MarketView for December 17

 

Summary  

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Stock prices were lower on Wednesday as the government's effort to stave off a deep economic recession raised worries about mounting public debt and the possibility of subsequent inflation, both of which blunted Tuesday’s optimism over the Fed's rate cut. The Street’s concern is also that the Fed is running low on ammunition to jumpstart the economy.

 

Energy stocks were the top drags on the Dow, after oil prices fell briefly below $40 a barrel for the first time since July 2004. Exxon Mobil fell 2.5 percent to $81.06, while ended the day down 2.8 percent at $76.82.

 

Weighing on the NASDAQ was Apple, whose share price slid nearly 7 percent after the company announced that CEO Steve Jobs would not be giving the keynote address at Macworld, renewing concerns about his health. The stock was subsequently downgraded and had its price target removed by Oppenheimer.

 

Meanwhile, financial stocks were unable to sustain their gains despite an analyst note that said poor results from Morgan Stanley were not likely to be repeated. The call helped lift shares of the investment bank by 2.3 percent, reversing an earlier decline after the bank reported a loss.

 

Oil futures declined despite a decision by OPEC to make its deepest output cut ever, 2.2 million barrels a day, but dealers said even that may fail to offset slumping world energy demand.

 

Retailers were a bright spot, as Macy's helped lift the sector, rising 18 percent to $10.01 after it said it obtained substantially more liquidity from its banks.

 

Another area of strength came from food makers General Mills and ConAgra Foods, both of which posted higher than expected earnings for the quarter, helped by price increases and expense controls. ConAgra shares were up nearly 8 percent to $16.25, while General Mills edged up 0.2 percent to close at $61.35.

 

OPEC Cuts Supply

 

OPEC agreed to its largest output cut ever on Wednesday, cutting 2.2 million barrels per day from oil markets as it tries to match supply to demand. The 12 members of OPEC were also aiming to build a floor under prices that have dropped more than $100 from a July peak above $147 a barrel.

 

The cut, effective January 1, comes atop existing curbs of 2 million bpd agreed by OPEC since September. It lowers the supply target for the 11 members bound by output limits to 24.845 million bpd, down nearly 15 percent from September output.

 

"I hope we surprised you -- if not, we have to do something about it," said OPEC President Chakib Khelil, host of the conference. Khelil said the group would do its utmost to ensure new restraints were strictly enforced.

 

"I can tell you it's going to be implemented and it's going to be implemented very well because we do not have a choice," said Khelil, also Algeria's energy minister. "If not, the situation is going to get worse."

 

A deepening recession is threatening to shrink world demand for two years running and fuel inventories are bulging. Prices already have plunged by two-thirds since the summer and analysts say the oil market is under the sway of world financial turmoil.

 

Saudi Arabia, the world's biggest oil exporter, has led by example, reducing supplies to customers even before a cut was agreed to help push prices back toward the $75 level Saudi King Abdullah has identified as "fair."

 

"The purpose of the cut is to bring the market into balance and avoid the gyrations of the price," said Saudi Oil Minister Ali al-Naimi. "The cut may lead to higher prices or may not."

 

Oil below $50 is uncomfortable for all producing nations, but especially for OPEC members Venezuela and Iran which are dependent on higher prices to fund ambitious domestic programs. OPEC hopes that a sharp supply cut will set oil on the path toward $75, a level the group believes is needed to encourage investment in future supply.

 

"You must understand the purpose of the $75 price is for a much more noble cause," the Saudi Oil Minister said. "You need every producer to produce and marginal producers cannot produce at $40 a barrel."

 

The influential Saudi Oil Minister clearly outlined the kingdom's route to lower production. It is pumping 8.2 million bpd against 9.7 million bpd in August. Saudi Arabia's implied output target is about 8.477 million bpd under existing OPEC curbs.

 

OPEC has encouraged other producers to cut back too. Russia and Azerbaijan attended the Oran meeting as observers and have said they could rein in exports in future, but stopped short of am immediate pledge.

 

Leading a high level delegation, Russia's Deputy Prime Minister Igor Sechin said in a speech to OPEC that Moscow did not plan to join in coordinated output cuts and did not want to join the group in the foreseeable future.

 

Crude Prices Fall

 

The price of crude oil dropped precipitously to a level not seen in four years on Wednesday after OPEC announced a record supply that still may fail to fully offset slumping world energy demand. The price of sweet domestic crude oil for January delivery settled down $3.54 per barrel at $40.06 after breaking through the $40 per barrel level for first time since July 2004. London Brent settled down $1.12 per barrel at $45.53.

 

Oil prices are down more than $100 per barrel since July as a global financial crisis cuts into consumer and industrial fuel demand, and government forecasters are now predicting the first decline in world energy use since 1983.

 

OPEC, eager to push prices back up, announced on Wednesday an agreement to cut 2.2 million barrels per day of output starting January 1, the biggest single reduction on record. The White House, which has been fighting to rescue the economy from a severe slowdown, called OPEC's decision to cut production "short sighted" and said the oil cartel has an obligation to keep the market well supplied.

 

OPEC is desperate to halt the slide in prices with economists predicting 11 of OPEC's 12 members, as well as big producers Russia and Mexico, will face budget deficits with crude oil at $40 a barrel.

 

The slump in prices has already sent shock waves through oil producer countries and top companies, leading to cutbacks and delays in spending on key projects that had promised to boost future world output.

 

Oil's losses on Wednesday reflect the economic gloom overshadowing government efforts to stimulate growth, including this week's move by the Federal Reserve to slash interest rates. The soft energy market has also led oil refiners in the United States to slow down fuel production to match the weak demand.

 

The U.S. Energy Information Administration said the nation's crude and refined fuel stockpiles rose last week as a demand slump led refiners to run less oil. AAA said on Wednesday that domestic travel over the Christmas holidays will fall more than 2 percent this year, the first decline since 2002.

 

The “Get Well” Price Tag is $850 billion

 

Think of $850 billion as the initial cost to set the economy on the road to better health and one that has to be paid as the price for greedily overeating at the trough of high returns and even higher risk. At least that is the first cut at a price tag being bandied about by President elect Obama’s team of advisors.

 

Eager to jolt a worsening economy back to life, President-elect Barack Obama's aides are assembling a two-year stimulus that rivals the drastic government actions used to fight the Great Depression. The emerging plan is blend of new jobs, middle-class tax relief and expanded aid for the poor and the unemployed, congressional officials said Wednesday.

 

Although he has not settled on a total cost, Obama is promoting a recovery plan that would feature spending on roads and other infrastructure projects, energy-efficient government buildings, new and renovated schools and environmentally friendly technologies.

 

While the final figure could be smaller than $850 billion, Obama’s team has begun telling Congress the stimulus should be larger than the $600 billion initially envisioned. There would also be some form of tax relief, according to the Obama team, aimed at middle- and lower-income taxpayers, and there would be no tax increases for wealthy Americans.

 

While some economists consulted by Obama's team recommended spending of up to $1 trillion over two years, a more likely figure seems to be $850 billion. There is concern that a package that looks too large could worry financial markets, and the incoming economic team also wants to signal fiscal restraint.

 

In addition to spending on roads, bridges and similar construction projects, Obama is expected to seek additional funds for numerous programs that experience increased demand when joblessness rises. Among them are food stamps and other nutrition programs, health insurance, unemployment insurance and job training programs.

 

Obama advisers, including Christina Romer and Lawrence Summers, have been contacting economists from across the political spectrum in search of advice as they assemble a spending plan that would meet Obama's goal of preserving or creating 2.5 million jobs over two years.

 

Only one outside economist contacted by Obama aides, Harvard's Greg Mankiw, who served on Bush's Council of Economic Advisers, voiced skepticism about the need for an economic stimulus, transition officials said.

 

The advisers say they agree with economic forecasts that predict that without a government infusion unemployment will rise above 9 percent and not begin to come down until 2011.

Senate Majority Leader Harry Reid, D-Nev., said Wednesday that Obama has indicated that Congress will get his recovery recommendations by the first of the year.

 

In a letter to Peter Orszag, Obama's choice to be White House budget chief, Reid asked, among other things, that the stimulus package include tax relief for middle-class families, including a reduction in rates and an extension of the child tax credit.

 

A stimulus package that approaches $1 trillion could run into significant Republican opposition in Congress. It also could cause heartburn for moderate and conservative Democratic lawmakers, known as Blue Dogs, who oppose large budget deficits.

 

In February, Congress passed an economic stimulus bill costing $168 billion and featuring $600 tax rebates for most individual taxpayers and tax breaks for businesses. Pelosi largely bowed to Bush's insistence to keep the measure free of spending on federal projects.

 

The upcoming effort would dwarf that earlier measure as well as a $61 billion stimulus bill the House passed just before adjourning for the elections. That measure died after a Bush veto threat and GOP opposition in the Senate.

 

Chrysler to Shut All 30 Plants for a Month

 

Chrysler announced Wednesday it is closing all its North American manufacturing plants for at least a month, the starkest move taken by any automaker to date. All three companies have been taking dramatic steps as they struggle to survive the recession auto sales hit their lowest point in 26 years.

 

Chrysler said it would extend the normal two-week holiday shutdown that begins Friday to at least Jan. 19 at all 30 of its factories due to slumping sales. The lack of consumer credit is hampering sales and forcing the production cuts, Chrysler said in a statement. Chrysler, Jeep and Dodge dealers say they have willing buyers for vehicles, but they can't close the deals, Chrysler said.

 

"The dealers have stated that they have lost an estimated 20 to 25 percent of their volume because of this credit situation," the statement said. Chrysler spokesman Dave Elshoff said four plants will be temporarily closed beyond Jan. 19: two plants in Toledo, Ohio, and one each in Ontario and Detroit.

 

Toledo North, which makes the Dodge Nitro and Jeep Liberty, and Toledo Supplier Park, which makes the Jeep Wrangler, will be closed until Jan. 26. The Windsor, Ontario, plant, which makes minivans, and Detroit's Conner Avenue plant, which makes the Dodge Viper roadster, will be closed until Feb. 2, Elshoff said.

 

Chrysler sales were off 47 percent last month and are down 28 percent through the first 11 months of the year.

 

Laid-off workers at Chrysler get vacation pay for the normal holiday shutdown, then will receive unemployment benefits and supplemental pay from the company that total about 85 percent of their normal pay.

 

Also Wednesday, Chrysler Financial, the company's dealer and consumer finance arm, warned dealers that it may temporarily stop financing vehicle inventories if dealers keep pulling large amounts of their money out of an account that helps fund those loans. Chrysler Financial said in a letter to dealers dated Dec. 12 that recent withdrawals from the company's cash management account have been "unusual and unprecedented."

 

Amber Gowen, a spokeswoman for Chrysler Financial, said the company continues to provide financing for 75 percent of all Chrysler LLC vehicles shipped to U.S. dealers.