The Week Ahead: A Plan Emerges

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By Andrew Nelson

The week ahead begins with either renewed hope or the death knell of free market economies (depending on your tastes). After an all day, all night affair on Saturday, lawmakers in the US have pretty much decided how they’re going to save their own and the world’s financial markets.

Treasury Secretary Henry Paulson said early Sunday morning US time that, while the bailout deal legislation still needed to be finalized, ”I think we’re there” on a deal. House Speaker Nancy Pelosi confirmed that while the deal still needs to be committed to paper, and lawmakers will then need to vote, a final announcement on the deal can be expected on Sunday.

It’s Sunday night Sydney time, or early morning in Washington that I write this, so no news yet, but Reuters reports that Congress is racing to reach an agreement before Asian financial markets open on Monday.

The gist of the agreement is that there will be US$700 billion made available by Congress to buy bad debt from ailing banks in a bid to keep credit markets from grinding to a halt under the burden of bad mortgage-backed bonds. The US$700 billion is to be paid out in stages, with the first $250 billion to be issued when the legislation is enacted, another US$100 billion can be spent if the President decides it is needed, while the remaining US$350 billion remains subject to Congressional review.

The legislation will see the government receive warrants from those companies participating in the sale, with the legislation expanding the range of firms that can sell troubled assets to the government to include pension plans, local governments and community banks. The government is then able to hold these warrants until maturity, giving taxpayers “an ownership stake and profit-making opportunities with participating companies”, according to a statement issued by speaker of the house Nancy Pelosi’s office.

As expected, new executive-compensation rules will be enacted to try to make sure nobody in the failing or indebted companies get rich, while the Democrats were forced to drop the affordable housing amendment they tried to tack on to the legislation.

What will it all accomplish?

I’d be willing to bet that we’ll see commentary all week saying how this initiative will not provide the much needed fix the broader US economy is looking for. Economic recovery will only come when the banking system has sufficient capital to finance recovery, which will be after they offload the toxic debt, go through another round or two of writedowns and losses. Then, as finance begins flowing and business returns toward normal, the US government will takes its clip from the warrants it will have in hand. After that, a recovery? (let’s hope)

Other than that, the week ahead presents us with Australian August retail sales, private sector credit, building approvals, and the national trade balance will all be released over the week. As like most things of late, expect the data to be contradictory, but still generally showing that the nation has hit a bit of a flat spot. Internationally, US and UK GDP and consumer confidence reads, a European rates decision and a number of economic indicators from Japan and New Zealand.

To start with…

Out of the US tonight is the final estimate of QII US GDP growth, which is expected to be in-line with previous estimates at 3.3% annualised. Also out from the US will be the University of Michigan September consumer confidence read. It is with these and news about the plan from Washington with which we will begin our week.

Later, New Zealand’s trade balance numbers are released, as are a number of reports from Japan including CPI, housing, retail sales and jobless rates. There is little in store from Australian sources Monday, but there are a dozen or so dividends to be paid.

Tuesday begins with US personal income and consumption figures and the PCE indicator, while the UK feeds us consumer credit and mortgage approvals. NZ Building permits and business confidence follows.

Domestically, we’ve got RBA credit aggregates, building approvals and retail sales, all for August. And a few more divs. Expect the credit read to show a continuation of sharply slowing conditions, with the RBA’s tightening of monetary policy and the global credit crunch adding to the tightening. Westpac expects retail figures to be strong, showing a 1.4% increase in sales, with consumers getting a temporary boost from tax cuts and lower fuel prices.

On Wednesday we start with US and UK consumer confidence, the UK 2Q GDP and current account reads and European CPI. There’s not much on the cards locally.

Thursday sees another boatload of data from the US, with numbers on employment, construction spend, manufacturing and vehicle sales. Later in the morning we’ll get a look at the Australian trade balance for August.

Friday is also pretty busy, with the European Central Bank’s rate decision, UK credit numbers and US factory orders.  Danske Bank for one do not think that the ECB is ready to lower its key rates just yet, thinking March and June 2009 to be more likely given the the continuation of high inflation.

On the local front, the Australian inflation gauge will hog the headlines, with market watchers looking for either hope or evidence about the next move from the RBA. Westpac notes recent market pricing shows an 85% probability of a 50 bp cut on October 7, with a 90% probability of another 25 bp in November.

The day also gives us a dozen or so stocks going ex div, with Crown ((CWN)), David Jones ((DJS)), Sims Group ((SGM)) and Toll Holdings ((TOL)) all coughing up.

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