MarketView for March 11

 

 

Summary 

 

It was not much of a gain but in today’s market environment, a gain is a gain and after Tuesday’s substantial run-up in share prices, Wednesday’s performance was more than acceptable. So what were the comments from Jamie Dimon, head of JP Morgan Chase on CNBC managed to ensure a positive gain for the day on Wall Street. According to Dimon, his bank was profitable in January and February, echoing comments by Citigroup's CEO a day earlier.

 

Dimon's comments reversed a broad decline, came after a speech where he said the bank's bond department had just had its two busiest months ever and followed similar remarks on profits from Citigroup's Vikram Pandit that on Tuesday that contributed substantially to Wall Street's largest rally in nearly four months. JPMorgan’s shares ended the day up 4.6 percent to $20.40t.

 

Meanwhile, the Dow Jones industrial average managed to eke out a slim gain as a 7 percent drop in oil prices pushed energy shares like Exxon Mobil lower and limited a broad-market advance.

 

A positive recommendation on Hewlett-Packard sent the share prices of computer manufacturers higher and the Nasdaq ended up nearly 1 percent. At the same time, Hewlett-Packard rose 5.8 percent to $28.61, making it the Dow's top advancer. On the Nasdaq, Apple closed out the day with a gain of 4.6 percent to $92.68. Dell was up 2.5 percent to close at $8.98.

 

Apple introduced a smaller version of its popular iPod Shuffle music player on Wednesday with a new feature that enables the user to see what song is playing.

 

However, a decline of 7.4 percent in the price of domestic sweet crude futures for April delivery sent energy shares lower. The April crude contract settled down $3.38 per barrel at $42.33. As a result, Exxon Mobil was among the heaviest weights on the Dow, down 2.4 percent at $65.77.

 

Price of Crude Falls Seven Percent

 

The price of crude oil fell about 7 percent to $42 per barrel on Wednesday on further signs of weak global demand and rising inventories. Government data showed crude stocks rose by 700,000 barrels last week, while overall demand over the past four weeks dropped 2.1 percent against last year's levels.

 

Nonetheless, gasoline demand rose as lower pump prices encouraged more driving. Gasoline stocks fell by 3 million barrels. Distillate demand fell 6.1 percent over the past four weeks from last year, with supplies off by 2.1 million barrels last week.

 

U.S. crude settled down $3.48 par barrel at $42.23, while London Brent crude settled down $2.39 per barrel at $41.57.

 

The inventory report came after China showed a surprise 15 percent drop in imports during February, as oil companies scaled back purchases due to high inventories and low demand. The was on the heels of an 8 percent decline during January.

 

OPEC meets on March 15, with some members calling for another output cut and others insisting greater compliance with current agreements is needed. Qatar's energy minister Abdullah al-Attiyah said 800,000 barrels per day of supply needs to be removed from the market before OPEC discussed further cuts. But Algeria, Venezuela and Libya have all raised the prospect of another OPEC supply reduction.

 

Saudi Arabia kept supplies to customers steady for April, according to industry sources. Energy Secretary Steven Chu said he will speak to OPEC ministers before their March 15 meeting and tell them that higher crude oil prices will slow the recovery of the world economy.

 

A Bit Self-Serving but Nonetheless Positive

 

JPMorgan Chase CEO Jamie Dimon said on Wednesday he sees "modest signs" of an economic recovery and endorsed a plan to create a systemic risk regulator. Dimon, also said he supports mark-to-market accounting, but banks may have applied the fair value rule "to a ridiculous point."

 

The mark-to-market accounting rule, which requires assets to be valued at market prices, is defended by investor advocates and some lawmakers as giving a clear picture of the assets held on banks' books. However, the banking industry, which has been forced to write down billions of dollars' worth of hard-to-value assets in illiquid markets, has pleaded for a suspension or modification of the rule.

 

Dimon endorsed the plan of Rep. Barney Frank, chairman of the House of Representatives Financial Services Committee, to create a systemic risk regulator. Frank plans a broad overhaul of financial regulation this year.

 

Christopher Dodd, chairman of the U.S. Senate Banking Committee, said on Wednesday he hopes to have comprehensive reform legislation to address the regulation of the financial services industry by the summer, instead of a series of proposals being considered in the House.

 

"There are modest signs of recovery and healing out there," Dimon told the chamber, adding the market just saw the two most active bond months ever.

 

Banks, reeling from the financial crisis as the economy remains mired in a recession, have seen their stock prices tumble. Some have blamed short-sellers for pushing down stock prices. Dimon said short-selling and the lapse in the so-called "uptick rule" contributed to the credit crisis.

 

The SEC said on Wednesday the agency could act in April to reinstate the uptick rule, which allowed short sales only when the last sale price was higher than the previous price. It was abolished by the SEC in 2007.

 

Speaking to reporters after his speech, Dimon said he opposes the nationalization of banks. "I don't think any banks should be nationalized. It doesn't work. It's a mistake," he said.

 

Dimon said nationalization means different things to different people, but some banks may need some government help and they should remain as private as possible, he said. He also said that if a bank is in really poor shape the FDIC has the responsibility to deal with it. "That's what the FDIC is for," he said.

 

The FDIC, which insures up to $250,000 per depositor, takes control of failed banks in a process in which sometimes a buyer is found or the agency takes control of the failed bank's assets.

 

In a wide-ranging speech, Dimon also criticized the Basel II international banking accord, saying the capital adequacy plan "allowed too much leverage by banks."

 

Dimon addressed the government stress tests, which banks with at least $100 billion in assets are undergoing in order to determine how they would withstand even more severe economic conditions. Regulators want to know how much capital or other aid they might need in the event of those economic conditions. Dimon believes banks will survive the tests, which could help "create a lot of credibility within the system."

 

JPMorgan is among many institutions that received capital injections from the government, but like other bank CEOs, Dimon wants to return government money as soon as possible.

 

He also said banks should try "not to overreact" to the restrictions the government is placing on banks receiving federal funds.

                   

Major Asset Sales Unlikely At BofA

 

Bank of America has put a private bank it inherited from Merrill Lynch on the block and may try to sell other assets as well. However, unlike rival Citigroup, which is planning a radical overhaul, Bank of America may not need capital so badly that it has to swallow hard and sell key assets it would rather keep and that may be just as well, given the dearth of buyers.

 

Since Citigroup last month received a second government bailout, Bank of America has had its hands full trying to stave off fears that it could be in the same situation.

 

Bank of America has received $45 billion from the government's $700 billion Troubled Asset Relief Program, including $20 billion in a January bailout that also included the government sharing in losses on some toxic assets, mainly at Merrill. Its stock has fallen about 67 percent since the start of the year.

 

If Bank of America found itself in need of capital, it has other assets it can sell but is unlikely the bank will want to do so. Included among those assets is its 16.6 percent stake in China Construction Bank and a nearly 50 percent interest in asset manager BlackRock, or Columbia Management.

 

Bank of America sold part of its Construction Bank shares in January for $2.83 billion, and has said it plans to sell more when a lock-up period expires in August 2010, but not sooner. Its stake is worth about $19 billion now.

 

BlackRock has a market value of around $12 billion. Columbia Management, meanwhile, said it had $386.4 billion in assets under management as of December 31. That could make it worth $7.7 billion, assuming a price of 2 percent of managed assets.

 

Getting rid of some or all of those holdings would stop short of a true restructuring involving the offloading of capital-heavy businesses such as mortgage lender Countrywide Financial and credit card issuer MBNA. Furthermore, selling off First Republic is probably nothing more than a disposal of a non-core businesses unit.

 

The bank has tried to demonstrate that its financial health is better than that of Citigroup, which said in January that it will split into two operating units, selling or winding down non-core assets.

Citigroup also agreed to give a controlling stake in its Smith Barney brokerage to Morgan Stanley for an initial $2.7 billion payment. Morgan Stanley may take over the entire business after five years.