut down. (See Health Care Reform Kickoff: What You Need to Know.)

A government shut down would shutter national parks, federally funded museums (including the Smithsonian), the National Zoo, all federal government websites (including the popular Panda Cam!), research by Health and Human Services, grant applications, new applications for Social Security, IRS walk-in centers, federal loan applications for small businesses, college tuition, or mortgages, Library of Congress buildings, events and web sites and potentially, the government of the District itself.

None of this would deal with the implications of hitting the nation’s borrowing limit - the debt ceiling. We have three weeks to deal with that issue, so don’t fret – here's a cheat sheet “Debt Ceiling, Part Deux,” which will help you brush up on your debt, deficit and debt ceiling facts.

If the government were to shut down, it may delay the Friday release of the September employment report. (Although we think the folks at the Bureau of Labor Statistics are important, Treasury Secretary Jack Lew might not agree.) This report could be pivotal. The big questions is: were the past three punk employment reports, (monthly job creation at just under 150,000, lower than the 180,000 average seen in 2013) a temporary pullback, or the sign of a more worrisome trend?

Economists predict that the September report will be more in line with this year’s 180,000 pace because recent data have shown that the labor market has been improving. (Employment reports from the Institute for Supply Management have gained ground and weekly jobless claims have dropped to the lowest level since June 2007.) The unemployment rate should remain at 7.3 percent.

MARKETS: “October. This is one of the peculiarly dangerous months to speculate in stocks…the others are July, January, September, April, November, May, March, June, December, August and February.” Mark Twain may have be on to something. Five of the 10 worst percentage losses since the Dow’s inception have occurred in October and the month claims the top three worst days ever: 10/19/87 (-22.61%), 10/28/29 (-12.82%) and 10/29/29 (-11.73%). This does not mean that investors should sell everything and run for the hills, but it’s just a reminder that with stock indexes up nearly 20 percent for the year as we enter the spooky month of October, there’s a lot going on that could cause a reversal of fortune for investors.

• DJIA: 15,258 down 1.2% on week, up 16.4% on year
• S&P 500: 1691, down 1% on week, up 18.6% on year
• NASDAQ: 3781, up 0.2% on week, up 25.2% on year
• 10-Year Treasury yield: 2.62% (from 2.74% a week ago)
• Nov Crude Oil: $102.87, down 1.8% on week
• Dec Gold: $1339.20, up 0.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.41

THE WEEK AHEAD:

Mon 9/30:

9:45 Chicago PMI

10:30 Dallas Fed

Midnight: Government funding deadline

Tues 10/1:

Health Care Marketplaces open (healthcare.gov)

Motor Vehicles Sales

10:00 ISM Manufacturing Index

10:00 Construction Spending

Weds 10/2:

8:15 ADP Private Jobs

Thurs 10/3:

7:30 Challenger Job Cuts

8:30 Weekly Jobless Claims

10:00 Factory Orders

10:00 ISM Non-Manufacturing

Fri 10/4:

8:30 Employment Report

Week ahead: Congress is the biggest risk to economy

It sure would have been great to hear Federal Reserve Chairman Ben Bernanke start his press conference like this: “Sorry to psych you out, but Congress is the biggest risk to the U.S. economy, so we have to keep buying $85 billion worth of bonds each month.” Instead, Bernanke’s defense of the Fed’s monthly bond-buying program, fondly known as Quantitative Easing or “QE3,” included a three-pronged rationale: (1) the labor market remains weak (2) the recent rise in interest rates could slow down the economy and (3) lawmakers in DC could throw everything for a loop if the government were to shut down or if the nation hits the debt ceiling in October.

Before diving into the three Fed concerns, let’s reflect on how Bernanke amped up investors’ anxieties with “taper talk”. During Congressional testimony on May 22, Bernanke discussed reducing bond purchases, saying "If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases. If we do that it would not mean that we are automatically aiming towards a complete wind down. Rather we would be looking beyond that to see how the economy evolves and we could either raise or lower our pace of purchases going forward."

Bottom line: if the economy were to improve, the Fed would pull back on its stimulus. After the June FOMC meeting, Bernanke offered more specific parameters that would argue for a change in bond buying: when the national unemployment rate drops to 7 percent, it would indicate that the economy would have improved “substantially”, and that it would be appropriate to begin tapering within the next few meetings.

OK, so now into the Fed’s three worries.

1. The labor market remains weak. Despite dropping to 7.3 percent (from 8.1 percent when the Fed launched QE3), Bernanke is not convinced that all is rosy on the employment front. Maybe officials were spooked by the last three reports, which indicated that job creation slowed to 149,000 on average, from 172,000 in the previous three months or that long-term unemployment and broader unemployment remains too high.

2. The recent rise in interest rates could slow down the economy. There was some irony in Bernanke using rising interest rates as a reason to maintain bond buying: rates skyrocketed because HE started talking about pulling back on the program! But maybe rates rose higher and faster than the Fed had anticipated. Regardless, Bernanke is worried that higher interest rates “could slow the pace of improvement in the economy and labor market”. There was one other troubling issue with regard to interest rates: the biggest jump in rates occurred between June and July, but there was nary a mention of higher rates posing downside risk in the Fed’s statement from the July 30-31 meeting.

3. Lawmakers in DC could throw everything for a loop. Fiscal uncertainty appears to be the largest unknown that the central bank faces and what was likely the most important reason for holding firm on current policy. Although the Autumnal Equinox will have passed, the heat index is likely to soar in Washington DC next week, as lawmakers duke it out over two fiscal issues: the funding of the government and the debt ceiling. House GOP leaders led a successful effort to pass a bill (230-189) that keeps the government open for business, but eliminates funding of the Affordable Care Act. This week, the Senate is expected to restore ACA funding and then send a stand-alone continuing resolution to fund the government back to the House.

You can see how quickly this could get ugly and might lead to a partial government shutdown on October 1, the start of a new budget year. On top of the pesky issue of funding the government, the nation will likely reach the debt ceiling limit of $16.7 trillion in mid October.

The Fed likely learned a painful lesson from the summer 2011 debt ceiling showdown. The central bank had just concluded its second round of bond buying in June 2011 (the $600B QE2 started in August 2010) so there were no active policies in place when Congress went at it in August 2011. In the aftermath of the debt ceiling smack down, S&P lowered the US credit rating by a notch; economic growth was nearly halved, falling from 2.5 percent in Q2 to 1.3 percent in Q3; the stock market tumbled by 17 percent; and the Fed reacted by introducing “Operation Twist,” in an effort to keep longer-term interest rates low and to spur economic activity.

Sure, the labor market is a bit wobbly of late, but Bernanke himself noted some positive undercurrents, like an increase in hours worked and a drop in weekly claims; and yes, higher mortgage rates could slow the housing recovery. But most housing experts note that the recovery should remain in tact, thought the pace of price gains are likely to moderate.

Bernanke couldn’t say it, so I will: Congress is the biggest near-term risk to the U.S. economy.

MARKETS: One thing Bernanke did not mention during his presser: the biggest beneficiary of bond buying has been the stock market. The S&P 500 is up 19 percent since the launch of QE3 last year. While stocks soared after the FOMC announcement, investors reversed course at the end of the week. Still, it was another winning week on Wall Street.

• DJIA: 15,541 up 0.5% on week, up 17.9% on year
• S&P 500: 1709, up 1.3% on week, up 19.9% on year
• NASDAQ: 3774, up 1.4% on week, up 25% on year
• 10-Year Treasury yield: 2.74% (from 2.89% a week ago)
• Nov Crude Oil: $104.75, down 3.3% on week
• Dec Gold: $1332.50, up 1.8% on week
• AAA Nat'l average price for gallon of regular Gas: $3.49

THE WEEK AHEAD: The effects of higher mortgage rates on the housing market may not be noticeable yet. Prices are expected to rise, though at a slower pace and activity may perk up, as would-be buyers try to close deals before rates climb even further.

Mon 9/23:

8:30 Chicago Fed Nat’l Activity Index

Tues 9/24:

9:00 FHFA House Price Index

9:00 S&P Case-Shiller HPI

10:00 Consumer Confidence

10:00 Richmond Fed Manufacturing

Weds 9/25:

8:30 Durable Goods Orders

10:00 New Home Sales

Thurs 9/26:

8:30 Weekly Jobless Claims

8:30 Q2 GDP (Final estimate; previous = 2.5%)

8:30 Corporate Profits

10:00 Pending Home Sales

Fri 9/27:

8:30 Personal Income and Spending

9:55 Consumer Sentiment

Week ahead: Financial Crisis Anniversary: Where We Stand

Over the course of one week five years ago, the U.S. financial system was brought to its knees. As a reminder of just how bad that week was, consider this timeline:

• 9/15/2008: Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection. On the same day, Bank of America announced its intent to purchase Merrill Lynch for $50 billion.
• 9/16/2008: The Federal Reserve Board authorized the Federal Reserve Bank of New York to lend up to $85 billion to AIG under Section 13(3) of the Federal Reserve Act.
• 9/16/2008: The net asset value of shares in the Reserve Primary Money Fund fell below $1 per share, primarily due to losses on Lehman Brothers commercial paper and medium-term notes. When the Reserve fund “broke the buck,” it caused panic among investors who considered money market accounts nearly the equivalent of bank savings accounts.
• 9/19/2008: To guard against a run on money market funds, the Treasury Department announced that it would insure up to $50 billion in money-market fund investments at companies that paid a fee to participate in the program. The year long initiative guaranteed that the funds' values would not fall below the $1 a share.
• 9/20/2008: The Treasury Department submitted draft legislation to Congress for authority to purchase troubled assets (the first version of TARP).
• 9/21/2008: The Federal Reserve Board approved applications of investment banking companies Goldman Sachs and Morgan Stanley to become bank holding companies.

Over the course of one week, four investment banks were gone (one absorbed, one went broke and two were forced to become bank holding companies); a global insurance company was bailed out; the money market fund industry was rocked; and the Treasury Department introduced the first version of TARP, which granted authority to purchase $700 billion of mortgage-related assets for two years.

Where do we stand five years after this momentous week?

Jobs: In September 2008, the unemployment rate was 6.1 percent, on its way up to 10 percent in October 2009. The rate now stands at 7.3 percent. Despite progress during the recovery, the economy still has 1.9 million fewer jobs than it did before the recession. At the recent pace of job growth it will take just under 11 months to reach the previous peak.

Income: For those lucky enough to have jobs, the financial crisis and recession put a dent in median household income. According to Sentier Research, July 2013 median household income ($52,113), adjusted for inflation, was 6.2 percent lower than December 2007 ($55,569), the first month of the recession. Incomes are 5 percent lower than in September 2008. It may be cold comfort to consider that the recession exacerbated a trend that was already occurring: July 2013 median was 7.3 percent lower than the median in January 2000 ($56,233), the beginning of the statistical series.

Economic growth: In the fourth quarter of 2008, when the impact of the financial crisis was cascading through the system, Gross Domestic Product dropped by 8.3 percent. For all of 2008, GDP slid 0.3 percent, followed by a 2.8 percent drop in 2009. The official end of the recession (as determined by the Dating Committee of the National Bureau of Economic Research) occurred in June 2009. While the total size of the US economy today ($15,681T) is larger than it was in Q3 2008 ($14.895T), the pace of the recovery has lagged the annual average post World War II growth rate of 3-3.5 percent.

Stocks: At the end of trading that first fateful week of the financial crisis, the damage wasn’t so bad, if you didn't have to live through the day-to-day swings. By Friday September 19, 2008 the Dow had dropped just 33 points to 11,388; the S&P 500 edged up 4 points to 1,255; and the NASDAQ was up 12 points to 2,273. Stocks bottomed out in March 2009 and then skyrocketed by nearly 150 percent to today’s near-record levels.

Housing: While stock markets bottomed out about six months after the Lehman Brothers bankruptcy, it took the epicenter of the crisis, the housing market, far longer. House prices peaked in 2006, then reached bottom in early 2012. National house prices are up nearly 16 percent from the post-bubble low, but still remain down over 23 percent from the peak. Currently, 14.5 percent of residential properties with a mortgage are still underwater (amount owed on mortgage is more than the home’s value), according to CoreLogic. The rate was down from the peak of 26 percent in the fourth quarter of 2009.

Bailouts: The government used extraordinary measures to save the financial system, including directly bailing out the financial and automobile industries. Of course, there were plenty of other measures that indirectly helped, liked providing financing through the Federal Reserve’s discount window for US banks, European banks and even for industrial conglomerates like General Electric. Here’s the accounting for some bailouts of note:

• Fannie Mae/Freddie Mac: $188B bailout, of which the companies are expected to return $146B in dividends by Sep 2013.
• GM and Chrysler: Of $80B committed, $51B repaid
• TARP: Of $700B, most has been repaid with interest. CBO puts eventual taxpayer tab at $21B.
• AIG: Fed and Treasury committed $182B, with taxpayers estimated to be fully repaid, plus $23B.

Regulatory: The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in July 2010, but lawmakers left a lot of the hard work to regulators. According to law firm Davis Polk, as of September 3, 2013, a total of 280 Dodd-Frank rulemaking requirement deadlines have passed. Of these 280 passed deadlines, 172 (61.4 percent) have been missed and 108 (38.6 percent) have been met with finalized rules. In addition, 160 (40.2 percent) of the 398 total required rulemakings have been finalized, while 126 (31.7 percent) rulemaking requirements have not yet been proposed.

Too Big To Fail: There may be fewer banks, but they are even bigger than they were at the beginning of 2007. The combined assets of the “Big Six,” which include JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley, have increased by 28 percent, according to data compiled by Bloomberg. The good news is that they have much more capital on hand. The bad news is that they are still leveraged, complicated and interconnected institutions, which makes them prone to inflict damage on the overall financial system.

Who paid what? There have been billions of dollars worth of penalties, which were levied as a result of the financial crisis. Among the biggies, the SEC has collected $2.73B and the national mortgage settlement will rake in $25B from the nation’s five largest mortgage servicers.

Who went to jail? Nobody. Jail is for federal crimes and there have been no federal convictions that have arisen from the financial crisis. (Fraudsters like Bernie Madoff and Alan Stanford didn’t have a direct connection with the financial crisis.) On the civil side, the SEC has filed civil charges against 138 firms and individuals for alleged misconduct just before or during the crisis, according to The Wall Street Journal. The biggest fish the regulators tried to land was former Countrywide CEO Angelo Mozillo, who ultimately settled with the SEC to the tune of $67.5 million in fines and a lifetime ban from serving as an officer of a public company. Former Goldman Sachs employee Fabrice “Fabulous Fab” Tourre was found guilty of misleading investors in mortgage securities issued by his firm.

Bottom Line: Just in time for the five-year anniversary, the Federal Reserve Bank of Dallas released a bleak assessment of the cost of the crisis. “Our bottom-line estimate of, assuming output eventually returns to its pre-crisis trend path, is an output loss of $6 trillion to $14 trillion. This amounts to $50,000 to $120,000 for every U.S. household…This seemingly wide range of estimates is due in part to the uncertainty of how long it might take to return to the pre-crisis growth trend.”

But, wait it gets worse. The Fed economists note that the U.S. may never return to trend, which would put the cost ABOVE $14 trillion. HAPPY ANNIVERSARY!

MARKETS:

• DJIA: 15,376 up 3% on week, up 17.3% on year (2^nd best week of the year)
• S&P 500: 1688, up 2% on week, up 18.4% on year (within 1.3% of its Aug. 2 all-time nominal high)
• NASDAQ: 3722, up 1.7% on week, up 23.3% on year
• 10-Year Treasury yield: 2.89% (from 2.94% a week ago)
• Oct Crude Oil: $108.21, down 2% on week
• Dec Gold: $1308.60, down 5.6% on week
• AAA Nat'l average price for gallon of regular Gas: $3.54

THE WEEK AHEAD: Here comes the Fed…the central bank will conduct a two-day confab, where most economists expect an announcement of a small pull back in monthly bond purchases (from $85B to $75B). Let the taper begin!

Mon 9/16:

8:30 Empire State Manufacturing

9:15 Industrial Production

Tues 9/17:

FOMC Begins

8:30 CPI

10:00 Housing Market Index

Weds 9/18:

2:00 FOMC Announcement/FOMC Forecasts

2:30 Bernanke Press Conference

Thurs 9/19:

8:30 Weekly Jobless Claims

10:00 Existing Home Sales

10:00 Philadelphia Fed

Fri 9/20:

Quadruple Witching: The expiration of stock index futures, stock index options, stock options and single stock futures…can lead to increased volatility.

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