MarketView for January 12

 

Summary  

 

Stock prices were lower again on Monday as concerns over massive credit losses at Citigroup knocked its shares 17 percent lower, dragging down bank stocks. Adding to concerns on Citigroup was news that the embattled bank is nearing a deal to sell a controlling stake in its Smith Barney retail brokerage business to Morgan Stanley. Investors fear that Citigroup is looking to sell one of its best assets because it needs cash.

 

Wall Street is also petrified that fourth-quarter earnings are likely to reveal some dismal numbers, an issue that begs two immediate comments. First of all, it should be obvious that the fourth quarter left something to be desired.

 

The Dow Jones industrial average has fallen for four consecutive sessions but remains up 12.2 percent from its closing low on November 20. Year-to-date, the S&P is down 3.7 percent, the Dow has fallen 3.4 percent and the Nasdaq has slipped 2.4 percent.

 

However, the issue is ancient history. What is important at this point in time is how companies are reacting to the current economic turmoil and more specifically, their plans to combat the slowdown in sales and earnings. Meanwhile, the Wall Street Journal report that Citigroup could report more than $10 billion in fourth-quarter operating losses struck a blow to other banks on fears of a fresh round of losses from the credit crisis.

 

Alcoa kicked off the fourth quarter earnings season after the bell with a wider-than-expected loss of 28 cents a share, excluding items. Ahead of the results, its shares closed down nearly 7 percent after Deutsche Bank recommended investors sell the stock, and slipped another 1.1 percent to $9.95 in after-hours trading.

 

Financial stocks were among the worst performers on the Dow, as Bank of America fell 12 percent, JPMorgan fell 4.1 percent, and Citigroup slumped to $5.60, near the stock's level before the bank was bailed out by the U.S. government last year.

 

After the closing bell, JPMorgan announced that it had moved its fourth-quarter earnings release date up to January 15 from January 21, sending shares up 1.6 percent to $25.30 in extended trade.

 

Chevron sold off on concerns that oil demand will be hurt by the current recession. Domestic sweet crude oil futures settled down nearly 8 percent. Chevron fell 2.8 percent to $70.82 per share, while Exxon Mobil shed 1.3 percent to $76.54.

 

Caterpillar was the top weight on the Dow as its share price fell 4.7 percent to $41.19. On the NASDAQ, Apple fell 2.1 percent to $88.66.

 

However, there were bright spots due to merger activity. Shares of Advanced Medical Optics rose143 percent to $21.50 after the company agreed to be bought by Abbott Labs for nearly $1.4 billion. Abbott’s shares fell 2.2 percent to $50.06.

 

In response to the faltering economy, President-elect Barack Obama asked President George W. Bush to seek from Congress the remaining $350 billion of the $700 billion financial industry bailout, and he agreed to do so, the White House said. Obama, who will be sworn in on January 20, has vowed to restructure Washington's financial rescue plan to stem mortgage loan foreclosures.

 

Crude Falls Eight Percent

 

The price of crude oil futures fell 8 percent on Monday, falling below $38 as a result of the growing impact of the economic recession on global energy consumption. Domestic sweet crude settled at down $3.24 per barrel at $37.59, after hitting a low of $37.48 per barrel. London Brent crude settled down $1.51per barrel at $42.91. Falling fuel demand due to the global recession sent oil prices down 54 percent last year, with crude now off more than $100 from a record peak above $147 per barrel last July.

 

Prices dropped despite news that OPEC members may cut production further and that heating oil demand will climb above average this week due to cold weather. As a result, Iran's OPEC representative was quoted as saying the group could decide to reduce oil output again at its meeting in March, if crude prices fell further.

 

Saudi Arabia, already plans to cut production by an additional 300,000 barrels per day (bpd) in February to prop up the collapsing oil market, industry sources said on Sunday. Riyadh has already lowered supply this month to 8 million bpd, meeting its target under OPEC's pact to reduce overall supplies by a record amount from January 1.

 

Saudi Arabia's cutbacks add to similar moves this month by other OPEC producers, including Iran, the United Arab Emirates, Kuwait and Libya, to curb supplies. However, evidence that oil producers are cutting output has not lent much support to prices outlook for crude in the short term is bearish.

 

Goldman Sachs Commodities said in a research note on Friday that a market surplus was expected to drive inventories higher and put pressure on its forecast oil price of $30 a barrel for the first quarter of 2009.

 

FDIC Wants Greater Transparency

 

The Federal Deposit Insurance Corp (FDIC) has urged its member banks to publicly disclose how they are using the billions of dollars of government capital injections and guarantees. The FDIC issued a letter to more than 5,000 banks it supervises, encouraging them to say more about how the funds have supported prudent lending and helped homeowners avoid foreclosure.

 

The letter is not an order to the banks but strongly encourages them to comply with the FDIC recommendations.

 

"Given that government funds, capital and guarantees are being used to support banking institutions, banks are expected to document how they are continuing to meet the credit needs of creditworthy borrowers," the agency said.

 

The Treasury Department is injecting billions of dollars into banks in return for preferred shares and warrants under the $700 billion financial rescue package passed by Congress in October.

 

The government has also offered to guarantee up to $1.9 trillion in certain debts and deposits, and has engineered a number of rescue packages for troubled financial firms.

 

The programs have been met with sharp criticism from lawmakers and consumer groups who complain that banks are hoarding the cash instead of using it to extend credit to consumers or help distressed homeowners avoid foreclosure.

 

Congress is expected to attach more specific conditions on these financial stability programs before it releases the second half of the $700 billion Troubled Asset Relief Program.

 

Those conditions could include more restrictions on executive pay for participating banks and more specific language on how the banks are supposed to use the capital injections.

 

In the meantime, the FDIC said banks should be systematically collecting information about how they are using federal funds, and then present this information in shareholder reports and financial statements.

 

Bank of America Hit on Analyst Warning

 

Bank of America lost 11.2 percent of its share price on Monday after an analyst said the bank might suffer a $3.6 billion fourth-quarter loss and again slash its dividend. The warning by Citigroup analyst Keith Horowitz indicated that Bank of America has exposure through its credit card and investment banking operations as well as through holdings of complex debt.

 

Bank of America shares came under additional pressure after CNBC television reported increased friction between Bank of America CEO Kenneth Lewis and former John Thain, who is now Bank of America's head of global banking, securities and wealth management. CNBC said this could jeopardize Thain's prospects of eventually succeeding Lewis, who is 61. Bank of America bought Merrill on January 1.

 

Horowitz expects Bank of America to have a fourth-quarter loss of 75 cents per share, compared with his earlier estimate for a profit of 2 cents per share. He also lowered his 2009 profit forecast to 25 cents per share from $1.75. Horowitz also said the bank might lower its quarterly dividend to 5 cents per share from 32 cents. The bank halved its dividend last October.

 

Bank of America raised $10 billion in a share sale last October, and subsequently received $25 billion from the U.S. Treasury Department's Troubled Asset Relief Program (TARP). The bank is also one of the world's largest credit card issuers, and became the country’s largest mortgage lender when it bought Countrywide Financial last July.

 

Horowitz said the bank may have recorded only one-third of losses that could potentially total $165 billion between 2008 and 2011. "Investors should be braced for a very challenging fourth quarter," Horowitz wrote. But he said the TARP infusion should allow the bank to avoid having to raise new capital now, though a capital raising could take place in two to five years.

 

Horowitz rates Bank of America shares as "buy" with a $22 price target, saying the stock has "excellent long term value."

 

GM May Again Lease Vehicles

 

General Motors is planning to re-enter the vehicle lease business early this year and could see that form of financing amount to about 5 percent of its vehicle sales. As credit tightened and the economy slowed last year, GM's affiliated finance company, GMAC, stopped financing vehicle leases and sharply tightened standards for vehicle loans.

 

But last month, GMAC won approval to operate as a bank. The Treasury Department also agreed to take a $5 billion stake in the finance company to support GM's turnaround, which it has backed with $13.4 billion of government loans.

 

GM’s hope is that it will win new sales in the coming months after a weak close to 2008 when many of its customers came to assume that they would not be able to finance new car purchases at GM showrooms. At one point leasing represented 20 percent of GM’s sales.

 

GM could sell up to 5 percent of its cars in the United States with leases if the secondary market for asset-backed securities turns more positive for new issues. However, it appears unlikely that GM would return to the kind of deeply subsidized leasing that boosted industry-wide sales volumes earlier this decade but proved costly when resale values of trucks and SUVs began to tumble.

 

In the second quarter of last year, GM said lease-related charges had depressed its earnings by $2 billion.

 

GMAC has traditionally provided the bulk of financing for GM retail customers, and also financing that dealers rely on to carry vehicle inventory. However, it has struggled under the weight of $7.9 billion of losses in the 15 months ending September 30, largely tied to soured mortgages in its Residential Capital unit.

 

GMAC is owned by private equity firm Cerberus Capital Management LP and GM. The government bailout will result in both reducing their ownership stakes. Some analysts have estimated that cheap vehicle leases inflated U.S. auto sales by as much as 2 million units per year earlier this decade when annual sales topped 17 million units.

 

Sales plunged to 13.2 million vehicles in 2008 from 16.2 million a year earlier in the world's largest vehicle market. Most Street analysts expect sales to drop further in 2009, with forecasts ranging from 10.5 million to 12.5 million units.

 

As part of its turnaround plan, GM has forecast U.S. auto industry sales of between 10.5 million and 12 million vehicles this year.