MarketView for November 4

Summary 

 

Wall Street saw stock prices rise sharply in the largest Election Day rally ever, as investors looked forward to the end of the uncertainty surrounding the long fight for the White House, and as energy companies' shares followed oil prices higher. For the record, Election Day was a market holiday before 1984, according to Standard & Poor's.

 

The rally pushed stocks to their highest close since October 6, with the S&P 500 crossing the 1,000 mark for the first time since October 13. The three major U.S. stock indexes are all up about 18 percent from their closing low points on October 27.

 

Adding to the positive tone, the Treasury Department is exploring how to best expand its capital injection program and is considering specialty finance firms, such as General Electric's GE Capital unit. Shares of GE, an economic bellwether and a Dow component, climbed 7.6 percent to $20.77. A possible next step for the Treasury could be extending help to specialty finance firms such as GE Capital, CIT Group and others

 

Chevron led the Dow higher after crude futures settled up $6.62 per barrel, or 10.4 percent, at $70.53 on signals that OPEC members were cutting output to comply with the group's recent decision. Chevron ended the day up 6.1 percent to $78.19

 

More signs of thawing credit markets prompted investors to snap up shares at multi-year lows. The interest rates banks charge each other for short-term loans fell again, providing further hope that measures to shore up the credit markets are taking hold.

 

Nonetheless, the presidential election was first and foremost on investors' minds. Opinion polls indicate Democrat Barack Obama is running ahead of Republican John McCain in enough states to give him more than the 270 electoral votes he needs to win.

 

Strong earnings from MasterCard Inc and Archer Daniels Midland Co improved optimism about consumer spending and pricing power even as economic data pointed to a worsening slowdown.

MasterCard, the world's second-largest card network, saw its share price rise 18.3 percent to $170.24 after the company reported stronger-than-expected earnings late on Monday.

 

Archer Daniels rose 5.3 percent to $24.33 after it posted a sharply higher profit, helped by higher selling prices and an accounting change.

, the source said. CIT's shares shot up 36.1 percent to $6.15 on the New York Stock Exchange.

 

Tenet Healthcare Corp sank 36.7 percent to $2.61 after the hospital operator reported worse-than-expected results and cut its 2008 forecast.

 

In economic news, data showed that new orders received by factories took a surprisingly steep tumble for a second month in a row during September, but the markets largely shrugged off the data..

 

Crude Sees 10 Percent Price Rise

 

Crude oil futures rose sharply on Tuesday on signs Saudi Arabia and other OPEC members had made cuts in crude exports and as global financial markets rallied ahead of the presidential election. U.S. crude settled up $6.62 per barrel at $70.53. London Brent crude settled up $5.96 per barrel at $66.44.

 

Saudi Arabia has reduced exports after the Organization of the Petroleum Exporting Countries agreed last month to lower output, according to trade sources, with some estimating the world's top exporter had cut shipments by around 900,000 barrels per day from a peak in August.

 

Crude prices have plummeted from a record above $147 a barrel in July as the global credit crisis hit the wider economy, damping fuel demand in major consumer nations, including the United States. The steep drop prompted OPEC to agree to reduce output by 1.5 million bpd at an emergency meeting last month, and some members have called for additional reductions. Venezuela said it had informed its clients of supply cuts that began on November 1 and added it will propose a further output cut of 1 million barrel bpd at the next OPEC meeting in December.

 

Gasoline demand edged up 1.3 percent last week from the previous week as national average prices for the fuel dropped, although it remained 3.9 percent below year-ago levels.

 

In addition to Saudi Arabia and Venezuela, other OPEC members were also showing signs of throttling back the supply of crude oil output. The United Arab Emirates has reduced its production to around 2.3 million bpd from around 2.5 million bpd, a top state oil company official said on Tuesday. Algeria was reducing oil output by 71,000 bpd in line with OPEC's supply cut decision, the Algerian official news agency APS said on Tuesday, quoting the country's Energy and Mining Ministry. Qatar has cut exports to Asia by about 40,000 bpd, effective this month.

 

Treasury May Move Beyond Typical Wall Street Firms

 

The Treasury Department is exploring how best to expand its capital injection program to provide more liquidity to credit markets and is considering specialty finance firms in the process. Apparently, the Treasury Department is working diligently behind the scenes but is not expected to announce any program expansion in the coming days. The government is trying to figure out its next step after already allocating to U.S. banks the bulk of the $250 billion it has for capital infusions.

 

Under the current equity purchase program, federally regulated banks may sell the Treasury a stake of preferred shares in a program that is expected to drain $250 billion of the $700 billion financial rescue program passed by Congress last month.

 

A possible next step for Treasury investment could be extending help to specialty finance arms such as General Electric's GE Capital unit, CIT Group and others that provide financing to the broad economy. A GE spokesman said on Tuesday the company does not expect the Treasury to offer it money from the bailout fund, but would listen to a proposal if one were made.

 

The news of a possible expansion of the Treasury's plan was first reported by the Wall Street Journal. "We are looking at many ideas for strengthening the financial system and for restoring lending," Treasury spokeswoman Jennifer Zuccarelli said. "We are weighing ideas and have made no decisions."

 

A possible expansion of its aid programs could involve the Treasury aiding insurance companies and financial arms of other companies that do not have a federal regulator.

 

David Nason, U.S. Treasury assistant secretary for financial institutions, last week declined to rule out capital injections for insurers and other companies.

 

"We started with the banks because that's targeted to providing credit to the economy, but there are a lot of industries coming in saying they need federal assistance, so we're willing to listen to their asks," Nason said.

 

The Treasury is also examining how to purchase troubled assets. Treasury Secretary Henry Paulson originally pitched the $700 billion bailout as a plan to soak up toxic mortgage-related assets that were weighing down balance sheets, likely through an auction process. But government officials have not ruled out the possibility of directly purchasing assets to provide relief.

 

Federal Reserve Chairman Ben Bernanke has told lawmakers the government could "have auctions or other mechanisms to purchase these assets."

 

Fed’s Fisher Speaks Again

 

The United States needs a new fiscal policy boost to complement aggressive steps taken by the Federal Reserve to shield the economy from a global credit crisis, Dallas Fed President Richard Fisher said on Tuesday.

 

"There are limits to what the central bank can do. Our efforts must be complemented by fiscal policy," Fisher said. Fisher is a voting member of the Fed's interest rate-setting committee this year.

 

Fisher said that even with concerted and complementary action between the Fed and Congress, the economy still faced an "epic challenge" after the collapse of its housing market sparked global market panic and chilled growth.

 

"The credit crisis has reached up and clutched the throat of the economy" he said. I expect no growth and maybe some negative numbers in the last quarter and throughout 2009. I'm talking about fourth quarter to fourth quarter," he said.

 

Fisher has been one of the Fed's most hawkish policy-makers who had dissented against easing monetary policy at every meeting this year, but that changed in September. Then Fisher closed ranks to vote for another interest rate cut after judging that the credit crisis had decisively trimmed the risks from rising prices.

 

"The impetus for rising prices came to a grinding halt as the credit crisis took grip and confidence evaporated. As the credit market congealed, inflationary momentum froze in its tracks," Fisher said.

 

However, he did not share the fear of some economists that the United States is in danger of slipping into deflation. This is a general decline in prices that mutes spending and causes bank failures to soar as loans get more expensive in real terms and go bad, as hit Japan during a 'lost decade' in the 1990s.

 

"I think we might see some negative numbers in a couple of months. I don't think there is a sustainable deflationary risk. ... There are some significant growth vectors in the global economy," he has said.

 

The Fed has slashed its benchmark overnight funds rate 4.25 percentage points to 1 percent since September 2007 and pumped billions of dollars into the financial system to prevent credit markets from completely freezing over. Fisher likened this behavior to "Bagehot on steroids," in reference to 19th century English bank Walter Bagehot's advice that banks lend to each other during times of crisis. It has already doubled the size of the Fed's balance sheet to around $1.9 trillion, and Fisher said this could probably keep growing to $3 trillion by the end of the year, adding:

 

"This combination of measures, together with an effective fed funds rate of less than 1 percent, is unprecedented. We believe they are a necessary antidote to what ails the economy and a needed impetus for the restoration of confidence," Fisher said.

 

Auto Finance Market In Poor Shape

 

A deteriorating economy, combined with an ongoing credit crunch, is darkening the credit outlook for the auto finance market well into 2009, said Moody's Investors Service in a report on Tuesday. "The sector is clearly under severe stress," said Curt Beaudouin, vice president and analyst at Moody's. He noted increasing delinquencies and write-downs of uncollectable debt, higher loss severities due to slumping used-car prices, as well as shrinking new vehicle sales.

 

The auto finance industry, which includes banks, independent finance companies and automaker-owned finance units or captives, has also been hurt by higher funding costs due to the credit crunch and depressed profitability due to greater auto loss provisions, he said.

 

According to Beaudouin, banks are less vulnerable to these mounting risks, and their auto lending is not a leading negative ratings driver. A combined Wells Fargo/Wachovia is the most committed to the sector in dollar terms, with about $55 billion, and a relatively moderate 5.9 percent of total loans.

 

"For none is auto finance exposure a leading negative rating driver. They possess more diversified asset and earnings bases and are not tied to the manufacturers," said Beaudouin.

 

Still, he said, auto finance will remain a difficult market for the banks. Their profit and/or asset quality potential will always be subordinated to the behavior of the captives, which they can't control.

 

"Banks would like to exit the market, but there are no willing buyers for their auto operations. So, banks are withdrawing from the business by slowing originations and winding down portfolios," said Beaudouin.

 

Currently, the highest-rated auto captive, other than Toyota Motor Credit Corp, which is rated "AAA" based on a support agreement from its parent Toyota Motor, is Ford Credit. Ford Credit is rated "B2," with a review for downgrade. Both GMAC and Chrysler Financial are rated lower, at "Caa1" and "B3," respectively, and remain under review for downgrade.

 

"The captives are -- and will continue to be -- more vulnerable to aggressive financing practices influenced by manufacturer sales targets; they are further weighed down by their monoline nature and heavy business concentrations with their troubled manufacturer affiliates," said Beaudouin.

 

The same basic picture applies to the independent auto finance firms, he said. The highest rated name is AmeriCredit, which carries a "B1" rating. Others include DriveTime Automotive, rated "B2" and Triad Financial, rated "Caa2."

 

"Their monoline (heavily subprime) nature and severely impaired wholesale funding model have caused retrenchment in the shrinking universe of independent auto finance companies," said Beaudouin, "and this trend is expected to continue." Those exposures must now be worked through, he said.

 

"Buyers have simply bought too much vehicle, thereby increasing their debt burden," said Beaudouin. "Auto lenders were enablers in this process, by offering increasingly aggressive financing terms and exposing themselves to increased severity of loss, in a phenomenon we refer to as 'the trade-in treadmill," he said.

 

In addition, Beaudouin said, the ongoing credit crunch, in place since the summer of 2007, has been hurting the cost and availability of funding for auto finance companies, while deteriorating economic conditions are taking a toll on the consumers, the used car market and new vehicles sales.