MarketView for December 31

 

Summary  

 

Here we are at the end of 2008 and for many the year is not going to missed as Wall Street closes out its worst performance since the Great Depression. However, you have to give the Street a little bit of credit; it did close out the year on a positive note as fresh efforts to stem the recession from Washington lifted equities for the second consecutive session.

 

For the year, the Dow fell 33.8 percent, for its bleakest year since 1931; the S&P skidded 38.5 percent; and the NASDAQ posted its worst year ever, with a 40.5 percent drop. When all was said and done, the S&P 500 found itself $5.02 trillion lighter than it was last year.

 

Only two stocks in the Dow Jones industrial average managed to end the year higher, Wal-Mart and McDonald's. The reason is actually quite obvious when you consider that  a major discounter like Wal-Mart and inexpensive fast-food restaurants like McDonald’s are just where consumers who are on tight budgets would go to spend that scarce cash as unemployment soared and the economy crumbled.

 

The biggest decliner on the Dow was General Motors, which fell 87.1 percent for the year as the company was compelled, along with other automakers, to plead for funds from Washington in an attempt to avoid bankruptcy.

 

On the S&P, the biggest decliner for the year was insurer American International Group which fell 97.3 percent after agreeing to an $85 billion bailout from the Federal Reserve in exchange for government control.

 

But the market rose on Wednesday on the hope that fresh initiatives from Washington will help stave off a deep recession. Late Tuesday, the Federal Reserve provided clarity on its plan to reduce mortgage costs and set a goal to buy $500 billion in mortgage-backed securities by mid-2009, a move that surprised many on Wall Street with its aggressiveness. By buying back the securities more quickly than expected, the expectation is that mortgage rates will fall at a faster pace and stimulate the beleaguered housing market.

 

For the week, the Dow and NASDAQ rose 3.1 percent while the S&P gained 3.5 percent. For the month, the Dow slid 0.6 percent; the S&P added 0.6 percent and NASDAQ climbed 2.7 percent.

 

Exxon Mobil was among the best performers in the Dow, rising 1.6 percent to $79.83 as oil rose 14 percent to over $44 a barrel. Chevron ended the day up 0.8 percent to close at $73.97.

 

The Fed move came a day after lawmakers gave an additional $6 billion to General Motors and its financing arm, GMAC, in another effort to stabilize the auto industry and prevent staggering job losses.

 

The Nasdaq received some positive momentum from large-cap tech companies that are seen as better able to withstand the economic crisis due to large cash reserves. Qualcomm was up 2.6 percent to $35.83, while Research in Motion gained 4.7 percent to $40.58.

 

Housing was another bright spot with Interest rates on. 30-year fixed-rate mortgages dropping for the ninth consecutive week to their lowest level since 1971, according to a survey released by home funding company Freddie Mac.

 

The drop in rates boosted demand for home loans, and mortgage applications held at the highest level in more than five years during the Christmas holiday week. On the downside, many of the mortgage applications are for refinancing.

 

Crude up 14 Percent

 

The price of crude oil rose 14 percent on the final trading day of 2008 in thin pre-holiday trade on Wednesday, tracking a jump in gasoline as a slowdown in domestic refinery activity sparked fears of tightening fuel supply this winter. Domestic sweet crude futures for February delivery settled up $5.57 per barrel at $44, down 54 percent from the $95.98 on the last day in 2007. London Brent settled up $5.44 at $45.59.

 

The weekly domestic inventory data on Wednesday showed a decline in refinery activity and a 500,000 barrel rise in crude stocks, compared with forecasts for a 1.5 million barrel decrease.

 

Inventories of refined products also rose, with gasoline stockpiles increasing by 800,000 barrels, while distillates rose by 700,000 barrels. Demand for both gasoline and distillates, which include heating oil, was lower than the same time a year ago, extending the trend for reduced consumption.

 

Markets also were watching a dispute over gas supplies between Russia and Ukraine, which may have to buy distillates from Europe if gas supplies from Russia are halted. Russia's gas export monopoly Gazprom said on Wednesday that talks with Ukraine over gas prices for 2009 have failed, making a cut-off of gas to Ukraine on January 1 unavoidable.

 

Faced with slumping demand and prices, OPEC this month said it was cutting output 2.2 million barrels per day (bpd), its deepest reduction ever. Evidence is mounting that OPEC is complying with its goal to reduce production, led by top exporter Saudi Arabia.

 

Current Week’s Unemployment Claims Suspect

 

The Labor Department reported on Wednesday that new claims for unemployment benefits fell last week but the improvement was probably a seasonal quirk rather than a turning point for the recession-ravaged labor market. Although the government reported the largest decline in claims since 1992, the data does not reflect a change in the labor market which has been weakening all year.

 

Specifically, initial claims for state unemployment insurance benefits fell by 94,000 claims to a seasonally adjusted 492,000 for the week ended December 27, as compared to an unrevised 586,000 claims the prior week, the Labor Department said. It was the lowest reading for initial claims since the week ended November 1.

 

A Labor Department official said the timing of the year-end holidays and volatility in factors used to seasonal adjust the data was likely to blame for the large decline in initial weekly claims, and he warned this situation could persist for several more weeks.

 

"The numbers seemed unbelievable but the states certified they were correct," the Labor Department official said.

 

The four-week average of new jobless claims, a better gauge of underlying employment trends because it smoothes out week-to-week volatility, fell to 552,250 claims, down from 558,000 the week before.

 

The number of people remaining on the benefits roll after drawing an initial week of aid rose by 140,000 to a more-than-forecast 4.506 million people collecting benefits in the week ended December 20, the most recent week for which data is available. This was the highest since the week ended December 4, 1982, when continued claims were 4.509 million.

 

Treasury Defines Its Stance on Automotives

 

The Treasury Department said on Wednesday that it will invest in any automotive company debt, equity or warrants that it determines to be "troubled assets."

 

According to the Department the guidelines for its Automotive Industry Financing Program will apply to Detroit automakers, auto finance companies and any other firms it views as important to the industry.

 

The guidelines offer more formality to a $17.4 billion bailout plan for General Motors Corp (GM.N) and Chrysler LLC that was rushed into effect on December 19. This was later supplemented by $6 billion in aid for finance company GMAC LLC.

 

The Department said it will determine a firm's eligibility for the program party on "whether a major disruption of the institution's operations would likely have a materially adverse effect on employment and thereby produce negative spillover effects on overall economic performance."

 

It said it also will consider whether the company is sufficiently important to the U.S. financial and economic system such that disruptions could hurt credit markets and reduce market confidence.

 

GMAC Puts in Place a $21.2 billion debt swap

 

GMAC completed a multibillion dollar debt swap on Wednesday designed to bolster its capital. That move comes on the heels of a $6 billion infusion from the government. GMAC said that holders of $21.2 billion of debt will swap their stakes for $15.7 billion of new securities plus cash. The exchange will ease GMAC's debt burden, though the lender fell short of its goal of 75 percent participation in the roughly $38 billion swap, instead getting about 56 percent.

 

GMAC's offer required investors to accept less than face value for their holdings. It was designed to enable Detroit-based GMAC to become a bank holding company, allowing it to tap low-cost funding and helping to assure its survival.

 

Pressure to complete the offer eased after the Federal Reserve awarded bank holding company status to GMAC on December 24, and the Treasury Department announced the $6 billion infusion five days later. Part of that money comes from the U.S. Treasury's $700 billion Troubled Asset Relief Program.

 

On Tuesday, GMAC said it would use the infusion to make loans to a wider range of borrowers. It also made some payments to GM for vehicle financing that it had previously deferred, GM said in a filing with the SEC. GMAC is the main lender to GM customers, and restoring its health is key to helping the nation's largest automaker stay afloat. Private equity firm Cerberus Capital Management is GMAC's other major owner.

 

GMAC accepted tenders from holders of $17.5 billion of old GMAC notes, and $3.7 billion, or 39 percent, of notes from its Residential Capital LLC mortgage unit. Apparently, GMAC investors will receive $11.9 billion of senior guaranteed notes and $2.6 billion of preferred stock that never matures, while the ResCap investors will receive $1.17 billion of new GMAC notes.

 

GMAC is trying to recover after $7.9 billion in losses in the 15 months ended September 30. Most of the losses came from ResCap, but credit problems on auto loans were also worsening.

 

Fitch May Cut Dow Chemical Rating

 

Fitch Ratings indicated on Wednesday that it may cut Dow Chemical's and Rohm & Haas's short-term issuer ratings and commercial paper ratings after Kuwait scrapped a deal to form a $17.4 billion petrochemical joint venture with Dow.

 

Dow and Rohm & Haas's long-term ratings also remain on review for downgrade from "BBB-plus," the third lowest investment grade. Fitch cut Dow's rating in July and placed both companies on review for downgrade after the acquisition was announced.

 

Standard & Poor's and Moody's Investors Service cut Dow's ratings on Monday and left them on review for further downgrade on the failed venture. Funds from the Kuwait joint venture, whose scrapping was announced on Sunday, were to be used to fund Dow's purchase of Rohm & Haas.

 

In the aftermath of the failed venture, "Dow would need to fund the Rohm & Haas acquisition (as it currently stands) with nearly all borrowed funds," Fitch said in a statement. As such, both companies' long-term ratings may be cut by more than one notch, Fitch said.

 

"Further weighing on both companies' ratings is the fundamentally weak state of the chemical industry from a demand and margin perspective," Fitch added. Fitch rates both companies short-term issuer and commercial paper ratings "F2," the second highest of six ratings.

 

Standard & Poor's and Moody's Investors Service cut Dow's ratings on Monday and left them on review for further downgrade on the failed venture. S&P cut Dow's corporate credit rating two notches to "BBB," the second-lowest investment grade, from "A-minus." Rohm & Haas' "BBB" rating was also placed on review for downgrade.

 

Moody's cut it rating on Dow one notch to a rating of “Baa1," the third-lowest investment grade, down from a rating of "A3." It also rates Rohm & Haas "Baa1" and has the company on review for downgrade.