MarketView for March 8

 

 

Summary

 

The major equity indexes were higher on Thursday, recovering most of the week's losses, after Greece moved closer to a bond swap with private creditors to avoid a messy default. Leading Thursday's advance were the materials and industrial sectors.

 

Greece was able to convince enough private bondholders to accept a restructuring on Thursday, moving it closer to unlocking aid needed to avoid a disruptive default.

 

Expectation for Friday's U.S. jobs data are for a net gain of 210,000 jobs in February. An unexpected rise in new U.S. weekly jobless claims on Thursday was not enough to change perceptions that the labor market was strengthening - a major catalyst in the current rally.

 

Apple rose 2.1 percent to $541.99. Many on the Street believe that Apple will continue to retain the lion's share of the tablet market as its new 4G-enabled iPad readies for competition from Windows 8-based products, and a cheaper iPad 2 takes on Amazon's popular Kindle Fire.

 

Coach, the luxury leather goods retailer, hit a record high of $78.22 after the overall positive tone of a presentation at a Bank of America conference. The stock later eased, but it still ended up 4.6 percent at $76.79.

 

American International Group fell 3.9 percent to $28.31 after the Treasury priced its $6 billion offering of AIG stock at $29 a share. That would allow the Obama administration to break even on its investment in the insurer as it winds down bailout programs from the financial crisis.

 

The Dow Jones Industrial Average was pressured by McDonald's after the hamburger chain reported a smaller-than-expected rise in February sales. McDonald’s ended the day down 3.2 percent to close at $96.96.

 

Volume was light, with about 6.1 billion shares changing hands on the three major equity exchanges, a number that was below the daily average of 6.9 billion shares.

 

Jobless Claims Up Slightly

 

The number of Americans filing new claims for jobless benefits rose last week, a government report showed on Thursday, but not enough to change perceptions that the labor market was strengthening.

 

Initial claims for state unemployment benefits increased 8,000 to a seasonally adjusted 362,000, the Labor Department said. Even with the increase, claims are still near their lowest in four years.

 

The four-week moving average for new claims, considered a better measure of labor market trends, edged up by 250 claims to 355,000 - still near a four-year low.

 

Despite the rise in claims last week, labor market conditions are improving and the government is expected to report on Friday that the economy had a third straight month of solid job gains in February.

 

Data on Wednesday indicated that private employers stepped up hiring in February. The improving labor market tone was reinforced by other data on Thursday showing planned layoffs at companies declined 3.3 percent in February.

 

Nonetheless, the recovery in the labor market remains painfully slow. The number of people still receiving benefits under regular state programs after an initial week of aid rose 10,000 to 3.42 million in the week ended February 25.

 

In January, about 43 percent of the 12.8 million unemployed Americans had been out of work for more than 6 months, a major cause of concern for the Federal Reserve. Moreover, 23.8 million people are either out of work or underemployed and there are no job openings for nearly three out of every four unemployed people.

 

Treasury Prices AIG Offering at $29 a share

 

The Treasury on Thursday priced its $6 billion AIG offering at $29 a share, allowing the Obama administration to break-even on its investment in the insurer as it winds down bailout programs from the financial crisis.

 

The Treasury said it would sell 206.9 million shares of AIG, reducing its stake in the insurer to 70 percent from 77 percent. AIG has agreed to buy 103.4 million shares, representing about half the proceeds.

 

The sale is part of efforts to exit stakes in private companies as soon as practicable, and to wind down the $700 billion Troubled Asset Relief Program established to protect Wall Street during the crisis, Treasury Assistant Secretary Tim Massad said.

 

Decline in Planned Layoffs

 

The number of planned layoffs at firms dipped in February, with the transportation and consumer products sectors seeing the most job cuts, a report on Thursday showed.

 

Employers announced 51,728 job cuts last month, down 3.3 percent from 53,486 in January, according to the report from consultants Challenger, Gray & Christmas Inc.

 

Still, February's job cuts were up 2 percent from the same time a year ago when 50,702 cuts were announced. For the first two months of 2012 there have been 105,214 layoffs, about an 18-percent jump from 89,221 at the start of last year.

 

Transportation and consumer product companies announced the most cuts last month with 14,065 and 13,856 layoffs, respectively.

 

"Both sectors are undoubtedly feeling the impact of rising fuel prices as heavy users of fuel, but also from their dependency on consumers, who are being forced to spend more on gasoline and less on the products and services provided by these firms," John Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement.

 

However, far fewer jobs have been cut in the government sector this year, with layoffs sliding to 3,654 for January and February from 22,830 the same time last year.

 

Meanwhile, planned hiring announcements jumped 42 percent to 10,720 in February from 7,568 in January. But that level dropped off 85.2 percent from 72,581 in February 2011.

 

Greece Closes Bond Swap

 

Greece secured an overwhelming acceptance of a bond swap offer to private creditors and beat its own most optimistic forecasts, a senior official said on Thursday after the deadline expired on a deal needed to avoid a chaotic debt default. Rumors are that the take-up on the offer was around 95 percent an hour before the offer closed at 2000 GMT with responses still coming in.

 

The biggest sovereign debt restructuring in history will see bond holders accept losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece's crippling public debt.

 

Preliminary results from the offer are expected to be announced officially at 0600 GMT on Friday and Finance Minister Evangelos Venizelos will hold a news conference before a call with euro zone finance ministers in the afternoon.

 

After initial fears that the deal could fail altogether, pitching Greece and the euro zone into fresh crisis, the unexpectedly strong result may mean that Athens can avoid enforcing the exchange on recalcitrant holdouts.

 

The government had been expected to activate so-called collective action clauses (CACs) on all 177 billion euros worth of bonds regulated under Greek law. That would potentially trigger payouts on the credit default swaps (CDS) that some investors held on the bonds, an event which would have unknown consequences for the market.

 

The private sector involvement (PSI) deal is a key element in a broader international bailout aimed at averting a chaotic default by Greece and a potentially disastrous banking crisis across the euro zone.

 

The European Union and International Monetary Fund have made a successful bond swap a pre-condition for final approval of the 130 billion euros ($170 billion) bailout agreed last month.

 

"If all goes well, tomorrow we will be able to announce that a debt burden of 105 billion euros has been lifted from the Greek people," Venizelos told parliament earlier in the day. "For the first time we are cutting debt instead of adding to it."

 

Despite the apparent success, the deal will not solve Greece's deep-seated problems and at best it may buy time for a country facing its biggest economic crisis since World War Two and staggering under debt equal to 160 percent of its gross domestic product. Nonetheless, the financial markets rose strongly as the threat of an immediate and uncontrolled default receded.

 

Bank stocks rose sharply and the risk premium on Italian and Spanish government bonds fell as investors hoped a Greek deal would curb the likelihood of any contagion spreading to other weaker euro zone economies.

 

Euro zone ministers could decide whether to clear the overall bailout package in their conference call on Friday afternoon, although they may leave the final decision until a face-to-face meeting on Monday.

 

Athens must have the funds in place by March 20 when some 14.5 billion euros of bonds are due, which it cannot hope to repay alone. At the same time, there has been growing resentment over the austerity medicine ordered by international creditors which has compounded the pain from a slump which has seen the economy shrink by a fifth since 2008. In addition, Greece has infuriated both the European Union and the International Monetary Fund with its repeated failure to push through promised reforms.