MarketView for December 10

Summary  

A rebound in oil prices and other commodities lifted energy, mining and materials shares, offsetting nervousness over whether Washington will agree on a bailout for ailing car makers and sending all three major equity indexes into positive territory for the day. Chevron was the leader among the Dow Jones industrials, rising 3.8 percent, as the price of oil rose on signs that Saudi Arabia will cut its January output. Crude oil settled up $1.45 per barrel at $43.52

Guarded optimism that a financial lifeline for ailing automakers could be imminent had earlier provided support and lifted shares of General Motors and Ford. However signs that the package may still face political hurdles fueled uncertainty, sending the shares of GM moving back down.

The push to rescue U.S. car markers became tied up in partisan wrangling as the U.S. House of Representatives appeared set to vote on a proposed $15 billion bridge loan, but congressional Republicans offered an alternative plan. As a result, shares of GM retreated 2.1 percent to $4.60, while Ford was up 0.6 percent at $3.25 after vacillating between negative and positive territory.

Trading was volatile with the major indexes swinging between positive and negative territory. The day's gain helped the market narrowly avert what would have been the first two days of losses in a row since its November 21 low. Since reaching that low, the broad S&P 500 is up more than 20 percent, but is still down close to 40 percent for the year so far.

Yahoo was among the top gainers on the NASDAQ after Ivory Investment Management LP, which has a 1.5 percent stake in the Internet company, urged it to sell its search business to Microsoft, stating that the deal would double its value. Yahoo ended the day up 9.9 percent at $13.40.

Unfortunately, the influx of companies posting warnings of lower earnings continues. Among the latest was Eastman Kodak who warned that its 2008 revenues and earnings would fall short of expectations. As a result, Kodak closed down 8.5 percent at $6.59. Also offering up a disappointing profit warning was Electronic Arts. EA was down 12.1 percent at $17.00.

American Express was the Dow's biggest loser, falling 7.4 percent to $21.56; after two analysts said it would be the most affected in the credit card industry from loan losses, a spending slowdown and funding needs.

Crude Prices Rise

The price of crude oil rose more than 3 percent on Wednesday on signs that Saudi Arabia has reduced supplies to customers for January as the economic crisis continues to slow demand.

Saudi Arabia told major customers it was reducing supplies substantially next month in a move that could bring the kingdom's output below its implied OPEC target of 8.47 million barrels per day.

Crude settled up $1.45 per barrel at $43.52 after hitting a session high of $46.17. London Brent crude settled up 87 cents per barrel at $42.40.

OPEC next meets on December 17, and the group is widely expected to agree to more output cuts. A drop off in demand in the United States and other developed economies has dramatically reduced the price per barrel from its high of $147 struck in July.

An Energy Information Administration report this week forecasting the first contraction in world oil demand since 1983 added to expectations that OPEC will deepen cuts. Earlier, crude came under pressure as U.S. inventory data showed rising fuel stocks in the world's top consumer as demand slumps.

Distillate stocks rose by 5.6 million barrels in the week to December 5, according to Energy Information Administration, while gasoline stocks gained 3.8 million barrels. Crude inventories rose slightly.

Total domestic product demand fell 6.1 percent over the past four weeks against year-ago levels. U.S. gasoline demand is expected to decline more sharply this year and next than in any other two-year period since 1979-1980, the EIA said.

China's crude imports in November hit their lowest this year as refiners in the No. 2 oil consumer reined in buying due to brimming storage and weakening demand.

Russia's energy minister on Wednesday said OPEC members were preparing a "significant cut" in oil production, and that Russian output was likely to decline in 2008 despite government attempts to stimulate production.

GMAC May Not Qualify For Bank Status

GMAC told Wall Street that only a fraction of its bondholders agreed to swap their debt, raising doubts over the company's efforts to become a bank holding company and stay solvent. Owned by private equity firm Cerberus as well as General Motors, GMAC said it would give bondholders until December 12 to exchange their debt under more favorable terms, making it the third time it has extended the date.

GMAC is looking to swap $38 billion of outstanding debt for a smaller amount of new debt, as well as preferred shares and cash, in an effort to reduce its debt load and raise the capital it needs to qualify as a bank.

The company already has a banking unit which offers certificates of deposit and online savings accounts, but becoming a bank holding company makes it eligible for government support including guarantees of new debt that it issues. The company could also apply for billions of dollars of capital under the United States' $700 billion Troubled Asset Relief Program.

However, some bondholders believe the exchange forces them to give up too much. The new bonds will be guaranteed by subsidiaries of GMAC, but when GMAC restructured, those subsidiaries may not have as much in the way of assets as now.

GMAC said that so far, investors holding about $6.3 billion of its debt, or about 22 percent of eligible bonds, have agreed to swap their securities. For the company's Residential Capital mortgage unit, holders of about $2.0 billion, or 21 percent, of outstanding notes have agreed.

Those amounts are well short of the 75 percent approval GMAC needs for the exchange to go through. A successful exchange would help GMAC raise the $30 billion of regulatory capital required for it to become a bank.

GMAC said last month that without bank holding company status, it would likely have to sell assets and take other extraordinary measures to make good on its obligations. GMAC's 5.85 percent notes due in January 2009 fell to 89 cents on the dollar, down from 94.125 cents on Tuesday.

Federal Deficit On Way To Record High

The federal government ran a record budget deficit in November, putting Uncle Sam on track to post an all-time high annual shortfall of $1 trillion or more. In just the first two months of the budget year that started Oct. 1, the deficit totaled $401.6 billion, nearly matching the record gap of $455 billion posted for all of last year, according to Treasury Department data released Wednesday. If the deficit does top $1 trillion for the current budget year, it also would be a post-World War II high when measured as a percentage of the economy.

The increased red ink stems from both lower tax revenue and increased spending that is a result of the recessionary economy. The government is receiving less in business and personal income taxes while spending more on programs such as unemployment insurance and food stamps. Then there's the $700 billion bank rescue program. The Treasury report showed that the government spent $76.5 billion from the program in November and $191.5 billion over the past two months.

According to the Treasury Department, the gap between the government's revenue collections and what it paid out last month totaled $164.4 billion, the largest deficit ever recorded for the month of November. The deficit was $98.2 billion in November 2007. An annual deficit of $1 trillion would equal 6.7 percent of the gross domestic product, the economy's total output in a single year. That would surpass the previous postwar record in GDP terms of 6 percent sent in 1983 when Ronald Reagan was president.

Some analysts argue that the deficit is effectively lower than Treasury's figures because the government has received stakes in the banks in return for the capital. The government could get some or all of the money back when it sells those ownership stakes in the future. The Congressional Budget Office said last week that accounting for the value of those stakes would reduce the combined deficit for October and November to $267 billion, rather than the $401.6 billion reported by Treasury.

Besides the $700 billion rescue package, the Treasury also is making purchases of mortgage-backed securities in an effort to bolster demand for these assets. Those purchases totaled $23.2 billion in November and $44.7 billion over the past two months.

Still, even budget hawks acknowledge that now is a good time for the government to step up its borrowing. With the Treasury Department paying the lowest rates on government debt in years, taxpayers will pay less in interest on all the new debt.

In recent days, the Treasury has sold one-month bills at zero percent and three-month bills at rates near zero. That's because the financial meltdown has caused large institutional investors to seek out the safety of T-bills, increasing demand and lowering the yield on government debt.