MarketView for December 12

Summary  

 

It was a difficult day on Wall Street on Friday, although one that did manage to have all three major equity indexes in positive territory by the closing bell. Nonetheless, concerns regarding the fate of the automaker's rattled investors, causing the Street to gyrate between gains and losses in a choppy session. But advancing technology shares helped spark a late recovery as the Street bet that their large stockpiles of cash would enable them to weather the economic downturn.

 

As investors scooped up big-cap technology shares, Apple helped lift the NASDAQ, rising more than 3 percent. This year, the NASDAQ is down 42 percent, underperforming the Dow's drop of about 35 percent.

 

Among blue-chip stocks, United Technologies was the Dow's best performer, a day after the diversified manufacturer gave some reassuring comments on its outlook. United Technologies' shares rose 3.7 percent to $48.82 on the New York Stock Exchange.

 

On the downside, Boeing Co was the Dow's worst performer, falling 2.7 percent to $39.20 a day after the company said it was delaying its 787 Dreamliner jet for the fourth time.

 

Meanwhile, hope reigned eternal that a lifeline for the struggling domestic auto industry could still materialize. The latest word with regard to the automakers' attempt to secure a financial rescue was that the White House said it might be willing to provide some emergency funding.

 

Uncertainty over the fate of automakers kept shares of GM and Ford vacillating between positive and negative territory. Ford ended up 4.8 percent at $3.04, while GM lost 4.4 percent to $3.94.

 

GM, Ford and Chrysler employ nearly 250,000 people directly and 100,000 more jobs at parts suppliers could depend on their survival. The industry fears the failure of one Detroit manufacturer could drag down the other two.

 

For the week, the Dow was down 0.1 percent, its second straight week of declines. The S&P was up 0.4 percent for the week, while the NASDAQ was up 2.1 percent.

 

Investor confidence took another hit with the arrest of former NASDAQ Chairman Bernard Madoff, who was charged with running a $50 billion "Ponzi scheme" in what would be one of the largest fraud cases ever.

 

Producer Price Index Mixed

 

According to a report by the Labor Department on Friday, its producer price index fell slightly more than expected in November as energy costs slumped for the fourth consecutive month, , providing further evidence that price pressures are abating.

 

The Labor Department said the PPI fell 2.2 percent, posting its fourth straight monthly decline. The index dropped 2.8 percent in October, which was the biggest monthly decline on record.

 

Compared to the same period last year, the producer price index rose by 0.4 percent, the lowest reading since January 2007, braking sharply from a 5.2 percent increase in October.

 

Core producer prices excluding food and energy costs increased by 0.1 percent in November, slowing from October's 0.4 percent increase. Core producer prices were up 4.2 percent over the last 12 months.

 

Energy prices dropped 11.2 percent in November, falling for the fourth straight month, while gasoline prices plunged by a record 25.7 percent.

 

White House May Direct Treasury To Tap Bailout Money

 

The Bush administration said on Friday it might be willing to provide emergency aid to the teetering domestic auto industry, keeping open the prospects for a bailout the day after Congress failed to approve a deal.

 

Warning of dire consequences for the recession-hit economy if the once-mighty automakers collapsed, the White House, in a reversal of policy, said it was ready to consider dipping into a $700 billion Wall Street bailout fund to help keep the companies afloat.

 

Democratic leaders and the auto workers union appealed to Bush to provide emergency funds after a Senate deal to save Detroit's Big Three collapsed in acrimony late on Thursday. The failure of the $14 billion bailout plan in Congress sent markets reeling around the world. Shares of Toyota lost a tenth of their value, and European automakers also closed sharply lower.

 

However, it appears that the White House and the Treasury Department might mount a last-ditch effort to help the carmakers and that helped the day’s trading activity on Wall Street.

 

The auto companies say one in 10 jobs in the United States are linked to their industry. However, the companies are widely criticized for fighting tougher fuel efficiency standards and poor model designs that have left them with products losing popularity with consumers. In response to the company's many struggles, GM said it would cut its first-quarter North American production by 60 percent.

 

Bush can ill afford the failure of one or more of the automakers as he prepares to leave office on January 20 with a presidential legacy already battered by the grim economy and the unpopular war in Iraq. Therefore, in response to the congressional impasse, the administration said it was considering tapping the Troubled Asset Relief Program (TARP) financial industry fund, whose use for an auto bailout it had earlier vowed to oppose.

 

Democratic leaders welcomed signs that the White House wanted to throw the industry a lifeline, with Sen. Chris Dodd telling reporters "we still have an opportunity to do this and we have an obligation to try." The Connecticut senator said if the White House showed leadership on the auto issue, Congress might be more willing to approve the second part of the $700 billion Wall Street bailout fund, only half of which has been released to the administration so far.

But options remain limited. Of the $350 billion portion of the TARP that the Treasury is authorized to tap without returning to Congress, only $15 billion remains uncommitted.

 

Treasury had pledged to pump $250 billion into banks, but so far has only disbursed $155.3 billion, with another $10 billion for Merrill Lynch on hold pending its merger with Bank of America.

 

Even if GM and Chrysler secure a last-ditch loan from the Bush administration, both will be under intense pressure to cut new cost-saving deals with creditors and the main labor union at a time when auto sales are at their lowest level adjusted for population since World War Two. Furthermore, a General Motors bankruptcy would deliver a huge punch to the economy and to the labor market.

 

The United Auto Workers blamed the failure of the congressional bailout plan on Senate Republicans who want more wage concessions from the union. The UAW said it was now up to Treasury Secretary Henry Paulson to find a way to bail out GM and Chrysler, along with Ford.

 

GM agreed the bailout's rejection had made matters worse, though its German unit Opel was not affected. Opel has already sought funding guarantees from the German government to help weather the devastating downturn in auto markets. The German government reiterated that any funding for Opel was conditional on none of it finding its way back to GM.

 

Ford's Volvo unit likewise sought to reassure investors, saying it was focused on a $3.1 billion bailout presented by the Swedish government, which also still requires approval by lawmakers.

 

The Senate's rejection was also felt by suppliers. Finnish tire maker Nokian and Swedish airbag and seatbelt maker Autoliv cut their earnings guidance.

 

Consumer Sentiment Rises

 

Consumer sentiment improved this month helped by falling gasoline prices, retail discounts and falling expectations with regard to inflation. Nonetheless, some pessimism over the future tempered enthusiasm.

 

The Reuters/University of Michigan Surveys of Consumers said its index of confidence for December rose to 59.1 from November's 55.3, aided by the fall in one-year inflation expectations to their lowest in five years. It was the highest reading since last September. Yet, despite the improvement, sentiment remains depressed by historical standards. The University of Michigan confidence index dates back to 1952 and is still mired near the record low of 51.7 hit in May 1980.

 

"Consumer confidence edged slightly higher in early December due to the collapse of gasoline prices, deep discounts by retailers and tumbling inflation expectations," the report said.

 

"Nonetheless, consumers have become even more pessimistic about prospects for the overall economy, especially the outlook for employment."

 

Though sentiment firmed and consumers' assessment of current economic conditions improved, expectations declined for the third consecutive month, hitting their lowest since June.

 

One-year inflation expectations fell to 1.7 percent -- their lowest since July 2003 -- from 2.9 percent in November. It was the biggest drop in one-year inflation expectations since November 2005. Five-year inflation expectations fell to their lowest in nearly four years, dropping to 2.7 percent in December from November's 2.9 percent.

 

In the short term the drop in inflation expectations will help consumers, who struggled with rising prices all year, and will also aid the Federal Reserve's attempt to stimulate the moribund economy.

 

However, it will also heighten worries that the deepening year-old recession could lead to a debilitating deflationary spiral of falling prices, wages and economic activity last seen in the United States during the Great Depression of the 1930s.

 

Price of Crude Oil Falls Again

 

Domestic sweet crude futures for January delivery settled down $1.70 per barrel at $46.28, after falling below $44 earlier. London Brent crude settled down 98 cents per barrel at $46.41. Oil recovered from earlier lows as stocks pared losses on the possibility that the White House or U.S. Treasury might come through with an aid package for the automakers, after the Senate failed to approve a $14 billion plan late Thursday.

 

Oil has fallen from record highs above $147 a barrel in July as the global economic crisis dents demand in large consumer nations. Goldman Sachs on Friday predicted oil could drop as low as $30 as the credit crunch puts a strangle-hold on the world economy. "The collapse in world oil demand in the fourth quarter of 2008 as the global credit crunch intensified now threatens to push oil prices below $40 a barrel in the near term," Goldman Sachs said in a research note.

 

"The impact of the global economic recession has swung the oil market from pricing demand destruction in 2008 to pricing supply destruction in 2009," it added.

 

Goldman Sachs, which earlier this year had predicted $200 per barrel oil, virtually halved its 2009 price forecast for U.S. crude to $45 a barrel and said the price could fall to $30 in the short term, hitting a trough in the first quarter.

 

The bank said a cut of an extra 2 million barrels per day by the Organization of Petroleum Exporting Countries was needed. The producer group meets next Wednesday in Algeria.

 

French bank BNP Paribas cut its 2009 price forecast to $53 a barrel from $75. OPEC President Chakib Khelil has called for more "severe" supply cuts at next week's meeting. Russian President Dmitry Medvedev said the country was ready to work with OPEC on possible oil output cuts. Japan's Nippon Oil said it expected OPEC to agree to cut 1.5 million to 2 million bpd next week.

 

Meanwhile, the Department of Transportation estimates that motorists drove 9 billion fewer miles in October than a year earlier, down 3.5 percent.