MarketView for February 11

 

 

Summary

 

After oscillating during the day, stock prices managed to eek out a small gain, sending the major equity indexes into positive territory for the day on Wednesday. Driving the late-in-the-day gain was word that Congress had reached a compromise deal on a $789 billion stimulus package that is seen as crucial to reviving the economy. Senate majority leader Harry Reid said differences have been bridged between the House and Senate versions of the bill and that votes by both Houses could come as early as Thursday.

 

Stock prices jumped around during the day, hurt by falling crude oil prices and declines in technology shares before finally holding gains on the stimulus package. Bank shares, which had traded higher throughout the day as bargain-hunters moved in after Tuesday's 14 percent sell-off, added to gains on hopes the stimulus package will reinvigorate the economy.

 

JPMorgan Chase was among the largest gainers among the companies making up the Dow Jones industrial average, rising 6 percent to $26.09. Citigroup rose 10.2 percent to $3.69 and Bank of America was 9.2 percent higher to close at $6.07.

 

Exxon Mobil hurt the Dow, falling 2.1 percent as crude oil futures fell more than 4 percent, weighed down by a large increase in domestic crude inventories last week and a gloomy oil demand forecast from the International Energy Agency

 

Gains on the NASDAQ were capped as tech stocks were hit by a disappointing profit outlook from Research in Motion and a loss from graphic chipmaker Nvidia that was greater than expected, highlighting the slowdown in both business and consumer spending. Research In Motion was the biggest loser on the Nasdaq, falling 14.5 percent to $48.76 while Nvidia tumbled 12.6 percent to $8.15.

 

Crude Down Sharply

 

The price of domestic sweet crude oil futures for March delivery settled down $1.61 or 4.3 percent per barrel at $35.94 on Wednesday, after the International Energy Agency issued a report indicating that global energy demand this year would post its largest decline since 1982, due to the economic crisis. London Brent settled down 33 cents per barrel at $44.28. Domestic crude has been running at a big discount to Brent due to a supply glut at the main U.S. storage hub in Oklahoma.

 

A report the U.S. Energy Information Administration that indicating that crude inventories rose last week by 4.7 million barrels, more than the 3.1 million build the Street had been expecting, contributed to the negative attitude regarding the potential of oil prices to move higher. The EIA report also showed gasoline inventories dropped last week by 2.6 million barrels. Gasoline futures rose 2.59 cents to settle at $1.2698 a gallon.

 

The IEA said in its monthly report that global oil demand would fall by 980,000 barrels per day (bpd) in 2009, a decline that would exceed its previous forecast for a 500,000 bpd contraction.

 

Saudi Arabia said current oil prices were unjustified and unsustainable. "If today's low prices continue long enough, they will sow the seeds for future price spikes and volatility," Saudi Oil Minister Ali al-Naimi said in Houston on Tuesday.

 

Data from China's General Administration of Customs showed January crude oil imports to the world's second-largest energy consumer had fallen by 8 percent to the lowest level for 15 months.

 

Deal Reached

 

Congressional negotiators said on Wednesday they had reached a deal on a $789 billion package of spending and tax cuts, handing President Obama a major victory in his effort to pull the economy out of a tailspin. The compromise followed earlier approval of separate House and Senate bills whose differences needed reconciling.

 

The only real fly in the ointment is that there still is no deal as of yet on money for school construction and states, key areas of difference. The Senate had cut out $16 billion for schools and $40 billion for states but Obama had sought the restoration of funds for schools. The massive package is aimed at reversing a deep recession that began 14 months ago, and news of the deal sent stock markets higher. Votes in both chambers on the compromise will likely be set for later this week.

 

Democrats control both chambers in Congress and fellow Democrat Obama has pushed them for a quick conclusion to the legislation in hopes it will begin to create and save up to 4 million jobs in an economy that has seen millions of workers laid off.

 

Unfortunately, the President’s stimulus plan has seen virtually no support among Republicans, underlining the scale of his task to try and reach across party lines from the White House. In the Senate, passage of the bill depended on support from a handful of moderate Republicans. Without a stimulus bill, Obama has said the country faces a possible economic "catastrophe."

 

At the suggestion of the White House, Congressional leaders agreed to a somewhat smaller tax credit for workers that would now total $400 for individuals and $800 for couples. An earlier version of the bill would have granted $500 and $1,000 respectively.

 

Seeking to blunt Republican criticisms that the bill contains wasteful spending that won't necessarily stimulate the economy, Obama said on a visit to a Virginia construction site: "We're going to do more than has ever been done before to make certain that every tax dollar is spent wisely and on its intended purposes."

 

A one-year fix of the Alternative Minimum Tax, costing about $70 billion, was also included. That fix would prevent middle-class taxpayers from being sucked into higher taxes paid by the wealthiest, which Congress never intended.

 

Republicans have been nearly unanimous in their opposition to the stimulus legislation, arguing it was poorly crafted and could end up wasting taxpayer money. Some House Republicans on Capitol Hill complained that they had been left out of the final negotiations.

 

Alone, the stimulus package is unlikely to fix the U.S. economy because it does not address financial sector problems that dried up credit. The Obama administration is planning to address that issue through a bank rescue program unveiled by Treasury Secretary Timothy Geithner on Tuesday. Initial reaction to that was cool from Wall Street, where stocks plunged as traders expressed disappointment there were not more details. 

 

Need To Be Forceful Now Says Geithner

 

Testifying for a second day on a financial stability plan he sketched out on Tuesday, Treasury Secretary Timothy Geithner said bold action now to halt the deep financial crisis would prove less costly to taxpayers over the long haul than acting too timidly.

 

"If we are not forceful now, ultimately it will be harder for us to get our fiscal position back into a sustainable position ... and all those challenges will be more difficult to solve," Geithner told the Senate Budget Committee.

 

Committee Chairman Kent Conrad, Democrat of North Dakota, said it was incumbent on Geithner to tell Congress soon if more money beyond the already approved $700 billion financial rescue fund was need. Geithner said a supervisory review of banks would help determine whether more money would be needed.

 

"If we believe that we think there's a compelling case for additional resources and authority, we will come to you and lay that out as quickly as we can," he said. "We're going to move forward very quickly to come out with detailed design elements on these proposals I outlined yesterday," Geithner said, adding that should take several weeks."

 

Geithner's bank rescue plan was criticized for lacking detail and clarity, particularly with respect to how public-private partnership would buy up bad assets. The plan is to use an unspecified amount of money from the bailout fund to set up a public-private partnership to mop up as much as $1 trillion of bad assets clogging bank balance sheets. In doing so, it is hoped that banks would then be able to renew lending, which, in turn, should help ease the current recession that is likely to be the worst since the Great Depression.

 

The plan will also use $100 billion in taxpayer funds to expand a Fed program to support up to $1 trillion in consumer, small business and commercial real estate lending. Geithner told lawmakers the crisis would take a long time to resolve and promised to consult closely with Capitol Hill as details of the plan are established.

 

"I completely understand the desire for details and commitments, but we're going to do this carefully, consult carefully so we don't put ourselves in the position again where we're laying out details ahead of the care and substance necessary to get it right," he said.

 

Research in Motion Falls on Forecast

 

Research in Motion told Wall Street on Wednesday that its earnings guidance was at the low end of expectations because businesses are not buying its latest smartphone upgrades in the economic downturn.

 

The warning overshadowed an unexpected jump in BlackBerry subscriptions. The company, which competes with Apple Inc and Nokia, said net subscriber account additions are running 20 percent higher than the 2.9 million it forecast on December 18.

 

New smartphones, such as the touch-screen Storm or high-end Bold, were attracting new sales, the company said, but existing customers, mainly businesses, were not upgrading as frequently as expected, crimping profit margins.

 

In December, RIM had forecast quarterly revenue between $3.3 billion and $3.5 billion, with earnings per share of 83 cents to 91 cents. Both numbers were above Wall Street's estimates at the time. As a consequence, analysts ratcheted up their forecasts and the stock surged, gaining more than 40 percent year to date.

 

RIM's main customer base is made up of business executives, lawyers, politicians and other professionals who use its BlackBerry handsets to send wireless email securely. To diversify, RIM has pushed aggressively into the broader consumer market with multimedia-laden handsets like the Pearl model and the touch screen BlackBerry Storm, its answer to Apple's popular iPhone. While the iPhone has been a hit with consumers, it has yet to gain enough traction with business users to threaten RIM's dominant position in the corporate, or enterprise, client market.

 

Although subscriber performance after the holiday season had exceeded its expectations, RIM said it anticipates subscriber additions in the current quarter to return to normal.