MarketView for December 18

 

Summary  

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Stock prices were lower again on Thursday after Standard & Poor's threatened to strip General Electric of its 'AAA' credit rating and slumping oil prices crippled energy shares. GE saw its share price fall 8.2 percent to $15.96 and ranked among the largest losers on the Dow Jones industrial average after S&P said there is at least a 1-in-3 chance that it will cut the company's credit rating from the top "AAA" tier in the next two years.

 

Chevron and Exxon Mobil kept GE company as oil fell almost $4, or about 10 percent, to settle near $36 a barrel on growing fears of falling demand. Chevron was down 4.9 percent at $73.03, while Exxon Mobil was down 5 percent at $77

 

The NASDAQ showed the ill effects of a downgrade by brokerage Jefferies & Co of Intel and other semiconductor stocks. The slowdown in the personal computer market, with declining sales of desktops and slowing sales of laptops, factored into Jefferies' downgrade of Intel's shares to "underperform" from "buy." The brokerage also slashed its price target on Intel to $11 from $26. Intel's stock lost 6.6 percent to $14.26 and ranked as the heaviest weight on the Nasdaq 100.

 

Wireless chip maker Qualcomm lost 2.8 percent to $34.12. It was the second-heaviest weight on the Nasdaq 100. Jefferies also downgraded Advanced Micro Devices to "underperform" from "hold," along with a cut in its ratings of seven other semiconductor stocks. Shares of AMD fell 2.6 percent to $2.23

 

After the close of regular trading, Oracle and Research in Motion reported quarterly earnings, which could help lift the NASDAQ in Friday's trading. Shares of Oracle rose 2.6 percent to $17.05 in extended trading, while Research in Motion's was down slightly.

 

Oil prices were lower despite OPEC's approval of a record output cut on Wednesday. U.S. crude for January delivery fell $3.84 to settle at $36.22 a barrel. The contract’s last day in Friday.

 

Investor sentiment was clouded by cautious corporate outlooks from a range of companies, including FedEx and Ingersoll-Rand. FedEx, considered an indicator of economic health, was down 2.1 percent at $62.60 after the company reported a rise in quarterly profit. However, the company said it would not provide an outlook for the third quarter of 2009 because of "significant economic uncertainty.

 

Ingersoll-Rand fell 4.7 percent to $15.59 after the diversified manufacturer cut its fourth-quarter and full-year 2009 revenue and earnings estimates, citing weakness in Europe.

 

Shares of General Motors were down16.3 percent to $3.66. The White House said it was nearing a conclusion on the bailout package that Detroit's Big Three automakers are seeking, even considering an "orderly" bankruptcy, as they struggle to cope with slumping demand and weakening consumer spending.

 

Earlier in the session, economic data on the labor market came in roughly in line with expectations, along with a survey from the Federal Reserve Bank of Philadelphia showing that factory activity in the Mid-Atlantic region contracted in December, but at a less severe rate than in the previous month.

 

Crude Prices Ignore OPEC

 

Despite announcing it's largest ever production cut just yesterday, OPEC’s move to arrest falling prices has spectacularly failed. How the 2.2 million barrel per day (bpd) quota cut will influence prices in the market over a longer period of time remains to be seen.

 

Apparently, the relationship between OPEC, who until yesterday produced 40% of the world’s oil supplies, and the price of a barrel of oil are not as intimately linked as perhaps the cartel first thought as an unprecedented demand slump in America pushes up U.S. crude inventories, further suppressing prices.

 

Last week the Energy Information Agency (EIA) said that U.S. oil demand was expected to grow by a meager 1m bpd, or 0.2%, over the coming two decades. The significantly reduced growth figures are a result of higher vehicle fuel standards and increased use of renewable fuels. Both will undoubtedly contribute to further stifling petroleum consumption.

 

Cited as the primary problem for OPEC in successfully stemming the fall in prices has been its inability to efficiently implement its own policies. The two cuts prior to yesterday’s announcement have enjoyed only partial compliance, at best, from member nations – particularly those whose economies are primarily dependent on production of the black gold.

 

The price of light, sweet crude for February delivery fell $2.10 to $42.51 barrel on the New York Mercantile Exchange. The January contract, which closes on Friday, fell 6 percent, or $2.41, to $37.65 after dropping as low as $37.68, levels last seen in the summer of 2004.

 

However, the higher prices for the February contract suggest that oil brokers and traders believe OPEC's unprecedented 2.2 million-barrel daily production cut, announced Wednesday, will tighten supply. The Organization of Petroleum Exporting Countries had already taken 2 million barrels of oil out of production, bringing total cuts to more than 4 million barrels per day.

 

Inventory data released by the EIA on Wednesday showed stockpiles at Cushing, Oklahoma, the key delivery point for the New York Mercantile Exchange contract rose by 4.7 million barrels last week.

 

This week's drop in oil prices comes as the dollar weakens against the euro, which peaked at $1.4719 in overnight trading, its highest point since late September. Typically, a weaker dollar sends investors scurrying into the oil markets because crude is bought and sold in dollars. That is what happened as prices made their historic run at $150 over the summer.

 

The severe drop-off in demand has basically eliminated almost all of the rules that traditionally govern trade in oil, as the OPEC production cuts show. Retail gasoline prices fell for 86 straight days, until Friday.

 

Retail gas prices, which hit a low of $1.656 a gallon on Friday, rose 0.3 cents to $1.67 a gallon Thursday, according to auto club AAA, the Oil Price Information Service and Wright Express. It is the third consecutive day of price increases, but is still down from $2.068 a month ago and $2.99 a year ago. Gasoline prices typically lag those of crude because it must be refined, and prices will likely drop again.

 

China on Thursday cut prices for gasoline, diesel and jet fuel as the government tries to revive economic growth. The price of diesel is being cut 18 percent while the price of gasoline will fall by 13.8 percent, effective Friday, according to the country's planning agency, the Cabinet's National Development and Reform Commission. Jet fuel prices will fall by 32 percent.

 

The cuts will help trucking companies, airlines, factories and others that are being squeezed by high fuel prices and a slump in sales.

 

The Department of Energy reported that natural gas storage levels fell much more than expected last week and continue to remain below year-ago levels. The Energy Information Administration said in its weekly report that natural gas inventories held in underground storage in the lower 48 states fell by 124 billion cubic feet to about 3.17 trillion cubic feet for the week ended Friday.

 

In other Nymex trading, gasoline futures rose 1.45 cents to $1.02 a gallon. Heating oil fell 2.71 cents a gallon while natural gas for January delivery fell less 6.8 cents to $5.551 per 1,000 cubic feet.

 

Fed to Leave No Stone Unturned

 

The Federal Reserve will take whatever steps necessary to keep financial markets open and end the country's year-long recession, Dallas Federal Reserve Bank President Richard Fisher said on Thursday.

 

"We will not shy from pursuing every practicable means of supporting the functioning of financial markets and stimulating the economy back to a steady state by employing new techniques that fit the current circumstance," Fisher said.

 

"We stand ready to grow our balance sheet even more should conditions warrant. For example, we will expand purchases of mortgage-backed securities, should we feel such purchases would be productive," he said.

 

Fisher, a well-known inflation "hawk," said at the current time the biggest concern for policy-makers was deflation and the Fed could worry about inflation later.

 

"Price pressures now are in the other direction," he said. "We have to do everything we can to lift the economy up and prevent deflation from taking hold."

 

Fisher is a voting member of the Fed's interest-rate setting committee this year and therefore supported the Fed's dramatic decision on Tuesday to hack its interest rate target to a range of between zero and 0.25 percent, from 1 percent.

 

He said the Fed knows it needs "an exit strategy" from its current policy course once the economy begins to recover and when that happens he will take up the cudgels against inflation once more.

 

"We're well aware that at some point, God willing, we'll have to tighten and we'll have to act and I'm here to tell you that my voice will be very loud at that juncture but right now that's not the issue," Fisher said.

 

With interest rates now effectively at or very near zero, the U.S. central bank has deployed a fleet of innovative, unconventional tools to protect the economy.

 

Fisher said the Fed's focus was on the other side of the balance sheet; on assets rather than liabilities, in an effort to lower private sector borrowing costs and boost spending.

 

"We believe that emphasizing the asset side of the balance sheet will do more to improve the functioning of credit markets and restore the flow of finance to the private sector.

 

"In the parlance of central banking finance, I consider this a more qualitative approach to 'quantitative easing,'" he said.

 

However, Fisher said that he was in no hurry to expand the range of assets the Fed will buy beyond the securities programs it has already announced: to support the agency mortgage-backed securities market and for top issuers of commercial paper.

 

"Before envisaging anything like that, I want to make sure what we've already announced works well," he said after the speech.

 

The economy entered into a recession last December and Fisher made plain that it would shrink by between 4 percent and 5 percent this quarter and not begin to recover until the second half of next year.

 

"Industrial production is falling sharply; consumption is cascading downhill; demand has evaporated as businesses and consumers alike pull in their horns and de-lever from excess indebtedness that fueled the prior boom," he said.

 

This has destroyed about 2 million U.S. jobs this year and Fisher warned the damage would continue to mount.

 

"Unemployment has increased to 6.7 percent at the last reading and appears to me to be headed in the direction of, and possibly past, 8 percent," he said in the speech.

 

On the other hand, he stressed that in certain important parts of the credit markets, things were improving, citing rates on mortgages backed by Fannie Mae and Freddie Mac, as well as the interbank market and debt for top borrowers.

 

"I think there is way too much emphasis on the negative side. There are some good signs. A 30-year fixed mortgage is...at a historic low. That is a sign of progress," he said.

 

Obama Will Try to Restore Stability and Legitimacy to Financial Markets

 

President-elect Barack Obama promised on Thursday to strengthen financial regulatory agencies and crack down on runaway "greed and scheming" in an effort to restore stability to a reeling U.S. economic system.

 

Obama named veteran regulator Mary Schapiro as chairwoman of the Securities and Exchange Commission and Gary Gensler to head the Commodity Futures Trading Commission. The president-elect said he would charge them with leading a broad overhaul of the financial regulatory system.

 

Schapiro is now chief executive of the Financial Industry Regulatory Authority, a self-regulatory body for the securities industry. She was an SEC commissioner for six years, then became chairwoman of the Commodity Futures Trading Commission in 1994 during the Clinton administration.

 

Gensler was a partner at Goldman Sachs for a decade and was undersecretary of the Treasury in the Clinton administration.

 

"These individuals will help put in place new, common-sense rules of the road that will protect investors, consumers and our entire economy from fraud and manipulation by an irresponsible few," Obama said in Chicago.

 

"These rules will reward the industriousness and entrepreneurial spirit that's always been the engine of our prosperity, and crack down on the culture of greed and scheming that has led us to this day of reckoning," he said.

 

Obama also named Georgetown University law professor Daniel Tarullo to fill one of the seven seats on the Federal Reserve Board, which is battling to ease a credit crisis and fend off a deepening recession.

 

Tarullo, Obama's choice for the Fed, has been one of Obama's top economic policy advisers. The 57-year-old Tarullo was President Bill Clinton's top adviser on international economic policy. He would replace Fed Governor Randall Kroszner, whose term expired in January, in a move that still leaves two vacancies that Obama can fill.

 

The SEC has come under heavy criticism after the Wall Street meltdown and financial scandals exposed lapses in its oversight. The collapses of investment firms Bear Stearns and Lehman Brothers prompted scathing criticism from lawmakers who said the agency, charged with monitoring publicly traded firms, should have flagged the problems earlier.

 

Criticism has intensified with the $50 billion investment fraud -- one of the biggest in history -- allegedly carried out over many years by Bernard Madoff.

 

"We have been asleep at the switch. Not just some of the regulatory agencies, but some of the congressional committees that might have been taking a look at this stuff," Obama said.

 

Obama said regulatory reform would be one of his earliest initiatives and he would release a detailed plan for regulatory changes. He said there was a need to potentially consolidate some regulatory agencies.

 

"We are going to have to greatly strengthen our regulatory apparatus, and update it from what worked for a 20th century financial system, so that it works in a 21st century financial system," Obama told reporters.

 

"I think the American people right now are feeling frustrated that there's not a lot of adult supervision out there," he said.