MarketView for November 12

Summary 

 

It was quicksand on Wall Street once again as gloomy economic news had stock prices sinking with the NASDAQ down to its lowest closing level in more than five years, beating the closing low hit at the end of October. The S&P 500 came close to retesting October's closing low for the third consecutive day. A key driving force to the downward momentum was a decision by the Treasury Department not to use its $700 billion bailout money to buy up sour mortgages. That in turn added to the uncertainty over how the government plans to revive bank lending.

 

Treasury Secretary Henry Paulson said the Treasury's focus now would be on shoring up financial institutions with direct investments and his comments served to underscore the extent of the problems in the economy. When Congress approved the $700 billion bailout plan last month, the stated purpose was to purchase toxic assets, especially mortgage-backed securities, from banks. It seems that Treasury and Mr. Paulson have decided to take matters in their own hands and do what they wish.

 

As a result, Wall Street sold off financial stocks amid questions about what impact the new plan will have on the financial sector. Among the casualties was Citigroup, which fell below $10 for the first time in its history. Citigroup dropped 10.7 percent to close at $9.64

 

Best Buy generated its own set of headaches for the market after the electronics giant told the Street that consumers were slashing spending and thereby creating the worst climate in the company's 42-year history. As a result, Best Buy lost 8 percent to close at $21.97. The reduced forecast came on the heels of Circuit City’s bankruptcy filing, providing further evidence of anemic consumer spending.

 

If that was not enough, Intel chimed in after the closing bell stating that its revenue would be about 14 percent below its previous forecast due to weak demand around the globe. Intel gave up 7.2 percent at $12.55 after the bell, while Apple was the largest drag on the NASDAQ, falling 4.9 percent to $90.12.

 

In an ironic twist, the deeply troubled auto sector provided one of the few bright spots in the day.

General Motors was the only advancer among the 30 Dow components amid hopes the automaker will get the financial assistance it desperately needs. GM, Ford and Chrysler are seeking $25 billion in urgent federal assistance as their cash burn rates rise. GM's stock climbed 5.5 percent to $3.08, while Ford gained 2.2 percent to $1.84.

 

The energy sector felt the impact of another decline in the price of crude oil as the government cut its global demand growth forecast. Crude futures for Dec delivery settled down $3.17 per barrel at $56.16, the lowest close since the end of January 2007.

 

Chevron and Exxon Mobil were the two top drags on the Dow. Chevron lost 8.5 percent to $67.28 and Exxon dropped 5.1 percent to $68.93.

 

On the earnings front, Macy's posted a narrower-than-expected quarterly loss as consumers curbed their shopping. Macy's ended the day down 11.1 percent to close at $8.37.

 

So Much For The Intentions Of Congress

 

The Bush administration on Wednesday largely abandoned its plan to buy up toxic mortgage assets under the Congressionally mandated bailout plan and said it will focus its $700 billion financial bailout fund on making direct investments in financial institutions and shoring up consumer credit markets.

 

The Treasury Department initially promoted the financial rescue package approved by Congress last month as a vehicle to buy illiquid mortgage assets from banks and other institutions to spur fresh lending. However, that plan never got off the ground and Treasury Secretary Henry Paulson told a news conference that asset purchases were not the most effective use of the funds.

 

"This is not going to be the focus," he said. Paulson added, however, that the Treasury would continue to examine the usefulness of "targeted" purchases.

 

Treasury has already tapped the fund to inject capital into banks and ailing insurer American International Group. Paulson said he was considering a second round of preferred share purchases in both banks and non-bank institutions which, in a fresh twist, would match privately raised funds.

 

He also said the Treasury was working with the Federal Reserve on a plan to help restore credit flows to households by using financial rescue funds to lure investors back to markets for securitized debt, such as car loans, student loans and credit cards. The administration's shifting focus was a major disappointment to Wall Street, sending share prices lower.

 

Paulson was unapologetic, stating that by the time the rescue bill was passed on October 3, it was clear the asset purchase plan would take too long and would not be sufficient to calm roiling markets. "I will never apologize for changing a strategy or an approach if the facts change," he said.

 

The $700 billion financial sector bailout is the United States' marquee effort to combat a credit crisis spawned by rising mortgage defaults that is now wreaking economic damage worldwide.

To help ease the crisis, the Treasury and bank regulators on Wednesday issued "guidance" for banks encouraging them to lend and to rein in any compensation plans that might lead executives to take excessive risks.

 

Paulson said Treasury was duty-bound to help prevent mortgage foreclosures, but he warned that further aid would likely mean a significant government subsidy, signaling a lack of support for a Federal Deposit Insurance Corp. proposal for more aggressive aid to borrowers.

 

Meanwhile,  Fannie Mae and Freddie Mac unveiled a plan on Tuesday to cut payments for hundreds of thousands of homeowners behind on their payments. That plan, however, would not touch the many loans held by mortgage investors.

 

Paulson sidestepped questions on whether the Treasury would use bailout funds to help struggling Detroit automakers, as the industry and some lawmakers have called for. While he said the industry was a "critical" one for the country, he said the purpose of the program was to provide financial system stability.

 

He said one option would be to amend legislation to allow $25 billion already approved for efficient vehicle production to be made available more quickly.

 

So far, the Treasury has focused on providing capital to federally regulated banks and thrifts, but Paulson said it was looking to broaden the effort to cover financial institutions that do not have a federal bank or thrift charter.

 

"Although the financial system has stabilized, both banks and non-banks may well need more capital given their troubled asset holdings, projections for continued high rates of foreclosures and stagnant U.S. and world economic conditions," he said.

 

Treasury has allocated $250 billion of the bailout funds to inject capital into banks and thrifts and it has earmarked another $40 billion to shore up AIG, leaving just $60 billion to dole out before it would have to ask Congress to release the final $350 billion.

 

Paulson said he had no timeline for that request, which means the decision could be left to the incoming administration of President-elect Barack Obama, who takes office on January 20. He also signaled he would not seek to increase the overall size of the bailout fund. "I still am comfortable that, with $700 billion, we have what we need," he said.

 

With an aim to restoring credit for households, Paulson said the Treasury and Fed were considering setting up a program to increase liquidity for top-rated asset-backed securities, but he provided few details.

 

Congress Looking At Helping The Desperate Autos

 

Massachusetts Democratic Rep. Barney Frank said his committee will hold a hearing next week to consider a bill to provide $25 billion in federal loans to U.S. auto manufacturers.

 

Frank, chairman of the House of Representatives Financial Services Committee, told reporters on Wednesday, after a hearing on another issue: "We will be having a hearing, by the way, a week from today on a bill that will be drafted to advance $25 billion in loans to the American auto companies."

 

General Motors, Ford and Chrysler have been lobbying for assistance as a severe downturn in auto sales pummels their balance sheets. Frank said the money for the loan would come out of the Troubled Assets Relief Program (TARP), part of the $700-billion financial market rescue law enacted last month, but he said separate legislation to amend the TARP is needed.

 

"It will be coming out of the TARP if the bill passes," he said, adding that the legislation will be written so it would not necessarily trigger release of the second half of the $700 billion funding for the TARP. "It won't require you to necessarily trigger the second 350," he said.

 

Crude Falls 5 Percent

 

Crude oil futures fell more than $1 after Wednesday's settlement on mounting pessimism about the global economic outlook. November delivery crude was down as much at $1.09, hitting $55.07 a barrel after settling earlier Monday at $56.16 a barrel, down $3.17 from Tuesday's finish.

 

Look for crude futures to find support in a range between $50 and $55 a barrel.

 

It Is Looking Grim According To Best Buy

 

Best Buy slashed its profit forecast on Wednesday, the latest sign that the deepening economic crisis may bring a bleak holiday season, sending the company's shares down 7 percent. Best Buy's warning comes just two days after smaller rival Circuit City filed for bankruptcy, falling victim to reduced consumer spending and tighter credit terms from suppliers.

 

"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen," Best Buy Chief Executive Brad Anderson said in a statement. "Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year."

 

The company, which analysts expect to benefit in the longer term as the electronics retail industry consolidates, said it expects to end the third quarter with higher inventory levels, short-term borrowings and accounts payable than previously projected due to the drop in consumer spending.

 

"In 42 years of retailing, we've never seen such difficult times for the consumer," Best Buy President Brian Dunn said. "People are making dramatic changes in how much they spend, and we're not immune from those forces."

 

In addition, the company is facing increased competition from discounters such as Wal-Mart, which has stepped up its product selection and advertising. However, fire sales at Circuit City are  expected to pressure Best Buy's results over the next few months. Circuit City is currently liquidating 155 U.S. outlets.

 

Best Buy said sales at stores open at least 14 months, or same-store sales, fell about 7.6 percent in October after falling 1.3 percent in September. Same-store sales from November 2008 through February 2009, when its fiscal year ends, could decline 5 percent to 15 percent, leading to an annual same-store store sales decline of 1 percent to 8 percent.

 

Best Buy now expects annual revenue of $43.7 billion to $45.5 billion, down from a prior forecast of $47 billion. The retailer said it now expects full-year earnings of $2.30 to $2.90 per share, down from a prior view of $3.25 to $3.40. The company earned $3.12 per share in fiscal 2008.

 

The company said it is working with vendors to adjust its inventory levels and its near-term working capital position and expects year-over-year domestic inventory to be flat by the end of the fiscal year.

 

Best Buy said it has a new $150 million committed credit facility, which expires on December 17. The facility was undertaken in part because one of the participants in its existing $2.5 billion revolving line of credit, Lehman Brothers, went bankrupt, effectively cutting the amount available to the retailer.