Vital Signs: Investors Grow Impatient with Recovery Plans

On deck in the coming week: federal budget, retail sales, business inventories, foreign trade, import prices, and consumer sentiment

Policymakers at the Treasury and the Federal Reserve are slowly but surely piecing together the key elements of Washington’s Financial Stability Plan (FSP), although investors remain clearly unimpressed by the efforts. With major stock indexes at levels not seen in 13 years, investors see little hope for a turnaround in financial conditions and the economy anytime soon.

However, despite current market sentiment, the FSP is structured around providing support in the three areas most crucial to an economic recovery: banking, credit markets, and housing. The FSP recognizes that a sustainable recovery depends on three things: removing the fear of bank insolvency, rejuvinating the securitization process in the credit markets, and stabilizing housing activity and home prices.

The FSP’s efforts toward shoring up the banks are investors’ greatest disappointment. So far, actions by the Treasury and the Fed have been essentially life support without addressing the disease itself, which is the ever-eroding value of banks’ toxic mortgage-related assets. The FSP’s Public-Private Investment Fund that's aimed at removing those assets from bank balance sheets is moving much more slowly than investors want to see, and the stress tests to determine which banks need capital, as part of the Capital Assistance Program, will take weeks to complete. Meanwhile, stocks continue to get hammered, with shares at Citigroup (C) breaking below $1.00 in intraday trading on Mar. 5.

Beyond the banks, programs aimed at supporting the credit markets and housing are moving more quickly. The Fed and Treasury announced this week that the Term Asset-Backed Securities Lending Facility (TALF) will be up and running on Mar. 17. The TALF will begin purchasing up to $1 trillion in securities backed by auto, credit card, small business, and student loans, and the program has been expanded to include commercial mortgage-backed securities (MBS) and non-agency residential MBS. The secondary market for loans, which has typically generated about half of all the credit flowing to households and businesses, has been all but frozen for months. Market analysts believe this program has great potential to significantly free up these markets and promote increased lending for business operations and consumer purchases.

Analysts are also optimistic about the FSP’s housing program and its efforts to mitigate mortgage foreclosures. The Housing Affordability and Stability Plan (HASP), for which additional details were released on Mar. 4, will provide cash incentives to both homeowners at risk of default and mortgage lenders and servicers to encourage loan modification. It will also boost refinancing for some homeowners with conventional mortgages whose payments are current but who cannot refinance due to falling prices. In total, these efforts are expected to reach between 7 million and 9 million homeowners. HASP will complement the Fed’s program to lower mortgage rates via its purchases of up to $600 billion in mortgage-backed securities held by federal agencies, an effort aimed at opening up the secondary market for mortgages.

The problem: No matter how successful these program will be, they will take time to implement, and investors are clearly running out of patience.

Here’s the weekly economic calendar, from Action Economics:

Top Economic Reports
Reports Date Time For Median Estimate Last Period
Wholesale Trade Sales Tuesday, Mar. 10 10:00 a.m. January -0.3% -3.6%
Treasury Budget ($Billions) Wednesday, Mar. 11 2:00 p.m. January -$200.0 -$83.8
Retail Sales Thursday, Mar. 12 8:30 a.m. February -0.4% 1.0%
Retail Sales (Excluding Autos) Thursday, Mar. 12 8:30 a.m. February -0.4% 0.9%
Business Inventories Thursday, Mar. 12 10:00 a.m. January -1.1% -1.3%
Trade Balance ($Billions) Friday, Mar. 13 8:30 a.m. January -$38.0 -$39.9
Exports, Goods & Services ($Billions) Friday, Mar. 13 8:30 a.m. January $133.0 $133.8
Imports, Goods & Services ($Billions) Friday, Mar. 13 8:30 a.m. January $171.2 $173.7
Export Price Index Friday, Mar. 13 8:30 a.m. February 0.0% 0.5%
Import Price Index Friday, Mar. 13 8:30 a.m. February -1.0% -1.1%
Consumer Sentiment Index (preliminary) Friday, Mar. 13 9:55 a.m. March 56.0 56.3
Other Reports and Events
Reports/ Events Date Time For
NFIB Report on Small Business Tuesday, Mar. 10 7:30 a.m. February
ICSC-UBS Store Sales Tuesday, Mar. 10 7:45 a.m. Mar. 1-7
Johnson Redbook Weekly Store Sales Tuesday, Mar. 10 8:55 a.m. Mar. 1-7
SPEECH: Fed Chairman Bernanke Tuesday, Mar. 10 8:30 a.m.
Job Openings & Labor Turnover Tuesday, Mar. 10 10:00 a.m. January
EARNINGS: Brown-Forman Tuesday, Mar. 10  
EARNINGS: Kroger Tuesday, Mar. 10  
Mortgage Applications Wednesday, Mar. 11 7:00 a.m. Mar. 1-7
EARNINGS: National Semiconductor Wednesday, Mar. 11  
EARNINGS: Pall Wednesday, Mar. 11  
EARNINGS: Staples Wednesday, Mar. 11  
Initial Unemployment Claims Thursday, Mar. 12 8:30 a.m. Mar. 1-7
    Before it's here, it's on the Bloomberg Terminal.