MarketView for January 5

 

Summary  

 

Stock prices fell prey to profit taking on Monday as concerns over the apparent decline in cell phone sales sent the share prices of some of the largest telecommunications companies plummeting. In particular, Verizon and AT&T both stumbled after Bernstein Research downgraded both companies, stating that the stocks have "come too far, too fast" as it forecast slower wireless growth and worsening land-line performance. Verizon ended the day down 6.2 percent at $32.48, while AT&T was down 3.4 percent to $28.43.

 

Financial stocks also hit the skids after Deutsche Bank cut its earnings forecast on 16 large commercial banks, including JPMorgan Chase, another Dow component. Deutsche Bank is of the opinion that loan losses for U.S. banks could rise 3 percent by the end of 2010, hurt by a larger percentage of bad loans, greater consumer leverage and faster problem recognition by banks. That compares to loan losses of 1.5 percent in the third quarter of 2008. As a result, JPMorgan fell nearly 7 percent.

 

The markets had closed out a holiday-shortened week with a more than 6 percent gain on the idea that a recovery was on the horizon after the worst year since the Great Depression. Stocks were positive in the trading day and the Dow cut losses after General Motors reported that its December sales exceeded expectations. GM ended the day up 1.6 percent to $3.71 after it said December sales fell 31 percent. Ford rose 4.9 percent to $2.58 after it reported December sales.

 

Homebuilder shares were higher on the day after the Commerce Department released a report on construction spending indicating that building at the end of the 2008 was stronger than Wall Street had expected.

 

Energy stocks were also higher on higher oil prices jumped more than 5 percent in New York on supply fears on Israel's deepening incursion into Gaza and the dispute between Russia and Ukraine over natural gas. The S&P index of energy was up 1.4 percent, helped by an 8.5 percent gain in Consol Energy.

 

On the NASDAQ, Apple rose 4.2 percent to $95.58 after CEO Steve Jobs reassured investors about his health.

 

Crude Futures Up 5 Percent

 

The price of crude oil futures for February delivery rose 5 percent on Monday after Israel's deepening incursion into Gaza and a dispute between Russia and Ukraine over natural gas heightened fears of supply disruptions, settling $2.47 per barrel at $48.81, after touching a three-week high of $49.28. London Brent crude was up $2.71 per barrel  to settle at $49.62.

 

Oil prices have chalked up gains of  around $35 per barrel since Israel launched its Gaza offensive on December 27, heightening fears of possible disruptions of crude supplies from the Middle East.

 

In addition, an Iranian military commander called for Islamic producers to cut supplies to Israel's supporters in Europe and the United States, the official IRNA news agency reported on Sunday. However, OPEC's most influential member, Saudi Arabia, and its neighbors Kuwait, the United Arab Emirates and Qatar, are regional allies of the United States.

 

Mounting evidence of OPEC's compliance with production cuts, and the Energy Department's decision to start rebuilding its crude reserves, also have supported oil prices.

 

Adding to geopolitical concerns, Russian natural gas supplies to southeast Europe have declined as a result of Russia's stand-off with Ukraine over prices, which began on New Year's day. The two sides blame each other for the dispute.

 

European energy companies, which receive about a fifth of their gas via pipelines through Ukraine, said they had stockpiled enough gas for several days. The dispute, which recalls a similar confrontation three years ago that disrupted supplies, was likely to raise new questions in Europe about Russia's reliability as a gas supplier.

 

The crude oil markets are also looking for further signs of OPEC production cuts, after Libya and Abu Dhabi's National Oil Co joined leading producer Saudi Arabia, vowing to cut output by January as OPEC tries to stem the $100 a barrel drop in oil prices since July 2008.

 

Senior OPEC officials have suggested the producer group could meet in mid-January or February to review the oil market's performance after announcing steep production cuts last month, although an OPEC source told Reuters Monday that was unlikely.

 

Debt Instruments Fall in Price

 

News of the planned stimulus package helped sent the dollar higher on Monday as Treasury prices slumped on fears that a price bubble is about to pop in the face of a massive wave of fresh debt. Meanwhile, prospects for a swelling supply of government debt drove both domestic and euro-zone prices down. The Treasury Department has said it will sell $16 billion of reopened 10-year notes and $30 billion in three-year notes this week. Although the issuance was broadly in line with market forecasts, it underscored this year's looming surge of debt that will to fund government efforts to rescue the financial system.

 

The 30-year Treasury bond fell nearly three full points in price, pushing its yield up to 2.92 percent, up from a record low near 2.52 percent in December. At the same time, the euro hit a three-week low versus the dollar, with weaker-than-expected Italian and Spanish inflation data and tax cuts in Germany expected to pressure the European Central Bank to soon cut rates further.

 

European equity markets were buoyed by the anticipation of further fiscal stimulus, drawing flows away from the safer-haven of government bonds. Sharp losses for the euro, which was down 2.28 percent at $1.3559, also spread to euro/sterling, taking it to 0.9278, well away from record lows for the pound last week and easing momentum toward parity.

 

The dollar rose against a basket of major trading-partner currencies. Against the yen, the dollar rose 1.31 percent at 93.43 from a previous session close of 92.220.

 

Longer maturity government debt fell, but shorter-term debt was little changed to higher. The benchmark 10-year U.S. Treasury note fell 34/32 in price to yield 2.47 percent, and the 30-year U.S. Treasury bond fell 102/32 in price to yield 2.94 percent.

 

Fed Starts Buying Mortgage Backed Securities

 

The Federal Reserve on Monday began its latest unconventional program to help out the moribund economy, this time taking aim at the heart of the slumping housing market. The Fed plans to buy back as much as a ninth of outstanding bonds sold by housing finance companies Fannie Mae, Freddie Mac and Ginnie Mae and backed by U.S. mortgages, to drive down mortgage costs. The aim is to provide incentive for buyers to return to the housing market or cut monthly payments on existing home loans.

 

The New York Fed began buying mortgage-backed securities guaranteed by Fannie, Freddie and Ginnie on Monday, part of a program of as much as $500 billion.

 

"They seem to be committed to getting interest rates on 30-year mortgages down to 4.50 percent, which is apparently a magnet for the market," said William O'Donnell, head of U.S. rates strategy at UBS in Stamford, Connecticut.

 

The MBS program has already had a significant housing market impact: mortgage rates dropped dramatically in anticipation of the purchases after they was announced on November 25, and there was a record jump in mortgage applications. The picture improved further on Monday after the purchases began, with the premium paid on mortgage debt over safe U.S. government debt narrowing sharply.

 

But, warned O'Donnell, the government and the central bank still have more work to do to stabilize home prices.

 

"The problem is not getting the interest rate down, but getting the lenders to lend. It is hard to imagine the lenders lending as they once did again after all the losses they have suffered over the past 12-18 months," he said. "Once burned, twice shy."

 

Nicholas Strand, a manager with the mortgage strategy group at Barclays Capital in New York, noted overseas investors, historically key buyers of Fannie and Freddie debt, are still waiting on the sidelines as they gauge how the measures will work.

 

The MBS program is the latest in an alphabet soup of unconventional policy measures to support financial markets and the U.S. economy, with interest rates around zero.

 

Janet Yellen, president of the San Francisco Federal Reserve Bank, said on Sunday the MBS program "could provide significant support to the housing sector."

 

Recovery of the housing sector is widely seen as a prerequisite for a turnaround in the economy's fortunes. With this in mind, the Fed has set a goal of buying $500 billion in mortgage-backed securities by mid-2009. That equals a ninth of the agency MBS market, which is roughly $4.5 trillion in size.

 

More information about the purchases will be available from Thursday and will be updated weekly, the New York Fed said. Current coupon 30-year agency MBSs yielded 195 basis points over a blend of five- and 10-year Treasuries on Monday, compared with 208 basis points on Friday.

 

Telecoms downgraded

 

Shares of top phone companies AT&T and Verizon Communications ended the day lower on Monday after Bernstein Research downgraded their ratings and price targets.

 

Bernstein analyst Craig Moffett lowered his rating on AT&T sharees to "market perform" from "outperform" and lowered the target price to $27 from $35. He cut Verizon's rating to "underperform" from "market perform" and lowered the target to $27 from $32.

 

"AT&T and Verizon may indeed be somewhat more recession-resistant than most business. But we believe they are nevertheless much more cyclically exposed than consensus estimates (and valuations) would suggest," he said in a report.

 

AT&T shares fell 4 percent to $28.24, while Verizon shares fell 5.3 percent to $32.80.

 

Analysts have lately been reassessing the outlook for U.S. telecommunications carriers and their network equipment vendors. While phone companies used to be considered recession-proof, consumers these days can easily disconnect landlines to go wireless or choose cheaper services. Carriers also require costly investment in new technologies, making them increasingly vulnerable to a downturn.

 

Staple of Wedding Gifts in Bankruptcy

 

Ireland's Waterford Wedgwood, whose luxury tableware was once a mainstay of wedding gift lists world wide has called in receivers, placing two of Britain's most venerable china makers into administration. The heavily indebted maker of Waterford crystal, one of Ireland's most famous brands, also asked on Monday that its shares be suspended from trading on the Irish Stock Exchange after failing to buy more time from creditors.

 

The owner of British potter Wedgwood, founded 250 years ago by Josiah Wedgwood -- one of the fathers of the industrial revolution, and whose tea and dinner services have graced royal tables ever since, had warned in December that it would not be able to pay interest to bondholders.

 

Waterford Wedgwood said a grace period given by its lenders had expired and not been renewed, but it remained optimistic an investor would save the group, whose stable of brands also includes Royal Doulton, known for its fine china tableware and figurines.

 

The company, which last year unsuccessfully sought a loan from the Irish government, has already cut or moved a lot of production to Asia, leaving 1,500 manufacturing jobs in Indonesia, 600 in the United Kingdom and 450 in Ireland.

 

The group's receiver Deloitte said a number of subsidiaries, including Josiah Wedgwood & Sons Ltd and Royal Doulton Ltd, had been placed into administration, meaning they would continue to trade while buyers are sought.

 

Waterford Wedgwood was trying to modernize its product range just as the economic downturn in its main markets, Britain and the United States, and the strength of the euro hit earnings. At the same time the credit crisis made talks with lenders more difficult.

 

Top shareholders led by Anthony O'Reilly, whose media interests make him one of Ireland's richest men, have repeatedly pumped extra funds into Waterford Wedgwood. The company said on Monday that O'Reilly and three other non-executive board members had resigned with immediate effect, without giving further details.

 

Waterford Wedgewood's shares have been in steady decline since 2001 and have traded at fractions of a euro cent since 2004, despite the injection of extra funds. Based on last week's closing price of 0.001 euros, the company had a market value of 5.35 million euros versus net debt that stood at 448.9 million ($625.1 million) in October.

 

Waterford Wedgwood's thinly traded 166 million euro subordinated notes, due to mature in December 2010, are bid at just 3 percent of face value and offered at 8 percent. The company also has a 210 million euro loan, which is due to mature in June 2010.

 

Year of the Tax Cuts

 

The prospect of new tax cuts in the United States and Germany injected a measure of New Year cheer on Monday. In a move that could help speed approval of a new stimulus plan President-elect Obama will seek as much as $310 billion in tax cuts as part of a move to counter what senior policymakers warned could be a prolonged period of economic stagnation and deflation.

 

Still, one top Democratic senator said enactment would not likely come until February despite congressional Democrats' hopes to present the incoming president with a stimulus measure to sign in the early days of his term.

 

In Germany, Chancellor Angela Merkel met her Social Democrat (SPD) coalition partners to discuss a second fiscal stimulus deal worth up to 50 billion euros. That would come on top of a 31 billion euro package last year that Merkel's critics -- including some European Union allies -- believe was too small to haul Europe's leading economy out of recession. Merkel on Sunday came out in favor of tax relief moves she had previously ruled out until after September's federal election. But she faced tough talks to get the SPD to agree.

 

The stimulus plans by the world's No. 1 and No. 3 economies mark the latest attempts to tackle a financial crisis that began with U.S. mortgage defaults in 2007 and snowballed into global market turmoil that threatens much of the world with a deep recession.

 

Meanwhile overseas, data published on Monday increased the pressure on the ECB to keep cutting interest rates. Spanish inflation in December was the lowest in a decade, at 1.5 percent, while Italian inflation fell to a 14-month low of 2.3 percent.

 

In Asia, December data showed greater-than-expected easing of inflation in Thailand, Indonesia and Taiwan, raising the prospect of temporary deflation and further rate cuts there.