MarketView for March 21

 

 

Summary

 

The largest proposed merger of the year sent share prices higher and the major equity indexes well into positive territory, despite the crises in Japan, the Middle East and North Africa. However, until those crises are somewhat mollified, you can look for the volatility on Wall Street to continue. At the same time, the bulls on Wall Street have continued to maintain an upper hand for three days now as the S&P 500 index underwent its best continuous three day run since early December.

 

With Monday's upward move, the major equity indexes recouped half of their losses from the recent decline, but met resistance at the 14-day moving average near 1,300. A climb through that level would set the next resistance point at 1,307.77, the 61.8 percent retracement of the 2011 high-to-low decline.

 

AT&T, part of the Dow Jones industrial average, rose 1.1 percent after the company announced plans to buy Deutsche Telekom's T-Mobile USA and refocused investor attention on its attractive company valuations. The $39 billion acquisition would create the largest wireless phone company in the United States. AT&T shares were upgraded by at least four brokerages, rising 1.1 percent to $28.26. In the European market, Deutsche Telecom rose 11.3 percent.

 

While the outlook for Japan remains a worry, glimmers of hope about the nuclear crisis and investor Warren Buffett's comments about Japanese stocks also helped investor sentiment on Monday. The iShares MSCI Japan Index Fund was up 2.7 percent.

 

The market volatility index fell 16.2 percent, its largest daily percentage drop since May, and was trading below its 14- and 200-day moving averages for the first time since the earthquake in Japan.

 

Shares of Verizon, which has a joint venture with Vodafone, closed up 1.7 percent at $36.46, while Sprint Nextel saw its share price fall 13.5 percent to close at $4.37.

 

In Japan, power cables were connected to nuclear reactors at a power plant damaged by an earthquake and tsunami. The World Health Organization said radiation found in food from the area was a "serious situation.

 

Volume was modest with about 7.66 billion shares changing hands on the three major exchanges, a number that was slightly below the daily average of 8.12 billion.

 

AT&T to Acquire T-Mobile

 

AT&T will likely be forced to sell major assets and pledge to expand service to poor areas to get approval from the U.S. government for its $39 billion deal to buy Deutsche Telekom AG's T-Mobile USA.

 

Antitrust experts say the merger, which will create the largest U.S. wireless service provider, faces a tough review by competition and communications regulators that could take as long as 18 months, but that it will ultimately be approved.

 

The deal gives AT&T -- the No. 2 U.S. mobile service often criticized for dropped calls and slow connection speeds -- more capacity to meet ever-growing demands for videos and data from devices such as Apple's iPhone.

 

It will have about 130 million customers and hold roughly 43 percent of the U.S. wireless market, a concentration that sparks major regulatory concerns. Both the Federal Communications Commission and the Justice Department could force the combined entity to give up precious assets, including chunks of U.S. airwaves, known as spectrum, experts said.

 

The FCC could go further than the DOJ, asking for AT&T to expand wireless service to poor and rural areas, and for service promises including more packages with data roaming.

 

Representative Henry Waxman, ranking member of the House Commerce committee which oversees telecommunications issues, expressed concern over the possible merger. Both the Senate and House of Representatives Judiciary Committees are expected to hold hearings to discuss it.

 

Nonetheless, the deal is likely to be approved, especially when you take into account that AT&T has agreed to pay an unusually high breakup fee of $3 billion and to give T-Mobile wireless airwaves if regulators reject it. In other words, AT&T did some homework prior to making that commitment.

 

AT&T shares closed up 1.14 percent and Deutsche Telekom closed up 11.26 percent. The German telecoms operator said it would focus on organic growth and return cash to shareholders after the deal.

 

In general, mergers in industries with expensive infrastructure can be more difficult to approve since it's unlikely that new competitors would easily emerge.

 

Home Prices Nearly Reach 9-Year Low

 

Sales of previously owned homes fell sharply in February, while prices reached their lowest level in nearly nine years, indicating a housing market recovery was still a long way off. According to a report by the National Association of Realtors that was released on Monday, sales fell 9.6 percent month over month to an annual rate of 4.88 million units, snapping three straight months of gains. The percentage decline was the largest since July.

 

The weak sales were the latest evidence of the malaise in the housing sector and confirmed it would remain outside the strengthening and broadening economic recovery. Existing home sales are measured when contracts are closed and last month's sales decline was telegraphed by a drop in January's pending contracts.

 

The Realtors' group also said tight credit conditions and home appraisals that fell short of agreed-upon selling prices weighed on sales. Furthermore, a large inventory of homes on the market and a flood of foreclosures are holding back any recovery in the housing sector, whose collapse helped to tip the U.S. economy into its worst recession since the 1930s.

 

According to NAR, the median home price fell 5.2 percent in February from a year earlier to $156,100, the lowest since April 2002, in a sign of the relentless downward pressure on prices from a market flooded with foreclosure sales.

 

"If the price declines persist, even with the job market recovery, that could hamper recovery in the housing market," said Lawrence Yun, the trade group's chief economist.

 

Data last week indicated a large drop in housing starts and the government on Wednesday is expected report a marginal rise in new single-family home sales for February. Home re-sales make up more than 90 percent of overall sales natinally.

 

Foreclosures and short sales, which typically occur below market value, accounted for 39 percent of transactions in February, the highest since April 2009, up from 37 percent the prior month, the trade group said. All-cash purchases made up a record 33 percent of transactions in February.

 

According to the Realtors' group, new home prices have been running 45 percent higher than existing home prices, a premium that is historically about 15 percent, indicating previously owned homes are selling well below the cost of construction.

 

At February's sales pace, the supply of existing homes represented an 8.6 months' supply, up from 7.5 in January. A supply of between six and seven months is generally considered ideal, with higher readings pointing to lower house prices.

 

Sales last month fell across the board, with multifamily dwellings declining 10 percent and single-family home units dropping 9.6 percent. Compared with February last year, overall sales were down 2.8 percent.

 

Citigroup Plans Reverse Split

 

Citigroup will resume paying a nominal dividend after it uses a reverse stock split to shrink the number of shares outstanding, taking a small step in its recovery from the financial crisis. Citigroup will pay a quarterly dividend of a penny a share, its first payout since 2009.

 

Citigroup said it will reduce the number of common shares outstanding to 2.9 billion from 29 billion through a 1-for-10 reverse stock split. The dividends it will pay out amount to about $116 million a year, or about 1 percent of its full-year 2010 net income. In 2006 the bank paid out $10 billion of dividends, amounting to about 45 percent of its full-year earnings.

 

The bank reiterated in a statement that it anticipates returning more capital to its shareholders starting in 2012.

 

"The reverse stock split and intention to reinstate a dividend are important steps as we anticipate returning capital to shareholders starting next year," Chief Executive Vikram Pandit said in a statement.

 

Citigroup's quarterly dividend peaked at 54 cents per share in 2007. By the end of that year, the bank had started recording billions of dollars of losses on subprime mortgages. It cut back on its shareholder payouts over the next year, until it eliminated its one-cent dividend in early 2009 as it received its third government rescue. It took $45 billion in bailout aid during the financial crisis.

 

The bank finished extricating itself from Federal government ownership in December. It reported a full-year profit for 2010, its first since 2007. Citigroup will resume paying a dividend in the second quarter, after the reverse split, which takes effect after the close of trading on May 6.

 

Nonetheless, Citigroup’s shares fell on Monday, in part because it remains behind rivals like JPMorgan Chase and Wells Fargo. Those banks on Friday received regulatory authorization to lift their dividends by as much as 20 cents a share and buy back stock.

 

Furthermore, reverse splits have traditionally been the resort of companies with low share prices trying to make their shares look more attractive to institutional investors, or trying to meet exchanges' minimum share price requirements.

 

Reverse splits are not always successful. Shares of American International Group fell in 2009 after the company cut its share count in a 1-for-20 reverse split. Citigroup shares rose to $5.15 in mid-January but in the past month have hovered in the mid-$4 range.

 

A reverse split makes no economic sense. You have the same equity ownership. In essence, it is more of a psychological move than anything else. Such a move might instill confidence in grandma, but it sure is not going to do anything for the analysts that follow the stock.