MarketView for April 30

 

 

Summary  

 

News that Chrysler had officially filed for bankruptcy resulted in the major equity indexes giving up their gains on the day with both the Dow Jones industrial average and the S&P 500 indexes closing out the day just into negative territory on Thursday thereby undercutting the day’s optimism over rising corporate profits and reassuring job market data.

 

Even so, the S&P 500 closed out its best month in nine years. For the month of April, the Dow rose 7.4 percent, the S&P 500 gained 9.4 percent and the Nasdaq was up 12.4 percent. The gains for the broad S&P were the largest since March 2000, while the Nasdaq scored its biggest percentage rise since October 2002. The best-performing sectors in the S&P 500 for the month were financials, up 22 percent, and consumer discretionary stocks, up 18.5 percent.

 

The S&P 500 is up 29 percent from the bear-market closing low set on March 9. Stocks have benefited in part from optimism over the state of the banking sector and hopes the recession is easing.

 

Exxon Mobil was the top drag on the Dow, down 2.6 percent at $66.67, after the world's largest publicly traded company posted a 58 percent drop in quarterly profit that missed Wall Street's estimates.

 

Although worrisome for the overall economy, Chrysler's Chapter 11 filing lifted its rivals' shares with General Motors ending the day up 6.1 percent to $1.92, while Ford rose 9.7 percent to $5.98. After the closing bell, MetLife posted a first-quarter loss as its investment income dropped, driving shares of the largest U.S. life insurer down 3.9 percent to $28.60 in extended trade.

 

Shares of Alcoa fell slightly to $9.06 in after-hours trading after the aluminum producer said it agreed to sell its wire harness and electrical distribution business to California-based private equity group Platinum Equity for an undisclosed amount.

However, shares of Motorola (MOT.N) fell 7.2 percent to $5.53 despite posting a narrower-than-expected loss as the cell phone manufacturer also announced its cash position fell about $1 billion in the last three months.

 

Shares of big-cap technology companies lifted the Nasdaq, along with green module manufacturer First Solar, which rose 23.5 percent to $187.29 after the company posted better-than-expected results.

 

Of the 280 companies in the S&P 500 that have reported earnings to date, 65 percent exceeded estimates, according to data from Thomson Reuters. However, many analysts' estimates had been reduced to reflect the current economic slump.

 

Finally, the latest government data showed the number of workers filing new claims for unemployment benefits unexpectedly fell last week, even as the number of people staying on those benefits rose to a fresh record high.

 

New Unemployment Claims Fall

 

According to reports released on Thursday by the Labor Department, the number of workers filing new claims for unemployment insurance fell unexpectedly last week, suggesting the pace of layoffs was easing, even as those already collecting benefits in mid-April reached another record high. Initial claims for state unemployment insurance benefits fell by 14,000 to a seasonally adjusted 631,000 last week.

 

The number of people staying on the benefits roll after drawing an initial week of jobless aid rose by 133,000 to 6.271 million in the week ended April 18, the Labor Department said.

 

However, the four-week average of new jobless claims, considered a better gauge of underlying labor trends, declined for the third week in a row to 637,250 from 648,000 the week before. It was the lowest reading since the end of February. The claims data is being monitored for clues when the recession will end.

 

Christina Romer, chairwoman of the White House Council of Economic Advisers, said that the claims data was encouraging, although it was too soon to say if it was strong evidence the labor market was finally starting to heal. However, at the moment the labor market remains weak. With demand in the doldrums and fewer companies hiring, the unemployed are finding it tough to reenter the job market.

 

It was the 13th consecutive week that continued claims have scaled a record and this pushed the insured unemployment rate up to 4.7 percent, the highest reading since December 1982, from 4.6 percent the prior week.

 

Meanwhile, it is estimated that nonfarm payrolls have likely declined by about 631,000 in April, with the unemployment rate climbing to 8.8 percent from 8.5 percent. The Labor Department will release the payrolls data on Friday, May 8.

 

Shrinking payrolls and falling asset prices are also putting a squeeze on incomes and eroding spending. At the same time, a separate report from the Commerce Department showed consumer spending fell 0.2 percent in March after a 0.4 percent increase in February.

 

The data was incorporated in the report for first-quarter U.S. gross domestic product released on Wednesday, which showed spending rose at a 2.2 percent annual rate in the first three months of this year after sinking in the last half of 2008.

 

Personal income slipped 0.3 percent after declining 0.2 percent in February, the Commerce Department said. Personal income has declined in five of the last six months.

 

With households becoming more frugal, savings increased to an annual rate of $455.3 billion, the highest since May. The savings rate climbed to 4.2 percent in March from 4 percent.

 

In another report, the Labor Department said its Employment Cost Index, a broad measure of wages and benefits, rose 0.3 percent in the January-March quarter, the lowest amount on record, after a 0.6 percent gain in the last quarter of 2008.

 

Price of Crude Oil Higher

 

The price of crude oil edged higher on Thursday as gains in wider global markets offset rising energy inventories and slumping demand with sweet domestic. crude for May delivery settling up 15 cents per barrel at $51.12. Brent crude rose 2 cents to settle at $50.80 a barrel.

 

Oil prices have been dragged down as demand slows and inventories rise due to the economic crisis. Domestic oil demand in February fell to its lowest level for the month in 11 years, according to data from the Energy Information Administration, down 5.4 percent compared with year-ago levels.

 

On Wednesday, the EIA reported U.S. oil inventories rose to a fresh 19-year high last week. Gasoline stocks, however, showed a surprisingly steep 4.7-million-barrel drop ahead of U.S. summer driving season. Markets were also eyeing the flu outbreak as officials urged increased worldwide precautions against an imminent pandemic and Mexico began shutting down parts of its economy to slow the spread of the new flu strain. The flu could hurt jet fuel demand by curtailing travel.

 

Meanwhile, Iraq's oil minister Hussain al-Sharistani said world oil markets seemed to be coming into balance, but did not rule out a further cut in oil supplies by OPEC at its next meeting on May 28.

 

Chrysler Finds Bankruptcy Inevitable

 

Chrysler filed for bankruptcy on Thursday and announced an industry-changing deal with Fiat, after being pummeled by sliding auto sales and unable to reach agreement on restructuring its debt. Despite weeks of intense negotiations, Chrysler failed to make a deal with its lenders to avoid the first-ever bankruptcy filing by a domestic automaker.

 

The move was hailed by President Barack Obama as a critical step in saving 30,000 jobs at Chrysler, majority-owned by Cerberus Capital Group and hundreds of thousands more jobs at affiliated suppliers and dealers.

At the same time, Chrysler entered an expected alliance with Fiat, in which the Italian carmaker was given an initial stake of 20 percent. The deal will allow Fiat to own up to 35 percent as it makes investments in U.S. operations and small-car technology for Chrysler. Over time, Fiat could eventually own 51 percent after Chrysler has repaid its loans to the U.S. Treasury.

 

The Chapter 11 filing, in U.S. Bankruptcy Court in Manhattan, has implications for the entire industry, including Chrysler's rivals and suppliers. As part of the filing, the U.S. government will provide up to $3.5 billion in debtor-in-possession (DIP) financing and up to $4.5 billion in exit financing. Obama said he hopes the entire process will take only 30 to 60 days.

 

Some of Chrysler's 3,600 U.S. dealers are expected to close, and Chrysler Financial will stop providing loans for new cars and trucks. Instead, General Motors's financing arm, GMAC, will provide loans to Chrysler dealers and customers. The legal proceedings will be overseen by Judge Arthur Gonzalez, the same jurist who oversaw Enron and WorldCom bankruptcies.

In addition to Fiat's ownership stake, U.S. officials expect Chrysler to be 55 percent owned by the United Auto Workers' healthcare trust fund while the U.S. and Canadian governments hold a combined stake of 10 percent.

 

Chrysler has three manufacturing plants in Canada and had to reach agreements with its unions there and the Canadian government under the restructuring. The automaker is not filing for bankruptcy in Canada, but the Canadian government, along with the province of Ontario, said they will provide $2.42 billion in financing to help the company restructure.

 

The bankruptcy signals that Obama is prepared to play hardball with holdout lenders rather than knuckle under to their demands and will likely set the tone for similar discussions with bondholders of General Motors, which is now on the clock to restructure its operations by the end of May.

 

While Obama voiced his support for Chrysler and the deal with Fiat, he was pointed in his criticism of the investors who did not agree to this deal.

 

"I don't stand with them. I stand with Chrysler's employees and their families and communities," the president said. "I don't stand with those who held out when everybody else is making sacrifices. That's why I'm supporting Chrysler's plans to use our bankruptcy laws to clear away its remaining obligations."

 

Chrysler Chief Executive Robert Nardelli will leave the automaker following the emergence from bankruptcy. The government will place six members on the new company's board and Fiat will appoint three.

The bankruptcy filing did not stall the Fiat deal. Chrysler has been seeking a rescue deal from the Italian automaker while also trying to finalize its debt agreement.

 

"It's a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry," Obama said. "Fiat has demonstrated that it can build the clean, fuel-efficient cars that are the future of the industry."