MarketView for January 13

 

Summary  

 

The Dow Jones industrial average chalked up its fifth straight day of negative numbers on Tuesday as Wall Street began to come to grips with what looks to be a less than spectacular earnings season. The day’s gloomy attitude took precedence over the likely possibility that authorities will take toxic assets off banks' balance sheets.

 

Yet, the S&P 500 and NASDAQ both managed to end the day in the black as rising oil prices lifted energy shares and biotechnology companies gained on the bet that those sectors will be among the few that are able to increase earnings in the current economic environment.

 

Among the biggest drags on markets in general was General Electric whose shares ended the day down 5.6 percent at $14.94 after a Barclays Capital analyst said the conglomerate's profit could rely more heavily on tax benefits than the Street expects.

 

Meanwhile, Alcoa kicked off the fourth-quarter earnings season on a sour note after reporting a big loss during after hours trading on Monday, which in turn carried over into Tuesday’s trading, sending its shares down 5.1 percent to close at $9.55

 

Tuesday’s trading activity was volatile, with indexes moving back and forth over break-even. The broad S&P 500 has gained nearly 18 percent since hitting an 11-year low in late November, and has lost about 3 percent since the year's start last week.

 

The financial sector, at the heart of the credit crunch and global economic slowdown, was able to generate some momentum after Federal Reserve Chairman Ben Bernanke said in a speech in London that more steps were needed to stabilize banks, reviving the idea of authorities sopping up toxic assets from banks' books.

 

Optimism that Washington would work quickly on a plea by President-elect Barack Obama for the remaining $350 billion of financial rescue funds to stabilize credit markets helped offset some of the gloom, as did news that our trade deficit saw its largest decline in 12 years during November.

 

JPMorgan Chase saw its share price move higher on the day after the company said late Monday it is bringing forward its results by six days. Apparently some investors interpreted positively the bank's decision to announce fourth-quarter results on January 15, six days sooner than planned. The stock ended at $26.35, up 5.8 percent.

 

In addition, JPMorgan Chief Executive Jamie Dimon has consistently warned that the bank's results in the fourth quarter are under pressure from rising unemployment and consumer credit concerns, and some investors said the stock may have been oversold on these warnings.

 

Citigroup is pushing ahead with a plan to sell a controlling stake in its Smith Barney retail brokerage, as it tries to replenish capital decimated by mounting losses.

 

On the downside, industrial shares dragged, including Boeing, which gave up 2.9 percent at $42.46. Credit Suisse downgraded the company on concerns over problems with Boeing's 787 Dreamliner program.

 

Energy shares benefited from a rise in oil prices on cold weather and comments from Saudi Arabia that it had made deep production cuts. Exxon Mobil rose 1.8 percent to $77.92, while Chevron gained 1.4 percent to close at $71.82.

 

Crude Ends Higher

 

Sweet domestic crude for February delivery settled up 19 cents per barrel at $37.78. February Brent settled up $1.92 per barrel at $44.83. Saudi Arabian Oil Minister Ali al-Naimi said the world's biggest exporter would pump below its OPEC production target of 8.05 million bpd in February.

 

"If there is a need to do more, we will do so because our purpose is to bring things in balance," Naimi told reporters in New Delhi. "We will look and see whether we need to take more. If we need to, if inventories keep rising, we will reduce." "We have taken in Saudi Arabia alone, 1.7 million (bpd)" (off the market), he said.

 

OPEC's secretary general said the cartel may cut oil output further at its meeting in March if the market remains oversupplied a month from now. OPEC agreed to cut supply by 2 million bpd at meetings in September and October. In December, it agreed to lower output by a further 2.2 million bpd as of January 1, a record reduction.

 

Support also came from a blast of cold winter weather in the northern hemisphere, which pushed up heating oil futures. The global economic crisis has dented global energy demand and helped send crude prices tumbling from record highs over $147 a barrel hit in July. Earlier in the day, oil prices turned negative as demand concerns overshadowed the cold front and Saudi Arabia's cuts.

 

The EIA revised down its 2009 world oil demand forecast by 200,000 barrels per day (bpd) on Tuesday, calling for consumption to fall by a total of 810,000 bpd this year compared with 2008 levels.

 

U.S. crude oil stocks have swelled as demand in the top oil consumer wilts, pushing U.S. crude futures into a deep discount compared with Brent crude. Stock levels at Cushing, Oklahoma, the delivery point for U.S. crude futures, have hit record levels and analysts expect inventories could rise further.

 

Pfizer Cuts 800

 

Pfizer, whose $7.5 billion annual research budget has produced few major medicines in recent years, said on Tuesday it would cut 800 research positions this year as part of a restructuring. The world's largest pharmaceutical company, which recently narrowed its sights to 10 disease areas and dropped its long-standing focus on heart research, said the layoffs will be at laboratories in St. Louis, Groton, Conn., La Jolla, Calif. and Sandwich, England.

 

"It's part of Pfizer's overall plan to refocus research in a more efficient way; we're taking a methodical approach to hit our goals," company spokesman Ray Kerins said of the job cuts. However, Pfizer would not disclose how much savings the layoffs might generate or whether additional research jobs could be targeted next year and beyond. "We're in a strong financial position, with a strong balance sheet," Kerins said.

 

However, company revenue fell in the third quarter amid declines for Lipitor and drugs for blood pressure, cancer and allergies now competing with generics.

 

Pfizer has already cut more than 25,000 jobs since 2004, or about a quarter of its overall global workforce, in an attempt to cut costs and generate earnings growth, despite generic competition for many of its major medicines.

 

Pfizer's biggest challenge comes in 2011, when its Lipitor cholesterol drug faces competition from cheaper generics. Earnings growth has been anemic and shares of the company are trading at 10-year lows, despite belt tightening and the promotion in mid-2006 of Pfizer's general counsel Jeffrey Kindler as chief executive.

 

Disappointing clinical trials have forced the company to scrap a number of once-promising experimental drugs, including the cholesterol medicine torcetrapib that Pfizer had hoped would become a $10 billion-a-year product and offset the expected decline in Lipitor sales.

 

The company is counting on Martin Mackay, a longtime Pfizer executive who was promoted to research chief in late 2007, to deliver the kinds of big products that have eluded its laboratories over the past decade. Mackay, speaking on Tuesday at a JP Morgan healthcare conference in San Francisco, highlighted experimental treatments for cancer, arthritis and Alzheimer's disease and said Pfizer was on track to file 15 to 20 marketing applications for drugs between 2010 and 2012.

 

Smith Barney to Become Part of Joint Venture

 

Morgan Stanley and Citigroup have agreed to form a joint venture wealth management business, of which Smith Barney will be a key part. Citigroup will exchange 100 percent of its Smith Barney, unit for a 49 percent share in the joint venture with Morgan Stanley and an upfront cash payment of $2.7 billion.

 

Morgan Stanley, in turn, will exchange 100 percent of its global wealth management business for a 51 percent stake in the joint venture and may buy a greater stake after three years, but Citigroup will retain a significant stake for at least five years.

 

The venture will create the largest domestic brokerage business with more than 20,000 brokers and $1.7 trillion in client assets. The brokerage force will surpass that of Bank of America’s Merrill Lynch division.

 

Citigroup, meanwhile, is expected to shed businesses it considers "non-core," and may announce plans on Jan, 22, the same day it is expected to post a large fourth-quarter loss. The transaction is part an overhaul of Citigroup, following big losses tied to complex debt.

 

After the deal has closed, Citigroup will recognize a pre-tax gain of approximately $9.5 billion and a $5.8 billion after tax gain on the transaction, while adding $6.5 billion of tangible common equity. Citigroup is also expected to achieve a cost savings of approximately $1.1 billion. expects to recognize

 

The bank has struggled to bolster capital after suffering $20.3 billion in losses in the year ended September 30, 2008. It has received $45 billion from the government's $700 billion Troubled Asset Relief Program, including $20 billion in an emergency rescue arranged in November.

 

Auto Sales to Hit 27 Year Low

 

Domestic auto sales in 2009 will likely decline about 13 percent and reach their lowest level in 27 years, pressuring the economy and pushing the industry close to collapse. Automotive forecasting firm J.D. Power and Associates expects light vehicle sales for the year to fall to around 11.4 million units, while Deutsche Bank expects sales of 11.5 million units, representatives said at a Society of Automotive Analysts (SAA) roundtable on the sidelines of the North American International Auto Show. That would make it the lowest sales figure in the United States since the 10.5 million units sold by automakers in 1982. Auto sales usually account for more than 10 percent of total U.S. consumer spending.

 

According to J.D. Power, first-quarter 2009 auto sales were seen ticking up to an annualized rate of 10.9 million units, from a rate of 10.2 million in the fourth quarter, with global auto sales falling 8.2 percent in 2009.

 

North American sales should drop 12.3 percent, while car sales in Europe should fall 14.9 percent. Sales in South America and Asia should slide 3.9 percent and 2.6 percent, respectively, according to J.D. Power. J.D. Power expects U.S. auto sales to rise to 13.4 million units in 2010 and 14.7 million units in 2011.

 

Domestic auto sales fell 18 percent in 2008, pushing GM and Chrysler to the brink of collapse. In December the Bush administration approved $17.4 billion in emergency loans for GM and Chrysler. But conditions attached to that bailout include automakers proving their long-term viability by March 31, plus obtaining fresh concessions from the United Auto Workers union and from holders of their debt.

 

Ford has not sought federal loans but asked for a $9 billion credit line if economic conditions worsen. Ford’s senior economist, Emily Kolinski-Morris, said the automaker expects 2009 U.S. auto sales in a range from 10.5 million to 12.5 million units, with the U.S. recession weighing on sales in the first half of the year.

 

Favorable government policy in the form of an economic stimulus should lift sales in the second half, she said. The forecast was consistent with submissions made by Ford to the U.S. Congress in December.

 

Kolinski-Morris said Ford's U.S. sales prediction includes housing industry declines near the "magnitude of the 1930s," with housing starts falling up to 76 percent from their peak.

 

J.D. Power said the drop in U.S. auto sales to 13.2 million units in 2008 from more than 16.1 million units in 2007, plus the expected decrease this year, means the industry is "one or two car companies" down in terms of volume.

 

Deutsche Bank's Lache said that the probability of an automaker going bankrupt as the industry tries to weather the downturn is "greater than not." "There's no guarantee that all of the automakers are going to survive this process," he said. "There is much more systemic risk than we've ever seen."