MarketView for March 19

Summary 

Concerns over whether the Federal Reserve's latest efforts to blunt the current recession are too costly and untested, resulted in some serious profit taking on Thursday. In other words, investors remain gun shy with regard to upcoming economic events and are not willing at the juncture to take even the remotest chance that they might sustain additional losses when it comes to their portfolios.

Specifically, it was the possibility that the Fed's action to pump another $1 trillion into the financial system and a plan to expand its consumer and small business lending program, will result in a serious problem with inflation going forward over the longer term that many on Wall Street were unwilling to chance.

On Wednesday, the Fed revealed its latest plan to stabilize the recession-hit economy, saying it will purchase longer-term government debt, which it has not done since the 1960s. The aim is to raise the supply of credit, pushing down longer-term rates on mortgages and other loans.

Financials led the S&P lower, including JPMorgan down 8 percent at $24.95. Citigroup fell 15.6 percent to $2.60 after it said it may conduct a reverse stock split as part of an exchange offer that could give the government a 36 percent stake in the bank. Diversified manufacturer 3M was among the Dow's biggest losers, ending the day down 3.5 percent at $47.47, after one firm cut its price target on 3M's stock, stating that the company will likely see its worst annual growth in nearly 40 years in 2009. Shares of FedEx rose 4.8 percent to $45.10 after the company said it was taking market share despite a recession that has sharply dented its profits.

The NASDAQ performed better than the other two main indexes with its declines offset by a rise in shares of Oracle after Oracle reported results that exceeded Street expectations. Oracle ended the day up 9.7 percent at $17.37. Shares of Chevron were up 0.8 percent to $67.13 as U.S. front-month crude settled up at $51.61 a barrel, up $3.47, or 7.2 percent. A weaker dollar following the Fed's action on Wednesday also helped boost commodity prices and lift shares in the energy and materials sectors, cushioning the market.

In economic news, the number of workers drawing continuous state unemployment benefits hit a new record high early this month, according to government data that highlighted the difficulties of finding jobs in the recession-hit economy.

In another report indicating that the economic downturn has yet to find a bottom, the Conference Board's Index of Leading Economic Indicators fell 0.4 percent in February after gaining 0.1 percent in January.

Meanwhile, the dollar fell for a second straight session, as the Fed's efforts to help the economy were too costly and untested. At the same time, government bond prices fell as profit taking became the name of the game after Wednesday's massive rally in the wake of the Fed's announcement. The Fed's latest steps are intended to lower interest rates to encourage lending and stimulate spending in a bid to break the nation's deep recession, which is now in its 15th month. The severe downturn is squeezing companies' profit margins, forcing them to cut jobs, exacerbating the burden of households already staggering from a rapid decline in wealth.

Unemployment Roles Rise Once Again

The number of workers drawing state unemployment benefits hit another record high early this month and factory activity in the Mid-Atlantic region shrank again as the economy battles a severe downturn.

The Labor Department said on Thursday that 5.47 million people stayed on the benefit rolls in the week ended March 7, up from 5.29 million the previous week and the highest on record. Jobless rolls are swelling to record levels after Congress last year extended benefits beyond the regular 26 weeks. With the economy mired in recession since December 2007, the nation's unemployment rate has jumped and the claims figures underscore the difficulty of finding a new job. The percentage of insured workers receiving jobless benefits hit 4.1 percent in the March 7 week, the highest since June 1983, from 3.9 percent the week before.

The data had little impact on financial markets, which were still focusing on the Federal Reserve's decision on Wednesday to buy up to $300 billion of longer-dated government debt.

Over 4 million jobs have been lost since the recession began and the jobless rate has already hit a 25-year high of 8.1 percent. The number of people filing new claims for jobless benefits ebbed to 646,000 last week from 658,000 the previous week. However, the four-week moving average for new claims, considered to be a better gauge of underlying trends, rose to 654,750 last week, the highest since October 1982.

The Philadelphia Federal Reserve Bank said its business activity index suggested manufacturing activity in the Mid-Atlantic region was declining at a slower pace this month than in February. The Philly Fed's index came in at minus 35.0 for March from minus 41.3 a month earlier, but an employment gauge fell to its lowest since the survey's launch in 1968, and new orders dropped to their lowest level in almost 29 years.

Crude Continues To Rise

Oil continued its upward climb on Thursday, moving up more than 7 percent to reach the $51 per barrel level after the Fed announced a new plan to fight the ongoing recession and a weak dollar boosted the appeal of commodities to investors. Sweet domestic crude for April delivery settled up $3.47 per barrel at $51.61, the highest settlement price since November 28. London Brent settled up $3.01 per barrel at $50.67.

The slumping global economy has battered oil demand and the International Monetary Fund on Thursday forecast the world economy will contract in 2009 for the first time since World War Two by between 0.5 percent and 1.0 percent.

Oil eased from earlier intraday highs after government jobs data showed a record high in the number individuals drawing state unemployment benefits thereby highlighting the extent of the problem. Meanwhile, OPEC has pledged to comply more strictly with deep supply curbs agreed last year as part of efforts to balance markets and support prices.

Saudi Arabian Oil Minister Ali al-Naimi, the group's most influential voice, said on Wednesday he believed OPEC had managed to put a floor under the market. "I think OPEC has succeeded in stabilizing prices," he said. "The next thing is to hope for a gradual improvement in prices over time."

OPEC seaborne oil exports, excluding Angola and Ecuador, are expected to fall to their lowest level since September 2003 in the four weeks to April 4.

Auto Suppliers Receive Help

The Obama administration has offered up to $5 billion to assist auto suppliers whose health is crucial to the survival of stricken car manufacturers. The emergency aid is the first act of the government's autos task force, which is overseeing the restructuring of General Motors and Chrysler LLC and includes a new bailout request from the two of nearly $22 billion.

U.S. Treasury Secretary Timothy Geithner said the short-term supplier initiative "will stabilize a critical component" of the industry owed billions by carmakers. Bob McKenna, the top lobbyist for the parts sector, said the move signaled the administration would not allow Detroit to collapse amid recession and high unemployment.

A task force official was quoted as saying that propping up suppliers was an "urgent matter" since carmakers cannot function if their parts stream is disrupted. The supplier network for domestic and overseas car companies is deeply interconnected.

GM said in a statement the move on suppliers can help reduce risks of any disruptions in its vehicle output. A Chrysler statement called the decision a "vote of confidence" for the industry and "the future of our company."

Ford Motor Co is restructuring without a bailout and said it would not participate in the parts rescue. Ford said it saw no problem paying its suppliers. Overseas manufacturers, like Toyota are also ineligible. Suppliers had requested up to $25.5 billion in emergency funding, saying two-thirds of some 5,000 companies face financial distress due to the drastic cutback in production that accelerated in the early weeks of 2009.

Major suppliers, including Lear and American Axle & Manufacturing Holdings, received warnings this month from auditors about their ability to continue as a "going concern," while Visteon has warned it was in danger of breaching its debt covenants. Lear said on Tuesday it may be required to file for bankruptcy protection, despite winning an agreement with lenders that gives it until May 15 to restructure its debt- heavy balance sheet. Shares of American Axle rose 0.7 percent to $1.56 on Thursday, while Lear was up 84.7 percent to $1.33. GM rose 8.7 percent to $2.87, and Ford rose 1.6 percent to $2.51.

Payments to suppliers from U.S. automakers are expected to fall to $2.4 billion in March, compared with $8.7 billion in December, according to McKenna's group, the Motor and Equipment Manufacturers Association.

Under the rescue program the government will guarantee receivables rapidly and allow GM and Chrysler to only focus on firms they plan to work with in the future.

GM and Chrysler will be gatekeepers for the fund, which will be administered through a bank that has not been named, and suppliers will pay a fee to participate. Companies can opt to pay 2 percent to secure a government guarantee of funds they are owed. For a higher payment of 3 percent, suppliers can opt for immediate payment from the fund, the Treasury said. The plan also allows suppliers easier access to bank lending that dried up last year.

Industry allies in Congress, like Rep. John Dingell of Michigan, praised the decision. But others, like Sen. Judd Gregg of New Hampshire, an influential Republican in creation of the financial sector bailout initiated by the Bush administration, said help for suppliers far exceeds the program's mandate.