MarketView for February 19

 

 

Summary

 

The Dow Jones industrial average hit a six year low on Thursday, primarily over concerns that banks could be nationalized. That possibility, as remote as it might be, sent share prices to a 17-year low. At the same time, a rise in the number people receiving jobless benefits stoked worries that the recession is getting worse, not better.

 

After several near misses this week, blue chips finally hit the November 20 bear market closing low in late trading; thereby erasing the result of a rally that had been built on hopes a new president would successfully tackle the deepening recession.

 

The NASDAQ fared the worst of the three major indexes after a disappointing outlook from Hewlett-Packard sent its shares tumbling nearly 8 percent, while at the same time dragging down other technology shares, Hewlett-Packard was also the Dow's largest negative weight.

 

Shares of major banks were also lower, over concerns regarding government plans to mop up bad assets from their books, led by a 14 percent slide in Bank of America. Bank of America was down 14 percent at $3.93, while Citigroup lost 13.8 percent to $2.51.

 

At the same time, economic bellwether General Electric, whose operations include a substantial division devoted to the financial industry, fell more than 4 percent and briefly traded below $10 for the first time since 1995, adjusted for stock splits.

 

The S&P 500 index, which suffered a fourth straight day of losses on Thursday that marked its longest losing streak since October, has lost close to 14 percent for the year. The broad S&P is now up almost 4 percent from its November lows after entering the year up about 20 percent from those levels.

 

The deteriorating economy also held front stage attention after reports indicated that the number of workers continuing to claim jobless benefits in the first week of February hit a record high, while there was a sharp contraction in factory activity in the Mid-Atlantic region.

 

In the telecommunications arena, Sprint Nextel was up nearly  20 percent to $3.25, after it reported a quarterly loss and a loss in subscribers that was not as deep as some had feared.

 

Worries about more heavy borrowing to fund the government's efforts to rescue the economy hammered Treasury debt prices.

 

And the Day’s Economic Data Remains Grim

 

The number of workers drawing unemployment insurance increased to a record high of nearly 5 million, the government reported on Thursday, as a worsening economy made it increasingly hard to find jobs.

 

The data from early February suggested the 13-month-old recession was deepening, a conclusion supported by a report that showed factory activity in the country's Mid-Atlantic region contracted sharply in February.

 

The number of unemployed still on the benefits rolls after drawing an initial week of aid surged 170,000 to 4.99 million in the week ended February 7, the Labor Department said.

 

It was the highest reading on records dating to 1967 and it took the insured jobless rate to 3.7 percent, the highest since 1983, when the economy was emerging from a 16-month recession. New applications for unemployment benefits were steady at 627,000 last week, hovering close to a 26-year high and raising the possibility that job losses in the non-farm sector could cross the 600,000 threshold in February.

 

The aggressive layoffs and the accompanying insecurity over jobs could lead households, whose net worth has already been eroded by the collapse of the housing and stock markets, to cut spending further, creating a vicious cycle. Washington has put forward an array of measures, including a $787 billion stimulus package, in the hopes of reviving the weakening economy.

 

The Philadelphia Federal Reserve Bank said its business activity index, which gauges factory activity in the Mid-Atlantic region, dropped to minus 41.3 in February from a negative 24.3 the prior month. New orders plummeted and the survey's jobs gauge hit its lowest level since the series started in 1968.

 

In a separate report, the Labor Department said prices received by farms, factories and refineries rose 0.8 percent in January, the first advance since July as energy prices rebounded. However, the producer price index was down 1 percent from its year-ago level, the largest drop since October 2006. Core prices, which exclude food and energy costs, rose 0.4 percent last month, accelerating from December's 0.2 percent rise.

 

An index from the private-sector Conference Board that forecasts where the economy is heading rose 0.4 percent in January, the second straight monthly gain.

 

However, the explanation being put forward is that the so-called index of leading indicators had been inflated by a rise in money supply as the Federal Reserve pumped billions of dollars into the economy to try to combat the recession.

 

Crude Price Falls

 

Oil prices rose 14 percent to top $39 a barrel on Thursday after government data indicated an unexpected drop in crude inventories last week due to lower imports and higher demand. The draw meant the end to a seven-week streak of crude builds as the drop in economic activity reduces the demand for fuel.

 

Domestic sweet crude futures for March delivery, which expires on Friday, settled up $4.86 per barrel at $39.48, marking the largest settlement gain since December 31. April delivery contracts settled up $2.77 at $40.18 per barrel. London Brent for April delivery settled up $2.44 per barrel at $41.99.

 

OPEC has agreed to a series of deep output cuts in the second half of 2008 to counter the steep drop in oil prices from record highs over $147 a barrel in July.

 

Encouraging oil's gains, Thursday's EIA data showed gasoline and distillate demand rising slightly over the four-week period ending February 13, compared with year-ago levels.

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Fed Is Not Out of Ammunition

 

Bold official action to tackle the U.S. recession will restore growth later this year but the Federal Reserve can still do more if a recovery fails to appear, Federal Reserve Bank of Atlanta President Dennis Lockhart said on Thursday.

 

"If forecasts of improvement don't materialize, the Fed is not without capacity to act, even with the fed funds rate at its lower bound," he said.

 

The Fed has cut interest rates almost to zero and pumped hundreds of billions of dollars into financial markets to ease a yearlong recession, alongside a massive $787 billion government stimulus package and $700 billion bank bailout.

 

Lockhart said the authorities had gotten the message about the need for aggressive action, but cautioned that any additional measures ought to be measured and convincing. "We've reached a point where incremental responses must proceed to something more comprehensive, scaled, and coherent," Lockhart, who is a voting member of the Fed's policy-setting committee this year, said.

 

The Fed on Wednesday sharply lowered its forecast for growth this year and warned unemployment could climb to nearly 9 percent, from 7.6 percent in January. It was not all bad news, and Lockhart noted lower mortgage rates were starting to aid home sales while stronger-than-expected January retail sales were "encouraging".

 

On the other hand, Lockhart said he was watching developments in emerging markets and domestic commercial real estate closely for evidence of problems. "Policy-makers have taken and will soon implement unprecedented measures to restore financial stability and economic growth," he said. "In my view, the diagnosis is substantially correct and the actions targeted on discrete aspects of the overall problem constitute an appropriately comprehensive approach."

 

GE - Same Price As Back in 1955

 

Shares of General Electric fell below $10 on Thursday, their lowest point since late 1995, amid a broad sell-off in stocks. GE’s shares closed at $10.06, down 49 cents or 4.6 percent, after earlier notching a low of $9.95 cents. They have been as high as $38.52 in the last 52 weeks.

 

GE has lost almost 70 percent of their value over the past year amid concerns over the effect of the credit crunch on GE Capital, GE's financial unit. Regarded as an economic bellwether, GE has been working to reduce its dependence on its GE Capital finance unit, though efforts to sell off parts of that portfolio have proved unsuccessful during the credit crunch.

 

Meanwhile, GE has underperformed the broader markets over the past year. Its 68.4 percent tumble is more dramatic than the 41.5 percent slide of the broad Standard & Poor's 500 index .The shares are now down more than 75 percent since CEO Jeff Immelt took the reins in September 2001. Immelt said earlier this week he declined any bonuses for 2008, a year when GE's profit fell 22 percent.

 

GE earlier this month said it would evaluate its planned second-half dividend, leaving open a possibility that it would reduce the quarterly payout of 31 cents per share. It also faces the possibility that its coveted triple-A credit rating will be cut. Both Standard & Poor's and Moody's Investors Service have put their top-notch ratings of the company on review.

 

Banks Spooked by Possible Nationalization

 

Citigroup shares nearly hit 18-year lows on Thursday, with Bank of America shares also falling sharply amid renewed fears that growing losses could lead to government control of troubled banks, wiping out shareholders.

 

Each bank received $45 billion in government aid in recent months and a backstop on toxic assets-related losses, more than their current market value. The U.S. Treasury is expected in coming weeks to subject up to 25 banks with assets exceeding $100 billion each to "stress tests" to decide which banks need additional capital.

 

And support for nationalizing troubled banks seems to be growing. Republican Senator Lindsey Graham has said nationalization could be an option, while former Federal Reserve Chairman Alan Greenspan said government intervention could be the least bad alternative left for policymakers.