MarketView for March 10

 

 

Summary 

 

It was a great day on Wall Street, at least in comparison to the previous days as the key stock indexes posted their best day in four months on Tuesday partially because of a release of a report by Citigroup indicating that it was profitable during the first two months of 2009. It was the Dow's largest percentage gain since November 21, 2008, and its fifth-biggest percentage increase since December 31, 2007.

 

As you might expect, financials led the huge rally, rising 16 percent after Citigroup Chief Executive Vikram Pandit also stated in a memo to staff that he was confident about its capital strength. Shares of Citigroup, in which the government more recently took a large common equity stake to help shore it up, rose 38.1 percent to $1.45. Citigroup's stock has fallen about 78 percent year to date.

 

Other bank shares rallied, with Bank of America up nearly 28 percent to $4.79, and Wells Fargo up 18.5 percent at $11.81. JPMorgan was the Dow's top performer with nearly a 23 percent jump to $19.50. All 30 Dow components were in positive territory.

 

The advance by financial shares marks a turnaround in investor sentiment after the sector has been hammered recently as banks' credit losses swelled.

 

Adding to the positive tone, U.S. Rep. Barney Frank, chairman of the U.S. House Financial Services Committee, said he is hopeful the Securities and Exchange Commission will once again impose the "uptick" rule in about a month. The rule slows the pace of short selling, or bets that a stock will fall, and could help calm volatile markets. It would be even more helpful if the SEC would enforce its no naked short selling rule.

 

Rep. Frank also echoed earlier comments from Federal Reserve Chairman Ben Bernanke, who called for "improvements" in mark-to-market regulations, rather than suspending them. Many have attributed these accounting rules for increasing losses and writedowns on bank balance sheets.

 

The last time the S&P rose as much as it did on Tuesday was after the government decided to rescue Citigroup for the first time in late November, when it agreed to pump $20 billion of new capital into the bank to avert a collapse that could have crippled the world's financial system.

 

After the closing bell, Treasury Secretary Timothy Geithner said in an interview with Public Broadcasting's Charlie Rose that the country was facing a deepening recession, but policy action would restore growth.

 

Other standouts included technology shares, with a jump in bellwethers like Apple, halting a three-day sell-off in the sector. Apple's shares ended the day up 6.6 percent at $88.63 and provided the largest boost to the Nasdaq 100. Microsoft gained 8.8 percent to $16.48 while Qualcomm added 7.2 percent to $35.36.

 

Crude Down Sharply

 

The price of crude oil fell nearly 3 percent per barrel on Tuesday after the government revised downward its forecast for world oil demand in 2009. According to the Energy Information Administration its latest forecast for world oil demand for 2009 was 84.27 million barrels per day, down 430,000 bpd from its previous projection and the lowest level since 2005.

 

Domestic sweet crude for March delivery settled down $1.36 per barrel at $45.71. London Brent settled down 17 cents per barrel at $43.96. OPEC meets in Vienna on March 15 to decide whether to add to an already-announced 4.2 million bpd production cut since September to support oil prices. A Saudi-owned newspaper said Monday that the world's top exporter wanted stricter compliance with existing production cuts before considering more cuts. Compliance with existing curbs is over 80 percent, according to independent observers.

 

Dealers were looking ahead to the weekly inventory reports from industry group API on Tuesday and the government on Wednesday. The expectation is that the EIA will report a 0.4 million barrel rise in oil inventories in the week to March 6, with gasoline supplies down 400,000 barrels and distillate supplies unchanged.

 

It Should Not Happen Again

 

The nation's financial rule book must be rewritten to prevent a repeat of the global economic crisis now gripping the United States and other countries, Federal Reserve Chairman Ben Bernanke said Tuesday.

 

"We must have a strategy that regulates the financial system as a whole ... not just its individual components," Bernanke said in a speech.

 

Bernanke offered new details on how to bolster mutual funds and a program that insures bank deposits. He also stressed the need for regulators to make sure financial companies have a sufficient capital cushion against potential losses.

 

Bernanke said there's a "good chance" the recession could end this year if the government is successful in getting financial markets to operate more normally again. The recession, now in its second year and already the longest in a quarter-century, has turned out to be more severe than anticipated, he acknowledged.

 

To guide the regulatory overhaul, Bernanke laid out four key elements. One is for Congress to enact legislation so the failure of a huge financial institution can be handled in such a way to minimize fallout to the national economy — similar to how the Federal Deposit Insurance Corp. deals with bank failures. Such "too big to fail" companies must be subject to more rigorous supervision to prevent them from taking excessive risk, he said.

 

The bailouts of insurance giant American International Group, Citigroup, Bank of America and mortgage finance companies Fannie Mae  and Freddie Mac  have put billions of taxpayers' dollars at risk over the past year and angered the American public.

 

Policymakers also should consider ways to bolster money market mutual funds that are susceptible to runs by investors, Bernanke said. That could be done by imposing tighter restrictions on the financial instruments that money markets can invest in or through a limited system of insurance for certain funds.

 

Bernanke also called for a review of regulatory policies and accounting rules, suggesting a larger financial buffer for the FDIC's insurance program for bank deposits that could be used when conditions worsen. Capital regulations for banks and other financial institutions also must be "appropriately forward-looking" to ensure sufficient money is set aside against potential losses.

 

Finally, the government should consider creating an authority specifically responsible for monitoring financial risks and protecting the country from crises like the current one. Tthe Fed, which already serves as the lender of last resort to troubled financial companies, could take on this super financial cop role.

 

Meanwhile, asked as to whether he has ever has second thoughts about taking the job as Fed chief, Bernanke said he couldn't deny there's been "some dark days, some difficult

 

Treasurys Are A Bonanza For Some

 

The decline in Treasury prices so far this year has left a select few with a small fortune as they bet on lower prices and higher yields on Treasury securities even as the economy continues to show signs of deterioration.

 

Fears that the U.S. government will be forced to issue $2 trillion, and possibly more, of Treasurys over the next 12 months to finance rescue packages for the banking sector is stoking bets that mounting supply will set in motion a huge domino effect.

 

Even the flight-to-quality trade into Treasuries, which have been investors' favorite safe haven during times of turmoil, has been overwhelmed by supply issues, as is the case with Tuesday's record $34 billion three-year auction.

 

Dramatic price drops in long-dated Treasuries have pushed yields to 3.67 percent, roughly 100 basis points higher year-to-date. Treasurys maturing in 20 years and beyond are posting negative returns of more than 12.5 percent, while Treasurys maturing in 10 to 20 years are down roughly 5.5 percent, according to Barclays Capital.

 

But some investors remain adamant bears, believing that recent price drops and rises in yields will be extended.

 

Some Regulatory Changers are Coming

 

Regulators will consider reviving the "uptick" restriction on short-sellers of stocks and Federal Reserve Chairman Ben Bernanke lent his support on Tuesday to modifying an accounting rule that has forced banks to take billions of dollars in write downs.

 

Federal Reserve Chairman Ben Bernanke said he was opposed to suspending mark-to-market accounting but said the rule tended to reinforce economic trends and improvements could be made. The prospect of the changes helped share prices turn in their best day in four months.

 

Barney Frank, who chairs the U.S. House of Representatives Financial Services Committee, told reporters he had spoken to the head of the Securities and Exchange Commission and hoped the uptick rule would soon be reinstated.

 

"I've spoken to Chair Schapiro of the SEC. I am hopeful the uptick rule will be restored within a month," Frank said.

 

The SEC later confirmed it may meet next month on the uptick issue but any proposal would likely be subject to a public comment period with a final rule possibly months away.

 

"The Commission may conduct a public meeting as early as next month to consider whether to formally propose reinstatement of the uptick rule, or consider other measures related to short sales," said SEC spokesman John Nester.

 

The uptick rule, adopted after the 1929 stock market crash, allowed short sales only when the last sale price was higher than the previous price. The SEC abolished the rule in 2007, after concluding that advances in trading strategies rendered it ineffective.

 

Senate Banking Committee Chairman Christopher Dodd said he backed the SEC reinstating the uptick rule "I wish they'd do it quickly," the Connecticut Democrat told reporters.

 

Short-selling is often blamed for precipitous declines in stocks but short-sellers defend their role, saying they prevent shares from becoming overvalued.

 

The SEC adopted short-term restrictions on short-selling last year but the measures were judged by some market watchers to have been largely ineffective.

 

Short-sellers borrow stocks they expect will fall in price in the hope of repaying the loans for less and pocketing the difference.

 

Frank welcomed Bernanke's support for changes to the mark-to-market accounting rule. "I do think you're going to see major movement on mark-to-market. Bernanke kind of blessed that...," he said.

 

Bernanke stressed that he supported mark-to-market's goal of making financial balance sheets as transparent as possible, but also talked about its shortcomings.

 

"It's one of the things that tends at times to increase the severity of ups and downs in the financial system and the economy," he said in response to an audience question following a speech to the Council on Foreign Relations.

 

"We need to do a lot more to provide guidance to the financial institutions and to the investors about what are reasonable ways to address valuation of assets that are being traded or if traded at all in highly illiquid, fire-sale type markets," Bernanke added.

 

The SEC and the Financial Accounting Standards Board have said they are working on more guidance to help banks determine values of assets in illiquid markets.

 

Bernanke's remarks come two days before a U.S. House Financial Services subcommittee is scheduled to meet to consider possible changes to the mark-to-market rule. The banking industry says the rule is undermining the government efforts to stabilize the financial industry.

 

But the SEC, which oversees and enforces accounting policy, is "not planning a suspension," of mark-to-market.