As bankruptcies, scandals, and layoffs mounted, the shell-shocked markets tried to look ahead to brighter times next year
What a week: Detroit flirted with the precipice, the feds fingered a lion of Wall Street in a $50 billion Ponzi scheme, news giant Tribune slouched into bankruptcy, investors loaned Uncle Sam $30 billion—interest free. And then there was Illinois Governor Rod Blagojevich, arrested on charges of trying to shake down Sam Zell and auction off President-elect Barack Obama's Senate seat.
The stock market? It yawned, roughly breaking even amid the automaker cliff-hanger after spending most of the week solidly up. Compare that with September, October, and much of November, when bad news flowed to a staccato beat and the markets jigged accordingly. "There's nothing much that'll really surprise you any more," Rich Repetto, a financial-stock analyst for Sandler O'Neill, said Friday. Investors have "seen everything and are sort of shell-shocked."
And yet, the Blagojevich imbroglio suggests there may be life in the patient still: Blasé as the world seemed about the dire economic and financial news, the Illinois governor's alleged expletive-laced efforts to cash in on Obama's vacant Senate seat seemed to draw genuine astonishment, even in corruption-scarred Chicago.
Close to the Vest
Of course, the market's calm in the face of this week's storms may well have a more jaded undertone. Repetto, for one, sees a little end-of-year caution at work among big institutional investors—many of whom have to report their holdings to suspicious investors annually. Much better to be seen holding something safe—like Treasuries, whose yields have been driven down toward zero by voracious demand. Plus, fund managers with profits (or even just small losses) have little appetite for big risks just before their scorecard is tallied on Dec. 31. Repetto says he knows three big hedge-fund managers heading off to Florida, the Bahamas, and elsewhere. "People hang up their cleats for the year," he says.
Certainly, as the week began, there was plenty of gloom around, even if you weren't looking particularly hard. On Dec. 5, word came that the U.S. shed more than half a million jobs in November, the worst showing since 1974 and enough to bring the year's job losses so far to 1.9 million. Yet, in a sign of the mysteries to come, the Dow closed up 259 points, and word filtered out that congressional leaders were near a deal to shore up the faltering automakers.
Monday, Dec. 8, began with a little light relief from —The Wall Street Journal reported that he asked Bank of America (BAC) for a $5 million to $10 million bonus for having delivered it a solvent Merrill Lynch (MER). Thain ultimately accepted zero. Yet storm clouds lingered: Predictions for 2009 ad spending tumbled, Extended Stay Hotels was in talks with creditors, and 3M (MMM) said it would cut 1,800 jobs.
Dreier to Blago to Madoff
Then Tribune filed for protection from its creditors in bankruptcy court, weighed down by the mountains of debt it had taken on in Zell's bid to take it private through an Employee Stock Ownership Plan, and New York attorney Marc Dreier was accused of bilking investors out of $100 million. Russia saw its debt rating slashed by Standard & Poor's. Dow Chemical (DOW) said it would close plants and slash 5,000 jobs—plus 6,000 contractors—while Anheuser-Busch InBev (INTB.BR) said its workforce would shrink by 6%.
Blagojevich, it's safe to say, dominated the news Tuesday. On the good-news side of the ledger: Progress on the auto bailout appeared to inch along. But layoff announcements continued to flow freely, and profit warnings multiplied. Sony (SNE) said it would decimate its factories—literally, closing one in every 10—and lay off 8,000 full-time staff and 8,000 contractors.
Uncle Sam got money for nothing as nervous investors agreed to take a 0% rate on $30 billion in four-week notes. What's next? Paying the government for Treasuries? Indeed, the yield on three-month T-bills fell into negative territory for a brief period on Tuesday. "If people are so busy during the day just protecting the cash they have, it's not a good sign," prominent analyst Ed Yardeni told The New York Times.
As Wednesday dawned, Nortel Networks (NT) joined the ranks of companies suddenly interested in making the acquaintance of bankruptcy counsel—no filing imminent, mind you, the Journal reported, and AIG's (AIG) losses on speculative trades appeared to widen by a good $10 billion. The Congressional Oversight Panel, set up to watch Treasury and its Troubled Asset Relief Program like a hawk, questioned whether the agency had a strategy and whether it knew how well it was succeeding or what dozens of banks had done with taxpayers' billions.
Wrangling over the auto bailout reached a fever pitch by Thursday, with a deal seeming imminent between the White House and House Democrats—and then in fact a pact passed, only to collapse in the Senate. Reports spread that General Motors (GM), too, had decided to engage restructuring experts. Then came the stunning story of Bernard Madoff, the onetime Nasdaq (NDAQ) chairman who was turned in by his sons and arrested, accused of running a $50 billion Ponzi scheme. Debt woes continued to mount, with mall owner General Growth Properties (GGP) hoping to extend $900 million in debt and facing bankruptcy court if it failed.
Even the seemingly unflappable market had had enough by Friday morning. Stocks in Asia and Europe tumbled as it sank in that no auto bailout was likely from Congress. Enter the Treasury and the White House. The last time their public pronouncements moved the market—in a positive way, at any rate—was weeks ago. But this was serious, and news they might in fact let loose some of the remaining billions bucked investors up considerably. With $15 billion uncommitted in Henry Paulson's kitty, it would be just enough to cover the $14 billion GM and Chrysler have said they need to last until January and (they hope) a more sympathetic Administration. It would even leave Paulson and the Treasury with $1 billion to tide them over to next year—without the embarrassing need to ask Congress for the second $350 billion, at any rate—should any other crises erupt.
Through all this, the Dow eked out a 0.75% gain for the week. Jaret Seiberg, a financial policy analyst with Stanford Group, has an optimistic take: "The market has come to realize that we're going to have a lot of gloom and doom," he says. So maybe it's doing what investment advisers always counsel: looking ahead. "The market's very good at looking six months forward, and the market's making a bet the government's going to pass a big stimulus package in January," Seiberg says. "As you look ahead six months, things look better."
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