MarketView for December 9

Summary 

 

Stock prices took at hit on Tuesday as profit warnings from FedEx prompted a serious round of profit-taking after two days of gains, while unprecedented demand for the safety of government securities were a strong indicator that all is still not right with the world.. Transportation stocks led the pullback as FedEx ended the day down 14.5 percent on word that its 2009 profit would fall shy of estimates due decrease in economic activity worldwide.

 

Markets were also rattled by an extraordinary sale of U.S. Treasury bills, widely viewed as the world's safest securities. Investors were so fearful of everything from deflation to the precarious condition of the banking system that they sacrificed all expected return just to hand over cash to the Treasury for safekeeping, producing an unprecedented zero percent rate.

 

With the day's slide, the S&P 500 was again negative on the month, after a brief pop into positive territory on Monday. Furthermore, the drop in Treasury bill rates, which effectively means investors are willing to pay the U.S. government a fee to look after their money, comes as stocks attempt to form a sustainable rally off recent lows.

 

The broad S&P 500 is up nearly 20 percent from the November 21 lows but remains down close to 40 percent for the year so far.

 

Texas Instruments ended the day up 4.9 percent to $15.55 despite cutting its fourth-quarter revenue forecast. Procter & Gamble was the Dow's greatest loser, falling 4.3 percent to $59.79 after UBS cut its price target.

 

3M fell for a second consecutive session, ending the day down 2.1 percent at $56.15, after Citigroup and Credit Suisse cut their targets on the stock a day after the manufacturer cut its 2008 outlook and announced 1,800 job cuts.

 

Crude Prices Fall

 

The price of crude oil fell on forecasts that global oil consumption would decline this year for the first time since the early 1980s. Domestic sweet crude futures for January delivery settled down $1.71 per barrel, or 3.91 percent, at $42.07. London Brent settled down $2.02 per barrel at $41.40.

 

The Energy Information Administration reported in its monthly energy outlook that it expected global oil demand to fall by 50,000 barrels per day in 2008 and 450,000 bpd in 2009, the first decline in year-to-year world oil demand since 1983. The lower forecast came as the EIA revised its 2009 world GDP growth estimate to 0.5 percent, down from last month's estimate of 1.8 percent. The EIA estimates 2008 GDP growth will end up at 2.7 percent.

 

The global economic crisis has sent oil prices spiraling down from record peaks above $147 a barrel in July, raising concern among members of OPEC. The current thought is that OPEC will reduce output by at least 1 million barrels per day when it meets next Wednesday in Algeria, after agreeing to cut supplies by 2 million bpd since September.

 

Demand For Crude Worldwide Down For First Time

 

Global oil demand will contract for the first time since the early 1980s as world economic growth slows to a near standstill, the government said on Tuesday. The forecast for 2008 and 2009 is bad news for energy companies and oil producing nations that depend on robust prices, but could benefit cash-strapped consumers by sending gasoline and heating costs lower, according to a Energy Information Administration report.

 

World oil demand is projected to fall by 50,000 barrels per day in 2008 and 450,000 barrels per day next year, the EIA said, led by a 1.2 million bpd contraction in top consumer the United States this year a 200,000 bpd drop in 2009. The report marked the first major forecast for shrinking energy demand tied to the current global financial crisis.

 

The lower forecast came as the EIA revised down its projection for 2009 global economic growth to 0.5 percent next year, from the 1.8 percent projection it made in its previous report issued in November.

 

"The current global economic slowdown is now projected to be more severe and longer ... leading to further reductions of global energy demand and additional declines in crude oil and other energy prices," the EIA said.

 

The weak economy and lower petroleum demand has already caused U.S. crude oil prices to sink from a record $147 a barrel in July to $42.07 on Tuesday, a slump that has rattled energy producing nations like Saudi Arabia, Russia and Venezuela, and triggered massive cutbacks in investment in oil projects like those in Canada's oil sands.

 

"The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices," the EIA said.

 

Demand still is expected to grow next year in emerging economies such as China, which helped drive the six-year rally in oil prices to record highs. Still, the latest EIA report revised demand from this group down by 40,000 bpd.

 

The EIA slashed its 2009 forecast for crude oil prices to $51 a barrel from $63.50 a barrel in its previous forecast.

 

Meanwhile, the World Bank said on Tuesday that the world financial crisis will sharply slow world economic growth next year, ending the five-year global price boom for crude oil and other commodities. The weaker energy prices could mark a bright spot for consumers who have been hard hit by the financial turmoil.

 

The EIA said it cut its winter heating oil forecast to $2.53 a gallon from $2.75 a gallon, and its 2009 gasoline price forecast to $2.03 a gallon from $2.37. Average U.S. gasoline price are currently running about $1.70 a gallon, down from a record $4.11 this summer.

 

Pending Home Sales Fall

 

Pending sales of previously owned homes fell in October, although the drop in pending home sales was unexpectedly small, one proffered reason is rising foreclosure sales that has homes being disposed off at discount prices.

 

The National Association of Realtors reported that its pending home sales index, based on contracts signed in October, slipped 0.7 percent to 88.9 after falling 4.3 percent in September. Economists had expected a 3.2 percent October decline.

 

Some economists were especially encouraged that pending home sales had not fallen sharply in October since the economy more broadly seemed to take a sharp turn for the worse after Lehman Brothers filed for bankruptcy and stock prices plunged. The collapse of the housing market has unleashed the worst financial crisis since the Great Depression and plunged many major economies into recession.

 

Treasury Rates Now Zero

 

The return on government debt is now zero. The Treasury Department indicated on Tuesday that it had sold $30 billion in four-week bills at an interest rate of zero percent, the first time that's happened since the government began issuing the notes in 2001.

 

The three-month Treasury bill yielded 0.03 percent, up marginally from 0.02 percent late Monday. The discount rate was 0.02 percent.

 

The 2-year note rose 6/32 to 100 25/32 and its yield fell to 0.85 percent from 0.94 percent late Monday. The 10-year note rose 25/32 to 109 17/32 and its yield fell to 2.65 percent from 2.75 percent. The 30-year bond rose 2 21/32 to 128 5/32 and its yield fell to 3.04 percent from 3.16 percent.

 

And bank-to-bank lending rates slipped. The London Interbank Offered Rate, or Libor, for three-month loans in dollars fell nearly 0.03 percentage points to just over 2.16 percent, according to the British Bankers' Association.

 

 

And when investors traded their T-bills with each other, the yield sometimes went negative. That's how extreme the market anxiety is: Investors are willing to give up a little of their money just to park it in a relatively safe place.

 

At last week's government auction of the four-week bills, the interest rate was a slightly higher but still paltry 0.04 percent. Three-month T-bills auctioned by the government on Monday paid poorly, too, 0.005 percent.

 

The U.S. government is considered the most creditworthy of borrowers, issues IOUs of varying durations to raise money. The zero percent interest rate is no reason to panic. As recently as Monday, investors were plowing cash into stocks, and averages like the Dow industrials are off their lows.

 

And long-term government bonds, while near record lows, are still paying decent returns considering the current investment climate. The yield on a 30-year bond on Tuesday was a little higher than 3 percent.

 

There's good news in all this for taxpayers: Low interest rates on government debt mean the United States is financing its $700 billion bailout of the financial system very cheaply. The Treasury has sold mountains of debt to pay for it.

 

However, the trend also underlines stubborn anxiety in the financial market that could keep the economy sluggish for years to come, and it translates into stagnant returns for people who have their money in places like money market funds.

 

Earning zero percent on an investment for a short while may not seem that dire for the average person. But a zero percent rate has serious consequences for the complex credit markets. Those markets have been dysfunctional since Lehman Brothers went bankrupt in September, scaring away investors who normally buy bonds from seemingly creditworthy borrowers. Lending, the lifeblood of the economy, has frozen up.

 

One corner of the credit markets is the repurchase markets, known as "repo," where banks and securities firms make and receive short-term loans backed by collateral, usually Treasury bills.

When those T-bills are yielding nothing, there's little incentive to deliver them on time. If the holder loses the interest, it's no big deal.

 

High demand for government debt rather than corporate debt could stifle economic growth.

Corporate bond rates have been surging to record levels compared with Treasurys, which makes it more expensive for companies to raise money..

 

Only a few corporate bond deals have been going through lately, and most have been through the government, which has agreed to guarantee financial institutions' bond sales. American Express said Tuesday it has issued $5.5 billion through the government program.