MarketView for April 21

 

 

Summary  

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Stock prices moved sharply higher on Tuesday after Treasury Secretary Timothy Geithner indicated most banks have sufficient reserves to protect against possible losses, thereby sending bank shares on a roll upwards. The Obama administration has said results of the stress tests on banks' capital levels will be released on May 4.

 

At the same time, earnings from several blue-chip companies added to the day’s momentum, led by United Technologies, as the industrial bellwether forecast a return to a rebound in earnings growth next year. The world's largest manufacturer of elevators and air conditioners, United Technologies shares rose 4.8 percent to close at $47.99 after the company beat profit expectations and said that although order rates remained down, there were signs of stabilization, especially in China.

 

The shares of JPMorgan Chase gained more than 9 percent and were the leader on the Dow Jones industrial average, a day after worries that government stress tests would reveal deep flaws in bank balance sheets dragged stocks to their lowest point since March 5.

 

Financials were the best-performing sector in the broad S&P 500 index after Geithner said most domestic banks have enough capital to keep lending. However, he also pointed out that bad debts are acting as a drag on nation’s economic recovery.

 

Citigroup closed up 10.2 percent to $3.24 after Chief Executive Vikram Pandit said he expects the bank to rebound from its current woes and repay "every dollar" it owes the U.S. government.

 

The earnings season saw one of its biggest days yet with five blue-chips reporting. On the downside, Merck and Coca-Cola were among the poorest performers on the Dow after both companies said sales were feeling the effects of the global slowdown. Merck was down 6.7 percent to close at at $23.54, while Coke dropped 2.8 percent to close at 43.09.

 

Technology shares could possibly move higher on Wednesday after Yahoo reported earnings that met expectations in after hours trading and said it would cut 5 percent of its worldwide work force. Yahoo also forecast second-quarter sales in a range between $1.425 billion and $1.625 billion. Yahoo closed up 1.6 percent to $14.61 in extended trading.

 

The technology sector saw another day of merger activity after Broadcom Corp made an unsolicited offer to buy Emulex, a manufacturer of storage equipment. Emulex rose 46.8 percent to $9.70, while Broadcom fell 5.8 percent at $20.52.

 

The S&P reclaimed about half of Monday's loss, which had thrown a speed bump into the market's impressive six-week rally. The broad index is up more than 25 percent from the early March bear market low.

 

Most Banks Have Enough Capital

 

Most U.S. banks have enough capital to keep lending but a pile of bad debts is fostering doubts about their health and slowing a recovery, U.S. Treasury Secretary Timothy Geithner said on Tuesday.

 

Testifying before the Congressional Oversight Panel, which monitors the Treasury's efforts to bail out troubled banks, he said toxic assets were "congesting" the U.S. financial system and hindering efforts to get credit flowing normally.

 

"Uncertainty about the value of legacy assets is constraining the ability of financial institutions to raise private capital," Geithner said, stating that he hoped a public-private investment program will improve the ability to put a price on troubled mortgage and other assets.

 

Earlier, Neil Barofsky, the special inspector general for the government's bailout effort said the toxic-asset plan offered opportunities for fraud and abuse and warned it should be bolstered by tough conflict-of-interest rules.

 

Barofsky said subsidies for the public-private partnerships to buy assets could expose taxpayers to higher losses without matching increases in the potential for profit. He called for tough screening of investors as well as forced disclosure of ownership stakes and any dealings by the funds.

 

The government has injected hundreds of billions of dollars into banks to help them weather the damage from bad mortgage loans and is running stress tests on 19 of the largest banks to see whether they are prepared to deal with a further downturn.

 

In a letter to panel chairman Elizabeth Warren, Geithner said the Treasury still has about $134.5 billion available out of an originally approved $700 billion for bolstering banks' capital and said he wouldn't need to ask Congress for more.

 

"Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators," Geithner said, a comment that gave stocks a lift in morning trading. However, he conceded there were persistent worries about the health of the banking system and said that was impeding a broader economic recovery.

 

"Concerns about economic conditions, combined with the destabilizing impact of distressed 'legacy assets', have created an environment under which uncertainty about the health of individual banks has sharply reduced lending across the financial system," he said.

 

If the stress tests, parts of which are expected to be made public next month, show some banks need to raise more capital, then they will have options for doing so.

 

"Those banks that need more capital will have an opportunity to raise that capital from private sources or request capital from the Treasury in the form of convertible preferred stock," Geithner said.

 

Some of the biggest banks have said they want to quickly repay money that they received under the government's Troubled Asset Relief Program, or TARP, in part to avoid constraints on pay set out as a condition for getting the money.

 

Geithner said if regulators certify that a bank would be sound without government help, the Treasury would gladly take the money back.

 

"It helps to underscore the basic point that the institutions of our financial system are in very different circumstances," Geithner said.

 

However, he hedged on whether he thought it would be good for the banking system if some banks returned the TARP money early, and he specified that regulators, not he, would decide whether to take bailout money back.

 

"My basic obligation and our responsibility is to make sure that system as a whole ... has the ability to provide the credit that recovery requires," Geithner said, "So we need to make a careful judgment about what policies are going to best promote that objective."

 

Some analysts question whether letting some banks return the TARP money would add to investors' and borrowers' doubts about dealing with banks that still need government help, potentially making them more vulnerable to failure.

 

In response to questions, Geithner said it will be important for people to see what stress tests on major banks show, though he did not shed any further light on how extensive the publicly issued comments on banks' health will be.

 

Transparency is vital, he said, adding "Without that, they are going to live with a deeper cloud of uncertainty over their financial health than they need to."

 

Geithner said the scope of the current crisis is unprecedented, so the government has no guide to follow in its efforts to ease the situation. But he insisted there were some signs of progress.

 

"Indicators on interbank lending, corporate issuance and credit spreads generally suggest improvements in confidence in the stability of the system and some thawing in credit markets," Geithner said.

 

Caterpillar and United Technology Feel The Pressure

 

Caterpillar and United Technologies indicated on Tuesday that falling global demand for their big-ticket products battered first-quarter results.

 

However, the companies also suggested that if conditions are not exactly getting better they also are not getting worse, thereby offering twin glimmers of hope to investors searching for signs of a rebound.

 

On Wall Street, shares of United Technologies ended up 4.8 percent after being up as much as 6.6 percent during the day, while Caterpillar, which fell sharply after its results were released, rallied to close 3 percent higher.

 

Caterpillar, the world's largest maker of mining and construction equipment, reported its first loss since 1992, pulled into the red by costs associated with a recession-triggered restructuring that has so far resulted in the elimination of 25,000 jobs.

 

The company, which also makes turbines and diesel engines, slashed its full-year forecast, warning that sales this year could decline the most since the 1930s. Even so, Caterpillar managed to sound upbeat. During a call, executives focused attention on how swiftly the company had reacted to the downturn, and how much better key financial metrics were performing than in previous downturns.

 

Caterpillar Chairman and Chief Executive Jim Owens gave an encouraging first peek into the company's second-quarter performance. "April was the first month since last fall that our near-term sales and operation planning did not result in a drop in the year-ahead forecast," he said on the call. "We're certainly not out of the woods yet. But there's reason for some optimism," he said.

 

United Technologies, meanwhile, reported a 28 percent drop in first-quarter profit as the downturn in in the economy crimped demand for its jet engines and air conditioners.

 

However, the company, which also makes Black Hawk helicopters and Otis elevators, seemed to hold out hope that demand would begin to stabilize in the second half. The company expects to return to profit growth next year, Chief Financial Officer Greg Hayes told analysts on a conference call.

 

United Tech said order trends were weak in the first quarter. But it said the rate of the year-over-year decline had stabilized across most of its businesses in March and it stood by its full-year forecast.

 

However, earnings at the company's Carrier air-conditioner division, which closely tracks construction activity, fell 91 percent in the quarter, on a 27 percent drop in revenue. That made it United Tech's weakest segment in for quarter.