The Ticker

Stocks are bouncing around today despite news the Obama Administration is considering an absolutely huge stimulus package that could be worth some $850 billion.

A bit of context from Bloomberg:

Barack Obama may ask Congress next year to approve a stimulus plan of around $850 billion, an amount that has grown as the U.S. economy sinks deeper into recession, an adviser to the president-elect said.

Obama’s transition team believes the amount, about 6 percent of the U.S.’s $14 trillion economy, is needed to reverse rising unemployment, said the adviser, who spoke on condition of anonymity. The sum would exceed initial estimates by House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, as well as surpassing what some economists and the International Monetary Fund say is required.

Pelosi and Reid were kicking around spending plans worth between $400 billion and $600 billion, and that gave investors a buy sign back in early December. So, if we now expect stimulus to be substantially higher (and still have no concrete evidence of where exactly that money will go other than vague discussion of roads, healthcare, renewable energy, etc.), shouldn't we be seeing more of a rally in stimulus-related stocks?

A few possibilities: First, the market may have already priced in the stimulus bump. Oft-touted infrastructure plays like smart-meter maker Itron (ITRI) are up more than 40 percent in the last month. Heavy engineering and construction firms like Jacobs Engineering (JEC) and Fluor (FLR) are up 62 percent and 48 percent respectively. Second, while the stimulus payout may be growing, the economy is getting worse. Picking stocks based on government spending alone can't be done without considering how the economic woes that caused such massive intervention in the first place will translate to lower profits overall, even for companies who reap the stimulus benefits.

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Steve Jobs won't give his keynote address at the Macworld conference and Oppenheimer's Yair Reiner
draws a line in the sand:

We don't know why Steve Jobs has pulled out of his annual address at Macworld on January 6. Maybe he's not feeling well, or maybe he just has nothing new to say. Whatever the reason, the unexpected announcement has underscored the greatest risk to Apple's long-term success-its dependence on Jobs' health and its apparent lack of a succession plan.

Six months have passed since Jobs appeared at the Apple Developer Conference, looking drawn and unwell. It's past time for Apple to either disclose the state of his health or elaborate a viable plan for eventually transferring power. Until such time, we can no longer continue to recommend Apple as a long-term investment. Downgrading to Perform; and removing our $145 PT.

Apple's shares are below $89 today, off about 6.8 percent. Barron's Eric Savitz has more analyst reactions here. Boomtown's Kara Swisher decodes the press release here.

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In its monthly survey of fund managers, Merrill Lynch says fear among fund managers has pulled back from the brink. From the report:

Ingredients for a rally in place; fiscal policy is the trigger

After the extreme pessimism of the past two months there is evidence of investors pulling back from the brink in December’s survey. Fund managers see the rate of deterioration in the global economy as slowing. With risk aversion showing signs of moderating (from very extreme levels), cash levels at the highest since 2001, and some belief that monetary policy is starting to have an impact, running textbook defensive asset allocations going into New Year may start to carry greater risk. Possible news flow on fiscal stimuli could trigger a sharp rally.

Investors hunker down for “below-trend” 2009

As investors start to look into 2009, 88% of respondents are hunkering down for a year of ‘below-trend’ growth and ‘below-trend’ inflation. Against such a backdrop there are only four global sectors that they wish to overweight: healthcare, telecoms, utilities, and consumer staples (a sector that many regard as overvalued). For the third month running a majority of fund managers believe that equities are undervalued. But they are still worried that it is a value-trap – and when it comes to asset allocation they still prefer bonds to stocks. Maybe this is because a net 87% of managers believe that consensus earnings estimates for 2009 are still ‘too high’.

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Wall Street was expecting an unspectacular announcement from the Federal Reserve today. Instead, Ben Bernanke & Co. decided to pull out all the stops with a full three-quarter point rate cut and an unusually specific commitment from the central bank to keep interest rates low "for some time" as part of continually expanding efforts to help fix an ailing economy.

The Fed cut the benchmark federal funds rate to a quarter of a point from one percent and central bankers said they'll continue to keep rates in a "target range" between zero and a quarter point as the Fed now "anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

The statement reads like the central bank is preparing to hunker down for a long fight:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.  Financial markets remain quite strained and credit conditions tight.  Overall, the outlook for economic activity has weakened further.

Meanwhile, inflationary pressures have diminished appreciably.  In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.  In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time. 

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level.  As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.  The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities.  Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.  The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Analysts react (bold is mine):

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