MarketView for February 12

 

 

Summary

 

After dropping sharply for most of the day on Thursday, stock prices rallied sharply late in the day on word that the Obama administration was working on a program to subsidize mortgage payments for troubled homeowners. From Wall Street’s point of view, it was ready to view the news as a solid indicator that the government was about to move decisively forward in its efforts to stabilize the housing sector.

 

Before the rally in the last hour of trading, which retraced a 3 percent drop in the Dow, investors feared a $789 billion economic stimulus package to be voted on as early as Friday would not be enough raise the economy out of the current recession. At the same time, better than expected quarterly results from Coca-Cola helped to underpin the rally. Coke’s shares ended the day up 7.6 percent at $44.39, making it one of the top performers among the 30 industrial companies that comprise the Dow Jones industrial average.

 

Gains in big-cap technology stocks, including Apple and Research in Motion, helped to lift the NASDAQ. Apple was the top gainer on NASDAQ, ending the day up 2.5 percent at $99.27.

 

In the banking sector, Citigroup fell 2.2 percent to $3.61; Wells Fargo was down 4 percent at $16.80 and Bank of America closed out the day down 3.3 percent to $5.87, each well above their session lows.

 

Government data showing that the number of people staying on unemployment benefits after drawing an initial week of aid hit a record in the last week of January, which underscored the toll of the 14-month-old recession on the labor market.

 

Price of Crude Oil Drops Sharply

 

The price of domestic sweet crude oil settled down 5.5 percent or $1.96 per barrel at $33.98 on Thursday to settle at its lowest level in nearly two months and extending a losing streak that has cut 17 percent off the price in five days. Brent crude settled up 37 cents per barrel at $44.65

Key reasons for the decline in domestic price are the continuing increase in crude stocks and the market’s concerns over the health of the global economy.

 

U.S. crude has been running at a big discount to Brent due to a glut at the main U.S. storage hub in Oklahoma along with supply problems in Nigeria that tend to have a bigger impact on European supplies. Brent crude was supported somewhat by news Shell may have trouble meeting some oil export obligations due to unrest in the Niger Delta.

 

The U.S. price decline came after the government reported on Wednesday a seventh straight weekly increase in nationwide crude inventories as the economic crisis crushes business and consumer fuel demand.

 

Crude oil stockpiles at Cushing, Oklahoma, the world's largest storage hub and the delivery point for U.S. crude futures, rose last week to record levels of around 35 million barrels, near operational capacity.

 

The global economic downturn is taking its toll on oil consumption and supply appears to be outpacing demand in many parts of the world, despite production cuts by OPEC. Word is that the cartel is considering additional supply reductions when it meets in March, and added that compliance among members is solid.

 

U.S. oil's losses were further exacerbated by a report Wednesday from the International Energy Agency forecasting global demand would shrink this year by the largest amount since 1982.

 

Once Again the Economic Data is Mixed

 

The Commerce Department reported that retail sales rebounded unexpectedly in January, but that the recovery was unlikely to be sustainable as recession-hit companies continued to aggressively cut jobs.

 

The sales increase was at odds with other reports that continue to point to an economy deeply bogged down in a recession since December 2007.

 

The Commerce Department said retail sales rose 1 percent in January, advancing for the first time in seven months, after slumping by a downwardly revised 3 percent in December. November sales were also revised to show a steeper decline. January's sales gain was the biggest since November 2007 and confounded economists' expectations for a 0.8 percent fall. However, compared with January 2008, sales fell 9.7 percent.

 

The Commerce Department retail report showed broad gains across the board, with gasoline sales jumping 2.6 percent, their biggest increase in seven months, after sliding 15.6 percent in December. The sales gain reflected higher prices. However, sales of building materials fell 3.2 percent after dropping 2.3 percent in December.

 

The downward revisions to the November and December figures indicated the government's estimate showing the economy shrank at an annual rate of 3.8 percent in the fourth quarter would be revised to show a deeper contraction.

 

Separately, the Labor Department said the number of people remaining on unemployment benefits after drawing an initial week of aid rose by 11,000 to a record 4.810 million in the last week of January.

 

While initial claims for jobless benefits slipped last week to 623,000 from 631,000 the prior week, economists said the level of new claims and the burgeoning rolls of Americans drawing aid reflected a deepening recession.

 

A report from the Federal Reserve showed household net worth fell more than 20 percent in the past year following the collapse of the housing and stock markets.

 

With demand slumping, businesses have cut production sharply and have tried to meet sales from existing inventory.

 

In separate report the Commerce Department said U.S. business inventories fell 1.3 percent in December, the largest drop since October 2001, after slipping 1.1 percent in November.

 

Like the downward revisions to November and December retail sales, the inventory data buttressed the case that the economy shrank more than initially estimated in the fourth quarter.

 

Less Lending by the Fed

 

The Federal Reserve made fewer direct loans to banks and financial companies at the discount window in the latest week, resuming the trend of recent declines, Fed data showed on Thursday.

 

However, banks have remained reliant on the lender of last resort, as lending conditions are still skewed by the global credit crunch. Banks' overall borrowings averaged $143.21 billion per day in the week ended February 11, down from an average $153.69 billion per day the week before.

 

But the Federal Reserve's balance sheet slipped to $1.827 trillion on Feb 11, from $1.834 trillion on Feb 4. Banks' primary credit discount window borrowings averaged $64.57 billion per day in the latest week, down from $67.43 billion the previous week.

 

Net portfolio holdings of the Fed's Commercial Paper Funding Facility which is buying three-month top-rated CP to free up this key area of short term lending, were $251.21 billion as of Feb 11, down from $258.66 billion on Feb 4.

 

Harford Loses Ability to Tap Fed's Commercial Paper Funding Facility

 

Hartford Financial Services Group lost access to the Federal Reserve’s commercial paper lending facility after recent debt rating downgrades, it said in a regulatory filing, and the insurer’s shares fell11 percent. In the filing on Thursday with the SEC, Hartford said it will have to repay the $375 million borrowed under a federal program.

 

Access was denied after Hartford’s commercial paper ratings were downgraded by Moody's Investor Services on February 6 and by Standard & Poor's and Fitch on February 9. As a result the Hartford will have to tap other sources of cash to repay the debt, a potential thorn as its capital had already eroded due to large losses over the past two quarters.

 

Also Thursday, Hartford said the Connecticut insurance department approved changes to the way it can account for some reserves. The decision effectively boosted its life insurance unit's capital by about $1 billion.

 

The move was not enough to offset bigger capital concerns, and may not protect it from ratings downgrades, which could trigger the need to raise additional capital. Hartford raised $2.5 billion in capital from German insurer Allianz SE last October.

 

The Connecticut insurance department's decision to grant Hartford the regulatory relief came after a national group of insurance regulators voted on January 29 not to approve such changes for life insurers nationwide.

 

Life insurers have lobbied for regulators to ease capital rules after heavy losses on investments, and on sales of variable annuities, a popular retirement product that accounts for much of the sector's business. Hartford and others have also sought capital injections under the U.S. government's $700 billion financial services rescue plan.

 

Government Considering Subsidizing Mortgages

 

The Obama administration is hammering out a program to subsidize mortgages in a new effort to contain and minimize the credit crisis. In a major break from existing aid programs, the plan under consideration would seek to help homeowners before they fall into arrears on their loans. Current programs only assist borrowers that are already delinquent.

 

Under the evolving plan, homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test. The administration may also lower the trigger level that decides who would be eligible for relief. Under an existing program, loans are reworked if a borrower is spending more than 38 percent of their gross income on their mortgage.

 

A rising wave of mortgage delinquencies has saddled the global banking system with big losses that have led banks to recoil from lending, choking economies around the globe. Late mortgage payments and home foreclosures hit record highs last year. Foreclosure filings eased last month, but were still 18 percent higher than a year ago, industry research firm RealtyTrac said on Thursday.

 

It would be likely that Fannie Mae and Freddie Mac would play a supporting role in the new plan, but said the two companies are not expected to repackage the reworked loans as securities for investors, a main line of their business.

 

Homeowners would have to make a case of hardship to qualify for new loan terms. Subsidizing existing mortgages would have the added benefit of using the mortgage companies' existing infrastructure, rather than creating a new bureaucracy.