MarketView for April 20

 

 

Summary  

 

It did not matter whether it was a loss of confidence or a desire to take some profits off the table or possibly a mistrust of the recent earnings numbers being put forth by the major banks, the bottom line is that the major equity indexes lost more than 3 percent on Monday. Furthermore, decline was broad-based and follows a six-week winning streak, the longest for the S&P 500 since 2007 and the longest for the Dow Jones industrial average since 1938.

 

Dow component Bank of America fell 24.3 percent to $8.02 despite reporting a rise in profits. The bank’s earnings report raised questions about the sustainability of recent better-than-expected results from banks after the bank said its credit quality deteriorated markedly. The sharp sell-off in the regular session was exacerbated by comments from Bank of America Chief Executive Ken Lewis that the already bad credit environment is getting worse.

 

Shares of Citigroup lost 19.5 percent to $2.94 after a Goldman Sachs analysts said credit losses at the bank continued to grow at a rapid rate and estimated the bank's underlying first-quarter loss was 38 cents a share. In addition, comments from J.P. Morgan Securities, which said it estimates banks will incur $400 billion of additional losses from the credit crisis and expects there will be a need for more capital for certain institutions.

 

After the closing bell, IBM reported a greater-than-expected drop in quarterly sales, demonstrating that even the largest of technology companies was not immune from the slowdown in spending. IBM's stock fell 3 percent to $97.47 in extended-hours trading.

 

However, Texas Instruments saw its share price rise 2.1 percent after the bell to $17.69 following the company’s report of a quarterly earnings and revenue that also exceeded expectations as demand for its processing chips appeared to stabilize even though it emphasized "caution about the business climate."

 

Energy and commodity shares also fell, with crude oil futures closing down almost 9 percent amid pressure from economic concerns and a rally in the U.S. dollar on safe-haven bids.

 

Adding to the bank worry, U.S. government officials have determined they can avoid asking Congress for more bank bailout funds by converting some existing bank loans to nto common stock. However, such a move would dilute stockholders' stakes.

 

Meanwhile, the Treasury indicated that there was "no basis" for a report showing its "stress tests" on the health of the nation's top 19 banks showed several were "technically insolvent."

 

The Chicago Board Options Exchange Volatility index .VIX, which measures the S&P 500's implied volatility and is also known as the "fear gauge," jumped 15.4 percent, its largest one-day rise since January 20.

 

Adding to the negative tone, President Obama said over the weekend the economy remains under strain and his top economic adviser tempered hopes for a speedy recovery.

 

On the merger front, Oracle announced that it would acquire Sun Microsystems for about $7.4 billion after IBM broke off negotiations earlier this month.Oracle shares shed 1.3 percent to $18.82, while Sun, the high-end computer server and software maker, surged 37 percent to $9.15.

 

Crude Slides Lower

 

The price of crude oil closed down over 8 percent on Monday to under $46 a barrel, depressed by a rising dollar and growing caution about the pace of any economic recovery and its impact on oil demand.

 

Sweet domestic crude for May delivery settled down $4.45 or 8.8 percent at $45.88 per barrel. The May domestic crude contract expires on Tuesday, which traders also cited as a factor helping to pressure the market. Brent crude for June delivery settled down $3.49 or 6.5 percent at $49.86.

 

The International Monetary Fund will cut global economic forecasts in the coming week, the agency's head, Dominique Strauss-Kahn, said on Monday, adding that he expected a recovery to start in the first half of next year.

 

The International Energy Agency does not expect OPEC to curb output again when it meets in May and does not expect oil demand recovery until 2010, the agency said Monday.

 

OPEC member United Arab Emirates' oil minister Mohamed al-Hamli said on Monday the market was "well supplied." "A lot of refineries are not running at full capacity. A lot of oil is going into storage," he said. "We've seen that stocks are building up. We've seen them go from 52 days to close to 59 days."

 

Some oil analysts see further price weakness through the Northern Hemisphere summer before the market recovers. BNP Paribas forecast U.S. light crude oil futures will drop to average just $35 per barrel in the second quarter of 2009, down from over $43 in the first quarter, before recovering to $45 in the third quarter and $58 in the fourth.

 

$30 Billion More To AIG

 

American International Group just closed a deal to access nearly $30 billion in additional federal funds. In a filing with the U.S. Securities and Exchange Commission on Monday, AIG said it would issue and sell to the Treasury Department 300,000 preferred shares, including warrants to purchase common stock, in exchange for up to $29.835 billion.

 

The original amount agreed in early March was $30 billion, but officials subtracted $165 million in retention bonuses paid to employees of the AIG Financial Products unit last month. The bonuses set off a maelstrom of protest across the United States. The financial products unit is blamed for most of the red ink at AIG, and taxpayers balked at executives of the unit being paid extra while the nation grapples with rising unemployment and recession.

 

AIG received a taxpayer bailout last September after bad mortgage bets taken by AIG Financial Products left the giant insurer with deep losses and short of cash to meet collateral commitments to counterparties.

 

IBM Does Better Than Expected

 

IBM's quarterly revenue fell by a greater-than-expected 11 percent as the slowdown in corporate spending hurt even one of the healthiest companies. Nonetheless, higher margins helped IBM's first-quarter profit exceed Wall Street estimates, and the company affirmed its full-year earnings outlook, thereby limiting the fall in IBM shares to 1.6 percent after hours.

 

According to IBM its first-quarter revenue fell to $21.71 billion from $24.50 billion a year earlier. Net earnings for the quarter fell 1 percent to $2.30 billion, from $2.32 billion in the year-ago quarter. However, earnings per share rose to $1.70 from $1.64, as the number of shares outstanding decreased.

 

IBM has so far fared better than many other technology companies, thanks to its growing focus on software and services, such as outsourcing and technology support. The company has moved to a more profitable revenue mix over the past decade, dumping increasingly commoditized hardware for software and services. Gross profit margin rose to 43.4 percent in the quarter from 41.5 percent a year earlier.

 

Despite the fall in revenue, IBM reiterated its outlook for a full-year profit of at least $9.20 per share. Chief Financial Officer Mark Loughridge said on a conference call that he was more confident in that outlook now than he was last quarter.

 

Chief Executive Samuel Palmisano was upbeat about the following year as well.

 

"We remain ahead of pace for our 2010 roadmap of $10 to $11 per share," Palmisano said in a statement.

 

Bank of America Faces Shareholder Unrest

 

Delinquent loans overshadowed better-than-expected earnings at Bank of America and the bank said it expects the credit situation to worsen, driving its shares down 24.3 percent. Although first-quarter earnings more than doubled, the results failed to end calls by investors for Kenneth Lewis to step down as chief executive or give up the post of chairman.

 

The bank's purchase of Merrill Lynch & Co on January 1 led to an emergency federal bailout two weeks later. Bank of America has received $45 billion of taxpayer money.

 

Lewis on a conference call said "we absolutely don't think we need additional capital," but he admitted conditions were tough as the recession deepens and unemployment rises. Nonperforming assets surged 41 percent in the quarter to $25.74 billion.

 

"Make no doubt about it, credit is bad, and we believe credit is going to get worse," Lewis said.

 

Net income applicable to common shareholders at Bank of America more than doubled to $2.81 billion, or 44 cents per share, from $1.02 billion, or 23 cents, a year earlier. Net revenue also more than doubled to $35.76 billion. Results included a $1.9 billion gain from selling shares of China Construction Bank Corp and $2.2 billion of gains tied to some Merrill structured notes.

 

Before the impact of preferred stock dividends paid to the government, net income rose to $4.25 billion from $1.21 billion. About 86 percent of earnings came from Merrill operations, while just $583 million came from Bank of America.

 

Lewis told CNBC television he would "like" and "prefer" to repay the $45 billion of bailout funds in 2009, but that the timing is up to regulators. He confirmed that Bank of America may sell First Republic Bank, a private bank unit it inherited when it bought Merrill.

 

Critics have faulted Lewis for failing to disclose what he knew about losses at Merrill before shareholders voted to approve the purchase, valued at about $29.1 billion in common and preferred stock, in December.

 

Bank of America faces many lawsuits over Merrill and its mid-2008 purchase of Countrywide Financial, once the nation's largest mortgage lender.

 

It has also infuriated regulators, including New York Attorney General Andrew Cuomo, over its handling of $3.62 billion of bonuses awarded to Merrill workers. Several top Merrill executives have left the combined company.

 

The bank added $6.44 billion to reserves for bad loans after losses from mortgages, credit cards and commercial real estate increased. Bank of America set aside $13.38 billion for credit losses, nearly twice the $6.94 billion of charge-offs it incurred. The bank's allowance for credit losses is $30.41 billion, which is $4.66 billion above nonperforming assets.

 

Credit card operations lost $1.77 billion in the quarter as the rate of managed credit card net losses rose to 8.62 percent from 7.16 percent at year-end.

 

The bank's ratio of tangible common equity to tangible assets rose to 3.13 percent from 2.93 percent at year-end. Some analysts prefer banks to have a 5 percent ratio. Mortgage and home equity loan production rose 79 percent from the fourth quarter to $89.26 billion.

 

Profit in the investment bank totaled $2.37 billion, compared with a year-earlier loss of $991 million, fueled primarily by $4.92 billion of trading profits. Wealth management profit more than doubled to $510 million.

 

Bank of America shareholders will consider whether to remove Lewis from the board or split the chairman and CEO jobs at the bank's annual meeting on April 29.