MarketView for December 14

Summary

It was another good day on the Street on Monday, as the major equity indexes managed to close at what appears to be 14-month highs as Abu Dhabi's $10 billion in aid to help Dubai avoid default eased concerns and a takeover deal by Exxon Mobil raised optimism about mergers and acquisitions activity. Abu Dhabi said on Monday it will provide Dubai $10 billion in bailout money, with $4.1 billion for payment on a maturing bond. Exxon Mobil said it would buy natural gas supplier XTO Energy Inc in an all-stock transaction valued at about $30 billion, excluding debt.

The closing levels for the Dow and the S&P 500 represent 14-month highs, while the Nasdaq ended at its highest level in 15 months.

Citigroup laid out a plan to repay the money it owes the U.S. government, including raising money by selling $17 billion of common stock immediately, as the bank looks to end the restrictions on executive pay that came with the funds.

Sun Microsystems saw its share price rise 11 percent to $9.28 after European Union regulators signaled they could clear Oracle's $7 billion takeover of Sun after Oracle promised measures to ease competition concerns. Oracle's stock rose 2.3 percent to $23.31.

Visa’s shares rose 4.2 percent to $84.77 after Standard & Poor's said late Friday the credit card company will replace telecommunications equipment maker Ciena in the S&P 500 after the close of trading on December 18. S&P also said Bristol-Myers Squibb's spin-off, Mead Johnson Nutrition Co, will replace bond insurer MBIA in the S&P 500 on the same date. Mead Johnson shares climbed 1.8 percent to $43.23.

Citi to Pay Back Uncle Sam

Citigroup plans to repay the money it owes taxpayers, including issuing about $20 billion of capital, as the bank looks to end the executive pay restrictions that came with the funds. The deal will begin to dissolve what has been a troubled relationship between Citigroup and the government, which bailed out the bank with three rescues last year and this year but also pressured it to sell businesses and remove executives.

The transaction is also a sign of a shift in the financial crisis, as regulators worry less about injecting capital into banks to stabilize them and more about properly monitoring banks to prevent the next crisis.

Specifically, Citigroup plans to sell $17 billion of common stock and about $3.5 billion of securities that turn into common shares in three years. Early next year, the bank may sell more than $4 billion of additional securities.

For its part, the government will stop guaranteeing a pool of toxic Citigroup assets against excessive losses, and will sell the nearly $30 billion of Citi shares it owns over the next year. Up to $5 billion of the shares will be sold alongside the bank's share sale this week. The government estimates it could see a profit of $13 billion to $14 billion on its investment in the bank.

The cost of protecting Citigroup's debt against default in the credit derivatives market fell by around 0.22 percentage point, to 1.37 percent, or $141,000 per year for five years to insure $10 million in debt, according to Markit. That cost has fallen from around 2.0 percent a week ago.

The TARP deal is a victory for Citigroup CEO Vikram Pandit, who has repeatedly clashed with regulators who have called for his ouster. Citigroup's multiple bailouts left the government with extraordinary say over the bank's operations, most notably with regard to compensation.

The Obama administration's pay czar, Kenneth Feinberg, had a say over the pay of Citigroup's top 100 employees for 2009 pay. In 2010, when Citigroup repays the $20 billion of TARP securities and ends its loss-sharing agreement with the government, Feinberg will no longer have say on the bank's pay.

The bank cannot promise higher pay in 2010 to make up for 2009 pay cuts, a Treasury official said on Monday. Citigroup will also reduce annual interest expenses by about $2 billion as part of the deal with the government.

Nonetheless, the agreement also represents a calculated gamble by Pandit and regulators that the bank will be able to ride out an uneven economic recovery. The bank lags many of its rivals.

Citigroup is taking an $8 billion pre-tax loss on the trust preferred purchase, because the securities were recorded on the bank's books at less than their face amount. Canceling securities linked to the government's asset guarantee will result in another $2.1 billion of pre-tax losses. Those losses eat into the benefit of raising capital.

The dilution to shareholders from this deal is about 15 percent, which is higher than the dilution Bank of America faced when it repaid the government earlier this month, analysts said.

When Citigroup's transactions are done, the bank will be left with a Tier 1 common ratio of 9 percent, putting it above Bank of America's 8.4 percent and JPMorgan's 8.2 percent, according to a Citigroup presentation to investors.

Citigroup borrowed $45 billion last year under TARP. This year, the government agreed to convert $25 billion of those funds into Citigroup common stock, leaving the United States with a roughly 34 percent stake in the bank. That stake is now worth nearly $30 billion.

Crude Prices Fall as Commodities Rise

The prices of most commodities rose on Monday, with the exception of energy futures, which were hampered by ongoing concerns over weak demand. A falling dollar helped buoy prices for gold, silver and other metals, while agriculture futures got a boost from an upbeat analyst report.

Oil prices fell for a ninth day in a row over concerns that demand will stay in a slump. Crude supplies have been on the rise as refiners cut back on production because of weak demand. Light, sweet crude for January delivery settled down 36 cents per barrel at $69.51, after falling as low as $68.59.

Gold for February delivery edged up $3.90 to settle at $1,123.80 an ounce. Prices have fallen 8.4 percent from a record high of $1,227.50 hit earlier this month. For the year, prices are still up 27.1 percent.

March silver rose 25 cents to $17.34 an ounce, while January platinum rose $24.30 to $1,447 an ounce. December palladium rose $6 to $366.15 an ounce. March copper futures rose 1.9 cents to $3.152 a pound. Gasoline futures lost 1.49 cents to $1.8267 a gallon, while heating oil futures dipped less than a cent to $1.9082 a gallon.

Grain prices rose on the Chicago Board of Trade after a bullish research note from Deutsche Bank said agriculture futures are poised to rise sharply in the coming months. Low crop inventories combined with forecasts for strong global demand should support higher prices.

January soybeans rose 20 cents to $10.55 a bushel, while March wheat futures added 6 cents to $5.435 a bushel. March corn rose 4 cents to $4.085 a bushel. Among other soft commodities, March coffee rose 3.25 cents to $1.459 a pound, while January sugar futures rose 1.28 cents, or 5.5 percent, to 24.71 cents per pound.