January 14, 2008 — The moment of truth has arrived. Most of us in the investment community are looking for a bottom in the financial stocks and an end to the bad news around credit, subprime losses, and consumer confidence. Will this be it? Several financial services firms (I’ll call them the financial titans) are on tap to report quarterly results this week. Wall Street will have its eye on Citigroup (C), State Street Corp. (STT), JP Morgan Chase (JPM), Wells Fargo & Co. (WFC), Merrill Lynch (MER), and Washington Mutual (WM) as all announce their results. I expect the market to take another beating this week. It could get ugly folks.
Which leads us to this: What is the Fed going to do with rates again this month? Comments by Federal Reserve Chairman Ben Bernanke and other officials all but assured the market that the Fed will further cut interest rates and attempt to prevent the economy from sliding into recession.
Although the Fed has now cut interest rates by one percentage point over three straight meetings, bringing the federal funds rate down to 4.25%, the cuts seemed “tight”. And after each of the three cuts, the Fed has sent the financial markets a clear impression that they are unsure about what to do next.
An economic recession is often defined as a period of negative gross domestic product growth for two or more successive quarters of a year. However, I like newspaper columnist Sidney J. Harris’ definition: “a recession is when you lose your job; a depression is when I lose mine.”
The U.S. economy seems to be facing ever-greater risks of entering a recession, especially with the latest statistics on job unemployment, activity in the manufacturing sector, and consumer confidence—not to mention the weakening U.S. dollar. Under these conditions, the Fed should give priority to avoiding a recession, and not concerning itself with inflationary risks at this moment.
Results at major financial firms this week are expected to continue to reflect the impact of subprime mortgages. Especially from Citibank who is expected to report earnings on Tuesday, and Merrill Lynch on Thursday. Merrill Lynch, the nation’s largest brokerage firm, is expected to report losses of $15 billion stemming from bad mortgage investments, according to a published report Friday.
Some key data will also be closely monitored this week. Tuesday will bring reports on December producer prices and retail sales. Wednesday will be busy with the release of the December consumer price index, industrial production data, and the Federal Reserve’s Beige Book of economic conditions. On Thursday, we’ll get December housing starts and weekly jobless claims. Friday will bring a key consumer sentiment survey along with leading economic indicators.