MarketView for April 23

 

 

Summary  

 

Stock prices moved somewhat higher in volatile trading on Thursday as better-than-expected results from several regional banks lifted financial shares, overshadowing disappointing economic data and anemic outlooks from economic bellwethers like United Parcel Service.

 

Specifically, earnings from PNC Financial Services Group and Fifth Third Bancorp provided glimmers of hope for a sector damaged by climbing loan losses as the recession lingers. Shares of PNC Financial rose 7.5 percent to $40.93 on the New York Stock Exchange, while Fifth Third's stock gained 3.5 percent to $3.82 on the Nasdaq.

 

Nonetheless, Wall Street is still concerned over the possibility that the federal government's "stress tests" on 19 major U.S. banks may reveal weaknesses, which created volatility throughout the session. The government is set to unveil results on May 4.

 

Solid results from companies such as Apple also helped the day’s momentum. Apple ended the day up 3.2 percent to $125.40 on strong sales of iPhones and iPods, making it the Nasdaq's top advancer. In contrast, United Parcel Service slid 2.6 percent to $53.33 after it said profits were hurt by the economic downturn and forecast second-quarter results below expectations.

 

Energy shares also gained as the price of crude rose 1.6 percent, lifting Chevron’s shares 2.8 percent to $65.53. Chevron contributed the most to the blue-chip Dow's advance.

 

Shares of Microsoft climbed 4.3 percent to $19.73 after the bell. Microsoft posted quarterly earnings that met Street's expectations after the regular trading session ended.  Amazon.com added 1.2 percent to $81.60 in extended trading after reporting a rise in revenue of 18 percent and earnings that topped analysts' estimates.

 

eBay also helped lift the Nasdaq after quarterly earnings topped Wall Street's expectations. Shares of eBay surged 12.3 percent to $16.62.

 

Employment Up – Housing Down

 

The number of newly laid off U.S. workers filing claims for unemployment aid rose last week and sales of previously owned homes fell in March, according to data on Thursday that showed the economy still sliding downward. First-time claims for jobless benefits rose 27,000 to 640,000 last week, the Labor Department said.

 

In addition, the number of people still claiming benefits after an initial week of aid jumped 93,000 to a record 6.14 million in the week ended April 11. It was the 14th straight week in which "continued" claims hit a record high.

 

While initial filings rose, analysts noted they remained below the 26-1/2 year high of 674,000 hit in late March, suggesting a moderation in the pace of economic decline.

 

On a more positive note, the four-week average of new jobless claims, which analysts study to gauge underlying lay-off trends, slipped to 646,750 last from 651,000 the previous week. Mounting job losses have eroded household incomes, already squeezed by the collapse of U.S. house prices and stocks, curtailing big purchases of items such as houses.

 

The National Association of Realtors said sales of previously owned homes fell to a 4.57 million unit annual rate last month from 4.71 million in February. The inventory of existing homes for sale fell 1.6 percent to 3.74 million, representing a 9.8-month supply at the current sales pace.

 

The median national home price rose 4.2 percent to $175,200 from February, boosted by seasonal factors. However, prices were still down 12.4 percent from the same period a year ago. NAR Chief Economist Lawrence Yun said the housing market appeared to be stabilizing, supported by first-time buyers who have been attracted by low prices and an $8,000 tax credit.

 

"We are hoping from early summer we will get a consistent rise in home sales. If not, then the U.S. economy is in trouble," Yun said.

 

Distressed sales made up about half of the sales reported in March, and given the end of a moratorium on foreclosures that had been put in place by many lenders, this proportion was expected to rise, said Yun.

 

Crude Higher – Dollar Lower

 

Oil rose on Thursday as a fall in the dollar and stock market gains outweighed rising inventories. U.S. crude settled up 77 cents per barrel at $49.62, after trading down to $48.37. London Brent crude settled up 30 cents per barrel at $50.11.

 

The euro gained against the dollar as demand rose on better-than-expected earnings results from banks and as data on euro zone industrial new orders showed a smaller-than-expected decrease. A falling dollar can boost the appeal of oil and commodities to investors as an inflation hedge.

 

Oil's gains came despite rising domestic. crude inventories, which hit a fresh 19-year high last week, according to U.S. government data released on Wednesday. The slumping economy has clipped fuel demand and dragged oil prices off record highs over $147 a barrel hit in July.

 

Bank of America Pressured to Buy Merrill Lynch

 

Bank of America CEO Kenneth Lewis was pressured by senior federal officials Henry Paulson and Ben Bernanke to accept a merger with troubled Merrill Lynch & Co or lose his job, New York Attorney General Andrew Cuomo said on Thursday.

 

In a letter to senior members of congressional committees and the head of the U.S. Securities and Exchange Commission, Cuomo said Lewis met then U.S. Treasury Secretary Paulson and Federal Reserve Chairman Bernanke in Washington in mid-December.

 

Cuomo said the SEC, which is charged with protecting investor interests, "appears to have been kept in the dark" about talks between the banks and federal officials that followed.

 

"During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement," Cuomo wrote. "We do not yet have a complete picture of the Federal Reserve's role in these matters because the Federal Reserve has invoked the bank examination privilege."

 

A spokesman for Paulson said on Thursday that the Treasury and the Federal Reserve believed there was no reasonable legal basis for Bank of America to terminate the Merrill deal.

 

Lewis testified in a probe by Cuomo that Paulson wanted the Merrill acquisition to go through "to stem a financial disaster in the financial markets." He also testified that Paulson and Bernanke pressured him to keep quiet about losses at Merrill, which rose to $12 billion from $9 billion in a matter of days in December. The fourth-quarter loss reported ultimately totaled more than $15 billion.

 

"No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure," Fed spokeswoman Michelle Smith said in an email on Thursday in response to a question.

 

Bank of America, which got additional government bailout money after the deal with Merrill, halted its attempt to scrap the merger on December 21, the attorney general said.

 

Cuomo, who released testimony by Lewis, said his office uncovered details during a probe into the circumstances of $3.6 billion of bonuses paid to Merrill executives before the completion of the Bank of America takeover on January 1.

 

"As you will see, while the investigation initially focused on huge fourth quarter bonus payouts, we have uncovered facts that raise questions about the transparency of the TARP (Troubled Asset Relief Program), as well as about corporate governance and disclosure practices at Bank of America," Cuomo wrote.

 

The revelations are unlikely to relieve shareholder pressure on Lewis to give up his job as chairman, or even to step down as chief executive. A shareholder proposal at the bank's April 29 annual meeting calls for the bank to appoint an independent chairman to replace Lewis.

 

According to Lewis's testimony, made public on Thursday, Paulson told him the management and board of the bank would be replaced if it pulled out of the deal.

 

"I can't recall if he said 'we would remove the board and management if you called' or if he said 'we would do it if you intended to,'" according to the transcript. Cuomo said that, in an interview, Paulson "largely corroborated" Lewis's account.

 

"Secretary Paulson's threat swayed Lewis," Cuomo said. The letter also stated that Paulson "has informed us that he made the threat at the request of Chairman Bernanke."

 

Cuomo sent the letter to SEC head Mary Schapiro, U.S. Senate Banking Committee Chairman Christopher Dodd, U.S. House Financial Services Chairman Barney Frank and Congressional Oversight Panel Chairwoman Elizabeth Warren. It was copied to Neil Barofsky, the inspector general of TARP.

 

In Washington, Barofsky said he was looking into the reports that Bank of America faced pressure to minimize public disclosure about the takeover of Merrill.

 

Fed’s Balance Sheet Doubles in Size

 

The Federal Reserve lifted the lid on its efforts to shore up the financial system on Thursday, and in the process, showed a $3 billion loss on the books from its deal to rescue investment bank Bear Stearns. The Fed provided more details of the huge increase in its balance sheet that occurred over the final months of 2008, rounding out data already issued on a weekly basis. Bank officials also said more disclosure could be on the way.

 

Combined assets in the Fed system hit $2.25 trillion as of December 31, 2008, up a sharp $1.33 trillion from a year ago as the  Fed has enacted an alphabet soup of new programs to support the credit markets.

 

Thursday's statements specifically provided a window into the Fed's Commercial Paper Funding Facility, created in October 2008 to provide liquidity to the CP market, and the three "Maiden Lane" limited-liability companies created by the New York Fed as part of broad-ranging rescue efforts.

 

Much interest was on the original Maiden Lane LLC, which was formed in mid-March 2008 as part of the orchestrated takeover of the failing investment bank Bear Stearns by JPMorgan Chase. Some $1.7 billion in gains logged by the CPFF were swamped by the $3.1-billion unrealized loss in Maiden Lane, which included $54 million in "professional fees."

 

Maiden Lane was created to hold an asset portfolio that JPMorgan found too toxic to assume in whole, and analysts said Thursday's report bore out that assessment. Fed figures showed that some 40 percent of the assets in Maiden Lane were Level 3, or basically illiquid, at year-end. That included $5.5 billion in commercial mortgage loans and $2.4 billion in swap contracts.

 

All other assets in the fund were dubbed Level 2, with valuations based on prices for similar instruments in active markets.

 

Maiden Lane II, a holding company whose assets are dominated by subprime mortgages, logged a $302 million loss. Maiden Lane III managed $45 million in net income on its portfolio of asset-based collateralized debt obligations. Both are holding companies created when AIG was taken over by the government in September 2008.

 

Fed officials said various aspects of the bailout effort also combined to reduce payments made to the Treasury in 2008 to $31.7 billion from $34.6 billion, a decline of 8 percent. Still, the Fed's holdings of commercial and residential loans were said to be in relatively good shape, with the majority regarded as performing. Over time that could create substantial upside, the officials said, as real estate markets recover.

 

Fed officials said they were mulling ways to increase disclosure of the type of information contained in Thursday's reports, including potential quarterly releases.