MarketView for April 8

News that the Treasury Department was prepared to aid certain major life insurance companies whose capital base has been eroded by falling markets, combined with new optimism over consumer spending after Bed Bath & Beyond reported a better-than-expected profit, sent the major equity indexes well into positive territory for the day. The Nasdaq gained ground on hopes that a recovery in business spending will boost tech profits. Qualcomm was among the Nasdaq's best advancing stock, gaining 2.2 percent to $40.22, while IBM was up 2.5 percent at $101.19.

However, in the latest sign of the economic downturn's impact, Moody's Investors Service stripped Warren Buffett's Berkshire Hathaway of its AAA rating after the closing bell, citing the recession and the severe decline in stocks.

In the home builders' sector, Pulte Homes indicated that it planned to acquire Centex for $1.3 billion in stock in a deal that would create the largest domestic home builder. Centex rose 18.9 percent to $9.06, while Pulte fell 10.5 percent to $9.64.

Bank Results Should Be Interesting

Banks' first-quarter results are likely to show that losses from credit cards and commercial and real estate loans have not yet peaked. The January-to-March period is the first full quarter since the industry got hundreds of billions of dollars of taxpayer bailout money and mergers weeded out several troubled lenders.

Results at large banks such as Bank of America, JPMorgan Chase, Citigroup and Wells Fargo are expected to improve from the fourth quarter, helped in part by a surge in mortgage refinancing, lower deposit costs and fewer write downs.

However, Wall Street knows that the bottom lines will reflect a new accounting rule that may further limit write downs without actually improving bank balance sheets. At the same time, the government is conducting "stress tests" to see which of the 19 biggest lenders may need more capital.

The fourth quarter was the banking sector's first in the red since 1990. Banks now face a deep recession that may not end before 2010, worry over how much new capital they need, and conjecture over how long executives will keep their jobs.

Regional banks may fare worse than big banks, given their large relative exposure to accelerating losses from consumer loans such as credit cards, commercial and industrial loans, and commercial real estate.

Goldman Sachs is expected to kick off earnings season on April 14 and return to profit after its first quarterly loss as a public company. Smaller rival Morgan Stanley may report results the following week with a small profit. Some banks will need to show they properly assessed the risk in buying lenders felled by mortgages and troubled debt.

Bottom lines may be inflated by a new Financial Accounting Standards Board rule that gives lenders more freedom to value holdings as they would in normal markets, rather than at lower values because current markets are distressed.

However, there is some logic not to take advantage of the new ruling. It may make it harder to sell assets under the government's $1 trillion Public-Private Investment Program if banks write up assets too far. Meanwhile, the government may decide after conducting the stress tests that the assets should not be written up so high and must be written back down.

The Treasury plans not to reveal stress test results until after earnings season to avoid spooking equity investors. Meanwhile, some banks that got TARP money have repaid it and others want to, noting that the government can (and does) retroactively impose new restrictions on banks that received funds, and a perception that banks on the dole might be too sick to survive on their own.

Some Insurance Companies To Receive Bailout Money

The Treasury Department announced that some life insurance companies have met requirements for government capital investments under an existing rescue plan, clarifying that it is not launching a new bailout for the sector.

"There are a number of life insurers that have met requirements for the Capital Purchase Program because of their bank holding company status," said Treasury spokesman Andrew Williams. "These are among the hundreds of financial institutions in the CPP pipeline that will be reviewed and funded as appropriate on a rolling basis."

The statement was made in response to a Wall Street Journal story published late on Tuesday saying the Treasury would extend its $700 billion financial bailout program to certain life insurers and would make an announcement in coming days.

Williams said any capital investments in insurers that have bank holding company status would not constitute a new rescue program for the insurance sector.

With $5.1 trillion in assets at the end of 2007, life insurers are major investors in corporate bonds. However, as markets have fallen, so have the value of life insurance policies used by many Americans as a key savings vehicle. Large numbers of policy redemptions could lead to a cash crunch for some companies. Funds from the Treasury's Troubled Asset Relief Program could help alleviate some of those pressures.

In addition to Met Life and Prudential, other insurers that now have bank holding company status include the Hartford Financial Services Group and Lincoln Financial.

Crude Moves Higher

The price of crude oil settled above $49 per barrel on Wednesday, slightly up on the day but well off session highs on news that Federal Reserve officials still see a grim economic outlook. Domestic sweet light crude for May delivery settled up 23 cents per barrel at $49.38. London Brent crude settled up 37 cents per barrel at $51.59. The drop in oil prices continues a trend in which commodity prices closely track Wall Street,

Oil prices rose early after the U.S. Energy Information Administration reported a surprise draw in distillate stocks last week. Demand for distillates, the primary fuel of industry, has been soft due to the ailing economy. Over the past four weeks, demand for the fuel was down 7.2 percent from a year earlier.

The EIA data also showed crude oil inventories rose 1.7 million barrels last week to a fresh 16-year high, in line with expectations. Stockpiles of distillates like diesel and jet fuel dropped more than expected.

Fed Still Worried

The Federal Reserve decided to buy a "substantial" amount of U.S. Treasury and mortgage debt according to the minutes of their most recent meeting showed on Wednesday. Staff economists for the Federal Open Market Committee lowered projections for real gross domestic product in the second half of 2009 and 2010, indicating a more gradual recovery. However the minutes, which were from the central bank's March 17-18 meeting, did not offer any revised figures.

"The deterioration in labor market conditions was rapid in recent months, with the steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the build up of some inventory overhangs," the Fed said in the minutes.

The Fed had already given up on any growth in 2009 when it released its last quarterly forecasts in February, saying that the U.S. economy would shrink 0.5 percent to 1.3 percent for the year. At that time, it anticipated a 2010 rebound to growth of 2.5 percent to 3.3 percent.

But the Fed staff forecasts indicated the GDP decline would flatten out gradually over the second half of 2009 and then turn to expansion "slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through and the correction in housing activity comes to an end."

The Fed minutes said FOMC members particularly noted a sharp fall in foreign activity that was reducing exports as a key development since their January meeting.

At the conclusion of the March 17-18 meeting, the Fed announced plans to buy up to $300 billion of longer-term Treasury securities and an additional $850 billion of agency mortgage debt to deal with the weak economic outlook. It agreed to keep its benchmark federal funds rate in a zero to 0.25 percent range. However, there was some division among members over which securities to buy and the appropriate amount, given the expansion of the Fed's balance sheet through a new securities loan program.

"One member preferred to focus on additional purchases on longer-term Treasury securities, whereas another member preferred to focus on agency MBS (mortgage-backed securities). However, both could support expanded purchases across a range of assets, and several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain,"

Fed policy-makers saw little chance of a pickup of inflation as rising unemployment and falling capacity utilizations were holding down wages and prices.

"Several expressed concern that inflation was likely to persist below desired levels, with a few pointing out the risk of deflation," the minutes said.

The Fed participants expressed a wide variety of views about the strength and timing of recovery, and did not interpret an uptick in housing starts as the beginning of a new trend, although there was only "limited scope for housing to fall further." They noted some signs of stabilization in consumer spending in January and February, but said the fear of unemployment could damp consumption growth in the near term.

FOMC members said they anticipated demand for funds from the Fed's new Term Asset-backed Securities Loan Facility would be modest initially, and some firms might be reluctant to borrow from TALF out of concern about potential future changes in the government's policies for financial rescues. Some members also expressed concern about risks that expansion of the Term Asset-backed Securities Loan Facility would raise if it were expanded to include older and lower-quality assets.