MarketView for March 12

 

 

Summary 

 

Oh what a beautiful day it was on Wall Street on Thursday as stock prices rose for a third consecutive day as a result of some relief that a ratings cut of General Electric by Standard & Poor’s was just one notch and that no further cuts loomed. At the same time retail sales indicated that consumer spending was improving just a bit.

 

Wall Street closed out its best three-day run since the end of November after GE, the ninth-largest company in the S&P 500 and viewed as an economic bellwether, closed up nearly 13 percent to $9.57. S&P stripped it of its AAA rating, citing the expectation for poor earnings at its finance unit, and assigned a "stable" outlook. There was considerable fear on the Street that the downgrade would be much worse or that the outlook would be negative.

 

Wal-Mart ended the day up 3.1 percent at $48.94, ranked among the Dow's top advancers following a government report that showed retail sales fell by an unexpectedly small margin in February. As a result, the Dow closed above 7,000 for the first time since February 27, but remains down 49 percent from its record close in October 2007. For the month of March, the blue-chip average is up 1.5 percent, but down 18.3 percent for the year.

 

Bank of America Chief Executive Kenneth Lewis said reported that BofA was profitable in January and February and should be able to ride out the recession without any additional help from taxpayers. Lewis' comments echoed statements by Citigroup and JPMorgan Chase executives over the past two days.

 

Bank of America's stock rose nearly 19 percent to close at $5.85 and JPMorgan chalked up a 13.7 percent gain to close at $23.20. Citigroup added 8.4 percent to $1.67, while Wells Fargo rose 17.4 percent to $13.95.

 

Investor sentiment derived some momentum from a flurry of takeover activity in the biotechnology sector, driving up shares of health-care companies. The Amex Biotechnology index rose 6 percent. Specifically, Gilead Sciences said it will acquire CV Therapeutics for about $1.4 billion, stepping in the middle of a hostile bid for CV from Japan's Astellas Pharma. Gilead shares gained 0.9 percent to $44.43, while CV's shares soared 31.5 percent to $21.04.

 

Shares of Celgene rose 11.7 percent to $47.16, placing it among the stocks contributing the most to the Nasdaq's advance. Celgene was the top percentage gainer in the S&P 500 health-care index, which rose 5.2 percent.

 

Genentech rose 1.9 percent to $93.92 after Swiss drug manufacturer Roche Holding AG struck a deal to acquire all of the company's outstanding shares for $46.8 billion. Pfizer advanced 9.6 percent to $14.02 following news that its drug was effective in slowing a rare type of pancreatic cancer.

 

Shares of General Motors closed up 17.2 percent to $2.18 after GM indicated that it will not immediately need $2 billion in emergency funding for March. Shares of Ford Motor added 7.1 percent to $2.10.

 

Price of Crude Rises Sharply

 

The price of crude oil was up more than 11 percent exceeding $46 per barrel on Thursday following better-than-expected retail sales for the month of February and ahead of a weekend OPEC meeting. Domestic sweet light crude settled up $4.70 per barrel at $47.03 after falling more than 7 percent on Wednesday. London Brent crude settled up $3.69 per barrel at $45.09.

 

Data from China, the world’s second largest oil consumer, was mixed, showing industrial output growth slowed to a record low at the start of the year, weighing on global markets. However, a reported showed a continued surge in bank lending in China in February fed optimism that economic activity could soon rebound.

 

The slumping global economy has damped global oil demand, sending crude oil prices down from record highs over $147 a barrel hit in July and prompting OPEC to agree a series of deep production cuts in the second half of last year.

 

OPEC meets on Sunday to agree on output policy and is widely expected to talk about stricter compliance with its existing output cuts rather than further reductions. Libya said it would go along with another production cut if needed, but added the group must first address compliance. Saudi Arabia, the biggest and most influential of the 12-member group, is among those that believe it is too soon to agree new output targets. Some members, however, such as Iraq and Kuwait, have said an additional cut might be necessary.

 

Retail Sales Better Than Expected

 

Retail sales fell modestly last month, indicating that spending could be stabilizing, but a record 5.3 million workers on jobless benefits indicated households remain under pressure. According to the Commerce Department, retail sales slipped 0.1 percent in February after a 1.8 percent rise a month earlier.

 

A large decline in auto sales helped pull down the retail results. Excluding motor vehicles and parts, sales increased 0.7 percent in February, compared to a 1.6 percent advance the previous month. Households, buffeted by rising unemployment and plummeting asset values, have largely become penny-pinchers and are shunning big-ticket items such as cars.

 

Consumer spending, which constitutes over two-thirds of U.S. economic activity, dropped at a 4.3 percent rate in the fourth quarter, the biggest fall since the second quarter of 1980 and a big contributor to the economy's sharp contraction. February's unexpectedly strong sales, coupled with an upward revision to the January figure, suggested consumers may be showing a bit more life this quarter.

 

Gasoline sales climbed 3.4 percent in February due to higher prices, the largest gain since November 2007, after increasing by 2.8 percent in January. That helped limit the impact of a 4.3 percent decline in vehicle sales on the headline number. Vehicle sales rose a surprisingly strong 3.1 percent in January.

 

Sales of building materials dipped 0.2 percent in February after slipping 1.3 percent in the prior month.

 

Sales in February were likely supported by continued deep discounts by retailers and cost of living adjustments to checks for Social Security recipients.

 

A separate Commerce Department report showed business inventories fell 1.1 percent in January and sales dropped 1.0 percent, another indication that first-quarter gross domestic product could fall at a similar pace to that seen in the October-December quarter.

 

That left the inventories-to-sales ratio, which measures how long it would take to empty shelves at the current pace of sales, at 1.43 months' worth, unchanged from the prior month.

 

Bank of America Bolsters Wall Street

 

Bank of America Chief Executive Kenneth Lewis said on Thursday BofA was profitable in January and February and should be able to ride out the recession without new help from the nation's taxpayers. He also said the bank will be profitable for all of 2009, after reporting the bank's first quarterly loss in 17 years for the October-to-December period.

 

According to Lewis said BofA could earn $50 billion in 2009 before taxes, credit losses and write downs, and would likely post a net profit, especially if businesses and consumers spend more. Early signs of recovery would likely come from housing, he said.

 

"I actually think the next six months is going to be, in a positive way, a gut-wrenching time," Lewis said. "We're going to start seeing signs of improvement and, at some point, you have to pull the trigger on that investment or that expansion."

 

Lewis also said it would be a "nightmare" for banks to be nationalized, wiping out shareholders and perhaps bondholders, and further damaging an economy that might begin to recover as soon as this year. Lewis said he is confident Charlotte, North Carolina-based Bank of America will pass a pending government "stress test" and will not need more taxpayer money.

 

BofA took $45 billion from the Treasury Department's Troubled Asset Relief Program (TARP), including $20 billion in a January bailout to help absorb Merrill. Lewis said he agreed with Federal Reserve Chairman Ben Bernanke that full takeovers of banks are the wrong way to go.

 

"It would give the false impression that all banks are insolvent, and investors would immediately start betting on which banks would be next, possibly creating a self-fulfilling prophecy," he said. "And government control of large banks would politicize lending decisions and the capital allocation process, damaging the economy."

 

Lewis said the United States should emerge from the global recession relatively early, perhaps this year, and praised federal efforts to spur lending and consumer spending. "There is too much ammunition being fired from too many directions to not bring this beast down," he said.

 

Lewis touched on two areas that have drawn fire from politicians and banking industry critics: executive pay and sponsorships of sports teams.

 

Alluding to a provision in February's government stimulus package, Lewis said it is wrong to require TARP recipients to cap pay of executives who are just below the top level and produce high amounts of revenue. He said they could be lured by foreign banks or boutique firms not subject to such limits.

 

He also said Bank of America's extensive sports marketing efforts generate $3 of profit and $10 of revenue for every dollar spent. Bank of America is the official bank of Major League Baseball and NASCAR, and has the naming rights to the stadium for the Carolina Panthers football team in its hometown of Charlotte.

 

GE Rating Falls

 

General Electric was stripped of its AAA credit rating by Standard & Poor's, which cited the performance of GE's finance unit, but its shares rose 12.7 percent as Wall Street breathed a sigh of relief the cut was not deeper. S&P said a sharp deterioration in world economies would lead to rising credit losses across GE's finance portfolio. However, S&P raised its outlook to stable from negative.

 

S&P lowered its outlook on GE's ratings to "negative" in December. A month later, Moody's Investors Service took a stronger step, putting its ratings on review for possible downgrade. Moody's put GE on review on January 28 and typically tries to complete its reviews within 90 days. Their stance was unchanged even after the company cut its dividend by 68 percent, in a move GE said would save $9 billion a year.

 

GE is the last original component to remain in the Dow Jones industrial average .Spreads for GE's 5.625 percent notes due in 2017, the most actively traded corporate bond on Thursday, narrowed over Treasuries. The cost of insuring debt of GE's finance arm against default fell.

 

GE, in a statement released just after the downgrade to AA-plus, said it does not anticipate significant operational or funding impact, and said it is one of the only financial services companies with a rating as high as AA-plus.

 

GE Capital's operations range from financing purchases of its jet engines, to making loans to mid-sized businesses, to investing in commercial real estate. Investors are most concerned about the parts of its portfolio that are directly exposed to consumers, including its U.S. private-label, credit-card business and UK mortgages.

 

The concern is that defaults will rise as more unemployed consumers are unable to repay their debts and that GE will be unable to make up the difference through maneuvers like selling its commercial real estate, given the weakness of that market.

 

The 130-year-old company had long defended the "triple-A" as a key competitive advantage, in part because it allowed GE Capital to borrow money cheaply and then lend it out more profitably.

 

But GE officials began to change their tone after both top credit agencies put the company's ratings under view, with Chief Executive Jeff Immelt in early February acknowledging he was prepared to run the company as an AA-rated entity. A month later, Chief Financial Officer Keith Sherin allowed that a cut to the AA range was "possible." The Fairfield, Connecticut-based company has held a top credit rating since 1956, when S&P first applied an AAA rating to it. Moody's followed suit in 1967.

 

Following GE's downgrade, just four nonfinancial companies get top marks from both agencies -- Johnson & Johnson, Exxon Mobil, Microsoft and Automatic Data Processing.