MarketView for February 24

 

 

Summary

 

At last we saw some relief on Tuesday as stock prices recovered slightly from 12-year lows, after Federal Reserve Chairman Ben Bernanke delivered some relief when he signaled that a bank nationalization program was not in the works. Bernanke said the significant value built up in the country's banks would be lost if they were government-owned, easing investor fears that shareholders would be wiped out if the banks were taken over. The gains snapped a six-day losing streak for the S&P 500.

 

In testimony to the U.S. Senate Banking Committee, Bernanke added that although there could be a time when it is necessary to close banks down, now is not the time. Concern about the future of the U.S. banking system had dragged the Dow and the S&P 500 to 1997 lows on Monday. Tuesday’s news sent prices higher across all sectors on Tuesday, with Microsoft the only decliner among the 30 components of the Dow industrials.

 

Shares of Home Depot rose over 10 percent to $20.67, after the leading home improvement chain's quarterly operating profit topped estimates. Exxon Mobil and Chevron were the top boosts to the Dow as crude oil futures rose nearly 4 percent. Exxon gained 4 percent to $72.09 and Chevron added 3.7 percent to $65.28. The price of crude rose amid expectations that OPEC's oil supply will fall as the group's members enforce a deal to cut output, increasing its scope to lower production further at a March 15 meeting.

 

Within the technology sector, Apple rose 3.8 percent and Google gained 4.7 percent. Shares of Microsoft, however, edged down 0.2 percent to $17.17 after the software maker said at an analysts' meeting there are no plans to accelerate cost cuts.

 

However, despite Tuesday's advance, stock prices are at about half their market value from peaks reached in October 2007.

 

Crude Prices Rise

 

The price of crude oil futures rose 4 percent on Tuesday, tracking a bounce on Wall Street, after Fed Chairman Ben Bernanke said he was committed to protecting the troubled banking sector. Figures showing higher-than-expected compliance OPEC to its agreed production cuts, aided the rebound.

 

Sweet domestic crude futures for March delivery settled up $1.52 per barrel at $39.96, while London Brent crude settled up $1.51per barrel at $42.50.

 

The oil markets were encouraged by figures showing stronger-than-expected OPEC compliance with its production cuts. In addition, OPEC is scheduled to meet March 15 in Vienna and will likely consider deepening their output cuts.

 

Oil prices have dropped nearly $110 a barrel from their peak in July as the economic crisis cuts into demand. Meanwhile, the markets are anxiously awaiting inventory data on Wednesday that was expected to show a 1-million-barrel increase in crude stocks over the past week.

 

Home Prices Continue to Fall

 

Home prices continued to fall at a record pace in December and consumer confidence hit a new low in February, as Federal Reserve Chairman Ben Bernanke warned the recession could extend beyond this year.

 

The Conference Board reported that its consumer confidence index fell to 25.0 in February, the lowest since the index began in 1967, from 34.7 in January. The gloomy outlook showed no sign of turning around, according to the report, boding ill for the consumer spending that drives some two-thirds of our economy.

 

In testimony to Congress, Bernanke said that unless government efforts helped restore financial stability, the U.S. recession may not end this year. However, the Fed chief also said big U.S. banks would survive the downturn without being nationalized, sparking some optimism in financial markets. That helped Wall Street rally in spite of the dire economic news as investors snapped up shares on the cheap after Monday's swoon sent the Dow industrials to a 12-year low.

 

The day's housing data also offered little reason for optimism. Prices of U.S. single-family homes fell 18.5 percent in December from a year earlier, with the pace of decline speeding up, according to the S&P/Case Shiller home price index. It was the largest decline since the data series began 21 years ago and suggested prices will probably continue falling in the months ahead, extending a 13-month-old recession.

 

The S&P/Case Shiller composite index of home prices in 20 metropolitan areas fell 2.5 percent after dipping 2.3 percent in November. The S&P/Case Shiller data showed that prices have plummeted 26.7 percent from the housing market peak in the second quarter of 2006.

 

A separate report from the Federal Housing Finance Agency said single-family home prices fell a record 4.5 percent in the last three months of 2008 compared with a year earlier, though the pace of decline slowed.

 

Bank of America is Stronger Than Its Critics Want You to Believe

 

The CEO of Bank of America, Ken Lewis, made it abundantly clear on Tuesday that BoA does not need more federal aid and is in better shape than most rivals, even as "rumors, innuendo and falsehoods" cause its stock to fall. As such, there is little or no danger that BoA is on a track to be nationalized. Speculation of such an event last week sent BoA shares to below $3, their lowest level since 1984.

 

"Our company does not need further assistance today and I don't believe we'll need any more in the future," Lewis said in a memo sent to employees. "Our business prospects and financial condition are far superior to those of most of our competitors." Bank of America spokesman Scott Silvestri confirmed the memo's contents on Tuesday.

 

Referring to pending federal "stress tests" of large U.S. banks, Lewis said Bank of America's own testing shows the bank is strong enough to weather today's economy, as well as environments where the unemployment rate is much higher.

 

"Bank of America's overwhelmingly large deposit base, our consumer and commercial customer base, and earnings power give us a great advantage over banks that have been more badly damaged in the current crisis," Lewis wrote.

 

"We continue to be profitable, our capital and liquidity are strong and we are actively lending in every sector of the marketplace," he said. "The market appears to be moving in part based on rumor, innuendo and falsehoods propagated by the misinformed."

 

Lewis also said the bank's tangible common equity ratio, a measure of capital, is about 2.68 percent, twice the level of rivals he did not name but which face "greater stress."

 

He also said Bank of America expects revenue this year to top $100 billion, including recently acquired Merrill Lynch & Co and a full year of results from the former Countrywide Financial Corp. Net revenue was $72.8 billion in 2008.

 

Dour Outlook for Economy but Banks will Survive

 

Federal Reserve Chairman Ben Bernanke warned on Tuesday the "severe" recession could drag into next year, but said banks should be able to weather the downturn without being nationalized, cheering markets.

 

"I don't see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn't necessary," Bernanke told the Senate Banking Committee.

 

"What we can do is make sure they have enough capital to fulfill their function and at the same time we exert adequate control to make sure that they are doing what is necessary to become healthy and viable over the longer term," he added.

 

Still, Bernanke was somber in his assessment of the economy. If efforts to stabilize banks failed, he said, the fast-shrinking economy could enter a mutually reinforcing cycle of weak growth and financial strain. "To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets," he said.

 

"If actions taken by the administration, the Congress and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view -- there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery," Bernanke said. "We are committed to ensuring the viability of all major financial institutions."

 

Regulators will begin "stress tests" at the nation's 19 largest banks on Wednesday. Bernanke said the tests aim to judge whether banks can keep lending even under unexpected economic strains.

 

Regulators want "to ensure that even in a bad scenario, banks will have enough capital, including enough common equity, to meet their obligations to lend," Bernanke said. He expressed faith that authorities were on the right path in taking time to fully diagnose the health of the top banks.

 

"Our major banks have significant franchise values," Bernanke said. "There is no commitment by any means to never shut down a big bank, absolutely not, but I do believe that the major banks we have now can be stabilized."

 

The Fed chairman warned that the global nature of the economic slowdown could sap U.S. exports and harm financial conditions to a greater degree than currently expected.

 

Bernanke said the Fed, which has dropped rates to nearly zero, would keep borrowing costs exceptionally low for some time and pledged to use "all available tools" to stimulate the economy and heal financial markets.

 

He said the central bank had not ruled out buying longer-term U.S. government bonds to drive down borrowing costs, but said its immediate focus was on other steps to lower mortgage rates and spur consumer lending.

 

Some of the measures the central bank has already taken had helped ease tight conditions in some credit markets, Bernanke said.

 

"Nevertheless, despite these favorable developments, significant stresses persist," he said.