MarketView for March 2

 

 

 

Summary 

 

The major equity indexes chalked up small gains on Tuesday as mergers and acquisitions supported selected sectors. At the same time, some of the better know large cap stocks, particularly in the areas of technology and finance suffered from profit-taking. Within the M&A arena, CF Industries raised its hostile bid for Terra Industries, and Dow Chemical said it planned to sell one of its units to Bain Capital Partners, a private equity firm. That news came a day after AIG announced a record-breaking deal to sell its Asia insurance unit. More deal-making is a sign that the financial markets are normalizing and the economy improving.

 

IBM fell 0.9 percent to close at $127.42, Hewlett Packard was down lost 0.8 percent to $51.12, while JPMorgan Chase fell 0.5 percent to $41.62. Bank of America lost 1.5 percent to $16.46. Nonetheless, Monday's session saw both the S&P 500 and the Nasdaq turn positive for the year.

 

In another bright spot, Greece's borrowing costs fell to their lowest level in weeks as its government is expected to announce new austerity measures to win European debt guarantees for the cash-strapped European Union member.

 

Some recent economic data has been lackluster, with Tuesday's figures on February sales from major U.S. automakers adding to the concerns. Shares of Ford fell 1.5 percent to $12.22.

 

CF Industries Holdings raised its offer to $47.40 per share in cash and stock, sending Terra Industries' shares up 10.9 percent to $45.67. CF shares shed 1 percent to $106.42. Dow Chemical Co said it would sell its Styron basic plastics unit to Bain Capital Partners for $1.63 billion. Dow shares were up 0.7 percent at $28.88.

 

On the Nasdaq, technology bellwether Qualcomm rose more than 6 percent to $37.93 after the company announced a new $3 billion share buyback plan and raised its quarterly dividend by 12 percent.

 

Futures Regulator Says Rules Must Apply Across the Board

 

Congress should not create blanket exemptions from new rules designed to make trading of over-the-counter derivatives more transparent, Michael Dunn, a Commodities Commissioner, said on Tuesday.

 

According to Dunn the Commodity Futures Trading Commission should be given the authority to exempt end users, companies that rely on hedging to spread their financial risk, from requirements to trade and clear standardized derivatives on a case-by-case basis. However, he recommended against a broader exemption now being considered by Senate committees.

 

"Allowing such a large class of transactions to be exempt from clearing would mean that dealers would have more risk on their books. If these dealers fail, this risk could affect the entire financial system," Dunn said.

 

Dunn's comments are in line with CFTC Chairman Gary Gensler, who has also argued against end user exemptions. Senate banking and agriculture committees are currently working on bills that would give regulators oversight of the OTC derivatives market that the CFTC estimates is worth about $300 trillion in the United States alone.

 

The House of Representatives' bill, passed in December, included clearing exemptions for end users. Senate committees working on legislation have also signaled they plan to include some exemptions, but details have not yet been released. Once U.S. President Barack Obama signs legislation passed by Congress, it will be up to regulators to write detailed rules for market participants.

 

Gensler has given many speeches about what he wants to see in the legislation, emphasizing all but the most tailored or customized derivatives should be cleared, and exemptions should be narrow. Gensler told reporters on Tuesday that he is taking his message to Congress, too.

 

Derivatives were blamed as part of the trigger for the recent financial crisis, spurring political pressure for tougher regulations and more transparency. Dunn said he believes regulatory reform legislation will move forward this year, echoing comments made by Gensler and CFTC commissioner Scott O'Malia in the last week.

 

The CFTC also has proposed position limits for energy markets aimed to prevent excessive speculation, and is seeking public comments on the proposal until April 26. The CFTC should get oversight over OTC derivatives from Congress to successfully implement proposed position limits, said Dunn, who expressed reservations about the proposal when it was introduced in January.

 

"I feel that if we do position limits without having the over-the-counter regulatory authority and without having substantial international work being done, we could end up with simply having these markets going into an opaque market or dark pool where we don't know what's happening," he said.

 

Greece Recognizes That Change Is Not Optional

 

Greek Prime Minister George Papandreou said on Tuesday his country was fighting for survival against bankruptcy and urged civil servants and pensioners to accept sacrifices to save the debt-burdened nation. In a speech to his Socialist PASOK party on the eve of a cabinet meeting expected to approve new austerity measures, Papandreou said: "I will fight to save the fatherland from whatever the nightmare possibility of bankruptcy might entail."

 

Under pressure to meet European Union demands to find up to 4.8 billion euros ($6.5 billion) in additional savings before he visits Germany on Friday, he played up the risk of default, stating that speculators had made borrowing costs prohibitive.

 

"If anyone thinks that this is a remote nightmare scenario, they don't realize what the situation is," he said. "Each day we discover new holes, new landmines, in the budget deficit."

 

Papandreou did not spell out specific measures but he said public employees would have to get by on less, and the state could not go on subsidizing pensions. That could hurt two of PASOK's key support bases. "We need to take tough decisions, decisions that can be unfair," he said.

 

Apparently some of the measures under consideration include raising value added tax (VAT), cutting public sector pay, freezing pensions and introducing higher duties on fuel, tobacco, alcohol and luxury goods. Meanwhile, Greece's borrowing costs fell to their lowest level in weeks on Tuesday amid growing expectations that the government will announce new austerity measures that will in turn help it secure European financial support.

 

At the same time, German Foreign Minister Guido Westerwelle said it was inappropriate to talk about financial aid until Athens had done more to clean up its public finances. "Before there are discussions about aid, we expect Greece to complete its homework on consolidation policy," Westerwelle, who is also vice-chancellor, said.

 

His liberal Free Democratic Party has been a leading voice opposing a bailout of the highly indebted euro zone country, but his comments do not preclude eventual financial support. At the same time, Germany and France are said to be working on contingency plans involving state-owned financial institutions guaranteeing the purchase of Greek bonds by banks or buying them directly.

 

Credit rating agency Moody's said in a research note the reported plan could involve the purchase of about 30 billion euros ($40.67 billion) in Greek debt by French and German state-owned banks, and by private investors. Details might be announced on Friday when Papandreou meets German Chancellor Angela Merkel in Berlin, it added.

 

As a result, Greece would have a window to issue a syndicated 10-year bond which the market expects by mid-March, when EU finance ministers will review its progress in cutting the budget deficit. It has vowed to cut it by four percentage points to 8.7 percent of gross domestic product this year.

 

Without waiting for the announcement of more austerity, Greece's main public sector union called a 24-hour strike for March 16 in protest against the new measures, expected to deepen cuts in civil servants' pay and benefits.

 

Yet, polls show relatively strong support for plans to tackle a crippling debt mountain Papandreou said on Tuesday had reached 300 billion euros ($405.7 billion), roughly 125 percent of Greek GDP. But taxi drivers brought traffic to a halt as they drove through Athens en masse in protest against a tax clampdown.

 

In Brussels, European Socialists proposed setting up an emergency fund to prevent defaults by euro zone countries such as Greece and ward off a "locust swarm of speculators." The fund would be part of the European Investment Bank (EIB), the European Union's government-owned soft lending arm, which issues bonds to secure cash for projects such as energy and motorway construction. However, the EIB said its charter barred it from any role in financial rescues and countries such as Germany, the Netherlands and Finland strongly oppose a bailout fund.

 

After EU Economic and Monetary Affairs Commissioner Olli Rehn held talks in Athens on Monday, the European Commission declined to say how much more Greece needed to save to achieve its ambitious deficit-cutting target.

 

Greek sources said EU, European Central Bank and IMF experts had assessed the additional gap at up to 4.8 billion euros in the most pessimistic growth scenario, but Greece has argued that the real shortfall is likely to be far smaller. For example, a two percentage point increase in VAT to 21 percent would bring in about 2 billion euros in extra revenue, but economic analysts say it would yield only about 1.4 billion because the rise would likely depress consumption. Cancelling a 14th month salary payment to public employees would save about 1.4 billion euros. But it would be unpopular and could undermine support for the broader austerity plan.

 

FDIC Is Selling 3.8 Billion of Securities Backed By Assets of Failed Banks

 

The Federal Deposit Insurance Corp is expected to offer $3.8 billion of guaranteed securitizations backed by the residential mortgage assets of failed banks, market sources said on Tuesday. The offerings are expected to come in three separate transactions with Barclays Capital acting as sole manager for the sales.

 

Its first $1.81 billion two part transaction, is expected to price later this week. Two additional offerings, including a $1.37 billion three-part sale and a $668 million one-tranche deal, are seen pricing in the coming weeks, after investor road shows were held for all three, market sources said.

 

While the sales move the assets off the FDIC's books it does not move the economic risks. The asset sales, which are guaranteed by the FDIC, are closely tied to the mortgage market meltdown and are seen as a positive step toward restoring investor confidence in the segment. In a move reminiscent of the Resolution Trust Corp, the government agency charged with insuring deposits and thrifts is employing securitization as a financial tool to help mop up the assets.

 

In the early 1990s, the federal government employed a similar method to dispose of the assets of failed banks and thrifts. During the savings and loan crisis, it created a new entity called the Resolution Trust Corporation, or RTC, whose mission was to dispose of assets, largely through securitization.

 

The move has been anticipated for months as the FDIC piles up loans from banks failing at an alarming rate. It could also awaken a market that has been largely frozen for two years, except for government-sponsored programs of Fannie Mae and Freddie Mac.

 

Caution Is Name of Game Says Minneapolis Fed President

 

The Fed must be especially careful when the time comes to raise interest rates because of its bloated balance sheet, Minneapolis Fed President Narayana Kocherlakota said on Tuesday.

 

"Where we are right now is a rather extreme form of where we are at the end of every recession -- trying to figure out when exactly to get this timing right, of ending a period of accommodation," he said. "I think the difference now, as opposed to other times maybe, is because of the size of the balance sheet which I have stressed, we have to be even more careful than usual in making the right decisions."

 

"When of course that will take place, that's what our job on the FOMC -- the Federal Open Market Committee -- is, to try to make that decision."

 

The Fed has kept its key interest rate target at near zero since December 2008 and added more than $1 trillion to its balance sheet with purchases of mortgage-backed securities and other assets in order to soften the blow of the worst recession since the 1930s.

 

Kocherlakota also said the Fed needs to pay special attention to the possibility of "tail events," which he described as low probability, high impact occurrences.