MarketView for April 2

 

 

Summary 

 

Stock prices were sharply higher again on Thursday more data pointed to a stabilizing economy and changes to the mark-to-market accounting rule was a long anticipated present for Wall Street. Meanwhile, world leaders at the G20 summit on London also aided the day’s market momentum after they announced an additional trillion dollars to support the International Monetary Fund and increase world trade.

 

As a result, the Dow Jones industrial average is now on track for its best four-week rally since 1933. Both the blue-chip Dow average and the S&P 500 ended the day on Thursday at a nearly two-month high point. The day’s bullishness sent the shares of General Electric up my nearly 6 percent. Shares of General Electric closed up 5.6 percent at $10.74. 

 

Across the board, Industrial, technology, consumer discretionary and energy stocks were the largest gainers after government data indicated a rise in factory orders during the month of February. It was the first increase in seven months.

 

Thursday's rally helped the S&P 500 rise 23.3 percent from 12-year lows reached early last month and cut its year-to-date losses to around 7.6 percent. During the day, the Dow traded above 8,000 for the first time since early February on an intraday basis.

 

In news that could lift the Nasdaq on Friday, shares of Research in Motion rose about 22 percent after the company posted better-than-expected results and gave a rosy outlook after the closing bell. In extended-hours trading, RIM's shares closed in after hours trading at $59.75. It had closed on the Nasdaq at $49.09, up 7.6 percent. The Nasdaq is now up more than 1.6 percent for the year.

 

The possibility of an improving global economy and the relaxation of accounting rules, which have shaken financial institutions with hefty write-downs, sent the financial sector higher

 

Shares of Bank of America rose 2.7 percent to $7.24 while Citigroup chalked up a gain of  2.2 percent to $2.74 and Wells Fargo rose 5.9 percent to $15.33.

 

The industrial sector ranked among the top gainers in a broad-based rally as data showed new orders received by factories rose 1.8 percent in February after a 3.5 percent decline in January, breaking six months of declines and raising hopes of a start to end of the recession.

 

In the consumer discretionary sector, Tiffany rose 6.8 percent to $23.34, while in tech IBM was up 3.3 percent to $100.82. Chevron added significantly to the Dow, as it ended the day up 2.9 percent at $70.31.  Crude oil futures rose nearly 9 percent to $52.64 per barrel on optimism for an economic recovery. 

 

Mark-to Market Defanged

 

The Financial Standards Accounting Board, or FSAB, succumbed to Congressional pressure on Thursday and significantly watered down its mark-to-market rules thereby allowing more flexibility in valuing toxic assets, a move expected to boost bank earnings and improve their capital levels.

 

The five-member Financial Accounting Standards Board voted unanimously to let banks exercise more judgment in using mark-to-market accounting that has forced billions of dollars in write downs and been blamed for worsening the recession. The board split 3-2 on backing guidance that would let lenders take smaller losses on impaired assets such as mortgage backed securities, a move critics said would let banks hide reality from investors.

 

Many lawmakers, banks and other supporters of the changes argue that pricing assets to fire sale prices during a time of inactive markets has exacerbated the financial crisis through the write downs, big earnings hits, damage to capital ratios, and a reduced ability to lend.

 

Investors and some former regulators take a different view, saying that more flexibility with the rules would let big banks hide the real value of their troubled assets. "I think it's a mistake. If it's too cold in the room, you don't fix the problem by holding a candle under the thermometer," William Poole, former Federal Reserve Bank of St. Louis president.

 

"It may increase reported bank earnings by 20 percent, but it has nothing to do with the reality of bank earnings. It's very important to maintain that distinction," Poole said.

 

Initial euphoria among business lobbyists over the changes was tempered as it became clear FASB would not let banks presume that all transactions within a market are distressed just because a market for an asset is inactive.

 

The changes would take effect in the second quarter for most U.S. financial firms, but early adoption could be allowed for first quarter results. The guidance documents should be issued next week, FASB staff said.

 

FASB deliberated for three hours in a drab boardroom that was filled with dozens of representatives of accounting firms, banks and insurance companies. "I think this is an improvement," FASB Chairman Robert Herz said of the changes. However, board members Marc Siegel and Thomas Linsmeier cast dissenting votes on the guidance for how companies write-down assets that have dropped significantly in value.

 

"I'm afraid that this change will result in fewer impairments being recognized, and I don't think that will help the investor confidence in the balance sheet," Siegel told the meeting.

 

FASB said at its meeting that the objective of mark-to-market in inactive markets should be to determine what an asset could fetch in an "orderly" transaction between market participants. Such an "orderly" transaction would not include distressed transactions or fire-sales, it said.

 

A Congressional panel last month told Herz to move quickly to ease the mark-to-market guidance or lawmakers would take action. Four days later FASB issued two proposals: one to give banks more flexibility in applying mark-to-market accounting and another addressing when banks must take write downs on impaired assets.

 

FASB's new guidance could affect a federal lending program for asset-backed securities and a public-private partnership to purchase troubled assets unveiled in March by the White House.

 

The Obama administration's plan to scrub toxic assets off banks' balance sheets depends heavily on banks' and potential investors' ability to agree on a value for an asset.

 

The accounting board considered hundreds of letters and e-mails sent by banks, investors and others commenting on the FASB proposals. Herz also said FASB "did extensive outreach to investors, particularly major investors in financial institutions" ahead of Thursday's meeting.

 

But FASB members Linsmeier and Siegel sparred over whether to call the write-down guidance "ridiculous" or "ludicrous," and Linsmeier said the board was making changes to address regulatory capital concerns.

 

"I find one of the most unfortunate parts of this to be the fact that we're continuing to take the responsibility on, rather than having the regulators to take this on," said Linsmeier, a FASB member for three years and former chairman of Michigan State University's accounting department.

 

Siegel joined the board in October. He had led an accounting research and analysis team at RiskMetrics Group that focused on investor-oriented issues.

 

Unemployment Claims Hit 21-Year High, Factory Orders Also Rise

 

The number of workers filing new claims for jobless benefits rose to a 26-1/2-year high last week, according to data released on Thursday, indicating that layoffs have yet to peak even as other reports signaled some improvement in the economy.

 

New applications for state jobless insurance benefits rose to 669,000 in the week ended March 28 from 657,000 the week before, the Labor Department said. It was the highest level of initial filings since the week ended October 2, 1982.

 

The Labor Department showed the ranks of unemployed who have claimed more than one week of aid hit a record peak last month, underscoring the hardships of finding a new job in a recession that has entered its 16th month.

 

Highlighting the difficulties of getting a new job was the fact that the number of people still on the benefit rolls after collecting an initial week of aid surged by 161,000 to a record high of 5.73 million in the week ended March 21. The insured unemployment rate, which measures the percentage of the insured labor force who are jobless, rose to 4.3 percent, the highest since May 1983, from 4.2 percent a week earlier.

 

Rising unemployment is a major headwind to the economy's recovery and analysts are watching for signs of a peak in new applications for unemployment benefits for clues on when the recession will end. Some economists say initial claims tend to peak three to four weeks before a recession ends.

 

Also on Thursday, the Commerce Department reported that new factory orders rebounded in February, snapping a six-month streak of declines. Orders for expensive, durable items were stronger than earlier thought, and demand for short-lived goods also edged up, it said.

 

That data came on the heels of stronger-than-expected reports on housing and retail sales that have raised some hope a bottom in the economy's downturn might be in sight. Economists said the jobless data indicated the serious challenges that remain in restoring the economy to health.

 

A private report on Wednesday that showed 742,000 private-sector jobs were shed suggests job losses could be even greater. In addition, a growing number of people are relying on assistance for things like groceries. A record 32.2 million people, one in every 10, received food stamps at latest count, the government said on Thursday. It was the third time in the last five months that enrollment set a record.

 

Still, the 1.8 percent rise in factory orders in February after a 3.5 percent drop a month earlier offered the latest glimmer of hope that the economy's decline was easing.

 

Crude Up 9 Percent

 

The price of crude oil futures rose nearly 9 percent to top $52 per barrel on Thursday, in line with a broad rally in global markets on hopes actions agreed at the G20 summit in London would restore global growth. Crude settled up $4.25 per barrel at $52.64. London Brent crude settled up $4.31, or 8.9 percent, at $52.75 per barrel.

 

The head of the International Energy Agency said the energy advisor to 28 developed nations is likely to cut its global oil demand forecasts in light of more bleak economic data.

 

Saudi Arabia has said it expects demand from developed countries to decline further, but global demand may revive this year if the economy improves.

 

"This pattern of decline within industrialized economies is expected to continue even after the global economic crisis is over," said Ibrahim Muhanna, adviser to Saudi Arabia's petroleum and mineral resources ministry.

 

OPEC Secretary General Abdullah al-Attiyah said the cartel may be able to live with oil prices around $50 a barrel in 2009, another sign the group has limited its price aspirations for now.