MarketView for January 30

Summary

 

It was a month that is best forgotten as Wall Street ended its worst January ever. Meanwhile, I extend kudos to Sen. Claire McCaskill, D-Missouri, who on Friday introduced legislation to cap compensation for employees of any company that accepts federal bailout money. Under the terms of a bill introduced by McCaskill, no employee would be allowed to make more than the president of the United States. President Obama's current annual salary is $400,000.

 

"We have a bunch of idiots on Wall Street that are kicking sand in the face of the American taxpayer," an enraged McCaskill said on the floor of the Senate. "They don't get it. These people are idiots. You can't use taxpayer money to pay out 18 billion dollars in bonuses."

 

McCaskill's proposed compensation limit would cover salaries, bonuses and stock options.

 

On Thursday, Obama said the prospect that some of the $700 billion Wall Street bailout could end up paying for bonuses to managers of struggling financial institutions was "shameful."

The president said it was the "height of irresponsibility" for executives to pay bonuses when their companies were asking for help from Washington.

 

"The American people understand we've got a big hole that we've got to dig ourselves out of, but they don't like the idea that people are digging a bigger hole even as they're being asked to fill it up," Obama said.

 

McCaskill's proposal comes three days after struggling banking giant Citigroup, which has taken about $45 billion from the government's Troubled Asset Relief Program, reversed plans to accept delivery of a new $42 million corporate jet. The company changed its mind under Treasury Department prodding.

 

Meanwhile, Stocks closed out their worst January ever with another slide on Friday after data showed the economy contracted at the fastest pace in nearly 27 years in the fourth quarter.

 

Uncertainty about the fate of a plan by the Obama administration to relieve banks of money-losing assets added to the bearish tone, with Citigroup falling 9 percent and Bank of America down 3 percent.

 

Procter & Gamble was a large drag on the Dow Jones industrial average, sliding 6.4 percent, after its quarterly profit missed expectations. P&G also added its name to a growing list of companies cutting outlooks. P&G’s shares ended the day down $3.72, to close at $54.50

 

Both the Dow and the S&P 500 suffered their worst January ever, with the Dow down 8.8 percent and the S&P down 8.6 percent. The NASDAQ dropped 6.4 percent in January. January performance traditionally serves as a harbinger for stocks for the rest of the year.

 

For the week, the Dow was down 0.95 percent, while the S&P 500 fell 0.73 percent and the NASDAQ slipped 0.06 percent. The S&P 500 is up about 10 percent from the November 21 intraday low after starting 2009 up more than 20 percent.

 

Kraft Foods fell 4.2 percent to $28.05, the third worst drag on the Dow, behind 3M. 3M fell after Barclays and JPMorgan analysts cut their price targets, a day after the company posted a drop in fourth-quarter profit and sales.

 

Among financial stocks, shares of Citigroup fell 9 percent to $3.55, while shares of Bank of America were down 3 percent to $6.58. The NASDAQ’s decline was led by a 3.1 percent slide in Apple shares to $90.13, and was only partly offset by a jump of 17.6 percent in Amazon.com (to $58.82.

 

Another standout loser was Juniper Networks, down more than 16 percent at $14.16, after the company warned its first-quarter revenue and profit would fall far short of the Street's expectations.

 

Worst GDP Report in 27 Years

 

The economy, as measured by the gross domestic product, contracted at the fastest pace in nearly 27 years during the fourth quarter of 2008. In a report that showed a broad-based drop ion economic activity across nearly all sectors, the Commerce Department said gross domestic product shrank at a 3.8 percent annual rate, the largest contraction since the first three months of 1982.

 

President Barack Obama, who is pushing Congress to approve a package of spending and tax cut measures that could cost close to $900 billion, said the report highlighted the need for quick government action.

 

"It's a continuing disaster for America's working families," Obama said of the latest data. "The recession is deepening and the urgency of our economic crisis growing."

 

The decline would have been considerably worse had it not been for a $6.2 billion rise in inventories, a development that suggests businesses might pull back even more sharply in the first quarter, prolonging the year-old recession. The increase in inventories added 1.3 percentage points to the change in GDP, meaning the economy would otherwise have contracted by at least 5 percent.

 

The fourth quarter decline came on the heels of a 0.5 percent drop in the third quarter. These are the first back-to-back quarterly contractions in output since the last quarter of 1990 and the first quarter of 1991.

 

Consumer spending, which accounts for two-thirds of U.S. economic activity, fell at a 3.5 percent rate in the fourth quarter after dropping at a 3.8 percent pace in the previous three months. It was the first time consumer spending had contracted for two straight quarters since the period that ended in March 1991.

 

Falling house prices combined with the collapse on Wall Street, tight access to credit and rising unemployment have reduced household wealth, causing a slump in demand. Spending on durable goods like cars and furniture plunged 22.4 percent, the steepest decline since early 1987. Business investment slumped 19.1 percent, the sharpest pullback since the first quarter of 1975.

 

Home building also took another heavy hit, falling at a 23.6 percent rate, while exports were down nearly 20 percent, their largest decline since the third quarter of 1974. For the year as a whole, GDP grew 1.3 percent, the smallest gain since 2001, the last time the economy was in recession.

 

Other reports also painted a grim economic picture. Business activity in New York City fell for a 12th straight month in January, while a gauge of business activity in the Chicago region hit a new low for the current downturn. However, consumer confidence rose to a four-month high in January amid optimism the Obama administration's policies would help to fix the broken economy.

 

The economy's collapse has pulled the floor out from commodity costs and raised the risk that a broad array of prices could begin to drop, further sapping activity and creating more headaches for the Federal Reserve.

 

A measure of consumer prices in the GDP report plunged at a record 5.5 percent annual rate in the fourth quarter, after a 5 percent rise in the third quarter. Excluding volatile food and energy items, core prices grew a muted 0.6 percent, the slowest rate since the fourth quarter of 1962.

 

The weak job market has employment costs rising just 2.6 percent last year, the smallest gain since the government began keeping records in 1982.

 

Oil Giants Still Printing Money

 

Exxon Mobil and Chevron posted higher-than-expected quarterly earnings on Friday as refining profits helped offset a steep decline in crude oil prices. Exxon said fourth-quarter earnings fell by a third, but full-year earnings of $45.2 billion set a new company record.

 

The energy sector has been hit hard by the twin blows of plunging energy prices and the credit crunch. However, the financial depth of the top oil companies means they can spend through the slump, having learned a lesson from past cycles, when under-investment left them exposed once oil demand recovered.

 

Exxon's fourth-quarter net profit fell to $7.8 billion, or $1.55 per share, from $11.7 billion, or $2.13 per share, a year earlier. Sales fell 27 percent to $84.7 billion, but Exxon had $31 billion in cash at the end of the quarter. The company will spend $7 billion buying back stock this quarter, down from $8 billion in the fourth quarter. Chevron said it would halt buybacks this quarter.

 

Exxon's refining operations benefited from the drop in crude prices versus the price for products such as gasoline and diesel, widening its profit margins and boosting quarterly profit from refining by $147 million to $2.41 billion. Exxon's 2008 exploration budget was $26.1 billion, up 25 percent from 2007.

 

However, in oil and gas production, Exxon’s earnings fell $2.57 billion to $5.63 billion as crude prices averaged about $59 a barrel in the fourth quarter, down from $90 a year earlier. Including natural gas, production fell to 4.11 million barrels of oil equivalent per day from 4.25 million a year earlier

 

Chevron's profit rose to $4.9 billion, or $2.44 per share, from $4.88 billion, or $2.32 per share, helped by $600 million from an asset swap in which it received stock for a producing field. Excluding that one-time gain, it earned $2.23 per share, down from a year earlier but topping analysts' average forecast of $1.79.

 

Patricia Yarrington, the new chief financial officer at Chevron, said her priorities were the dividend, the capital program and staying flexible. "So we've always seen the share repurchase program as sort of the discretionary part of that," she said on a conference call.

 

Chevron's production was down 70,000 barrels of oil equivalent production to 2.54 million barrels, largely from reductions in the Gulf of Mexico due to the hurricanes that hit the region in September. That knocked down earnings from production by 35 percent to $3.15 billion, but the decline was more than offset by a jump in refining profit to $2.08 billion from $204 million. Chevron aims to produce 2.63 million in 2009, assuming oil at $50 a barrel, but said it would not meet a 3 percent compound annual production growth goal for 2005 to 2010.

 

Roche Takes Aim at Genentech

 

The Swiss pharmaceutical company, Roche Holding, launched a surprise hostile bid for Genentech at a price below its original rejected offer, reflecting tougher financing conditions and a drop in Genentech shares. Roche is now making a public tender offer at $86.50 per share in cash for the 44 percent of Genentech it does not already own, valuing the deal at $42 billion and replacing its initial $44 billion bid.

 

The move comes just days after Pfizer agreed to buy smaller rival Wyeth for $68 billion, backed by a $22.5 billion loan, indicating debt markets for cash-rich pharmaceutical makers are far from dead.

 

"We are confident that we will have the financing available when the money is needed," Roche Chairman Franz Humer told reporters.

 

Genentech said a special committee of its board would make a formal response within 10 business days of starting the tender offer and urged shareholders to take no action at this time. But it signaled another rejection in the offing.

 

Buying Genentech would give Roche control of all revenue for blockbuster cancer drugs Avastin and Herceptin, as well as an attractive portfolio of other medicines, and reflects the pharmaceutical industry's push to acquire biotech assets to fill sparse new-product pipelines. Genentech currently gets U.S. revenue from its medicines, while Roche sells the drugs outside the United States.

 

Roche appeared to be turning up the pressure on Genentech, so as to possibly do a deal before the anxiously awaited clinical data on Avastin, due in April, is released. Significantly positive data would likely expand Avastin use and thereby drive up the company's value.

 

Roche, which currently owns 56 percent of the Genentech outstanding shares and originally bid $89 per share, pitched its new offer at a premium of nearly 3 percent over Genentech's Thursday closing price of $84.09. That is 6 percent above Genentech's price before the initial offer was announced last year, compared with 29 percent for Pfizer's Wyeth deal.

 

Roche had initially aimed to acquire the remaining shares through a negotiated settlement but decided to appeal directly to shareholders after further talks failed to reach an agreement.

 

Roche said it will seek a merger with Genentech if at the end of the offer it owns 90 percent or more of the shares. It did not give details of the possible length of its tender. Apparently, Roche made a fresh round of calls to banks after news of the Pfizer-Wyeth deal emerged.

 

After the initial Roche offer in July 2008, Genentech shares rose to a high of $99.05, but later fell back below the offer price as the credit crisis bit, which gave Roche leeway to lower its bid.

 

Bad News at Procter & Gamble

 

Procter & Gamble lowered its expectations for the year on Friday after sales slowed in its second quarter, the latest signal that consumers and retailers are cutting spending in the recession. As a result shares of P&G, fell as much as 5 percent.

 

P&G earned $5 billion, or $1.58 per share, in its fiscal second quarter, compared with a profit of $3.27 billion, or 98 cents per share, a year earlier. P&G had forecast earnings of $1.58 to $1.63 per share. The results include a gain of 63 cents per share from the sale of its Folgers coffee business to JM Smucker. Earnings from continuing operations totaled 94 cents per share.

 

P&G lowered its earnings and sales forecast for the fiscal year ending in June, adding to the list of household products makers tempering expectations as they deal with the recession. P&G expects fiscal 2009 sales to be flat to down 4 percent. Organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, are now expected to rise 2 to 5 percent, down from an earlier forecast of 4 percent to 6 percent growth that P&G stood by as recently as December.

 

P&G is trying to show investors that it is doing what it can to keep shoppers interested in its brands, while cutting its own costs. P&G is using more coupons and other promotions to tout the value of its products and taking steps such as cutting travel costs by relying on more video and phone conferencing.

 

At the same time, P&G should get some relief from higher commodity and energy costs. While such costs will still be higher this year, P&G now expects to incur slightly less than $2 billion in incremental costs, down from a forecast of about $2 billion it issued in December.

 

Second-quarter sales fell 3 percent to $20.37 billion, while volume dropped 3 percent. Organic sales rose 2 percent. On a net basis, sales fell in every unit except for baby and family care, where sales rose 3 percent.

 

P&G said it is comfortable $4.29 per share for the year, which ends in June. P&G lowered its own guidance to a range of $4.20 to $4.35 per share from a range of $4.28 to $4.38 per share. P&G forecast third quarter earnings of 78 cents to 86 cents per share, including Folgers-related restructuring charges. It said total sales should fall 2 percent to 7 percent in the quarter.