MarketView for February 09

 

 

 

Summary

 

The Dow Jones industrial average posted its largest one-day percentage gain since November 9 on Tuesday, as a result of reports that an aid plan for heavily indebted Greece is in the works. A senior German ruling coalition source said euro zone governments have decided in principle to help Greece, comments that calmed investors worried about a threat to global economic stability.

 

Concern over rising debt in Greece and some other euro zone countries have sapped confidence in equity markets in recent weeks, with the Dow average closing below 10,000 on Monday for the first time since November.

 

As a result, the positive action on Wall Street was broad-based, while the shares of commodity-related companies felt the impetus of a falling dollar that in turn helped out the prices of oil and gold. As an example, Chevron closed up 1.7 percent at $71.31. Shares of Exxon Mobil were up 1.3 percent to close at $65.20, while oil futures settled up $1.86 per barrel at $73.75.

 

Industrial shares were also higher after Morgan Stanley raised its rating on the sector; writing to clients that share prices should catch up to an improving business environment. Caterpillar Inc was up 5.4 percent at $53.53.

 

In earnings news, shares of Coca-Cola Co rose 2.6 percent to $54.01 after the soft-drink company reported results. After the close, shares of Walt Disney chalked up a 2.8 percent increase to $30.30 after the company reported earnings that beat expectations.

 

Greece to Receive Aid

 

European governments have agreed in principle to help heavily indebted Greece, a senior German coalition source said on Tuesday, in what would be the first rescue of a euro zone member in the currency's 11-year history. Various options were under consideration and no final decision had been taken but the most likely possibility was to offer "bilateral help," the source said.

 

The comments were the strongest signal so far that European Union economic heavyweight Germany may be ready to step in to stave off a crisis of confidence in the 16-nation currency bloc that has roiled markets around the globe.

 

German government spokesman Ulrich Wilhelm called reports that a decision had already in effect been taken "unfounded," but the newspaper Financial Times Deutschland also said Germany was preparing an aid package for Greece.

 

The Wall Street Journal said Germany was considering taking a lead role in a plan with its European Union partners to offer Greece and other euro zone countries loan guarantees in an effort to calm market fears of a debt default.

 

German Finance Minister Wolfgang Schaeuble discussed the idea in recent days with European Central Bank President Jean-Claude Trichet, the WSJ said in a report on its website, quoting a person familiar with the matter.

 

The reports came two days before a European Union summit expected to discuss the Greek debt crisis. Outgoing EU Monetary Affairs Commissioner Joaquin Almunia fueled speculation of a rescue by urging European leaders to help Athens in exchange for drastic fiscal reforms when they meet on Thursday.

 

"I would like the leaders of Europe to say to the Greek authorities that in exchange for the efforts you are making, you are going to get support from us," Almunia told the European Parliament.

 

"You don't get support for free. That would simply lay the foundations for further imbalances and crisis. We have got instruments to provide that in exchange for clear commitments that they will meet their responsibilities," Almunia said.

 

Portuguese Finance Minister Fernando Teixeira dos Santos, whose country has also been hit by the market turmoil, said he was sure action would be taken to help Greece if it proved necessary, even though the EU treaties did not foresee such assistance.

 

The euro, which fell to near 9-month lows against the U.S. dollar last Friday amid worries about Greek, Portuguese and Spanish finances, rose on Monday to highs near $1.38 following the comments from the German source. The spreads of Greek bond yields over benchmark German issues also narrowed sharply on the day as did the cost of insuring Greek debt against default.

 

Fiscally fragile euro-zone countries like Greece, Portugal and Spain are under intense pressure to rein in huge budget deficits, aggravated by a steep economic downturn and billions of euros in stimulus spending.

 

Their financial woes have hit investor confidence in the European single currency bloc and even sparked speculation that a country could be forced out of the euro area.

 

Greece's troubles are expected to dominate the informal summit of EU leaders on Thursday that was originally intended to focus on a long-term growth strategy for the bloc. Meanwhile, EU policymakers and credit ratings agencies kept up pressure on Athens to deliver on its deficit-cutting plan.

 

The government has vowed to cut the budget deficit below the EU's 3.0 percent ceiling by 2012 after it spiraled to 12.7 percent of gross domestic product (GDP) last year. On Tuesday, Finance Minister George Papaconstantinou outlined plans to freeze public sector wages and overhaul the country's tax regime in a drive to consolidate the budget.

 

French Economy Minister Christine Lagarde said she was confident Greece would deliver on its fiscal program, adding that EU partners were watching the situation carefully.

 

Fitch Ratings said markets would not wait long for Greece to address concerns about the long-term sustainability of its public finances. "They need to address those concerns now because ultimately the market won't wait until it becomes blatantly obvious that the situation is unsustainable," Chris Price, Fitch analyst for Greece, said on a conference call.

 

ECB Governing Council member Ewald Nowotny said the central bank could not help Greece due to its no-bailout clause and any help from member states would be a political decision.

 

Job Market Stabilizing

 

Job openings edged up to 2.5 million from 2.4 million in November, the Labor Department reported in its monthly Job Openings and Labor Turnover Survey. At the same time, the number of unemployed workers fell 73,000 to 15.3 million. The result is that there are signs the jobs sector is on the mend.

 

The Labor Department report on Tuesday also showed hiring was little changed at 4.1 million in December. Total separations -- quits, layoff and discharges -- fell 36,000 to 4.2 million in December.

 

In the face of rough labor market conditions, workers are reluctant to change jobs. The quits rates, a measure of workers' willingness or ability to change jobs, decreased in the business sector and was unchanged for government in December, the report showed.

 

MetLife May Make a Deal with AIG Using Stock and Cash

 

MetLife, the largest publicly traded domestic life insurer, may pay roughly $8 billion of the purchase price in stock and the rest in cash. Banks including JPMorgan Chase, Bank of America, Deutsche Bank and Credit Suisse may give MetLife a $5 billion bridge loan for the deal, according to Bloomberg, which first reported the news. A deal could be struck as soon as February 11, Bloomberg said. However, the terms of any deal had not been finalized, though, and the mix could change.

 

Alico, sells life insurance and retirement products to 19 million customers in 54 countries. Its sale would be the largest for AIG since its September 2008 bailout, and a transformational deal for MetLife, expanding its presence in fast-growing international markets. However, the large stock component to the purchase price would add complications around how AIG pays back U.S. taxpayers, who have pledged a total of $182.3 billion to support the insurer.

 

The insurer has put Alico and American International Assurance, another life insurance business, in special purpose vehicles, and given the New York Federal Reserve a preferred stake in them. The Fed's interest in the Alico vehicle is worth $9 billion, while that in AIA is worth $16 billion. The possibility for the Fed to accept stock as repayment adds a level of complexity but may not be a deal breaker,

 

AIG has announced some two dozen deals to sell assets for more than $11.9 billion so far, as part of its efforts to pay back taxpayers. It remains tens of billions of dollars away from paying off Uncle Sam.

 

Robert Benmosche, who took over as AIG's chief executive last summer, has slowed the divestment process and pulled some auctions as he tries to rebuild the insurer's businesses. In a recent interview, he told employees he envisions a smaller AIG in the future, with global property-casualty and U.S. life and annuity operations at its core.

 

Under the terms of his contract, Benmosche, a former MetLife chief executive and current shareholder, cannot be involved in AIG's discussions to sell Alico to his former employer. Last week, MetLife confirmed it was in talks to buy Alico but hadn't reached a deal.

 

There is "no certainty" MetLife will reach a deal for the AIG unit, Chief Executive Robert Henrikson said on a conference call last Wednesday, adding the insurer does not need an acquisition to meet its business objectives. Management added MetLife would not sell any of its current businesses to finance a possible deal, nor would it use capital in an off-shore reinsurance unit toward a deal.