MarketView for March 24

Summary 

Stock prices retreated a bit on Tuesday as Wall Street moved to reassess the government's latest plans to clean up bank balance sheets and revive the financial system, a day after initial euphoria over the plan drove huge gains. Bank stocks, which posted their best day in at least 16 years on Monday, dragged Wall Street lower as investors booked profits amid questions as to whether the government's plan to spend up to $1 trillion to buy up toxic bank assets would work.

Bank of America lost 8.3 percent to close at $7.15, JPMorgan Chase was down 9.2 percent to close at $26.22, while Goldman Sachs fell 1.4 percent to close at $110.33. Technology shares, up 22 percent since March 9 as measured by the S&P information technology index, were also among the day’s biggest losers. Qualcomm fell 1.9 percent to $38.08, Microsoft ended the day down 2.3 percent to $17.91, while Intel was down 3 percent at $15.05.

Energy prices also contributed to the downside momentum as oil prices softened after Monday's surge. Exxon Mobil was also among the Dow's largest losers, falling 1.7 percent to close at $69.35. Front month crude fell 0.3 percent to $53.98 per barrel. Shares of General Electric closed modestly lower, falling 0.6 percent to close at $10.37. Deutsche Bank said on Tuesday it remains comfortable with GE's ability to support its finance unit until the end of 2010.

Chicago Fed President Says Recession to End in 2009

The economy should start growing by the end of this year and unemployment, expected to peak at around 9 percent, will begin to decline in 2010, Chicago Fed President Charles Evans said on Tuesday.

"I think the U.S. economy will certainly begin to grow by the end of this year. I think the unemployment rate will begin to decline sometime in 2010, though I think it's going to take some time."

Evans also said the Fed would have been better off if it had started tightening policy faster than it did earlier this decade and regulations would be looked at very closely once the crisis is over.

Crude Continues To Rise

The price of crude oil rose again on Tuesday, however the gains were limited as dealers awaited the next round of oil inventory data that is expected to show a an increase in stockpiles. Light sweet crude for May delivery settled up 18 cents close at $53.98 per barrel, after hitting a near-three-month high of $54.20 earlier in the day. London Brent crude settled up 3 cents per barrel at $53.50.

It is expected that the oil inventory data to be released by the American Petroleum Institute on Tuesday afternoon and the Energy Information Administration on Wednesday to show a 1.2 million barrel build in crude stockpiles. Energy demand in the world's biggest consumer has been hard-hit by the economic meltdown, buffering inventory levels, and global consumption has been shrinking for the first time in a quarter century.

Oil prices have climbed from under $33 last December, partly due to aggressive supply cuts from OPEC. Further limiting gains was the fact that China's refined fuel stocks rose 11 percent in February despite a sharp post-holiday rebound in domestic sales, suggesting demand in the world's second largerest consumer refiner may be weaker than thought.

A strike by oil workers in Brazil entered its second day Tuesday, but output from South America's second-biggest oil producer was unaffected according to state oil company Petrobras. Meanwhile, Nigerian oil unions on Tuesday called off plans for a workers' strike this week after the government promised to do more to improve security in the restive Niger Delta.

Geithner Wants Increased Authority

Treasury Secretary Timothy Geithner, testifying before lawmakers still fuming about big bonuses for executives at bailout recipient AIG, called on Congress for new powers to take over big non-bank financial firms that run amok.

Federal Reserve Chairman Ben Bernanke strongly backed Geithner in testimony before the same committee, and President Barack Obama took the case public in remarks to reporters.

"In the absence of that capacity you end up with the situation we've been in ... an institution that poses systemic risks to the system but a lack of capacity to close it down in an orderly fashion, renegotiate contracts, sell off bad assets," Obama said.

Geithner said the government needed the same types of tools to deal with failing non-bank institutions that it already has to deal with struggling banks. Under his proposal, the Treasury chief would determine whether emergency action was needed in consultation with the Fed and the relevant regulator.

"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," he told the House of Representatives Financial Services Committee.

Congress has already begun working on a revamp of financial regulations that is expected to include authority to wind down non-bank firms. Aides at the House panel said on Monday the committee would likely vote on a bill as soon as March 31.

AIG, which has been propped up with up to $180 billion from taxpayers, has become the poster child for U.S. regulatory reform. Geithner, Bernanke and New York Federal Reserve Bank President William Dudley all painted a dire picture before lawmakers of what could have happened if AIG had failed.

"Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs," Bernanke said.

Fury at the $165 million in bonuses recently paid by the insurer threatens to undercut efforts to stabilize the rickety financial sector.

Geithner laid out a plan on Monday to sop up as much as $1 trillion in toxic assets sitting on bank books, but success hinges on the willingness of investors to participate.

Last week, the House passed legislation to claw back most of the AIG bonus money, and investors are wary of partnering with the government out of fear the rules could later change.

The proposal sketched by Geithner would let the government step in to act as a receiver for troubled non-banks. It would be able to deal with non-banks in the same way the Federal Deposit Insurance Corp, a banking regulator, does with banks.

When the FDIC seizes a bank, it typically holds it until it gets it in shape to reopen under new ownership or to be taken over by a healthy bank. FDIC Chairman Sheila Bair has hinted that her agency might be suited to play a similar role for other financial firms. Government officials have indicated that if they had authority to shut non-bank firms, the collapse of Lehman Brothers, which touched off the most virulent phase of the credit crisis, could have been avoided.