MarketView for April 26

Summary 

It was not much of a day on Wall Street on Monday with bank shares in the red as a result of fears that financial reform making its way through Congress will curb profits. A proposal to overhaul financial regulation that could restrict lucrative derivatives trading faced a crucial Senate test vote on Monday and weighed on financial shares. As it turned out, the Republican Party kept its filibuster in place and there was no vote to bring the bill on to the floor for discussion. As a result, JPMorgan fell 2.3 percent to $43.89 and Bank of America was down 2.1 percent to $18.05.

On the other side of the proverbial coin was Caterpillar, whose strong earnings release helped the Dow Jones industrial average at least be able to point to a positive day although the plus was virtually non-existent. Caterpillar shares rose after the heavy machinery maker raised its full-year profit forecast and said "economic conditions are definitely improving." The stock gained 4.2 percent to $71.65.

Shares of health insurer Humana fell 4.3 percent to $43.56 over the fallout from the recently passed health reform law and on profit-taking after the company posted a strong earnings report.

Citigroup fell 5.1 percent to $4.61 after the Treasury Department said it would begin selling part of the 27 percent stake it holds in the bank after $45 billion in taxpayer-funded bailouts.

Positive corporate earnings and a flurry of deals pushed some stocks sharply higher. Whirlpool rose 10 percent to close at $112.42. Whirlpool's shares had hit an all-time high at $118.44 after the appliance manufacturer reported earnings that exceeded estimates and raised its full-year profit view.

Hertz said it agreed to buy Dollar Thrifty Automotive Group for about $1.2 billion. Dollar Thrifty's stock gained 10.9 percent to $43.07, while shares of acquirer Hertz shot up 14.1 percent to $14.69. Charles River Laboratories said it plans to acquire Shanghai-based WuXi PharmaTech for $1.6 billion. The U.S.-listed shares of WuXi surged 17.1 percent to $19.41, while the stock of acquirer Charles River Laboratories slid 15.6 percent to $33.55.

Caterpillar Underpins the Markets on Monday

Caterpillar reported strong quarterly earnings on Monday and raised its full-year earnings and sales forecasts, citing an improving global economy, especially in Asia and Latin America. The world's largest manufacturer of earth-moving equipment, whose shares rose as much as 5.9 percent after the news, said it was seeing particularly robust orders from mining and energy companies.

Rebounding metals prices have resulted in firm orders for much of the company's available 2010 production of large mining trucks and large track-type tractors, Caterpillar said. Some of its largest mining vehicles are sold out for the year, and it is now taking orders for delivery in 2011.

"Economic conditions are definitely improving, particularly in the world's developing economies," Caterpillar said in a statement. "Industry activity and orders are significantly higher than last year and are at record levels in some areas." Caterpillar said demand for parts, which closely tracks equipment usage, was strong and had picked up as the quarter unfolded, an indication of recovery in the global economy.

However, the company cut its outlook for 2010 housing starts by 20 percent, from 1 million to 800,000, saying the weak labor market was the main reason for some lingering pessimism about the U.S. economy.

Caterpillar, based in Peoria, Illinois, said its first-quarter net profit was $233 million, or 36 cents a share, compared with a year-earlier loss of $112 million, or 19 cents a share. If you exclude one-time charges, including tax expenses of $90 million related to recently signed U.S. health care legislation, earnings were 50 cents a share.

Sales, including revenue from Caterpillar's financial service arm, fell 11 percent to $8.23 billion, pulled down by a 28 percent decline in its engine and turbine business. Despite lighter-than-expected sales, Caterpillar beat earnings expectations because of lower manufacturing costs and strong pricing. The company said its manufacturing costs fell $566 million during the quarter because of lower labor, overhead, warranty and material expenses.

Caterpillar raised its outlook for 2010 and said it now expects to earn a full-year profit of $2.50 to $3.25 a share, midpoint $2.88 a share, on sales of $38 billion to $42 billion. It had previously forecast earnings of $2.50 a share on sales of between $35.6 billion and $40.5 billion.

The company, which laid off nearly 30,000 full-time and contract workers worldwide from late 2008 through 2009, said it had hired 1,500 workers worldwide in the first quarter, most of them outside the United States.

"Currently, we are seeing faster recovery in Asia/Pacific and Latin America," Caterpillar said. "So, prospects for employment increases in 2010 are best for facilities in those regions."

The next time Caterpillar reports earnings, it will be under new Chief Executive Doug Oberhelman, who oversees engines and turbines at the company. Jim Owens is due to step down as CEO at the June board meeting, ending a career that began in 1972 when he was still finishing his PhD in economics at North Carolina State University.

During Owens' first five years at Caterpillar's helm, sales of the company's iconic yellow construction and mining equipment, and diesel and turbine engines, rose 70 percent to $51.3 billion, and earnings per share and dividends doubled. Then came the economic downturn and sales last year shrank to $32.4 billion, right about where they were when Owens was named CEO in February 2004.

Treasury Department to Begin to Sell Citigroup Stock

The Treasury Department said Monday that it plans to sell up to 1.5 billion shares of Citigroup stock, its latest move to unwind the support it provided big banks during the financial crisis. The sales, which amount to about 20 percent of the government's ownership stake, could begin as soon as.

The government received about 7.7 billion shares, or a 27 percent ownership stake, as compensation for the massive support it extended to the bank during the height of the financial crisis in late 2008. Treasury said last month that it would soon begin selling its Citigroup stock and planned to complete the sales this year.

The sales should earn a tidy profit for the government, which purchased the common stock in the summer of 2009 at a share price of $3.25. Citigroup shares fell 19 cents, or 3.9 percent, to $4.67 in midday trading Monday. If the government sold all its 7.7 billion shares at $4.70, it would receive about $36.2 billion in proceeds. That's $11.2 billion above the $25 billion it paid for the shares.

In a statement Monday, Treasury said it planned to proceed with the sales of the Citigroup common stock "in an orderly fashion under a pre-arranged trading plan with Morgan Stanley, Treasury's sales agent."

In a separate filing with the Securities and Exchange Commission, the company said it would report quarterly on the number of shares sold.

Treasury said Morgan Stanley had the authority to make the initial sales "under certain parameters" and that Treasury expected to give the company the authority to sell additional shares after the initial 1.5 billion shares had been sold.

"We're putting TARP out of its misery," Treasury Secretary Timothy Geithner said on CNN's "Fareed Zakaria GPS" program Sunday. Citi, one of the hardest-hit banks during the financial crisis and Great Recession, received a total of $45 billion in bailout money. That was one of the largest rescues under the TARP. Of the $45 billion, $25 billion was converted to a government ownership stake in Citi last summer and the bank repaid the other $20 billion in December.

Geithner estimated last week that the government's losses from the bailouts of the banks, the auto companies, the insurance company AIG, and mortgage giants Fannie Mae and Freddie Mac would be about $87 billion. That's much lower than a year ago, when Treasury estimated the ultimate cost would be closer to $500 billion, Geithner said in a letter to congressional leaders.