Election Elation Overshadows String of Disappointing Economic Reports

Yesterday's economic reports pointed to a significant slowdown in virtually every sector of the US economy.  Car sales for October fell to a 25 year low, with GM sales, in particular, down an astonishing 45%.  Plunging consumer confidence and a contraction in credit were the primary culprits.  Manufacturing contracted in October at the fastest pace in 26 years, with the ISM falling to 38.9, the lowest level since 1982.  Bank lending continues to tighten, according to the latest survey by the Federal Reserve, further hamstringing the beaten-down economy.  Yet despite the economic gloom, investors are enthusiastic about the prospects of new leadership for the country.  

The markets are being further buoyed by the various government stimulus packages floating around.  According to the Wall Street Journal, the Treasury is considering using the $700 billion rescue fund to buy stakes in a broad range of financial companies, not just banks and insurers.  A few of the names popping up in the article are specialty finance firms such as GE Capital and CIT Group.  No doubt this new iteration of equity injection was spurred in-part by recent announcements by GE Capital, one of the largest providers of debtor-in-possession financing, that it was halting this type of lending.  Debtor-in-possession financing is provided to companies in or near bankruptcy, which allows them to continue paying bills until a reorganization can be worked out with creditors.  Without it, companies that would normally file Chapter 11 because of liquidity issues, may be forced into a Chapter 7 liquidation.  With the prospect of rising bankruptcy filings due to a contraction in the economy, as well as the recent increase in debt-laden companies that arose from the private equity boom, lack of access to DIP financing could make a bad situation much worse.  Of course, an argument can be made that this will aide private equity firms, as it is private-equity backed companies that are overly levered which will ultimately need this type of financing.  On the other hand, helping companies in Chapter 11 stay out of Chapter 7 will keep many employed.   

For those interested in the running tally of the Treasury's allocation of the TARP, of the original $700 billion, $250 billion has been set aside for equity injections, of which $163 billion has already been distributed to banks.  The Treasury has yet to determine how the $87 billion balance of equity infusions will be doled out, although I suspect that a significant portion will go to insurers that are suffering significant investment losses from the recent market carnage.  The remaining $450 billion set aside for purchasing distressed assets, the original purpose of the TARP, may be crowded out by calls for loans and infusions into other struggling sectors of the economy.  Much of this will be determined by the new administration.

The good news is that the coordinated central bank actions to restore lending among banks appear to be working.  Three-month Libor fell again to 2.71%, down from a peak of around 4.87% a few weeks ago.  Some semblance of normalcy appears to be returning to money markets, allowing of course, for the caveat that "trillions in stimulus from governments around the world" is the new normal.  It's still far better than mass pandemonium.