MarketView for November 10

Summary 

 

Stock prices gave up an early rally and then proceeded to end the day down about 2 percent on Monday as concerns over the outlook for a raft of companies from General Motors to Goldman Sachs in a harsh economic environment stifled even the enthusiasm of the bottom feeders.

 

Stock prices were higher after the opening bell on news that China had approved a $586 billion government spending package and said it would adopt a "moderately easy" monetary policy. China's economic stimulus involves new government spending between now and 2010 and would focus largely on infrastructure and social projects. However, the euphoria fizzled fast as the Street was quickly inundated with negative economic headlines.

 

In looking at the day’s trading activity, the financial sector led the parade downward after Barclays Capital indicated that they expect Goldman Sachs to post a quarterly loss for the first time in its history due to steep equity market declines. Goldman Sachs shares lost 8.5 percent to $71.21 after Barclays said it expected the bank to post a fourth-quarter loss of $2.50 per share.

 

GM, a component of the Dow Jones industrial average, fell to a 62-year low after Deutsche Bank lowered its equity value on the automaker to zero and a number of brokerages warned that GM and its rivals are rapidly burning through their available cash. GM's stock plummeted 22.9 percent to $3.36, dragging along rival Ford, whose shares declined 4.5 percent to $1.93.

 

After October's drubbing, stocks have made effectively no headway in November, and volume has been fairly light so far this month. Trading was low on the New York Stock Exchange, with about 1.14 billion shares changing hands, well below last year's estimated daily average of roughly 1.90 billion, while on NASDAQ about 1.71 billion shares traded, also falling short ot last year's daily average of 2.17 billion.

 

Also notable was the absence of a sharp last-minute sell-off, which had been a hallmark of down days during October's extreme volatility. In fact, major benchmarks cut some of their losses heading into the close on Monday. Nonetheless, the grim news continued after hours, with Starbucks falling more than 3 percent after its quarterly results fell short of expectations.

 

Another piece of worrisome news was the latest chapter in the bailout of American International Group. That number is now $150 billion after a smaller bailout failed to stabilize the ailing insurance monolith.

 

Google shares weighed on the NASDAQ after Barclays Capital cut its fourth-quarter revenue estimates on the company and lowered its price target on the stock, citing further macro weakness. Google shares fell 3.7 percent to $318.78.

 

Adding to the market's jitters was a bankruptcy filing by Circuit City on Monday, just weeks before the holiday shopping season.

 

McDonald's Corp helped the Dow fare better than the S&P 500 and NASDAQ. The fast food giant said global sales at restaurants open at least 13 months rose 8.2 percent in October. McDonald's shares rose 1.8 percent to $56.48.

 

The U.S. bond market closed early on Monday, ahead of the Veterans Day holiday when it will be closed. The U.S. stock market will be open as normal on Tuesday.

 

AIG Gets Another Bit Of The Apple

 

The government on Monday provided new financial assistance to troubled insurance giant American International Group, including pouring $40 billion into the company in return for partial ownership. The action, announced jointly by the Federal Reserve and the Treasury Department, was taken as it became increasingly clear that an original financial lifeline thrown to AIG in September would be insufficient to stabilize the teetering company.

 

All told, the moves boost aid to the company to around $150 billion in what is likely to be the largest bailout to a single private firm. Fed officials, however, expressed confidence that the money would be repaid to taxpayers.

 

The $40 billion infusion comes from the recently enacted $700 billion financial bailout package. The government is buying preferred shares of AIG stock, giving taxpayers an ownership stake in the company. In turn, restrictions will be placed on executive compensation at the firm.

 

As part of the new arrangement, the Federal Reserve is reducing a $85 billion loan it had made available to AIG to $60 billion. The Fed also is replacing a separate $37.8 billion loan to the insurance company with a $52 billion aid package.

 

The actions were needed to "keep the company strong and facilitate its ability to complete its restructuring process successfully," the government said.

It marked the first time money from the $700 billion bailout package Congress enacted last month has gone to any company other than a bank.

 

The Treasury Department, which is overseeing the program, has promised to inject $250 billion into banks in return for partial ownership. The original notion behind the bailout package was to help financial institutions lend money more freely again, one of the main reasons the economy is in danger of getting stuck in a long and painful recession.

 

Until Monday, all of AIG's bailout relief was coming from the Fed. The Fed, earlier this year, said it would loan a total of $123 billion to AIG. The insurance company was later allowed to access another $20.9 billion through the Fed's "commercial paper" program. That's where the Fed is buying mounds of companies' short-term debt often used for crucial day-to-day expenses, such as payrolls and supplies.

 

Monday's restructuring provides AIG with easier terms on the original Fed loan. The new package reduces the interest rate AIG will pay and will extend the loan term to five years from two, reducing the need for AIG to sell off business lines and other assets at firesale prices to repay the government.

 

Under the new $52 billion package, the loans will last for six years. Through two new facilities, the Fed will fund the purchase of both residential mortgage-backed securities from AIG's portfolio, and collateralized debt obligations, which are complex financial instruments that combine various slices of debt.

 

By taking these troubled assets off AIG's balance sheet, it should take stress off the company, giving it more breathing room and helping to prevent future losses, Fed officials said. The Fed doesn't believe it will suffer losses because it is hopeful the market for such distressed investments will recover as the economy and financial markets rebound.

 

AIG reported Monday that continued financial market turmoil resulted in a large third-quarter loss of $24.47 billion, or $9.05 per share, after a profit of $3.09 billion, or $1.19 per share, a year ago. Results included pretax losses of $18.31 billion tied to the declining value of AIG's investment portfolio. They also were hurt by catastrophe losses and charges related to restructuring. Excluding items, operating losses totaled $3.42 per share

 

AIG in early October said it would sell certain business units to pay off the $85 billion Fed loan. The company, however, said it plans to retain its U.S. property-and-casualty and foreign general insurance businesses. It also plans to keep an ownership interest in its foreign life-insurance operations.

 

Besides life, property and other insurance offerings, AIG provides asset-management services and airplane leases. Its myriad businesses are also linked to mutual funds, annuities and other retirement products held by millions of ordinary Americans.

 

But perhaps the biggest concern about AIG is its complex array of financial instruments it structured for commercial banks, investment banks and hedge funds around the globe — many of which were directly or indirectly linked to the value of subprime mortgages.

 

GM Downgraded To Zero

 

Shares of General Motors were downgraded to sell from hold and were labeled Monday as likely to be worthless by Deutsche Bank, which said GM may not be able to fund its U.S. business past December without government intervention.

 

Deutsche Bank analyst Rod Lache wrote in a note to clients that he believes the government will be compelled to intervene to shore up Detroit-based GM. If GM manages to avoid bankruptcy, equity shareholders are unlikely to get anything back, Lache said in slashing his target price for the shares to nil from $4.

 

"Without government assistance, we believe that GM's collapse would be inevitable, and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers, and sectors of the U.S. economy," the note said.

 

"As part of GM's restructuring, we are also convinced that a large number of stakeholders who are senior to GM's equity will have to settle for pennies on the dollar," it added.

 

A report by the Center for Automotive Research last week estimated that 3 million jobs could be lost in the first year if all three major Detroit manufacturers were to halt U.S. production.

 

In addition, the economy could lose $156 billion over three years through lost wages as well as lower receipts from social security and income taxes, according to Sean McAlinden, the center's chief economist.

 

"Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like," said Lache.

 

He estimated the U.S. may have to provide GM with at least $10 billion in loans to keep it afloat through 2010 and as much as $25 billion to fund the company's cash burn and restructuring.

 

As for Ford, Deutsche Bank said the company still has the potential to restructure without falling into bankruptcy, again possibly on the receiving end of government assistance.

 

If Ford can avoid impairments over the next year or two, it may be able to boost its market share from the inevitable shrinking of GM and also benefit from more competitive labor costs.

 

Price of Crude Oil Rises

 

The price of crude oil rose 2 percent on Monday as Saudi Arabia's move to cut supplies and China's launch of a $600 billion economic stimulus plan offset concerns about the global economy. Sweet domestic crude settled up $1.37 per barrel at $62.41, while London Brent settled up $1.73 per barrel at $59.08.

 

Concerns over the rapidly weakening economy had pushed the price of crude oil lower. Saudi Arabia told refiners in Asia it would cut December supplies by 5 percent, signaling its adherence to an OPEC plan to cut output.

 

OPEC members last month agreed to lower the group's output ceiling by 1.5 million barrels per day (bpd), roughly 5 percent, after slumping demand in the United States and other top consumers sent crude prices tumbling from record highs over $147 a barrel in July.

 

The weekly government inventory data forecast of crude oil stocks rose by 0.8 million barrels last week. The data, which will be released on Thursday instead of Wednesday due to the U.S. Veterans Day holiday, will likely show a 0.5 million-barrel rise in distillate inventories and a 0.8 million-barrel rise in gasoline stocks.