MarketView for December 8

Summary 

Stock prices rose sharply for the second trading day in arrow on Monday with many prices hitting levels not seen for over a month as optimism over President-elect Barack Obama's proposed infrastructure spending flowed freely. The Street is desperately hoping that government intervention in terms of President-elect Obama’s desire to update the country’s infrastructure will stimulate the economy and limit the depth of the year-old recession. Over the weekend, Obama outlined plans for the largest infrastructure investment since the 1950s in a bid to create at least 2.5 million jobs by 2011.

The move came on the heels of Friday's dismal payrolls data that showed the economy shed more than half a million jobs in November.

In addition, it appears that Congress will throw some sort of a lifeline to the automakers. In the latest in the Detroit Three's bid to secure financial help from Uncle Sam, the White House and congressional Democrats neared agreement on a $15 billion bailout proposal. The draft legislation would require each of the automakers to submit a restructuring plan by March 31. As a result, GM saw its share price rise 20.8 percent to $4.93, and Ford surged 24.3 percent to $3.38 as investors bet that a rescue package would soon be forthcoming.

Apparently Wall Street is becoming quite confident there are better times on the horizon because the S&P 500 index moved into positive territory for the month, giving weight to a growing chorus of market pundits who believe the worst is past for stocks. The equities market has not posted a monthly gain since August, before the collapse of Lehman Brothers sent the credit crisis into overdrive.

Construction and materials companies poised to profit from a national rebuilding spree fueled the day's gains. Dow component Caterpillar moved up 10.9 percent, while Terex, a manufacturer of mining and building equipment, gained 18 percent. Caterpillar closed at $42.42, while Terex ended the day at $16.01.

The advance extended the market's rally from an 11-year low on Nov 21. The benchmark S&P 500, which regained the 900 level, is up more than 22 percent since then, but it remains down 38 percent on the year and on pace for its worst year since 1937, when it fell 38.6 percent. The Dow briefly crossed the 9,000 level for the first time in about a month.

Chevron was up 4.9 percent at $78.09 while the price of oil settled up $2.90 at $43.71 amid signs of deepening cuts from Saudi Arabia, the world's top crude oil supplier. 3M was the biggest loser among the Dow Jones industrials, falling 4.1 percent to $57.38 after it issued a profit warning.

Crude Rises Sharply

The rice of crude oil was up sharply, rising 7 percent on Monday as a rebound in global equity markets and signs of deepening cuts from top world supplier Saudi Arabia helped the market break a six-session losing streak. Sweet domestic crude for January delivery settled up $2.90 per barrel at $43.71. London Brent settled up $3.68 per barrel at $43.42.

The rebound came alongside gains in other global commodity and equity markets as Washington worked to finalize a rescue for the struggling auto industry. The price momentum was further driven by the prospect of a fresh OPEC agreement to trim output when the cartel meets December 17.

Saudi Arabia, which has said it is seeking a $75 price for a barrel of oil, told oil refiners in Asia it would deepen supply cuts to as much as 10 percent of contracted volumes in January versus a 5 percent cut in December. It also reduced supplies to European refiners.

Facing a slide in oil prices since July of over $100 a barrel, OPEC has already agreed to cut about 2 million barrels per day (bpd) of production to support prices and members are leaning toward more supply cuts at the December 17 meeting in Algeria.

Deal For The Autos Could Be Imminent

The White House and Congress moved toward an agreement of sorts on Monday to rescue the domestic auto industry by extending emergency loans but their plan leaves key restructuring decisions to the incoming Obama administration.

Three days of talks between congressional Democrats and Bush administration officials neared conclusion with a draft bill being sent to the White House that outlines temporary low interest loans, terms for repayment and oversight submitted for final White House review. The final figure was still being worked out with the plan worth between $14 billion and $17 billion.

The rescue aims to avert the threatened collapse of General Motors and Chrysler, saving thousands of factory and millions of related jobs in the U.S. recession. "This is no blank check or blank hope," Senate Majority Leader Harry Reid said as he reconvened the chamber to consider a measure later in the week.

"If the companies fail to develop a plan that will lead to long-term competitiveness, profitability, if they fail to stick to that plan, the loan can be recalled," Reid said.

Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services committee, told CNBC television an agreement would come by day's end. Senior Democratic and Republican aides believe the bailout will pass Congress.

Both GM and Chrysler have requested billions by month's end to boost their dwindling cash reserves. Ford Motor is requesting a line of credit that would not be tapped unless its finances deteriorate further than expected in 2009.

The plan would release loans later this month and establish a board headed, by a "car czar," to oversee the aid and compliance with terms. The proposal also sets a March 31 deadline for the companies to submit detailed plans of how they intend to cut costs and further overhaul their businesses to compete with nimble and better capitalized rivals.

The plan initially lacked tough medicine some Republicans had sought, including specific requirements for bondholders and additional cost cuts from the United Auto Workers. Nevertheless, GM seems headed for a wrenching restructuring that will hit investors, creditors, dealers and workers almost as hard as if the top U.S. automaker had sought bankruptcy.

The UAW union is seeking a stake in GM and a board seat as it offers new concessions. The union also said it will pose another round of buyouts in 2009. Union leadership wants rank-and-file to ratify new contract provisions for GM by the end of March.

On Sunday, the lead senator on bailout legislation, Banking Committee Chairman Christopher Dodd, said he thought Chrysler was "basically gone" and recommended it revive merger talks with GM. He also said it was time for GM's chairman chief executive, Rick Wagoner, to step down.

Many lawmakers questioned Chrysler's viability as a stand-alone company. GM and Chrysler explored a merger in October before dropping the idea as sales collapsed and GM began to churn through cash faster.

Negotiators responded to lawmaker frustrations with what members have characterized as an entrenched business culture at GM, Ford and Chrysler. Many lawmakers doubt they would be worthy of aid if the country was not in recession. Last week's startling jump in jobless claims reversed what had been an uncertain bailout effort on Capitol Hill. Lawmakers blame the companies for failing to innovate and leaving industry vulnerable to downturns and failure.

GM unveiled an unusually frank advertisement on Monday acknowledging it had "disappointed" and sometimes even "betrayed" American consumers by letting "our quality fall below industry standards and our designs became lackluster."

The grim outlook for automakers spread to Italian carmaker Fiat which said it was too small to survive alone, drawing attention to the prospect of mergers, Sweden reportedly mulled a rescue package for Volvo and Saab. Mitsubishi Motors will suspend production at its Illinois plant for seven weeks next year in response to sales slump, the company said on Monday. Daimler AG said its main plant would adopt a shorter work week for three months and Toyota was said to be eyeing spending cuts of up to 40 percent.

The plan also will seek taxpayer protections in the form of preferred shares for the government and a prohibition on shareholder dividends. Neither Ford nor GM are currently paying dividends. Interest on loans would be 5 percent for five years and 9 percent after that, the same conditions Democrats proposed in an earlier bailout attempt.

How Bad Will The News Be

With many companies ready to spell out their 2009 financial forecasts over the next two weeks, Wall Street is braced for bad news. The question is how bad? There is a substantial opinion on the Street that many companies will follow the lead of 3M, which on Monday set a profit target for next year that was about 12 percent lower than Street expectations.

What will be on their mind is how General Electric, United Technologies and other manufacturers plan to ride out the deepening global recession. More job cuts are likely to be a key theme. Companies across all sectors of the economy are all shedding workers in a bid to cut costs.

A key worry for investors will be how order backlogs are holding up. Capital goods, such as jet engines, electricity-producing turbines and automation equipment, are typically ordered months if not years in advance and industrial companies count on a backlog of orders to help smooth out results when the economy weakens.

Wall Street's expectations are already low ahead of outlook briefings from the large industrial companies with expectations being that earnings per share at GE will fall over 18.3 percent next year and about 5.5 percent at Honeywell. United Tech could see earning growth of over 3 percent. However, the Street’s expectations could be too high, given the recessions in the United States, Japan and much of Europe, and fears that U.S. unemployment could near 10 percent next year.

One concern is that the aggressive job cutting being undertaken by the major corporations could set off a self-reinforcing vicious cycle in the economy, which is highly dependent on consumer spending. At the same time, there is a slowdown in demand from emerging markets, which had kept many diversified manufacturers on a growth footing even as the domestic economy slowed over the past year.