MarketView for December 11

Summary  

  

The markets reversed again on Thursday as stock prices fell sending all three major equity indexes back into negative territory as prospects for an automaker bailout deteriorated. At the same time, comments regarding the prospects of the banking sector in general, and JPMorgan Chase in particular, by the bank's chief executive prompted a selloff of financial shares.

 

JPMorgan Chase was the Dow's biggest drag, falling more than 10 percent. A sell-off in the bank's shares accelerated after Chief Executive Jamie Dimon told CNBC the year-end environment was "terrible."

 

Much of the selloff during the late in the afternoon, but the day was governed by a steady stream of dismal corporate and economic news, including initial claims for unemployment benefits hitting a 26-year high. It was the third straight day of losses for the financial sector, the longest losing streak since the bailout of Citigroup late last month.

 

A rescue for the struggling auto industry seemed dead unless all sides could come to an agreement. The White House urged Senate Republicans to back the $14 billion financial lifeline, but Republicans appeared to have more than enough votes to stop the bailout with a procedural roadblock.

 

Yet, it was only the fourth down day for the S&P 500 since it hit a noteworthy intraday low on November 21. With the day's decline, the broad S&P 500 is up nearly 18 percent since tumbling to an 11-year low in late November. But the S&P remains down about 40 percent for the year so far.

 

After the bell, Dow component Bank of America said it plans to cut about 30,000 to 35,000 jobs over the next three years. Its shares rose 2.5 percent to $15.28 in extended-hours trading.

 

Shares of General Motors ended the day down 10.4 percent to $4.12, while Ford lost 10.8 percent to $2.90. The concern on the Street is that that without the government's help, a potential failure or bankruptcy of one of Detroit's Big Three could send shock waves through the economy and make the country's unemployment rate even worse.

 

The energy sector provided a bright spot, with Chevron giving the Dow its biggest boost. Chevron's stock rose 1.3 percent to $79.46. A report from the International Energy Agency forecast global oil demand will rebound next year, helping send January crude oil futures up $4.46 to settle at $47.98 a barrel.

 

Shares of Ciena were down 20 percent to $6.05 after the company reported a surprising quarterly loss and warned of weaker-than-expected sales. Boeing lost 3.4 percent to $40.27 after it pushed back the schedule for its 787 Dreamliner jet for the fourth time.

 

Crude Oil Up Sharply

 

The price of crude oil rose more than 10 percent on Thursday, settling at nearly $48 a barrel after OPEC’s president called for more "severe" production cuts and the dollar fell to a seven-week low versus the euro. News that Russia's President Dmitry Medvedev said the country was ready to work with OPEC on possible oil output cuts lent additional support to the market.

 

Specifically, domestic sweet crude for January delivery settled up $4.46, or 10.25 percent, at $47.98 per barrel, continuing a rebound from near four-year lows hit last week. It was the largest single-day percentage gain since November 4, when prices ended up 10.36 percent. European benchmark Brent crude settled up $4.99 per barrel at $47.39.

 

Saudi Oil Minister Ali al-Naimi said the world's largest exporter pumped 8.49 million barrels per day of oil in November, less than estimated by analysts and in line with its OPEC target. That would put the kingdom's output at 560,000 bpd less than the IEA's estimate of Saudi November production, published earlier on Thursday, of 9.05 million bpd.

 

As a result, January shipments are expected to be below Saudi's existing OPEC target, implying it expects OPEC to agree a further supply cut when the producer group meets in Algeria on December 17. Meanwhile, OPEC member Ecuador also said it wants to slash oil output at the Algeria meeting to stabilize the market.

 

Russia, which will attend the Algerian meeting as an observer amid calls from some members for Moscow to join in output curbs, said Wednesday it will present its own proposal at the talks.

 

A prediction from the International Energy Agency (IEA) that world oil demand growth would rebound in 2009 after shrinking this year for the first time since 1983 was also supportive. In addition, the IEA cut its forecasts for supply outside of OPEC next year.

 

The IEA's view that demand will grow in 2009 contrasts with that of the U.S. government's Energy Information Administration, which this week forecast consumption would fall by 450,000 barrels per day (bpd) next year. The IEA also lowered forecasts for supply from outside OPEC in 2009, leading to a 200,000 bpd increase in the amount it said OPEC needs to pump to balance the market.

 

Unemployment Claims Rise Sharply

 

New claims for jobless benefits rose sharply last week, coming in worse than expectations and the figures would get even worse without an auto industry bailout. Initial applications for unemployment benefits rose to a seasonally adjusted 573,000, the Labor Department reported on Thursday. That was nearly 50,000 than had been expected and up from a revised 515,000 the week before.

 

The four-week average of new jobless claims, which smooths out fluctuations, is now a seasonally adjusted 540,500. That's the highest since December 1982, when the economy was emerging from a deep recession.

 

The number of people continuing to claim jobless benefits also jumped much more than expected, increasing by 338,000 to 4.4 million, the department said. Economists had expected a small increase to 4.1 million.

 

That figure also indicates that workers are having a harder time finding a job and leaving the unemployment rolls, economists said.

 

As a proportion of the work force, the number of people continuing to receive benefits is the highest since August 1992, when the U.S. was recovering from a relatively mild recession.

Economists consider jobless claims a timely, if volatile, indicator of the health of the labor markets and broader economy. A year ago, initial claims stood at 337,000.

 

The last time new jobless claims hit that level in a single week was in 1982, although the labor force has grown by about half since then.

 

Adding more damage to the already ravaged labor market, Bank of America said it expected to cut as many as 35,000 jobs over the next three years, including some from investment bank Merrill Lynch, which it agreed to buy in September.  Besides Bank of America's announcement, more layoffs in other industries were also announced on Thursday. Stanley Works  said it plans to cut 2,000 jobs and close three manufacturing facilities.

 

Sara Lee plans to cut 700 jobs as it outsources parts of its business. Still, food companies will likely fare better over the next few months than other employers because consumers will buy food and other staples even in a recession.

 

Companies have eliminated a net total of 1.9 million jobs this year, and some economists project the total cuts could reach 3 million by the spring of 2010. Several large U.S. employers announced layoffs this week, including Dow Chemical, 3M, Anheuser-Busch InBev, National Public Radio and the National Football League.

 

AIG Could Leave Taxpayers Holding The Bag

 

Is it a good business decision and competitors are simply crying in their beer, or is American International Group, better known as AIG, taking unreasonable risks that could put the American taxpayer on the hook for additional losses? Specifically, the giant insurer is dramatically cutting prices to win new business, thereby raising concerns that taxpayers could again be left to pick up the tab.

 

AIG, once the world's biggest insurer by market value, was rescued by the government last September as the cost of meeting counterparty obligations on bad mortgage bets left it close to bankruptcy. In the wake of its federal bailout, which last month swelled to more than $150 billion, apparently AIG has been cutting premiums at a time when market fundamentals show insurance rates need to rise.

 

In one example of its aggressive rate-cutting, a unit of AIG’s commercial insurance division agreed to provide coverage for the Las Vegas McCarran International Airport at a price 60 percent below what was charged for the same policy a year earlier. Last year the airport paid $3.54 million to a consortium of seven insurers led by Travelers Group for a property, boiler and machinery insurance policy worth $1.7 billion, an airport spokesman said.

 

This year the airport got its coverage from Lexington Insurance Co, a large AIG unit, for just $1.4 million. The insurer agreed to take on the airport coverage with one other insurer, compared with the seven that had been on the program the prior year, leaving fewer carriers to shoulder any potential losses.

 

By selling policies for less while taking on more risk, AIG is raising the chances that it will be hit by large losses. It also makes it harder for other insurers to sell policies that are priced high enough to cover potential losses.

 

The rate cuts come even as large investment losses and rising claims from a range of events, including hurricanes and lawsuits against financial executives; mean insurers are now widely expected to start charging more for many types of coverage when policies are renewed throughout 2009.

 

To be sure, it is possible for insurers to sometimes use modeling techniques and other risk tools to price policies more competitively, but critics says in many cases AIG is simply driving down prices to win business. When losses lead to an insurance company's collapse, rivals often have to foot the bill through insurer-funded guaranty funds formed by many U.S. states and some countries.

 

It is also possible that the federal government, as AIG's majority owner, would feel obliged to step in with more financial support for the insurance subsidiaries if underwriting losses become a problem. About $15 billion of a $60 billion government loan to AIG had already been consumed by its insurance units as of November 5, according to the company's latest quarterly filing.