MarketView for March 27

 

 

Summary 

 

Stock prices gave way to some profit taking on Friday and bank shares dropped after bank executives indicated March had been a tougher month for the industry than the previous two. The gloomy comments on bank profits contrasted with statements earlier in the month. For example, JPMorgan Chase CEO Jamie Dimon said that March was "a little tough.” The bank's shares fell 5.8 percent to $27.40. Bank of America followed suit, stating that its trading book lagged the two prior months in March. Citigroup fell 6.8 percent to $2.62. Stocks had rallied amid increasing optimism that the worst of the current downturn might be over as well as government action geared at stabilizing the ailing financial system.

 

Tumbling oil prices sank energy shares as well, with Exxon Mobil and Chevron among the Dow's top drags. Exxon Mobil and Chevron both fell nearly 2 percent as U.S. crude futures fell 3.6 percent to $52.38 per barrel amid economic concerns and a stronger U.S. dollar, after closing at a four-month high on Thursday. A drop in commodities prices weighed on stocks in the materials sector, and aluminum producer Alcoa fell 3.9 percent to $7.80.

 

For the week, the Dow Jones industrial average was up 6.8 percent, the S&P 500 rose 6.2 percent and the Nasdaq was up 6 percent. The Dow is up 10.1 percent for the month but remains down 11.4 percent year-to-date. The S&P 500 is still down nearly 10 percent this year and has shed 47.9 percent since hitting its all-time high in October 2007.

 

A decline in big-cap technology shares pulled down the Nasdaq on Friday. For example, Intel was down 2.5 percent to $15.42 after the chipmaker said it might issue up to $1 billion in stock and was countersued by Nvidia for breach of contract. Adding to the negative numbers for tech, Apple was down 2.8 percent to $106.85 and Microsoft fell 3.7 percent to $18.13. IBM was the top drag among the Dow 30, falling 4.7 percent to $94.15.

 

Government bond prices were mixed after a second round of Treasury debt purchase by the Federal Reserve, part of a wider program to jump start the economy.

 

General Motors was a bright spot, gaining 6.2 percent to $3.62, a day after President Obama said a plan to help the struggling U.S. auto industry would be unveiled soon, combined with news that GM's German unit, Opel, forecast what could be the best quarterly results in a decade.

 

Economic Outlook Improving

 

Consumer spending rose for a second consecutive month during February and sentiment edged up in March, according to reports on Friday that backed views that the worst of the recession may be over. Spending increased 0.2 percent after rising by an upwardly revised 1.0 percent in January, the Commerce Department said.

 

The hefty adjustment to January's figure, which was previously reported as a 0.6 percent gain, suggested that consumer spending rebounded in the first quarter after a big drop at the end of last year, analysts said.

 

Consumer spending, which accounts for over two-thirds of our domestic economic activity, fell at a 4.3 percent annual rate in the fourth quarter, the biggest decline since 1980. Spending dropped 3.8 percent in the July-September period.

 

Plunging asset prices and rising unemployment, as firms reel from the 15-month recession, left households poorer, curbing their spending power. Federal Reserve data this month showed household net worth dropped by $11.2 trillion in 2008.

 

Recent retail and home sales data have also been relatively upbeat, raising guarded optimism that the economy likely did not contract as sharply in the first quarter of 2009 as in the fourth quarter of 2008, when GDP dropped at a steep 6.3 percent annualized pace.

 

With job losses escalating, incomes fell by 0.2 percent in February, reversing January's 0.2 percent rise, the Commerce Department data showed.

 

Savings fell slightly to an annual rate of $450.7 billion. The saving rate, the percentage of disposable income socked away, slipped to 4.2 percent from 4.4 percent in January, ending a five-month string of increases.

 

Despite mounting unemployment, consumer morale is perking up a little bit amid hope that the government's $787 billion tax cut and spending plan, and the Fed's measures to stimulate demand, will help revive the economy.

 

However, consumers remain worried about their financial health.

 

With companies showing some ability to raise prices, there are worries that the Fed's massive cash injections into the financial system, aimed at keeping interest rates low, could fuel inflation when the economy recovers.

 

The Commerce Department report showed prices edged up in February, with the overall personal consumption expenditures price index rising 1.0 percent on a year-over-year basis from 0.8 percent in January. Excluding food and energy, prices were up 1.8 percent over the past 12 months after gaining 1.7 percent in January.

 

Bankers On Board With President

 

President Barack Obama won support from top bankers on Friday for his efforts to rid financial institutions of bad debts, but differences remained over broader plans for the financial industry. Chief executives from Wells Fargo, JP Morgan Chase and other financial giants met Obama at the White House and echoed his call for cooperation to help the economy.

 

However, their statements about tough trading conditions in March overshadowed the positive spin the executives and the White House sought to give to the meeting.

 

"The basic message is we're all in this thing together," Wells Fargo Chief Executive John Stumpf told reporters after the meeting. Obama, in an interview later with CBS News, said he told the bankers they should be more sensitive to how Wall Street's actions look to the rest of the country.

 

"Show some restraint," he said he told them. "Show that you get that this is a crisis and everybody has to make sacrifices."

 

Obama saw the meeting as productive and frank, White House spokesman Robert Gibbs said, adding the president stressed the importance of dealing with "toxic assets" -- bad loans many banks are stuck with thanks to the collapse of the U.S. housing market.

 

"The president opened up by talking about the importance of dealing with toxic assets and getting banks lending again," Gibbs told a briefing.

 

The meeting came just days after the U.S. Treasury Department provided details on a government plan to cleanse banks' balance sheets of up to $1 trillion in distressed loans and securities, a plan the banks will have to support in order for it to work.

 

White House advisers said the president wanted to get a snapshot of the economy from the banking chiefs, and the message they sent was lukewarm.

 

"March was a little rough," said JPMorgan Chase Chief Executive Jamie Dimon. Bank of America's Ken Lewis said his institution's "trading book for March was not as good" as it was the first two months of the year. The comments pushed bank stocks and the overall market lower.

 

The White House meeting came ahead of next week's G20 summit, at which Obama is expected to pitch his plans to rescue the recession-hit U.S. economy to fellow world leaders.

 

The executives, who have often found they are bearing the brunt of Obama's criticism about the financial mess and the bonuses many executives in the struggling industry accepted, said not all issues were agreed upon at the meeting.

 

One key topic involved government bailout funds and executive compensation limits. The Street is concerned that if healthier banks return government money to get out of newly imposed executive pay rules, weaker banks that cannot afford to return the funds will be stigmatized.

 

Dimon said Obama did not instruct the bankers to stop considering an early return of some of the bailout funds that they received as part of the government's $700 billion rescue plan for the financial industry.

 

The Obama administration announced on Thursday its plan to rewrite financial rules, including creating a single regulator to monitor any firm whose failure could threaten the financial system. Officials said executive compensation was discussed, although it did not dominate the conversation, and bankers indicated a public outcry over the issue had sunk in.

 

"We know mistakes were made" around executive compensation, JPMorgan's Dimon said. Bank of America's CEO Ken Lewis said everyone understood the "golden age" of bank pay was over.

 

About 15 chief executives attended, according to the White House. Included were the heads of Freddie Mac, Bank of New York Mellon, Northern Trust, PNC Financial, State Street, Morgan Stanley, American Bankers Association and Independent Community Bankers.