MarketView for December 19

 

Summary  

I

Although the S&P 500 and the NASDAQ managed a small gain on Friday after the federal government threw a $17.4 billion lifeline to General Motors and Chrysler, it was not to be for the Dow Jones industrial average as energy stocks, including Chevron and Exxon Mobil due to the price of crude oil falling for the sixth day in a row on fears that the anemic economy will continue to reduce demand stocks, took their toll on that particular index. Exxon Mobil slumped 2.6 percent to $75.02, while Chevron fell 3 percent to $70.85. Oil fell to $33.87 a barrel, its lowest settlement since February 10, 2004.

 

Initial optimism over the government's bridge loan to the automakers, which sent stocks up as much as 2 percent, faded as investors digested terms of the bailout that give them a relatively short period of time to repair their problems.

 

Over the last three days, the Dow has fallen 3.9 percent. For the month so far, the Dow is down 2.8 percent. For the week, the Dow fell 0.7 percent, while the S&P 500 rose 0.8 percent and the NASDAQ gained 1.5 percent. The NASDAQ was the best-performing index, after Oracle and Research in Motion helped, after the companies reported better-than-expected earnings late Thursday.

 

Research in Motion was among the NASDAQ’s major advancers, ending the day up 11.4 percent to close at $42.83. In addition to posting better-than-expected third-quarter results after the close on Thursday, RIM posted an optimistic outlook for its fourth quarter.

 

Friday marked the end of the convergence known as quadruple witching, in which settlement and expiration of four different types of futures and options contracts happen in a two-day period. This can add to volatility, but on Friday, that was not the case. The Chicago Board Options Exchange Volatility Index, which is Wall Street's favorite fear gauge, fell 5.09 percent to end at 44.93.

 

Retailers' shares also weighed on the market, as the S&P Retailers Index .RLX fell 1.1 percent while heavy snow and inclement weather across large parts of the United States threatened to damage sales during the last weekend of what is expected to be a weak holiday shopping season. A drop in retailers' stocks, including Target and JC Penney helped to curtail the S&P's earlier gains. Target's shares ended the day down 2.8 percent to $34.42,while JC Penney shares lost 4 percent to close at $19.92.

 

Shares of General Motors rose 23 percent to $4.49 after the White House said it would be irresponsible to let the companies go bankrupt in a time of economic crisis. Wall Street had been quite worried over the possible ramifications of a potential failure of one of Detroit's big automakers. The government loans would be called back if they cannot restructure enough to ensure their survival. Shares of Ford rose 3.9 percent to $2.95.

 

Oracle's stock climbed 7 percent to $17.78 and ranked as the No. 1 boost to the Nasdaq 100 .NDX a day after reporting second-quarter earnings that were in line with estimates, while posting a sales decline that was less than feared.

 

Bailed Out Temporarily

 

The While House announced a $17.4 billion emergency loan program for GM and Chrysler on Friday in a dramatic step to stave off collapse of the industry and save hundreds of thousands of jobs from falling victim to a deep recession. President Bush said it would be irresponsible in a time of economic crisis to let carmakers die.

 

The government will offer up to $17.4 billion in loans to the U.S. automakers, reeling from a slump in consumer demand, and expects General Motors and Chrysler LLC to access the money immediately. The White House said the loan agreements had been signed.

 

Ford Motor Co, the other firm in Detroit's storied Big Three, said its liquidity is adequate for now and it did not need a loan at this point.

 

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers," Bush said, warning that to do nothing would deepen and prolong the U.S. recession.

 

Some $13.4 billion of the total package will be made available in December and January from a $700 billion Wall Street bailout fund that was originally designed to rescue struggling financial institutions.

 

Bush attached a string of conditions to the three-year loans and set a deadline of March 31 for the companies to prove they can restructure enough to ensure their survival or have the loans called back.

 

Democratic President-elect Barack Obama, who takes over from Bush on January 20 and so will inherit the handling of the deal, welcomed the loan move as a necessary step. But he said he wanted to make sure workers do not bear the brunt of the restructuring.

 

"My top priority in this administration is to create 2.5 million new jobs and I want some of those jobs to be in the auto industry," Obama said at a news conference. Obama has been calling for short-term loans to the sector based on steps toward long-term viability. Other Democrats and the main auto labor union assailed the deal as unfair, saying workers were going to have to concede too much.

 

One provision in the loan terms on worker pay brought protests from the United Auto Workers union, and then a change in wording by the U.S. Treasury. The Treasury altered the wording of the terms for automakers to seek reductions in wages and benefits to levels "competitive with" Japanese rivals.

 

Under wording released earlier in the day, the Treasury said it would require reductions to levels "equal to" average compensation paid per hour and employee by Toyota, Nissan and Honda in the United States. The change was described as a correction of a grammatical error by a Treasury spokeswoman.

 

GM's CEO, Rick Wagoner, said the company would now focus on fully implementing its restructuring plan and was confident of meeting the government’s requirements. At the same time, Chrysler, widely seen as the weakest of the Big Three, said concessions would happen quickly and it would continue to undertake "significant cost reductions."

 

Private equity firm Cerberus said in a statement it would use the first $2 billion of proceeds from Chrysler's auto financing arm Chrysler Financial to backstop the government loan allocated to its struggling Chrysler car making unit.

 

Ford, while not seeking an immediate loan under the program, has said it would like a line of credit from the government only to be used if its finances worsen significantly in 2009.

 

Some Republicans opposed to bailing out Detroit were dismayed at the loan package. "I find it unacceptable that we would leave the American taxpayer with a tab of tens of billions of dollars while failing to receive any serious concessions from the industry," said Arizona Republican Sen. John McCain.

 

The White House presented a dire picture if it did not act, saying that if the auto industry were to collapse, it could reduce U.S. economic growth by more than 1 percent, put about 1.1 million workers out of jobs and cost some $13 billion in new unemployment claims.

 

The White House moved on its own after Republicans in the Democratic-controlled U.S. Congress stalled a deal last week. That plan followed weeks of negotiations that included desperate pleas on Capitol Hill from the auto chiefs.

 

The loan conditions included limits on executive compensation. Auto companies must pay back all their loans to the government, and show that their firms can earn a profit and achieve a positive net worth. The automakers would also have to provide warrants for non-voting stock.

 

Both GM and Chrysler have said a bankruptcy filing is not an option they would chose because of the risk that it would drive more consumers away from their brands. Both have idled plants and laid off thousands of workers across North America.

 

A bankruptcy filing by one company could topple suppliers and endanger the remaining two companies because of the overlap in their key parts suppliers. The Treasury said the move to help the automakers had effectively exhausted the initial $350 billion of the Wall Street bailout funds approved by Congress and that it now needs to access the rest of the $700 billion.

 

The remaining $4 billion in autos aid is contingent on the administration seeking the second half of the Troubled Asset Relief Program, an administration official said. The loans would have an interest rate of at least 5 pct but could rise to 10 pct if the carmakers default, officials said.

 

Canadian Prime Minister Stephen Harper was set to announce an aid package for his country's auto industry on Saturday. That aid could amount to several billion dollars.

 

Credit Freeze May Be Defrosting

 

Central banks around the world announced their latest effort to pump cash into the financial system on Friday but noted overall demand for U.S. dollars has declined, in a sign the global credit crunch may be easing. Led by the Federal Reserve, they said they will continue to provide U.S. dollar liquidity in the first quarter of next year, although demand for dollar funding in Europe is showing signs of falling.

 

The Fed will hold three auctions of 28-day loans through its Term Auction Facility and three auctions of 84-day loans; while the European Central Bank (ECB) and Swiss National Bank said they will offer as much 7- 28- and 84-day dollar funds as banks need.

 

"Central banks will continue to work together to address pressures in global money markets," the Fed said in a statement. The Bank of England and Bank of Japan made similar announcements on the provision of dollar liquidity.

 

Global demand for dollar funds rocketed after the collapse of Lehman Brothers in September unleashed the darkest and most serious phase of the global financial market crisis.

 

Central banks subsequently unveiled a series of coordinated measures to ease the pressure on the global financial system, including dollar liquidity operations, currency swaps and even interest rate cuts in October.

 

Indications are, however, that market stresses have since eased. Interbank lending rates have fallen and spread -- such as the premium of interbank lending rates over expected policy rates, and interbank dollar rates over Treasury bill yields -- have narrowed sharply.

 

In light of this apparent easing in money market tensions, the ECB said it will scrap in January the FX swaps operations it had been holding in parallel with dollar liquidity provisions, due to a lack of demand.

 

"Given the limited demand, the operations in the form of EUR/USD foreign exchange swaps will be discontinued at the end of January but could be started again in the future, if needed in view of prevailing market circumstances," the ECB said in a statement.

 

The ECB's dollar liquidity provisions will continue to take the form of repurchase operations against ECB-eligible collateral and to be carried out as fixed rate tenders with full allotment.

 

The BoE, which consistently saw less demand from UK banks at its dollar auctions in recent months, also said it would provide banks with as much funds as they need but waning demand will keep further auctions under review.

 

"In the UK, there has been declining participation in the U.S. dollar repo operations recently, as access to dollar liquidity in the market has improved," the BoE said on Friday.

 

"The Bank will continue to conduct dollar repo operations, including its weekly tenders, as long as necessary but will keep them under review if market conditions continue to improve," it continued.

 

Operations would be carried out at a fixed rate with full allotment of all bids, the BoE added.

 

Downward Spiral of Crude Oil Continues

 

Oil fell over 6 percent on Friday, as fears of economic slowdown weighed heavier than proposed production cuts by the world's major oil exporters.

 

U.S. light crude for January delivery, which expired Friday, settled down $2.35 at $33.87 a barrel, the lowest since February 10, 2004, when it ended at the same level. The more active February contract settled up 69 cents at $42.36 a barrel with cuts in OPEC production expected to take hold in that month. London Brent crude gained 64 cents, settling at $44.00.

 

Friday marks the sixth consecutive day that the price of crude oil has declined, falling more than 29 percent from the $47.98 seen when prices last rose on December 11. Oil prices have fallen more than $100 from their peak above $147 in July as a global economic downturn ripped into global oil demand, and looked set for one of their biggest weekly declines for years. Industry forecasters predict that global oil demand will contract for the first time since 1983.

 

Pledges by OPEC to cut output by 2.2 million barrels per day (bpd), the largest ever reduction by the producer group, failed to support January prices. However, it is doubtful OPEC, whose third production cut since September has brought its total reduction to more than 4 million bpd or 5 percent of world supply, will fully implement the agreed cuts.

 

Saudi Arabia's Oil Minister Ali al-Naimi, speaking in London on Friday, said the kingdom would be pumping less oil in January and would be at its new output target in line with the group's latest cut. That reassurance appeared to be having some impact on the market in late European trade on Friday.

 

OPEC President Chakib Khelil said on Friday he believed oil prices had found a floor around current levels.

 

Record Low Mortgage Rates Could Unfreeze Housing

 

The average 30-year mortgage fell more than 1/4 point in the week ended December 18, to 5.19 percent, the lowest since Freddie Mac started its weekly survey 37 years ago. It was the seventh straight weekly decline and brought rates down from about 6-1/2 percent in October. The decline was also the result of the Federal Reserve cutting its benchmark federal funds rate target to a record low this week.

 

Deep stock market losses and two years of home price declines have shredded wealth for many homeowners who may be able to restore some of their losses with cheaper borrowing. An overabundance of unsold homes has been one of the biggest thorns in this housing crisis. In addition, much lending froze amid huge write-downs by banks on soured mortgages and record foreclosures.

 

The latest interest rate cuts may be enough to entice some buyers who were waiting for even lower prices. Borrowers with strong credit have plenty of homes from which to choose. It makes it easier that he doesn't have to sell a home, a stumbling block for many buyers in a struggling market.

 

Borrowers without pristine credit and easily documented income will have a harder time. Stringent lending standards could mean that at least a third of those who apply to refinance will fail to win approval, several analysts said.

 

Many owners also have mortgages that are higher than their homes' value, and won't be able to refinance.