MarketView for December 15

 

Summary  

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Stock prices fell sharply on Monday, due in no small part to concerns over how big a bite a massive investment fraud scheme by investment manager Bernard Madoff, who is accused of masterminding a $50 billion Ponzi scheme, had hurt various investors, investment funds and charities across the globe.

 

JPMorgan Chase was the largest drag on the Dow Jones industrial average after Merrill Lynch cut its rating on the bank’s shares to an "underperform" and forecast a loss in the fourth quarter. The downgrade of JPMorgan comes before earnings this week from two other big financial names, Goldman Sachs and Morgan Stanley on Wednesday. Goldman Sachs ended the day down 1.9 percent to $66.46, while Morgan Stanley closed down 1.5 percent at $13.64.

 

Technology shares also sent the market lower after Goldman Sachs cut its rating on Apple to "neutral" and removed the company from its conviction buy list, citing falling consumer demand for its products. Apple's ended the day down 3.6 percent, to close at $94.75.

 

Economic data gave investors more reasons for caution. A gauge of manufacturing in New York State hit a record low in December, while homebuilder sentiment remained at record lows for the month. At the same time, the markets were looking to an interest-rate decision from the Federal Reserve on Tuesday. The Fed is expected to cut its benchmark fed funds rate to 0.5 percent from 1 percent.

 

An index of energy stocks slipped 0.3 percent on concerns over global energy demand as major world economies struggle with an expanding recessionary environment. When OPEC ministers meet on Wednesday, they may make their deepest oil supply cut ever.

 

Bucking the session's downtrend were shares of General Motors and Ford, which rose on hopes that a financial lifeline could still materialize. The timing and size of any government aid package, however, were still in question. GM's stock ended the day up 3.6 percent to $4.08, while Ford closed up 4.6 percent at $3.18.

 

Price Of Crude Falls

 

The price of sweet domestic crude oil settled down $1.77 per barrel at $44.51 while. London Brent crude settled down $1.81 per barrel at $44.60, as economic worries countered expectations that OPEC would agree to its biggest supply cut ever when the group meets in Algeria this week.

 

Dealers said they were eyeing stock market losses amid worries about the world economy, even as OPEC and top non-OPEC producer Russia said they likely would agree to slash output. Economic turmoil has slammed energy demand growth and contributed to a slide in oil prices.

 

OPEC ministers, who meet on Wednesday, are calling for the largest output cuts ever to combat rising inventories and sagging demand. Russia is sending its highest ranking delegation ever to the meeting in Algeria in another sign the world's top non-OPEC producer is willing to clinch a deal to protect oil prices.

 

Saudi Arabia, OPEC's most influential member, identified $75 a barrel as a "fair" price for crude in November, while Iran's oil minister said over the weekend that the "real price" of oil should be more than $100 a barrel.

 

After slashing a combined two million barrels daily, 7.3 percent of its output at two previous meetings, OPEC was expected to chop production by at least another 5 percent to help draw down global inventories.

 

OPEC President Chakib Khelil said the amount of crude oil stored on tankers around the world by oil producers and international companies may have swelled to the equivalent of one full day's worth of global output as the economy slows.

 

"Everybody is supporting a cut -- I don't have any doubt about it. The Saudis have already taken a decision ahead of the meeting, as you know, they have reduced their supply to the market by 8 percent, which has had an affect on the market," Khelil told reporters.

 

Meanwhile, in China, the world's second biggest energy consumer, it is estimated that oil demand is down about 3.5 percent for the month of  November.

 

30 Year Bonds Move Higher

 

The price on U.S. 30-year Treasury bonds climbed a full point on Monday, testing their session highs, after data showed home builder sentiments were stuck at record low, suggesting more tough times ahead for the battered U.S. housing market.

 

The 30-year Treasury bond was up 1-1/32 in price in the wake of the December report from the National Association of Home Builders. Its yield, which moves inversely to price, traded at 2.99 percent, not far above its record low set last week. It ended at 3.045 percent on Friday.

 

Home Builder Sentiment Continues At Low Point

 

Home builder sentiment held steady in December at its record low reading as continuing turmoil in the financial markets, a contracting economy, a deteriorating job market, and the increasing flow of foreclosed homes continues to hurt sales of new homes, the National Association of Home Builders said.

 

According to the NAHB, its preliminary NAHB/Wells Fargo Housing Market Index was 9 in December, unchanged from November when it reached its lowest level on record since its launch in January 1985. Readings below 50 indicate more builders view market conditions as poor than favorable. The December index was in line with expectations based on a Reuters survey of economists.

 

The housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes, tighter lending standards and record foreclosures push down home prices.

 

"The crisis continues," NAHB Chairman Sandy Dunn, a home builder from Point Pleasant, West Virginia, said in a statement.

 

"While builders are doing everything we can in the way of price and non-price incentives to move new homes off the books, buyers are afraid to move forward, and in any case there is almost no way to compete with the cut-rate product that is continually flooding the market from mounting foreclosures," she said.

 

Dunn said Congress and the administration must step in with substantial incentives to bring qualified buyers back to the table and effective foreclosure relief programs.

 

The gauge of current single-family homes sales fell to 8 from a revised 9. The index of sales expected in the next six months dropped to 16 from a revised 18. The prospective-buyer traffic measure was unchanged at 7, the NHBA said.

 

Home builders, struggling under sinking demand and a credit crisis, have been facing off with a flood of homes in foreclosure. However, interest rates on mortgages have fallen sharply over the past month, a key development that could help turn the hard-hit housing sector around.

 

Home builders have curbed their new construction. They have also been offloading their inventories of unsold homes by slashing prices at the expense of profits to pay off their debt and keep afloat.

 

"We have seen no improvement over the past month in terms of sales conditions for new homes," NAHB Chief Economist David Crowe said in a statement.

 

"In fact, certain factors have gotten progressively worse, not the least of which is the job market, where massive layoffs are having a devastating effect on consumer confidence," he said.

 

Crowe said at this point it will take definitive government action to stop the slide in home values and turn the tide of consumer sentiment.

 

"Expanding the first-time buyer tax credit and providing government action to reduce mortgage rates would go a long way toward arresting this downward spiral, just as a combination of similar moves worked in the 1970s to boost the housing market and economy," he said.

 

On a regional basis, the housing market index declined in two out of the four regions in December. The Midwest and South posted a one-point and a two-point decrease, to 6 and 10, respectively. The Northeast held even with the previous month's 11 reading. The West posted a one-point gain to 7 this month.

 

Bank of America’s Analysis Of GM Is Correct

 

The federal government may need to lend General Motors around $30 billion to help the automaker operate through a bankruptcy, or risk a systemic chain of failures in the auto industry, Bank of America said.

 

GM may need around $30 billion in debtor-in-possession loans, which are used to pay for a company's operating expenses as it restructures under bankruptcy protection, Bank of America analysts said in a report issued late on Friday.

 

The $30 billion represents around two times GM's working capital, with an additional $10 billion cushion for further earnings hits and to fund suppliers, the bank said. GM had $36 billion in long-term debt as of September 30, according to a regulatory filing.

 

To support GM, and the industry, the government will need to lend funds to support the company in bankruptcy rather than out of bankruptcy, as that is the only way to ensure the government has the most senior claim on the automaker's assets, the bank added.

 

"The alternative to attempt to legislate a senior position for the government outside of bankruptcy, as appeared in earlier versions of the auto bailout legislation, represents a violation of contract law, a dangerous precedent that all government interventions to date have sought to avoid," the bank said.

 

Bank of America suggests that the money from the Troubled Asset Relief Program, or TARP, could be combined with funds from section 13 of the Federal Reserve Act, which allows the Fed to lend to companies on a secured basis under "unusual and exigent conditions."

 

"With the DIP in place to allow fundamental cost restructuring, restoring the long-term viability of GM could mean a longer payback of government funds over a 5-10 year period and perhaps sooner through a sale or refinancing," the bank added.

 

If GM fails to get funding and is forced to liquidate, it would have systemic consequences, dragging down suppliers and potentially other automakers with it, Bank of America said.

 

If a company like Lear Corp, which supplies GM and Ford, is hurt by a GM failure it could also inhibit its ability to supply Ford, which in turn could also hurt Ford's major supplier, Visteon, the report said.

 

"The systemic risk argument of a set of cascading payment defaults is borne out in the close linkages between suppliers and manufacturers," Bank of America said.

 

"Debtor-In-Possession financing helps to forestall such a systemic risk outcome by allowing companies to continue to operate, and in this case, to continue to make payments to their suppliers, and avoid such an event," the bank said.