MarketView for March 16

Summary 

Stock prices gave back all the day’s gains after American Express reported that delinquencies were on the up swing. American Express, which has a relatively wealthier clientele than its brethren, reported that its credit card default rates rose to 8.7 percent in February. Shares of American Express ended the day down 3.3 percent to close at $12.66.

Intel also had its difficulties on Monday after the company stated that Advanced Micro Devices had not kept to the terms of a mutual cross-licensing agreement. Intel fell 3.1 percent to $14.25, while AMD, which denied Intel's charge, was down 1.6 percent to $2.48.

Shares of Alcoa fell 10.1 percent to $5.50 in extended trading on word that the company planned to cut its dividend, issue stock and convertible notes and trim its 2010 spending in an effort to weather a downturn in demand for aluminum.

Banks had earlier pushed indexes higher after British bank Barclays reported a "strong start" to 2009. Barclays also confirmed it had discussed selling its iShares unit, in a move that could help it avoid giving a stake to the British government.

Comments from Federal Reserve Chairman Ben Bernanke helped improve investor sentiment after he said during an interview on the CBS program "60 Minutes" on Sunday that the U.S. recession could probably come to an end this year and "we'll see recovery beginning next year."

Financial stocks were also helped by news that the Financial Accounting Standards Board, which sets U.S. accounting rules, proposed to allow more leeway on mark-to-market accounting rules. Mark-to-market accounting has forced financial institutions to write down billions of dollars in assets. Finally, in economic news, a report showed that a gauge of New York State manufacturing activity hit a record low in March.

OPEC Says No Cuts in Supply

OPEC stated on Sunday that it would not implement new supply cuts, much to the relief of the new Administration. Two days prior, President Barack Obama called Saudi King Abdullah and suggested strongly that OPEC should stick to existing supply targets, despite the fact that fuel inventories have increased and oil prices are at a level that OPEC finds disturbing..

The Organization of the Petroleum Exporting Countries said the weakness of the world economy, which effectively receives a financial stimulus from cheaper oil, was a central motivation. It also gave a tentative welcome to the new administration in Washington.

"I don't want to say that I voted for Obama, but we can see a different tone ... that we didn't see in the past," OPEC Secretary General Abdullah al-Badri told reporters.

"We have seen a positive approach. They are ready for dialogue and we are ready for dialogue and ready for talk."

U.S. Energy Secretary Steven Chu said he was pleased with OPEC's latest output decision, although he restated our commitment to ending its dependence on foreign oil.

However, let us not fool ourselves. The real issue is the economy and overriding self-interest dictated the group needed to avoid the kind of damage to growth that would only further limit energy consumption.

Nonetheless, the gentle pressure from Obama, as opposed to from former president George W. Bush, might have been less disruptive to the producer group's debate, making consensus easier to achieve. This was evidenced by the fact that adversaries of the United States, such as Venezuela and Iran, went along quietly with Sunday's decision.

Oil prices that are hovering around $45 per barrel, combined with shrinking demand as a weak global economy saps energy consumption, is in stark contrast to a meeting in Vienna about a year ago. 

Back then, Washington had said even a modest output increase would help to calm oil markets, but OPEC instead kept supplies steady. In response, prices leapt to what was then a new record above $100 a barrel. Rejecting that request OPEC President at the time, Chakib Khelil of Algeria, said that the United States' mismanagement of the economy, not OPEC, was to blame for high oil prices.

Now the consequences of economic mismanagement are so much clearer, observers had predicted well before Sunday's meeting that OPEC would hesitate to deepen record output cuts, which have totaled 4.2 million barrels per day (bpd) since September last year.

The Group of 20 summit of developed and emerging nations in April, to which Saudi Arabia is invited, was likely a major consideration and that could have been part of the telephone discussion between Obama and King Abdullah on Friday.

"They would not wish to appear to be undermining this meeting, which will focus on seeking resolutions to the global financial crisis," Sadad al-Husseini, a former top official at state oil giant Saudi Aramco, said last week.

OPEC's final communiqué on Sunday voiced the "hope that the decisions taken by the forthcoming meeting of G20 in April 2009 may contribute a substantial improvement to the world economy."

Its prime interest in the economy relates to its implications for oil demand, which is expected to drop by about one million bpd this year compared with last year. OPEC has argued that for long-term economic health, oil prices need to be high enough to sustain investment in new production, but in the nearer term, it is resigned to allowing a weaker oil market.

GE Exceeds $10 Once Again

Shares of General Electric moved above the $10 level on Monday for the first time in almost a month after an analyst at UBS lifted a short-term "sell" rating from the stock. Also, in a sign that investors were becoming less worried about its credit, its credit default swaps ceased to trade upfront, meaning that the requirement for a large one-time payment to insure GE’s debt was no longer being required.

The concerns over the health of GE Capital have kept the shares below $10 since February 19. However, GE has since cut its dividend 68 percent and been stripped of its "AAA" credit rating by Standard & Poor's. Those events lift most of the near-term risks GE shareholders faced, wrote UBS analyst Jason Feldman.

"We believe the likelihood of further negative catalysts in the near-term is now much lower," Feldman wrote in a note to clients. We also caution against an overly bearish near-term stance given uncertainty regarding how investors will react to GE's Thursday analyst presentation on the finance business."

UBS lifted its short-term sell rating on GE and maintained its long-term rating at neutral, while cutting its share price target to $9.50 from $12.

The cost of insuring GE Capital's debt with credit default swaps also fell on Monday, with sellers of the swaps no longer requiring upfront payments to secure the debt, according to Phoenix Partners Group. Its CDSs had first traded "upfront," a condition that typically suggests higher perception of risk, on March 2.

Investors on Monday were paying $700,000 a year to protect $10 million of GE Capital debt for five years with credit default swaps. That was down from Friday, when it cost $775,000 upfront plus $500,000 per year to insure those bonds.