MarketView for January 16

Summary

 

Stock prices hit the skids on Tuesday, despite Barak Obama’s pledge for substantial changes ahead with regard to the economy. However, the Street’s naïve, yet abundant, expectations for details on how the new administration would address the growing banking crisis and faltering economy were dampened after the inauguration speech concluded with little new information to digest.

 

State Street, the world's largest institutional money manager, set the Street on edge when it said it had a $6.3 billion unrealized loss in its investment portfolio and lowered its outlook. Its shares ended the day down 59 percent at $14.89.

 

The drop in the Dow Jones industrial average marked the largest point and percentage drop for the index since December 1, 2008, and the first time the Dow has been below 8,000 since November 20, 2008. Since Obama won the election in November, Wall Street has been betting he will put plans in place to help stabilize the sliding economy and stem rising unemployment.

 

The negative tone for the financial sector was set in Britain by the Royal Bank of Scotland, which unveiled that it expects to take the biggest loss in British corporate history on Monday. The news sparked concerns about the global banking sector and hurt shares of financials, including JPMorgan Chase, which was the top drag on the Dow.

 

Citigroup's shares rose nearly 3 percent to $2.88 in after hours trading, after the company declared a quarterly dividend of 1 cent per share and said it had completed the sale of Citigroup Technology Services Ltd (India) for $127 million.

 

Bank of New York Mellon was down 2.6 percent to $18.50 in after hours trading following its fourth-quarter earnings.

 

Underscoring the widespread selling in the regular session, the Chicago Board Options Exchange Volatility index shot up 22.86 percent, its largest daily percentage gain since December 1, when it rose 23.96 percent, according to CBOE data. The index, also known as the VIX, is Wall Street's favorite barometer of fear.

 

Although the S&P 500 has rebounded from its November 21 intraday low, the broad index has fallen 10.9 percent this year on worries about the deepening global recession. Technology shares were pulled down by expectations of poor quarterly results from IBM.

 

IBM shed 3.5 percent to $81.98 before it released its quarterly results after the bell. However, IBM surprised and beat expectations. Then in after-hours trading, IBM's shares rose 4.5 percent to $85.64 after the release of the fourth-quarter numbers.

 

Apple was down 4 percent to $78.20, and Microsoft lost 6.2 percent to $18.48.  Both companies are expected to report results later this week. Meanwhile, shares of Intel fell 6.4 percent to $12.86 after the company cut the price of some processors by as much as 48 percent.

 

 

Crude Up As Feb Futures Contract Ends

 

The price of crude oil futures for February delivery settled up 6 percent on Tuesday as traders sought to square their books ahead of the expiry of the February contract. February contracts, which expired on Tuesday, settled up $2.23 per barrel at $38.74, while March crude settled down $1.73 per barrel at $40.84. London Brent settled down 88 cents per barrel at $43.62.

 

Falling demand is prompting OPEC to implement a series of output cuts aimed at balancing the market and supporting prices. For example, Kuwait has informed all customers of cuts in oil supply in line with OPEC's December decision to reduce supply, state oil company Kuwait Petroleum Corp said.

 

OPEC's new president, Botelho de Vasconcelos, has said that OPEC is enforcing its deepest ever supply curbs, adding that the cartel was unlikely to meet before its next scheduled meeting in Vienna in March.

 

China, one engine in the six-year commodity price rally that started in 2002, was expected to release fourth-quarter GDP data this week that is expected to indicate a 7.0 percent growth, the slowest pace of expansion in nearly a decade for the world's third largest economy.

 

Russian gas reached Europe via Ukraine for the first time in two weeks after Moscow and Kiev ended a contract dispute that had cut supplies to about 20 European countries.

 

Weekly inventory data will come out on Thursday. The report will be delayed a day following the holiday on Monday honoring Martin Luther King Jr.

 

IBM Exceeds Expectations

 

IBM issued a 2009 profit outlook that exceeded Street expectations, underscoring the ability of the company to weather the global downturn and sending its share price higher in after-hours trading. The fourth-quarter earnings were a rare bright spot for the tech industry, which has been hit by profit warnings and sweeping job cuts as companies and consumers reduce spending.

 

Although IBM's fourth-quarter revenue came in a little shy of expectations, falling 6.4 percent from a year ago, the company also managed to cut costs by 3-4 percent. A lower tax rate also helped.

 

Chief Executive Samuel Palmisano said IBM is "ahead of pace" on its plan to boost earnings to $10 to $11 per share by 2010. That is more optimistic than its assessment in October, when it said it was on pace to meet that goal. The company posted a gross profit margin of 47.9 percent, up 3 percentage points from a year earlier.

 

Chief Financial Officer Mark Loughridge said the firm will keep improving margins. "We will continue our focus on structural changes that reduce our spending levels and improve productivity in 2009," Loughridge said on a conference call.

 

Those efforts include standardizing services products so they are less costly to deliver to IBM's customers, which are predominantly among the world's largest. IBM also plans to shift staff from headquarters to local offices where they can meet directly with clients.

 

IBM, predicted 2009 earnings of least $9.20 a share with net income increasing 12 percent to $4.43 billion, or $3.28 per share, in the fourth quarter ended December 31, from $3.95 billion, or $2.80 per share, a year earlier.

 

Revenue fell 6.4 percent to $27.0 billion, but turnover in its software segment climbed 3 percent to $6.4 billion.

 

IBM also signed services contracts totaling $17.2 billion, at actual rates, a decrease of 5 percent. But its backlog of services bookings rose to a currency-adjusted $117 billion at the end of December, up $3 billion from the end of September.

 

IBM shares climbed to 85.25 in after-hours trade from a regular close of $81.98 on the New York Stock Exchange. The stock has dropped about 16 percent over the past year, less than half the 36 percent drop in the Nasdaq Composite Index. Shares of Microsoft are down about 41 percent, while Hewlett-Packard Co's stock has fallen 22 percent over the same period.

 

Concerns Continue to Haunt Citigroup and Bank of America

 

Citigroup and Bank of America hit their lowest levels since the early 1990s as investors, seeing no quick end to losses from toxic assets, worried that many banks are running short of capital. Confidence in the banking sector was further rattled after State Street said it might need additional capital and reported a 71 percent drop in fourth-quarter profit on Tuesday, a day after Royal Bank of Scotland Group Plc posted the largest loss in U.K. corporate history.

 

The rout was wide spread, with shares of regional bank PNC Financial Services sliding 41 percent and even relative islands of safety like JPMorgan Chase falling 21 percent. Investors were worried that the economy was worsening and that banks may not be able to withstand more credit losses without government help, further diluting shareholder interests.

 

Among regional banks, PNC stock slid 41 percent on worries that the bank might suffer investment losses or need more capital to absorb bad loans at newly acquired National City.

 

Four analysts increased their 2009 loss estimates for Citigroup due to higher bad loans. Shares of Citigroup closed below $3, a level last reached in November, when the government rescued it with an injection of $20 billion and a backstop on toxic assets. Citigroup closed down 70 cents, or 20 percent, to $2.80, its lowest level in 18 years.

 

Four days after posting its first quarterly loss in 17 years, Bank of America fell to its lowest level since November 1990, with the bank remaining under pressure until it rebuilds its capital. Bank of America saw its share price fall 29 percent, or $2.08, to $5.10.

 

The Treasury Department has asked banks receiving government bailout funds to provide more details about lending, a sign of further pressure to increase credit, and hopefully increase economic activity, even as they struggle with mounting losses.

 

On Monday, RBS said it was on course to report a 2008 loss of up to 28 billion pounds ($41 billion) after taking big losses from bad debts, while Britain threw its troubled banks another multibillion-pound lifeline, the second since October.

 

RBS shares fell 11 percent on Tuesday after sinking 67 percent Monday, while Lloyds Banking Group Plc stock lost almost one-third of its value, hitting its lowest price in 20 years. Barclays Plc lost 17 percent, despite the fresh government actions to pump money into the markets.

 

Regions Financial, a large Southeast bank, reported an unexpected $6 billion charge to write down parts of its banking business on Tuesday, bringing its fourth-quarter loss to $6.22 billion. Shares slid 24 percent.

 

State Street saw its share price fall 59 percent to its lowest level in over a decade after reporting higher unrealized losses in its commercial paper program and investment portfolio and said it could need to raise capital.

 

Bank of New York Mellon, a major custody bank, moved up its earnings report following the disappointing results from rival State Street. Bank of New York's fourth-quarter profit fell 88 percent and its shares fell 3 percent in after hours trading, following on the heels of a 17 percent share price decline in regular trading.

 

The financial stocks' freefall also dragged down J.P. Morgan, whose shares dropped 21 percent to the lowest price in six years after analysts cut their earnings outlook on the second-largest U.S. bank.

 

Wells Fargo & Co's shares fell 21 percent to their lowest level in 10 years amid growing fears of lower earnings, dividend cuts and higher credit losses.