MarketView for December 22

 

Summary  

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Wall Street began the holiday-shortened week in the red on Monday as bleak news from Toyota and Walgreen sent all three major equity indexes into negative territory for the day. However, keep in mind that trading volumes were quite low and will likely to stay that way throughout the week. Therefore, the market's movements, which are magnified by the low volume, may not be indicative of its long-term direction.

 

In addition, there is probably still some tax-loss selling taking place as investors sell securities at a loss to offset a capital gains tax liability, which also will likely contribute to the market's weakness until the year's end. However, there is no question but that the year-long recession will continue to cut into corporate profits, while retailers deal with a holiday shopping season that is likely to be the worst in nearly 40 years.

 

The only really good news for consumers is that light, sweet crude for February delivery fell $2.45, or nearly 6 percent, to $39.91 per barrel. The dollar was mixed against other major currencies, while gold prices rose.

 

Meanwhile, the auto sector was again a main source of anxiety, cutting short the relief over last week's bailout deal. Toyota reported that it would post an operating loss for the first time in 71 years, while the Street concerned itself with the possibility that Washington's rescue package for General Motors would leave its shareholders out in the cold.

 

A Credit Suisse analyst said the equity of GM may be wiped out as it complies with the restructuring targets laid out in the bailout. As a result, GM’s shares closed down 21.6 percent, or $0.97, at $3.52. GM’s shares closed down for the first time since the $17.4 billion emergency bailout from the Treasury Department was announced.

 

Walgreen said it was opening fewer stores than it previously planned as consumers curbed their spending, while rival CVS Caremark said customers are cutting back. Walgreen fell 4.2 percent to $24.98 and CVS trimmed earlier losses to edge down 0.2 percent to $26.91.

 

Concerns over the outlook for retailers continued to rise as cash-strapped consumers had kept a lid on shopping despite deep discounts over the last weekend before the holiday. The weak outlook for consumer spending and the economy dragged crude oil prices lower, again, taking oil producer shares down.

 

With just six trading days remaining in the year, there is little hope the markets will avoid having their worst yearly performance since the 1930s. The S&P 500 is down about 40 percent for the year.

 

Caterpillar was among the largest drags on the Dow Jones industrial average, falling 2.1 percent to $41.78 after the heavy equipment maker said it would cut white-collar pay by up to 50 percent and offer buyouts to some employees.

 

Energy and other resource companies slid as the price of oil dropped below $40 a barrel on signs the global economic downturn is further drying up fuel demand.

 

Crude Down Again

 

Oil dropped nearly 6 percent to below $40 a barrel on Monday on signs the global economic malaise was slowing fuel demand further.

 

Apparent oil consumption in China fell by 3.2 percent in November from a year ago, according to Reuters calculations, while crude imports into the world's No. 2 energy consumer dropped to the lowest level this year.

 

U.S. crude for February delivery settled down $2.45 at $39.91 a barrel. The January contract touched $32.40 on Friday before expiring, the lowest since February 2004, weighed down by rising stock levels at the Cushing, Oklahoma, delivery point for the New York Mercantile Exchange contract. London Brent crude settled $2.55 lower at $41.45 a barrel.

 

OPEC last week agreed to reduce output by another 2.2 million barrels per day, adding to agreements to cut 2 million bpd from global supplies made since September to help balance the market and prop up prices.

 

"Don't doubt the efforts of OPEC or its members to return the oil market to stability," Saudi Oil Minister Ali al-Naimi told reporters over the weekend in Qatar.

 

A senior OPEC delegate said the group was ready to reduce supply further if needed after the latest round of cuts were agreed last week, but added that he believed it had done enough for now to balance the market.

 

Asian refiners have yet to receive notice from OPEC's core Gulf members of any further reductions to oil supplies since the group announced fresh cuts last week.

 

Job Market Continues Downhill

 

Several key manufacturers added their names to the growing list of companies making job or benefit cuts to weather the global financial crisis. Caterpillar, the world's largest maker of heavy construction and mining equipment, said Monday it is cutting white-collar pay by up to 50 percent and offering buyouts to as many as 25,000 U.S. employees as it looks to cut costs during what it characterized as "uncertain times."

 

Caterpillar's actions, in addition to an across-the-board wage freeze, are its broadest moves yet in response to weakening demand for its earth-moving equipment, diesel engines and gas turbines. Until now, the cuts at Caterpillar have been more surgical, confined to specific product lines, like residential construction equipment plants or factories making diesel engines for big-rig trucks, or to contract workers who were not, technically speaking, Caterpillar employees.

 

In 2009, it said that compensation for its most senior executives will be cut by as much as 50 percent, while pay for senior managers will be reduced 5 to 35 percent, and other management and support staff will see cuts of up to 15 percent.

 

The cuts will come via reductions in its incentive compensation program and equity-based compensation and not through cuts in base pay.

  

Textron, the world's largest manufacturer of corporate jets, said it will eliminate 2,200 jobs worldwide to cope with a global downturn that has forced its customers to pare all but essential spending. Textron, which employs about 44,000 workers worldwide, said "further headcount reductions" and other cost-cutting actions were likely.

 

Other companies announcing plans to cut jobs and bring production in line with fast-falling demand just days before the Christmas holiday included Steelcase, a manufacturer of furniture equipment, Kemet, a manufacturer of passive electronic components, and diversified manufacturer Roper Industries Inc.

 

The moves announced Monday come just days after FedEx said it was forcing salaried workers to take at least a 5 percent pay cut and was suspending its 401(k) retirement plan match. The take backs should be considered to be an ominous sign of things to come at many other companies as businesses, even relatively healthy ones like FedEx and Caterpillar, adopt defensive crouches in response to the worst economic downturn in decades.

 

Caterpillar also warned that additional involuntary layoffs, like the one announced last week at its Mossville, Illinois diesel engine plant, could be necessary. It said it would also implement temporary factory shutdowns as needed "in response to economic conditions that impact the markets for its products."

 

In the meantime, some members of Caterpillar's management and most of its U.S.-based support staff are being offered buyouts. Caterpillar said eligible employees would have three weeks to elect to take part in the program.

 

"We considered waiting until January to make this announcement," Jim Owens, Caterpillar's CEO, said in a statement, "but decided it was better to communicate these plans with our employees as we approach the completion of our 2009 planning process." "We also wanted to give employees interested in the voluntary separation plan time to consider this decision and discuss it with family over the holiday break," Owens said.

 

Housing Market Remains Moribund

 

The desperate straits of many homeowners appeared in new data released on Monday, suggesting efforts to help them are having limited success. As the recession throws more people out of work, the rate of re-default on modified mortgages is rising and may worsen as the economy deteriorates, banking regulators said.

 

The Office of the Comptroller of the Currency and the Office of Thrift Supervision, both key U.S. banking regulators, said that after six months, nearly 37 percent of mortgage loans modified in the first quarter were 60 or more days delinquent. After three months, 19 percent were 60 or more days delinquent or already in the process of foreclosure, they said. Possible explanations for the high re-default rate include the faltering economy as well as loan terms were not being modified enough to help homeowners

 

After much browbeating from Congress, banks and other mortgage lenders are beginning to do more to modify home loans so that distressed borrowers can avoid foreclosure. However, the latest figures from regulators raise questions about how modifications are being done and how much they help, even as foreclosure rates hit record-setting levels.

 

Loan modifications up until a few months ago were, for the most part, temporary and not aimed at providing for sustainable payment plans, so it comes as no surprise that homeowners are defaulting. A spokesman for IndyMac Bancorp, which was taken over by the FDIC in July, said lenders were only tinkering with loan terms up until a few months ago and not making true modifications.

 

The housing crisis and the recession will keep Congress busy when it returns on January 6, 2009, from a holiday break, and preoccupy President-elect Barack Obama after he is sworn in on January 20. Between January 6 and the inauguration, congressional Democrats are expected to introduce legislation urging more aggressive efforts to help those homeowners who are in over their heads. A bill being drafted by Massachusetts Rep. Barney Frank might include a sweeping mortgage relief plan from Federal Deposit Insurance Corp Chairman Sheila Bair, a House aide said on Monday. The bill will likely mandate that more be done to help homeowners under the plan already under way, the Treasury Department's $700 billion Troubled Asset Relief Program.

 

Known as the TARP, that plan has given hundreds of millions of dollars in aid to banks and, more recently, to major U.S. automakers. However, Frank and other Democrats contend the TARP is doing little to help homeowners.

 

The data, some of which was released in preliminary form earlier this month, were based on information collected from some of the biggest U.S. financial institutions, including Bank of America, Citigroup and JPMorgan Chase.

 

Treasury 2-Year Note Yield Hits New Low

 

The high yield of 0.922 percent on Monday's auction of $38-billion of two-year Treasury notes was an historic low, the Treasury Department said. "The yield today is the lowest ever," the department said after the results were published.

 

The auction of $38 billion of the 2-year notes had a bid-to-cover ratio, which is an indication of demand, of 2.13, compared with an average bid-to-cover ratio of 2.31 in the previous 11 such 2-year auctions in 2008.

 

The markets have been watching for a yield under one percent for the notes since the Federal Reserve slashed official interest rates to range between zero and 1/4 of a percentage point last week. Meanwhile, Treasury debt prices traded steady at lower levels on Monday after a record-large auction of 2-year Treasury notes saw relatively decent demand.

 

The benchmark 10-year Treasury note was trading 13/32 lower in price for a yield of 2.17 from 2.13 percent late on Friday, while the 2-year note was trading 5/32 lower for a yield of 0.84 from 0.75 percent.