MarketView for March 6

 

 

Summary 

 

After a sharp rally in the morning that evaporated by midday, a little bit of increased bullishness managed to send stock prices higher by the closing bell, with the Dow Jones industrial average and the S&P 500 indexes rebounding to end the day in positive territory. Contributing to the upward activity in stocks was a surge in oil prices that sent energy stocks higher and offset a sell-off in technology shares on bets that the slowing economy will sap consumer spending on items such as computers and other hi-tech equipment.

 

Exxon Mobil and Chevron topped the Dow as the price of oil rose 4.4 percent, or $1.91 per barrel, to settle at $45.52 on expectations that OPEC might again reduce output. Chevron rose 3.2 percent to $58.27 and Exxon gained 2.9 percent to $64.03.

 

The Street was also pleased to learn from a report by the Wall Street Journal that Lloyds Banking Group and the U.K. government had agreed on an asset protection scheme, easing concerns about frail capital positions at global banks. During the day’s trading session, the Dow and S&P touched fresh 12-year lows. However, they erased those losses late in the session after the Journal's report on Lloyds.

 

Unfortunately, a four percent slide in Apple helped keep the Nasdaq under water, dragging it to a 6-year intraday low. JPMorgan cut its price target and profit views on Apple, citing signs that Mac and iPhone volumes have been below expectations. Apple's stock fell 4 percent to $85.30. Shares of big-cap technology stocks followed Apple's lead, with cell-phone chip and technology supplier Qualcomm down 2.9 percent at $33.63.

 

Overall, it was the fourth week of declines for all the indexes, while the S&P 500 posted its worst week since November. For the week, the Dow lost 6.2 percent, the S&P 500 was down 7 percent, and the Nasdaq fell 6.1 percent. In addition, the week marked another leg down for the bear market with both the Dow and S&P off more than 24 percent since the start of the year. The markets have seen about $11 trillion in value evaporate since the key indexes reached an all-time high during October 2007.

 

Even with the late-day bounce, there was on-going concern with regard to the banking sector. As a result, JPMorgan fell 4 percent at $15.93 and Goldman ended the day down 7.4 percent at $75.65. Bleak economic news added to the negative tone after a government report indicated that the unemployment rate rose last month to 8.1 percent, its highest level since December 1983, as 651,000 jobs were cut.

 

The gloomy jobs picture is disconcerting news for both companies and consumers, whose spending drives corporate profits. Automaker and Dow component General Motors fell 22 percent to $1.45 a day after auditors raised doubts about the company's viability. GM traded as low as $1.27.

 

Dow Chemical rose nearly 10 percent to $7.11 and Rohm and Haas was up 18.1 percent to $63.80 after the companies confirmed that discussions are under way with regard to their troubled merger. Dow Chemical agreed last July to buy Rohm for $78 a share, but then pulled out of the deal. In other M&A activity, Roche Holding AG raised its offer to buy out the minority shareholders of Genentech to $93 per share from $86.50, driving Genentech’s shares up 11.3 percent to $90.86.

 

Unemployment Hits 25-Year High

 

The Labor Department reported on Friday that unemployment rose to a 25-year high of 8.1 percent for the month of February as employers, cut 651,000 jobs. In addition, 161,000 more jobs were lost in January and December than previously reported, the Labor Department reported in its monthly nonfarm payrolls report.

 

Since the recession started in December 2007, the economy has lost 4.4 million jobs, with more than half of that number lost in the last four months alone. A total of 12.5 million people were unemployed in February, the Labor Department said.

 

However, the drop was not as deep as had been expected on the Street, thereby taking some pressure off the Treasurys market, with debt prices dropping. Nonetheless, February's jobless rate was still the highest since December 1983 and was a half percentage point above January's 7.6 percent.

 

The increase was also the largest for any month since April 1980. January's job cuts were revised to show a steep decline of 655,000, while December's payroll losses were adjusted to 681,000, the deepest since October 1949.

 

The Obama administration said February's jobs statistics were more evidence of the depth of the recession. Speaking in Columbus, Ohio, President Obama said: "I don't need to tell the people of this state what statistics like this mean, because so many of you have been watching jobs disappear long before this recession hit."

 

The success of spending plan depends on stabilizing the fractured financial system and the collapsed housing market, which are at the center of the economic rout. Losses in February were broad based, with only government, education and health services hiring. Economists expected the pace of job losses to continue into 2010, even with the much anticipated economic recovery is the second half of this year.

 

The manufacturing sector shed 168,000 jobs, after 257,000 vanished in January, while the construction sector lost 104,000 jobs, after losing 118,000 in January. The service sector, grouping industries such as airlines, hotels, banks and restaurants, slashed 375,000 positions after shedding 276,000 in January.

 

Companies struggling with falling revenues and tight profit margins are axing jobs in huge numbers, forcing households to further scale back spending, creating a vicious cycle.

 

To make matters worse, a measure of the unemployed, people working part-time for economic reasons and those who have given up looking for work hit14.8 percent, the highest on records dating back to 1994, from 13.9 percent in January. The Labor Department also noted a sharp rise in the number of people experiencing long spells of unemployment, with 2.9 million people having been unemployed for 27 weeks or longer in February, compared to 1.3 million in January.

 

The length of the workweek was steady at 33.3 hours, matching a record low registered in December. The factory workweek edged lower to 39.6 hours from 39.8 in January. Weekly overtime hours at factories slipped to 2.6 hours in February from 2.8 in January. Average hourly earnings inched up to $18.47 from $18.44.

 

Major Write Downs Unlikely At GE

 

Analysts at Merrill Lynch and Bernstein Research said they did not see GE sharply marking down assets in its hefty finance arm in the near future.

 

"With financial companies around (the) world under increasing pressure and governments injecting funds into multiple financial institutions, we think investors have rightly questioned managements' forecast and planning assumptions that continue to seem too optimistic and out-of-step with the environment," Merrill Lynch analyst John Inch, wrote to clients.

 

Bernstein Research analyst Steven Winoker wrote that, while he thinks GE will need to mark down the value of its financial portfolio over time, he does not see an immediate and large write down as likely.

 

"Probably the biggest controversy surrounding GE right now is what the fair value of (GE Capital's) $661 billion is if/when a write-down to fair value should occur," Winoker wrote in a note to clients.

 

He estimated that parts of GE could be overestimating the value of some of its assets -- for example, he calculates that its real estate equity is worth about $20 billion, rather than the $32.7 billion GE estimated it at the end of the year. However, he saw no need for immediate action.

 

"We think such write-downs, if needed, would be spread over several years, which will lessen the need for equity raises, but will hurt long-term earnings," Winoker wrote.

 

Inch, of Merrill Lynch, wrote that he considered it unlikely GE would have to raise additional capital -- a step the company has repeatedly said it regards as unlikely. But he warned that if that changes, GE may it find it difficult to raise substantial money in equity markets due to its low stock price.

 

He noted that if GE Capital did face a funding crisis, he believed it would be likely the U.S. government would step in to block a bankruptcy filing or a spin-off, given the lender's huge role in the U.S. financial system.

 

"Investors cannot assume that the risks of a future government bailout of GE Capital are zero," Inch wrote.

 

Merrill Lynch cut its 2009 profit target for GE to $1.16 per share, below his prior view of $1.32, which would represent a roughly 38 percent drop on a per-share basis, excluding unusual items. It cited the deteriorating economy.

 

GE, which also runs the NBC Universal media business, has not provided a numeric per-share profit target for the year, instead setting out a framework that allows for a drop in profit at GE Capital but modest growth at its big infrastructure businesses.

 

Another question facing GE is what will happen to its current top-notch credit rating. Many on Wall Street expect Moody's Investors Service and Standard & Poor's to cut GE's "triple-A." GE's chief financial officer and noted bond investor Dan Fuss of Loomis Sayles said on Thursday they believed any cut to GE's rating would keep the company in the "double-A" range.

 

If its rating was lowered further, to "A+," Winoker estimated GE would be on the hook for an $8.2 billion collateral call. A far deeper cut, to "BBB+" would mean another $2.9 billion payment.

 

The cost of insuring GE Capital's debt through credit-default swaps declined on Friday, according to Phoenix Partners Group. Investors were paying 15.5 percent upfront, meaning that it required an immediate $1.55 million payment plus an additional $500,000 per year to ensure $10 million of GE debt for five years. At Thursday's close they had stood at 16.5 percent upfront.