MarketView for December 30

Summary  

It was a better day on Wall Street on Tuesday, although volume was still a very low 948.8 million shares trading on the Big Board as the equity indexes tried to exit the year with a little dignity still in tact after the government expanded its bailout of the auto industry, raising hopes that Congress would continue to take steps to minimize the severity of the year-long recession.

The Bush Administration said late Monday it would extend an additional $1 billion loan to General Motors, while at the same time taking a $5 billion stake in the automaker's financing arm, GMAC, in an effort to ease the credit crisis. GM rose 5.6 percent to $3.80, while Ford added 3.2 percent to $2.29. On Tuesday, GMAC announced easier financing terms for car and truck buyers and GM announced zero percent financing for some vehicles, which could help bolster sales.

The Dow is now down 1.8 percent month-to-date after closing down 5.3 percent in November and 34.7 percent year-to-date. The S&P is up almost 18 percent since hitting an 11-year low on November 20, but is still down about 40 percent for 2008.

The NASDAQ was helped out by the rise in shares of some large cap technology stocks of companies that have larger cash reserves and are seen as better positioned to withstand the economic slump. For example, the shares of Qualcomm rose 2.5 percent to $34.94, while Oracle Corp ended the day up 3.5 percent to $17.83. IBM was the leading advancer on the Dow, ending the day up 2.8 percent at $83.55.

Meanwhile, the markets seemed to ignore the latest round of economic reports that pointed to a deepening recession. Prices of single-family homes were down a record 18 percent in October, while consumer confidence also fell to a record low.

Rohm & Haas saw its shares jump 11.9 percent to $59.70 after the Financial Times reported Dow Chemical could tap a $13 billion bridge loan or renegotiate the price to salvage its $15 billion planned takeover of the company. The deal was jeopardized after Kuwait decided to scrap a joint venture with Dow Chemical over the weekend, depriving Dow Chemical of financing it planned to use for the acquisition. Dow’s shares posted a gain of 1.5 percent to $15.55.

Economic Data Continues to Look Grim

The economy extended its run of record-breaking dismal data on Tuesday, with consumer confidence and home prices registering a pair of grim milestones. Consumer confidence fell to a record low for the month of December as the worst job market in 16 years hammered sentiment, the Conference Board reported on Tuesday.

The Conference Board said its Consumer Confidence Index fell to 38.0 in December from a slightly downwardly revised 44.7 in November. Not surprisingly, consumers also rated their present situation poorly, with the index of this measure tumbling to 29.4, its lowest since April 1992, from November's 42.3.

"The further erosion of the Consumer Confidence Index reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008," said Lynn Franco, director of the Conference Board's Consumer Research Center. "The overall economic outlook remains quite dismal for the first half of 2009, and only a modest recovery is expected in the second half," she said.

So it is little wonder that the International Council of Shopping Centers reported that this holiday shopping season has been the worst since at least 1970. Sales at U.S. chain stores fell 1.8 percent in the week ended December 27 compared with the previous year, while sales fell 1.5 percent compared with the prior week, according to the ICSC-Goldman Sachs Weekly Chain Store Sales index.

The ICSC expects holiday sales in November and December to fall 1.5 percent to 2 percent versus the year-ago period. That would represent the first decline since the ICSC began tracking holiday sales in 1969.

Single-family homes in October posted a record price decline of 18.0 percent from a year earlier, according to the closely watched Standard & Poor's/Case-Shiller Home Price Indices. And business activity in the Midwest continued to shrink in December but at a less severe rate than expected and input prices fell sharply. All in all it was a grim reminder that the economy is in for a tough slog after a year-long recession, which many expect to continue during the first half of 2009.

If there was any good news it was that the Institute for Supply Management-Chicago business barometer rose to 34.1 for December from 33.8 in November. The reading was better than the 33.0 economists had forecast, but was still well below the 50 level that separates expansion from contraction.

High among the problems facing consumers is the spiraling job losses being posted in recent months. Employers cut 533,000 jobs from their payrolls in November alone, the most in 34 years, according to Labor Department data released earlier this month. The Conference Board data reflected this, with its "jobs hard to get" index rising to 42.0 in December, the highest since December 1992. That was up from 37.1 in November.

The Standard & Poor's/Case-Shiller composite home price index of 20 metropolitan areas fell 2.2 percent in October from September. S&P said its composite index of 10 metropolitan areas dropped 2.1 percent in October from September for a 19.1 percent year-over-year drop, also a record.

Crude Down Again

The price of domestic sweet crude oil futures for February delivery were lower again on Tuesday as fear about demand in an increasingly recessionary economy outweighed expectations of further Saudi supply cuts in February and tension in the Middle East due to the Israeli-Hamas conflict. The market took in data showing a sharp fall in weekly U.S. retail gasoline demand, and record low consumer confidence in the world's largest energy user in December.

U.S. crude settled down 99 cents per barrel at $39.03. London Brent settled down 40 cents per barrel at $40.15. Crude prices had increased as much as 12 percent on Monday after Israel launched its fiercest air offensive in Hamas-ruled Gaza in decades.

Retail gasoline demand for the week ending December 26 fell 3.8 percent from the same week a year ago as consumers tightened their belts over Christmas, according to a MasterCard Spending Pulse report. The price of crude has fallen more than $100 from a record peak above $147 a barrel in July, with the recession denting demand in large consumer nations.

To help support a higher price for crude, OPEC has already announced its largest ever production cut of 2.2 million barrels per day. Saudi Arabia is rumored to be planning to cut oil supplies even further in February, potentially taking output below its agreed OPEC target.

OPEC has already has cut output three times in an effort to remove about 5 percent of world supply. OPEC oil supply, excluding Iraq and Indonesia, is expected to fall by 400,000 bpd in December as members increase their compliance with the announced cuts. If it does so, OPEC has more than delivered on its pledge to lower the supply from 11 members to 27.3 million barrels per day.

GM Making It Easier To Buy

General Motors and its GMAC financing affiliate launched programs on Tuesday designed to bring car and truck buyers back into showrooms, as the nation's largest automaker tries to revive its sagging fortunes. GMAC modified its credit criteria and will now extend loans to retail customers with credit scores of 621 or higher, eliminating a restriction that required a score of 700.

That means that GMAC can now lend to a wider range of potential customers, two-and-a-half months after implementing the significantly stricter policy. However, a credit score of 620 or lower to be "subprime." The median credit score in the country overall is 723, according to Fair Isaac Corp's myFICO unit. Sales at GM were down 41 percent in November in part because many customers could not obtain financing from GMAC.

Meanwhile, GM is offering zero-percent financing on several vehicles, and rates no higher than 5.9 percent on more than three dozen 2008 and 2009 models. The offer expires on January 5. Many eligible vehicles also carry cash discounts of $500 to $4,250.

The changes came a day after the Treasury Department agreed to take a $5 billion stake in GMAC, and lend GM as much as $1 billion to support GMAC, in an effort to help ensure that both survive. GMAC has traditionally provided the bulk of financing for GM retail customers, and also financing that dealers rely on to carry vehicle inventory. GMAC has struggled under the weight of $7.9 billion of losses in the 15 months ending September 30, largely tied to soured mortgages in its Residential Capital LLC unit.

The Treasury Department agreed to buy $5 billion of senior preferred equity in GMAC. It is lending GM up to $1 billion to let the automaker take part in a rights offering to support GMAC's reorganization as a bank holding company, which won Federal Reserve approval on December 24. GMAC is owned by GM and private equity firm Cerberus Capital Management LP. The government financing will result in both reducing their ownership stakes.

GMAC is the latest non-bank financial company to qualify for help under the Treasury Department's $700 billion Troubled Asset Relief Program. Unlike many lenders that received TARP funds, GMAC said it will use its money to provide affordable credit to consumers.

The $6 billion of financing is in addition to a potential $17.4 billion that the government committed on December 19 to help GM and smaller rival Chrysler LLC avoid possible bankruptcy. Cerberus also owns a majority of Chrysler.

The cost of insuring $10 million of GMAC debt against default for five years fell to $1.4 million upfront plus $500,000 annually, according to Phoenix Partners Group, compared with $2.15 million upfront on Monday. Credit default swaps for Ford Motor Co's finance arm also declined.

GM's deeply distressed 8.375 percent bonds maturing in 2033 rose 1.8 cents on the dollar to 16.8 cents, yielding 49.9 percent to maturity, according to a bond pricing service.