MarketView for March 8

 

 

 

Summary 

 

Some days the markets just seem to march in place and not really go anywhere. Well, Monday was one of those days and except for a few key tech stocks, such as Research in Motion and Cisco Systems, there was little to commemorate the day's activity except a minimal amount of red ink. Research in Motion ended the day up 5.6 percent, leading the Nasdaq higher after an analyst's upgrade. Cisco Systems, a Dow component, hit a 21-month high at $26.36 after JPMorgan Chase recommended the stock to investors, and a day before the company is expected to announce new technology to speed up Internet connections.

 

The mood of the Street did improve somewhat on the announcement that American International Group had agreed to sell its Alico foreign life insurance unit to MetLife for about $15.5 billion in cash and stock. MetLife's shares rose 5.1 percent to $40.90 and AIG gained 3.6 percent to $29.10.

 

McDonald's chalked up a gain of 2.3 percent to $65.12 after the chain reported that February same-store sales increased 4.8 percent.

 

Sprint Nextel saw its share gain 3.7 percent after the company's chief financial officer said he hoped to see revenue declines slowing this year and a turn to revenue growth several quarters ahead. Shares of Clearwire, of which the majority shareowner is Sprint, rose 13.6 percent to $7.69.

 

There Is More Work to Do On Housing

 

Michael Barr, the Treasury's assistant secretary for financial institutions, told state housing agency officials that the Obama administration's housing policies "are helping to stabilize housing markets".

 

He said mortgage rates remain near historic lows, unsold home inventories are falling and prices are declining less rapidly in most markets with some prices increasing.

 

"However, even with these signs of progress, we have more work to do to help American homeowners and the U.S. housing market. Families are struggling and communities are hurting. Foreclosure and delinquency rates remain high," Barr said.

 

"Elevated unemployment is making it difficult for many families to make their mortgage payments," he said, noting that one in four homeowners owed more on their mortgages than the property is currently worth.

 

Barr's remarks did not mention any specific new programs or initiatives beyond the implementation of a new $1.5 billion aimed at supporting homeowners in five states experiencing the most severe price declines -- California, Florida, Nevada, Arizona and Michigan.

 

The so-called "Hardest Hit Fund" will provide money to state and local housing agencies to launch programs that help unemployed workers keep their homes, that help "underwater" homeowners and that help modify or reduce second-lien mortgages.

 

The states participating in the program will be asked to submit program designs to Treasury by April. "We are working together to ensure that assistance will reach struggling homeowners in these hard-hit states as quickly as possible."

 

House of Representative Financial Services Committee Chairman Barney Frank is ratcheting up pressure on big mortgage providers to write down second mortgages to prevent a deepening crisis in the housing market.

 

FDIC Remains In Favor Of Low Interest Rates

 

Sheila Bair, chairman of the Federal Deposit Insurance Corp,  said on Monday that a low interest rate policy is "clearly appropriate" to get credit flowing, while also saying regulators should stop short of ordering banks to lend. Bair has expressed frustration that creditworthy borrowers, including small businesses, cannot get loans.

 

"A policy of low interest rates is clearly appropriate given the struggling economy," Bair said in remarks to the National Association for Business Economics. "Clearly there was too much credit leading into this crisis ... but I am concerned with it moving too far the other way."

 

Bair said there are plenty of instances of banks being too tight with credit, particularly large banks. She said a public spotlight needs to be shined on banks for having pulled back too far on credit. "The smaller banks seem to be doing a better job than the larger institutions in making loans or maintaining loan balances," Bair said.

 

Increasing small business lending, as a way to jump-start economic growth, is a key policy initiative of the Obama administration. Bank regulators have repeatedly issued advisory notes to banks, urging them to extend prudent loans, but Bair said they should not mandate the activity.

 

"If you cross a line and get into a situation where regulators are starting to order banks to lend, the history on that isn't good," Blair said.

 

The FDIC's most recent banking profile showed that loan balances industry wide declined another 1.7 percent during the fourth quarter, the sixth consecutive quarter of contraction.

 

Bair reiterated her priorities for financial reform, but said a regulatory overhaul will not be enough to rein in excesses. She said the United States must examine policies that have skewed economic activities toward consumption and rapid growth in housing and the financial sector.

 

"Examples of these policies include federal tax and credit subsidies for housing, a tax code that can unduly favor short-term profit, and implied government backstops for financial firms that have now, in many cases, been made explicit," Bair said.

 

She also said U.S. mortgage finance agencies Fannie Mae (FNM.N) and Freddie Mac (FRE.N) should be either privatized or nationalized, and that the hybrid approach does not work.

 

The government took the two massive companies into conservatorship in 2008 but has not yet laid out a plan to reform them.

 

Bair said the excesses of the past decade were a costly diversion of resources from the U.S. industrial base and public infrastructure. She said creating a resolution mechanism to unwind troubled financial giants, regulating the shadow banking sector and enhancing consumer protection will only do so much.

 

"Rules and regulations can help constrain our 'animal spirits,' but unless economic incentives are also appropriately aligned, regulation alone will fail," Bair said.

 

It Took Two Years but MetLife Closes Deal

 

MetLife chased after AIG's foreign life insurance business for two years before finally sealing a $15.5 billion purchase that will provide the firm with an easy entry into 47 nations from Peru to Bangladesh. The deal for American Life Insurance Co will help MetLife, already the largest life insurer in the United States and Mexico, to diversify revenue by product, distribution and geography.

 

"The AIA deal really is an Asia deal. Ours is really a global deal," William Toppeta, president of MetLife's international business, said. "It is really about the growth opportunities in a lot of parts of the world and not just about Asia."

 

MetLife shares rose 5.1 percent to close at $40.90, their highest level in nearly six months, and AIG rose 3.6 percent to close at $29.10, also on the New York Stock Exchange.

 

MetLife first started eyeing Alico, which sells life, accident and health insurance as well as retirement and wealth management products in 55 countries, in the months before AIG nearly collapsed in September 2008.

 

MetLife said it would pay $6.8 billion in cash and $8.7 billion in equity for Alico, confirming an earlier Reuters report.

 

With the AIA and Alico deals, AIG plans to repay the Federal Reserve Bank of New York about $31.5 billion in cash, with more expected as it sells Prudential and MetLife stock over time. The proceeds should help the insurer pay down all of its New York Fed debt, but it will still leave the government holding roughly $47 billion in equity investments, including funds drawn under a $30 billion equity line. The government also has a nearly 80 percent stake in AIG.

 

MetLife expects the deal to increase its 2011 operating earnings per share by 45 to 55 cents, excluding one-time expenses of 12 cents. Analysts, on average, expected MetLife to post a profit of $4.89 per share in 2011. At the same time, MetLife sees annualized post-tax cost savings of $50 million to $75 million.

 

The equity portion of the price for Alico consists of $3 billion in MetLife common stock, $2.7 billion in contingent convertible preferred stock, and $3 billion of equity units. The common stock and equivalents would give AIG a 14 percent ownership in MetLife, MetLife CFO William Wheeler was quoted as saying.