MarketView for December 9

Summary

Stocks moved higher on Wednesday as the dollar fell, lifting shares of financial, technology and natural resource companies. The move represented the first positive action in two days, in part because the dollar was rising in value. There has been a close correlation between the dollar and the S&P 500 index since early March. The correlation reflects in part the so-called carry trade, whereby investors borrow a currency cheaply in order to invest in higher-yielding assets. The U.S. dollar index dropped 0.4 percent on Wednesday.

Meanwhile, Citigroup announced that it plans to pay the Treasury back the funds it received under the TARP program. Apple ended the day up 4.2 percent to $197.80 after Oppenheimer wrote in a note to clients that Apple is preparing to launch a tablet personal computer in late March or April.

Treasury Secretary Timothy Geithner said the government would extend its $700 billion financial bailout fund to October 2010 for further efforts to fight home foreclosures and to ease credit for small businesses in the hopes of spurring job growth. The extension could help medium and small bank. Capital One gained 2.7 percent to $38.61 and Zions Bancorp ended the day up 1.8 percent at $13.98.

In the materials sector, shares of U.S. Steel rose 5.7 percent to $46.74, while Alcoa’s shares rose 1.6 percent to $13.08. Lifting the Dow was 3M Co, which ended up 3.4 percent at $79.74 after Citigroup upgraded the manufacturer's stock.

On the downside, Texas Instruments fell 1.3 percent to $25.99 a day after it gave a fourth-quarter earnings view that disappointed the Street somewhat.

 Standard & Poor's revised its outlook on Spain's credit to negative; a day after Fitch Ratings downgraded Greece's debt. The moves came amid fears that Dubai's debt problems could spread to other parts of the Gulf region.

We Are Not There Yet

Treasury Secretary Timothy Geithner said on Wednesday that his Department had extended the government's $700 billion financial bailout fund to October next year, because the economy still faced "significant challenges." Under the law, Geithner had to decide by December 31 whether to extend the program to October 3, 2010, or let it expire -- a move that would have forfeited about $330 billion in funds that have not been disbursed.

Geithner has said that he plans to utilize no more than $550 billion from the Troubled Asset Relief Program, allowing for some of the unspent funds to reduce budget deficits. The extension, opposed by many Republicans, will allow the Obama administration to tap the financial rescue program for further efforts to fight home foreclosures and to ease credit access for small businesses as it seeks to spur job growth.

"This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats," Geithner told House Speaker Nancy Pelosi and Senate Democratic leader Harry Reid.

However, Geithner also warned that withdrawing programs aimed at containing the crisis too early could prolong the economic downturn. "Too many American families, homeowners and small businesses still face severe financial pressure," he said. "Further, the recovery of our financial system remains incomplete. And near-term shocks to that system could undermine the economic recovery we have seen to date."

Geithner said the Treasury expects up to $175 billion in repayments from bailout recipients by the end of next year, with "substantial additional repayments thereafter." These funds, along with the $150 billion in TARP resources that will not be deployed, "should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate over time.

The Obama administration has said it expects the program will ultimately cost U.S. taxpayers at least $200 billion less than the $341 billion it had projected in August. This includes $25 billion of potential costs from commitments that will be made next year, commitments in 2010, the majority of which would come from "mitigating foreclosure for responsible American homeowners," Geithner said.

He said the new commitments would be limited to the housing market, capital for small banks and other efforts to boost small business lending, and increased support for the Federal Reserve's Term Asset-Backed Securities Loan Facility, which has been credited with reviving securitization of consumer, small business and commercial mortgage loans.

The decision came as a TARP watchdog group, the Congressional Oversight Panel, released a report saying that the program had failed to resolve key problems in the financial system, citing toxic assets still weighing down bank balance sheets, a sharp contraction of credit and the moral hazard associated with bailouts.

It credited the program, which has helped prop up big financial firms like Citigroup and insurer AIG, with helping to stabilize financial markets, but said it was doing too little to stem home foreclosures, which could reach 13 million over the next five years.

Inventory Data Indicates Demand Is Rising

The Commerce Department reported on Wednesday that total wholesale inventories rose 0.3 percent, ending a 13-month declining trend. They were down 0.8 percent in September. What this means is that wholesalers began a restocking process in October for the first time in more than a year, suggesting the economy could get a lift as a long-running effort by businesses to pare inventories reaches an end.

A moderation in the rate at which businesses are drawing down inventories contributed to economic growth in the July-September period, the first expansion after four straight quarters of decline.

With the liquidation of inventories appearing to be in its final stages, the economy would remain supported through next year. The data helped Wall Street overlook a weak forecast for the technology sector, as well as concerns over the credit ratings of Greece and Spain

Inventories of durable goods -- items meant to last -- fell 0.4 percent at the wholesale level, but auto stocks rose 1.7 percent, the largest such gain since December 2008, the Commerce Department said. Nondurable inventories were 1.5 percent higher, the largest rise since June 2008, as wholesalers added to stocks of drugs, alcohol, farm products and petroleum products.

Sales at wholesalers rose 1.2 percent in October, making it the seventh straight monthly increase, after a rise of 1.3 percent the previous month. The rise in sales lowered the inventory-to-sales ratio, a measure of how long it would take to sell stocks at the current sales pace, to 1.16 months' worth from September's 1.17.

It was the seventh straight monthly decline and brought the ratio to its lowest since August last year, a sign that inventories that had piled up as the economy plunged around the turn of the year had largely been worked off.

Bank of America Pays Back The Government

Bank of America fully repaid the $45 billion in aid it took during the height of the financial crisis, the bank reported on Wednesday. According to the bank, it sent the Treasury a mix of cash from its corporate coffers and money raised as part of a $19.29 billion securities offering earlier this week to settle the outstanding Troubled Asset Relief Program, or TARP, investment.

Bank of America, the largest bank by assets, estimated that after repaying the taxpayer funds, its Tier 1 Common Capital ratio -- a metric used by investors and regulators to measure a bank's health -- improved to about 8.4 percent from 7.3 percent as of September 30. The repayment also comes amid reports Citigroup Inc -- the other bank that received extraordinary taxpayer assistance -- is looking to repay its $45 billion in aid.

The Treasury Department stated that after receiving Bank of America's payment, the total amount of TARP funds repaid so far totaled $116 billion. The Treasury forecast total repayment could reach $175 billion by the end of 2010.

Chief Executive Ken Lewis has stated publicly throughout the year that repaying TARP was a top priority before he retired. He is slated to retire on December 31. The bank first announced an agreement with the U.S. Treasury to repay TARP on December 2.

The company originally received the government aid in two payments, an initial $25 billion in the fall of 2008 at the height of the financial crisis and another $20 billion in January 2009 as part of the deal to purchase Merrill Lynch.