Dow Struggles at 10,500

One pillar of hope for the U.S. economy continues to deteriorate. Early estimates are that 169,00 jobs were lost last month (I assume this is a net number, accounting for total lay-offs and hires). Estimates were that 150,000 jobs were lost.
It should be clear that the unemployment rate will head higher. And rather than focus on increasing employment, economists seem to be focused simply on signs of stabilization. So while the rate of job losses may be declining, unemployment is still on the rise.
Right now, improvement in the jobs picture is priced into the stock market. Analysts imagine that some improvement to employment will help earnings. The longer unemployment numbers are rising, the more precarious earnings estimates become going forward.
*****We can turn to the retail sales numbers from Black Friday for an example. 195 million people came out to shop ont eh Friday after Thanksgiving. That’s a significant improvement over the 172 million shoppers from last year. And the overall sales numbers showed some improvement.
But spending on a per capita basis fell. Spending per person was $343.31 this year, compared to $372.57 last year.
There’s no doubt the sheer number of shoppers is good news. But the level of spending is a result of a weak economy. And we should expect overall levels of spending to remain depressed.
*****As you know, I have been critical of how Treasury Secretary Geithner handled bank bailouts and the now infamous stress tests. And the fact that accounting rules were changed to allow banks to improve their balance sheets was a very superficial way to put an end to the banking liquidity crisis.
But today, the Treasury is showing that it’s finally decided to stop letting banks decide how bailouts will work.
You may recall that the Treasury demanded warrants and preferred stock in return for TARP loans. In addition to paying back loans, the warrants and preferred stock were required as an incentive to the Treasury (and the taxpayer) for the bailout risk. So far, banks that have paid off their loans and exited the TARP program have negotiated privately with the Treasury to also buy back the warrants and preferred stock.
The Treasury Department owns 12.7 million warrants for Capital One Financial stock (NYSE:COF). These warrants allow the holder to buy Capital One stock at $42.13 a share by November 14, 2018. The current price for Capital One stock is around $38 a share.
Instead of letting Capital One re-buy the warrants, the Treasury will sell them at auction. In other words, it’s letting the market decide what they’re worth. And early estimates are that may be $1.35 billion or more.
It’s doubtful that the Treasury will turn a net profit on TARP loans. I don’t see how AIG (NYSE:AIG), for instance, will every pay back the full $180 billion it received. Still, it’s good to see that the Treasury is intent on maximizing its return on these warrants.
*****The Dow Industrials continues to struggle at 10,500. I am not surprised. There’s nothing magical about 10,500 itself. But that level does represent optimistic earnings estimates.
Dow 10,500 is 25% lower than the all time closing high at 14,093. Given where the U.S. economy is in terms of economic recovery, it’ shard to justify the Dow getting much closer to all-time highs.
Of course, that doesn’t mean there’s no opportunity for individual stocks. But I think the major indices are just about maxed out (at least until we see some positive data abut unemployment).

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