MarketView for March 3

 

 

Summary

 

 

It was a volatile trading day on Wall Street on Tuesday, with the major indexes moving between positive and negative territory on a seemly regular basis before ending the day in the red. The S&P 500 index closed below 700 for the first time since October 1996 as persistent uncertainty regarding the resources required to shore up the financial system overshadowed a hunt for bargains. The S&P is down nearly 23 percent for the year so far and has given up more than 55 percent since the high hit in October 2007.

 

Federal Reserve Chairman Ben Bernanke left the door open to whether banks will need more money when he said the size of a $700 billion bank-rescue package would depend on bank "stress tests" being conducted by regulators and the economy's direction.

 

On the upside, energy shares were able to profit from the increase in the price of crude oil as expectations rose that OPEC will cut production once again. Chevron

 

American Express rose 6.9 percent to $11.82 after the government unveiled details of a program to stabilize the financial system that could ease the credit card company's financial expenses.

 

In its latest efforts to bolster the economy, the Federal Reserve and the Treasury launched a new securities loan program and said a future expansion may include some of the riskier mortgage and debt securities hampering banks.

 

The $200 billion Term Asset-backed Securities Loan Facility, or TALF, is designed to give frozen securitization markets a jolt by offering financing for investors to encourage them to buy "AAA"-rated asset-backed securities.

 

In testimony before a congressional committee, Treasury Secretary Timothy Geithner said the Obama administration will work with Congress to determine the size and shape of future efforts to shore up banks and acknowledged the cost of the financial bailout may rise.

 

General Electric ended the day down 7.8 percent to close at $7.01, the result of concerns over the company’s future. Last week, GE announced a deep cut in its dividend.

 

This Time it is Home and Auto Sales that Plummet

 

Sales of previously owned homes fell 7.7 percent in January and auto sales were down to nearly a almost 30-year low last month. The data came as Federal Reserve Chairman Ben Bernanke urged bold action to pull the economy out of a 14-month slump and White House economic adviser Christina Romer warned that first-quarter output was looking "pretty lousy."

 

The lengthening recession is keeping potential home buyers on the sidelines, even though housing is now at the most affordable level in nearly four decades.

 

The National Association of Realtors pending home sales index, based on contracts signed in January, was down 7.7 percent to 80.4, the lowest reading since the NAR started tracking the series in 2001. The index was at 87.1 in December. Compared with the same period a year earlier, pending home sales were down 6.4 percent in January.

 

Escalating job losses and weak consumer confidence are keeping house sales depressed, but there is cautious optimism that aggressive measures by the government and the Fed will help to stabilize the housing market, which is seen as key to a broader economic recovery.

 

The government has put in place a $275 billion program to stem a wave of home foreclosures. The NAR's housing affordability index surged 13.6 percentage points in January to 166.8, the highest level since tracking began in 1970. The affordability index indicates a median-income family, earning $59,800 could afford a home costing $283,400 in January with a 20 percent down payment, according to the NAR.

 

Meanwhile, auto sales were down more than 40 percent in February, marking the 15th straight month of declining auto sales.

 

“We Had To Rescue AIG” – Fed Chairman Ben Bernanke

 

Federal Reserve Chairman Ben Bernanke on Tuesday defended the government's latest bailout of embattled insurer AIG, telling irate lawmakers that he was also angry, but that the failure to act could have triggered an economic disaster.

 

Bernanke, in testimony to the Senate Budget Committee, gave a grim view of U.S. economic prospects, saying labor market conditions may have worsened in recent weeks. His comments helped drive the stock market briefly lower.

 

Pressed by the Senate committee to justify the latest in an expanding series of bailouts for American International Group, Bernanke said there was no alternative, even though the company had been irresponsible.

 

"We know that failure of major financial firms in a financial crisis can be disastrous for the economy. We really had no choice," he told the panel.

 

The government threw a fresh $30 billion lifeline to AIG on Monday, as part of a restructured bailout that had earlier swelled to about $150 billion. AIG, which reported a record $61.7 billion quarterly loss on Monday, has been slammed by losses on its credit default swaps that guarantee mortgage-linked securities.

 

Lawmakers told the Fed chairman that public patience has worn thin over the generous support for the foundering insurer even as smaller firms and households are taking heavy hits from the slumping economy.

 

Bernanke said AIG's extensive relationships with banks around the globe presented the risk of "contagion" should the company fail, and said authorities were working hard to try to neutralize dangerous positions.

 

"We have been doing what we can to break the company up, to get it into a saleable position and to try to defang it," he said. "If there's a single episode in this entire 18 months that has made me angrier, I can't think of one (other than) AIG," Bernanke added, equating the company's financial services division with an unregulated hedge fund.

 

Bernanke told the committee that restoring stability to the battered financial sector was a prerequisite to a recovery from the deep U.S. recession, and said a surge in U.S. government debt was unavoidable.

 

"We are better off moving aggressively today to solve our economic problems," he said. "The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period."

 

In addition to the likelihood of a worsening jobs market, Bernanke said many businesses are burdened with excess inventories and are likely to cut production further in the months ahead.

 

Crude Moves Higher

 

Oil prices rose nearly 4 percent on Tuesday on expectations that OPEC will cut output again. Domestic sweet crude for March delivery settled up $1.50 per barrel at  $41.65, while London Brent crude settled up $1.46 per barrel at $43.70.

 

Slumping demand due to the global recession has sent crude prices off highs above $147 a barrel in July, prompting OPEC to agree to a series of deep production cuts. Some OPEC members are calling for another reduction when the cartel meets this month.

 

Libya's top OPEC official, Shokri Ghanem, said markets were still oversupplied and the exporter group needed to reduce output, either through better compliance with existing supply curbs or a new cutback. OPEC President Jose Botelho de Vasconcelos said the group has yet to decide whether to cut output further when it meets.

 

Price support also came after Royal Dutch Shell shut a number of oil installations at its Nigerian venture following explosions on a pipeline. Production outages in the OPEC nation helped support prices during oil's record rally last year.

 

New Loan Program Initiated

 

A joint effort by the Treasury Department and the Federal Reserve initiated a new securities loan program to include equipment and vehicle fleet leases and said a future expansion to $1 trillion may also include some of the riskier mortgage and debt securities now plaguing banks. Launching the long-awaited $200 billion Term Asset-backed Securities Loan Facility, or TALF, the Fed and Treasury said the program will start offering loans on March 17.

 

As collateral, the TALF will accept triple-A rated asset-backed securities supported by new and recently originated auto loans, credit card loans, student loans and government-guaranteed small business loans.

 

The Fed and Treasury also said they were considering accepting a broader range of securities that would be supported at a later date. These include commercial mortgage backed securities as well as "private label" residential mortgage backed securities and collateralized debt obligations.

 

The TALF is designed to give frozen securitization markets a jolt by offering financing for investors to encourage them to buy AAA-rated asset-backed securities. In February, Treasury Secretary Timothy Geithner announced plans to expand the program to up to $1 trillion by increasing the Treasury's backing for the program with $100 billion of federal bank bailout funds.

 

"Ultimately, the program should bring down the cost and increase the availability of new credit to consumers and businesses," the Treasury said in a position paper.

 

Adding commercial mortgage backed securities to the program could head off major problems in commercial real estate by providing new financing options.

 

By April, the Fed and Treasury anticipate that the loan program will include asset-backed securities backed by small ticket equipment, heavy equipment and agricultural loans and leases. These include items ranging from office copiers for small businesses to giant construction cranes and farm harvesters.

 

Treasury and Fed said their teams are analyzing "appropriate terms and conditions" for CMBS and are "evaluating" other types of triple-A-rated securities.

 

If the program includes private-label mortgage-backed securities and collateralized loan and debt obligations, the program could help lift some of the most illiquid assets from banks' books, taking pressure off their balance sheets.

 

Private label MBS not backed by Fannie Mae (FNM.N) or Freddie Mac (FRE.N) helped fuel the U.S. home price bubble that burst in 2007, bringing some financial institutions to their knees.

 

"The expanded program will remain focused on securities that will have the greatest macroeconomic impact and can be most efficiently added to the TALF at a low and manageable risk to the government," they said.

 

In addition, the Fed and Treasury said they might include non-auto floor loans as well as securities backed by mortgage-servicer advances.

 

But the Fed warned that increased TALF lending and other actions to stabilize the financial system "have the potential to greatly expand" the Fed's balance sheet, already bloated to nearly $2 trillion by other lending and liquidity programs.

 

Therefore, it needs more ability to manage its balance sheet and therefore, the level of reserves in the banking system. Treasury and the Fed said they will seek legislation to give the Fed additional tools needed to manage the level of reserves while providing necessary funding for TALF and other liquidity programs.

 

Treasury Secretary to Work With Congress on Bailout Costs

 

Treasury Secretary Timothy Geithner said on Tuesday that the Obama administration will work with Congress to determine the size and shape of future rescue efforts. In testimony before the U.S. House of Representatives Ways and Means Committee, Geithner said a $250 billion "placeholder" provision in Obama's budget plan for additional financial stability costs did not represent a specific request.

 

The fiscal 2010 budget "acknowledges that, as expensive as it already has been, our effort to stabilize the financial system might cost more," Geithner said in prepared remarks.

 

The placeholder, which would allow the Treasury to purchase $750 billion in financial sector assets, will "help ensure we can cover any additional financial stability costs."

 

This amount would be in addition to the $700 billion that the U.S. Treasury is spending through a financial rescue fund approved by Congress in October. That fund is more than half spent or committed.

 

Geithner defended a deal made over the weekend to prop up staggering insurance giant American International Group with up to another $30 billion in taxpayer funds, saying that allowing the company to default on its obligations would cause "catastrophic damage to the American people."

 

He said the global financial situation has dramatically worsened since AIG was first rescued in September 2008 and this has put more pressure on the economy and AIG.

 

"The most effective thing to do is to try to make sure that that firm can be restructured over a period of time ... and so that we can get through this," he said.

 

Geithner said the Obama budget plan addresses deep challenges for an economy that is shrinking and caused the administration to inherit a $1.3 trillion budget deficit. "The contraction in credit is causing more job losses and further declines in business activity, which, in turn is adding more pressure on the financial system," the Treasury secretary said.

 

Geithner also said it was important to bring deficits down in four years to around 3 percent of gross domestic product, keeping the national debt from growing faster than the economy itself. The budget proposes to do this in part by raising tax rates after 2011 on couples earning more than $250,000, a plan criticized by Republicans.

 

"Failure to reduce deficits to this level would result in higher interest rates as government borrowing crowds out private investment, leading to slower growth and lower living standards for Americans," he said.

 

Geithner also said the Obama administration intended to recoup lost revenues by cracking down on tax shelters and the use of offshore structures and accounts by corporations.

 

"Over the next several months, the president will propose a series of legislative and enforcement measures to reduce such U.S. tax evasion and avoidance," Geithner said.