MarketView for May 11

 

 

Summary 

 

Wall Street took a bit of a breather on Monday after a two-month run-up in share prices when the news of new share offerings by several banks heightened worries about the dilutive impact on current shareholders. At the same time, with government stress tests on big banks out of the way, and after a steep rise from March lows, investors used the opportunity to take some of their profits off the table.  

 

In the banking sector, U.S. Bancorp lost almost 10 percent to close at $18.50 and Capital One fell 13.5 percent to $27.10, while BB&T closed down 7.6 percent at $24.34. These banks were the latest to seek additional capital by announcing stock offerings on Monday. However, also feeling the effects were JPMorgan Chase down 8 percent to $35.83 and Bank of America down 8.7 percent to close at $12.94. Citigroup fell 4 percent to close at $3.86, while Wells Fargo was down nearly 6 percent at $26.53.

 

Technology shares fared better after German software maker SAP's co-chief executive said the next few months may bring "glimmers of hope" for the global economy. The tech sector's resiliency helped propel the Nasdaq to its ninth straight weekly gain on Friday, its longest winning streak since December 1999.

 

 Big-cap software makers, including Oracle, were standouts, with Oracle ending the day up 1.3 percent at $18.56. Other tech bellwethers doing well included Apple, up 0.3 percent at $129.57 and Symantec up 3 percent to close at $15.32.

 

In earnings news, Dish Network posted better-than-expected quarterly earnings, sending the shares up 17.1 percent to $17.92, and making it one of the Nasdaq's top advancers.

 

Besides financials, shares of energy companies exerted some major drag due to retreating oil prices. Chevron fell 3.4 percent to $68, making the stock the Dow's second- worst drag behind JPMorgan. Exxon Mobil fell 1.6 percent to $69.27. Domestic front-month crude dipped 13 cents, or 0.22 percent, to settle at $58.50 per barrel.

 

Crude Falls

 

The price of crude oil fell on Monday, pressured slightly by weaker equity markets and a firmer dollar. Domestic sweet crude for may delivery settled down 13 cents per barrel at $58.50, off a session low of $56.78. In London, Brent crude settled down 66 cents per barrel at $57.48.

 

Oil prices hit a near six-month high of $58.75 on Friday, after the economy shed fewer than expected jobs in April and government stress test results removed some uncertainty over the health of major American banks.

 

A stronger dollar, which makes oil more expensive for holders of other currencies, also added pressure to the oil price. The price of crude has edged higher over the past three months alongside a rally in equity markets, rising about 80 percent from a January low of $32.70 a barrel.

 

In an attempt to support prices, oil producing group OPEC has cut output by 4.2 million barrels per day since September. The group will meet again later this month to discuss its options going forward. A Kuwaiti oil official was quoted this weekend saying that OPEC is not expected to announce further output cuts in its next meeting.

 

Saudi Arabia, the world's top crude exporter, will maintain supply curbs to Asia and the United States in June, while some importers in Europe were told to expect lower crude volumes.

 

News from China, the world's second biggest energy consumer, indicated that the government's stimulus plan had worked better than expected, as crude import data indicated a spike in demand. China's April crude imports marked the first monthly increase of the year and hit the second-highest level on a daily basis, providing more evidence that oil demand in the country was picking up.

 

Nobel economist Paul Krugman Speaks Out

 

The United States risks a Japan-style lost decade of growth if it does not take aggressive action to stimulate its economy and clean up its banking system, Nobel Prize-winning economist Paul Krugman said on Monday.

 

"We're doing half-measures that help the economy limp along without fully recovering, and we're having measures that help the banks survive without really thriving," Krugman said. "We're doing what the Japanese did in the nineties," he said.

 

He said it was not clear that China would suffer sub-par growth as a consequence of the fallout of the present crisis. "I'm mostly worried that the U.S. and the euro zone will have Japanese-type lost decades," he said.

 

Krugman said he expected little or no employment growth this year or next in the United States, where the jobless rate in April hit a 25-year high of 8.9 percent. "A second stimulus is becoming clearly urgent. They need a very, very strong stimulus," said Krugman.

 

He said stress tests carried out on 19 leading U.S. banks had bought time for the administration of Barack Obama, but they had not answered the key question of whether the banks have enough capital to fulfill their key role in the economy.

 

"It's clear the administration won't take radical action to strengthen the banks any time soon," he said. To have done so would have meant temporarily nationalizing Citigroup and, perhaps, Bank of America, he said.

 

Krugman gave credit to China for vigorously implementing its own economic stimulus plan but said he had detected no commitment by Beijing to switch to a domestic demand-driven growth model that would reduce its excess savings.

 

"It's very hard to see how the world has a full recovery if China continues to run current account surpluses of 10 percent of GDP," he said.

 

If China's big external surpluses persist alongside high U.S. unemployment and low European growth, political friction will ensue. "Something will have to give, and it won't be pretty."

 

Krugman said China should not be in a rush to make the yuan, or renminbi (RMB), fully convertible or to liberalize its capital account; countries at a similar stage of development that have scrapped capital controls have run into trouble, he noted.

 

"I'm not sure we're talking about a full-floating RMB," Krugman said. "But an appreciation of the RMB, though it's not what China wants to hear right now, is going to be necessary."

 

Desire to Pay Back the Government Gains Ground

 

Four major banks on Monday said they would sell $6.55 billion of common stock and repay funds from the government's bank bailout program, after federal stress tests showed they can weather a deep recession without new capital.

 

U.S. Bancorp plans to sell $2.5 billion of stock, and sold $1 billion of five-year notes. Capital One Financial sold $1.55 billion of stock, BB&T said it will sell $1.5 billion, and Bank of New York Mellon Corp said it will sell $1 billion.

 

BB&T also cut its quarterly dividend 68 percent to 15 cents per share to save $725 million a year, after 37 straight years of higher payouts. Chief Executive Kelly King in an interview said the decision marks "the worst day in my 37-year career."

 

Separately, KeyCorp said it would sell $750 million of stock to help plug what regulators called a $1.8 billion capital shortfall. KeyCorp said it may take other actions, including converting other securities to common stock.

 

The offerings were announced three days after Wells Fargo & Co and Morgan Stanley sold a combined $12.6 billion of stock. Morgan Stanley also sold $4 billion of debt.

 

Banks are raising capital after improved investor sentiment caused shares in the sector to more than double from their lows in early March, despite worsening credit conditions in housing, commercial loans and credit cards.

 

U.S. Bancorp took $6.6 billion from the government's Troubled Asset Relief Program, while Capital One took $3.55 billion, BB&T $3.1 billion and KeyCorp $2.5 billion. Yet many now view TARP as an albatross that imposes too many restrictions, including those on executive pay, and gives the impression that recipients are desperate for capital.

 

At least one dozen lenders have repaid or gotten permission to repay TARP, and Goldman Sachs and JPMorgan Chase have said they want to do so as well.

 

Budget Deficit Likely To Increase

 

The White House on Monday raised its forecast for this year's budget deficit by $89 billion due to the recession, millions of new unemployment claims and corporate bailouts. The new estimate predicted a deficit of $1.84 trillion, or 12.9 percent of gross domestic product, for the fiscal year ending September 30.

 

White House officials said the gloomier picture reflected weaker tax receipts as the economy declined and higher costs for social safety-net programs such as unemployment insurance. Spending on government rescues for the financial and automobile industries also played a part.

 

While the Democratic-led Congress has approved the broad outline of Obama's proposed FY 2010 budget that includes initiatives on healthcare, education and other items, many lawmakers are wary about the deficit outlook. Republicans contend Obama's agenda would sharply increase the size of government and add to a mountain of debt.

 

The fresh budget documents include an Obama proposal to increase the Federal Deposit Insurance Corp's borrowing authority to $100 billion from $30 billion. The increase is intended to help the agency protect bank depositors amid expectations that more financial institutions may fail this year. It would also aim to ease strains on banks by lowering the cost they pay to the government for deposit insurance.

 

The new White House figures bring the deficit estimates closer in line with the non-partisan Congressional Budget Office, which has forecast a $1.85 trillion deficit this year and $1.38 trillion in fiscal 2010.

 

To allay worries about the deficit and fend off Republican attempts to paint him as a big spender, Obama in the past week has rolled out a series of announcements aimed at showing he is working to stem the red ink. Last week, he said he could wring $17 billion in savings from his budget by cutting waste in areas from weapons systems and education to the cleanup of abandoned mines. However, the cuts in 121 programs amounted to less than one-half of 1 percent of the total budget for 2010 and even the slim list of reductions is likely to face resistance in Congress.

 

Obama also unveiled a plan to toughen tax policies for multinational companies that invest abroad and to close loopholes on overseas tax shelters. Many businesses strongly oppose the proposed changes for multinational firms. Obama on Monday also highlighted more savings at a White House forum on making the U.S. healthcare system more efficient.