MarketView for March 9

 

 

Summary 

 

Sometimes you cannot win for trying on Wall Street and Monday was one of those days. Normally a large merger or acquisition deal would send the markets sharply skyward but that was not the case with the announcement released early Monday morning stating that Merck had agreed to purchase Schering-Plough for $41 billion. Instead, the Nasdaq manages to hit a 6 ½ year low. The current opinion on the Street is that with major indexes trading around 12-year lows, evidence of thawing credit markets, along with some evidence of an economic recovery is is necessary before you will see any solid rebound of Wall Street.

 

As a result, pharmaceuticals were among the top drags on the Dow Jones industrial average with Merck down 7.7 percent at $20.99, Johnson & Johnson falling 2.9 percent to $46.60 and Pfizer down 0.8 percent to $12.63. Only Schering-Plough managed to turn in a substantial gain, closing up 14.2 percent at $20.13 per share.

 

The deal between the two companies also comes at an uncertain time for the pharmaceutical industry after it failed to produce enough new drugs to replace old ones and the current administration is looking at health-care reforms that could pressure drug prices.

 

The Street also received news of another large acquisition late in the day with Dow agreeing to go through with its purchase of Rohm and Haas. The companies reached a settlement as the two sides were set to face off in court over Dow's refusal to close the deal. Shares of Rohm and Haas rose 4.7 percent to $77.47 in extended trading, while Dow Chemical's shares dropped 10 percent to $5.70.

 

Meanwhile, the Dow is down 7.3 percent for the month and off 25.4 percent for the year so far. The blue-chip average has been unable to post gains in consecutive sessions since the most recent back-to-back run on February 5-6. Large blue chip techs pulled the Nasdaq down to its lowest close since October 2002.

 

In other news, Google fell 5.7 percent to $290.89, which at its current pace will be its fifth straight weekly decline and mark its longest losing streak in more than a year. Bank of America managed a 19.4 percent gain to $3.75 and Wells Fargo was up nearly 16 percent to $9.97. Investment bank Merrill Lynch said the S&P 500 stock index is likely to bottom at 600 points in October, with financial stocks pointing the way out of the current bear market six months ahead of that.

 

Also weighing on investor sentiment were comments from billionaire investor Warren Buffett, who said in an interview on CNBC television, the current environment was an "economic Pearl Harbor." But he added that over a 10-year period, investors will do "considerably better owning a group of equities" rather than Treasury securities.

 

Crude Up Again

 

The price of crude oil rose more than 3 percent to $47 a barrel on Monday as a naval incident between the United States and China increased tensions at the same time that dealers were looking at the possibility of deeper production cuts by OPEC.

 

According to the State Department, five Chinese ships, including a naval vessel, harassed an unarmed Navy ocean surveillance ship in international waters in the South China Sea on Sunday.

 

As a result, sweet domestic crude for March delivery settled up $1.55 per barrel at $47.07, while London Brent settled down 72 cents per barrel at $44.13. Crude prices have fallen as the economic crisis continues to crimps demand. Meanwhile, OPEC next meets on March 15 to set output policy again. OPEC Secretary-General Abdullah al-Badri said the 12-member producer group would consider reducing output again at the meeting.

 

"All options are on the table," he told reporters in Qatar when asked if OPEC, which pumps more than a third of the world's oil, would announce another reduction. Top OPEC exporter Saudi Arabia, however, wants the cartel to discuss stricter compliance with existing supply curbs, a Saudi-owned newspaper reported, and cited sources as saying the group should not discuss another cut.

 

OPEC has agreed to lower oil production by a total of 4.2 million barrels per day from September levels and it is estimated that OPEC has probably come close to meeting that pledge with compliance of more than 80 percent. Saudi Arabia already plans to lower supplies to one European oil company in April, according to a trading source.

 

At the same time, Royal Dutch Shell declared force majeure, a formal suspension of its supply commitments, on its shipments of Nigerian Forcados crude due to the impact of explosions on a pipeline last week.

 

Market Fell Off A Cliff

 

Warren Buffett said on Monday that the has "fallen off a cliff" but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s.

 

Speaking on CNBC television, the 78-year-old billionaire said the country is experiencing a "close to the worst-case" scenario of falling business activity and rising unemployment, causing consumer confidence and spending to tumble.

 

Buffett called on Democratic and Republican policymakers to set aside partisan differences and unite under the leadership of President Barack Obama to wage an "economic war" that will fix the economy and restore confidence in banking. He urged policymakers and regulators to communicate their efforts better to the public, though he stopped short of major, specific policy recommendations.

 

"People are confused and scared," he said. "People can't be worried about banks, and a lot of them are."

 

Buffett’s company, Berkshire Hathaway, reported al 96 percent decline in earnings, largely from losses on derivatives contracts. Berkshire's book value per share fell 9.6 percent in 2008, the worst year since Buffett took over in 1965.

 

According to Buffett, no one including himself foresaw the severity of home price declines, which led to problems with securitizations and other debt whose value depended on home prices continuing to rise, or at least not plummet.

 

"It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either," Buffett said. "We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do."

 

Consumers too should reduce their reliance on debt such as credit cards, he said. "I can't make money borrowing money at 18 or 20 percent," said Buffett, ranked as the second-richest American by Forbes magazine in October. "I'd go broke."

 

Buffett said the economy was mere hours away from collapse last September when credit markets seized up, Lehman Brothers went bankrupt and insurer American International Group Inc got its first bailout.

 

While praising efforts by Federal Reserve Chairman Ben Bernanke and others to stimulate the economy, he said the economy "can't turn around on a dime" and that their efforts could trigger higher inflation once demand rebounds. "We are certainly doing things that could lead to a lot of inflation," he said. "In economics there is no free lunch."

 

The stock of Omaha, Nebraska-based Berkshire has fallen by half since September. Growth in some units such as auto insurer Geico Corp has been offset by weakness elsewhere, including jewelry retailers that Buffett said have "gotten killed."

 

Buffett said Berkshire will write less catastrophe insurance this year after investing roughly one-third of its cash in high-yielding securities issued by GE, Goldman Sachs and other companies.

 

Buffett called on banks to "get back to banking" and said an overwhelmingly number would "earn their way out" of the recession, even if stockholders don't go along for the ride. Saying that "a bank that's going to go broke should be allowed to go broke," Buffett nevertheless added that the "paralysis of confidence" in the sector is "silly" because of safeguards such as deposit insurance.

 

He said Wells Fargo and U.S. Bancorp, two large Berkshire holdings, should appear "better than ever" three years from now, while Citigroup, which Berkshire does not own, would probably keep shrinking.

 

Buffett said he still expects Berkshire's derivatives contracts, whose value depends on where four stock indexes trade a decade and more from now, to be profitable. Over 10 years, he said, "you will do considerably better owning a group of equities" than Treasurys. Buffett also defended his imperfectly timed October opinion piece for The New York Times, where he said he was moving non-Berkshire holdings in his personal account to stocks. "I stand by the article," he said. "I just wish I had written it a few months later."

 

Ford Does What GM and Chrysler Still Can’t

 

Ford Motor and the United Auto Workers said on Monday that workers had agreed to contract concessions and a new funding arrangement for a retiree healthcare trust to help the automaker preserve cash amid the auto industry downturn. The cuts put additional pressure on General Motors and Chrysler to complete discussions with the UAW that are required as part of their government bailouts.

 

In effect, Ford has negotiated concessions from the UAW on a par with those mandated by the government for GM and Chrysler, but ahead of its cross-town rivals. About 59 percent of production workers and 58 percent of skilled-trades workers voted to accept the changes.

The labor agreement is contingent on the pursuit of the debt reduction and other actions. Ford also provided confirmation of future business for certain UAW plants in exchange for the concessions.

 

Members of the Obama administration task force were touring GM and Chrysler facilities in the Detroit area on Monday. Chrysler, which is about 80 percent controlled by Cerberus Capital Management, and GM have until the end of March to demonstrate that they can be made viable.

 

The agreement between Ford and the UAW is one of several steps the automaker has taken to cut costs and maintain liquidity for a turnaround plan that started four years ago. Ford said it worked closely with the UAW to identify changes that would help make its labor costs competitive with foreign-owned automakers. Ford also said those changes also were "important to our efforts to operate through the current economic environment without accessing a bridge loan from the U.S. government."

 

The agreement with the UAW includes contract changes that will reduce Ford's labor costs and also allows Ford to make up to half of required payments into VEBA (the retiree healthcare trust) in company stock, reducing the drain on Ford's liquidity.

 

GM and Chrysler are required to complete concession agreements on labor costs and to provide half of their VEBA funding in company stock as conditions for their emergency government loans.