MarketView for November 17

Summary 

Stock prices were lower again on Monday; despite a midday rally tht had the Dow Jones industrial average in positive territory. Driving prices lower was an accelerating global slowdown after Japan's surprise news it had fallen into recession and Citigroup’s announcement that it planned to cut 52,000 jobs, far more than had been expected. Japan, the world's second-largest economy and a key U.S. trading partner, unexpectedly slid into recession in the third quarter.

The day’s decline on Wall Street was the fifth one out of the past six sessions. As a result, the NASDAQ hit its lowest closing level in five and a half years, with the Dow and S&P 500 barely above their lows for the year. Financials led the parade downward after Citigroup Inc said it would cut 15 percent of its workforce by early next year. Citigroup also said it plans to cut expenses by as much as 20 percent. The latest job cuts are the most by any U.S. company since the credit crisis BEGAN more than a year ago.  As a result, Citigroup, a Dow component, fell 6.6 percent to $8.89. Bank of America was down 8.5 percent at $15.03.

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Adding to day’s worries over the depth of the global slowdown, a Philadelphia Federal Reserve Bank survey showed private-sector economists believe the economy fell into recession last spring and that the downturn would last for 14 months.

Strange as it may seem, General Motors was again a bright spot, rising 5.7 percent to $3.18, as Congress debated a bailout of the American auto industry. The Senate Democratic leadership proposed a $25 billion auto aid bill in which the loans would be used to ensure the "long term" viability of the auto companies.

Alcoa fell 10.8 percent to $9.67 after UBS downgraded the aluminum company, citing uncertainty in the aluminum market. IBM was the largest drag on the Dow, falling 3.6 percent to $77.48, due to a selloff of technology stocks because they are seen as sensitive to reduced spending in an economic slowdown. Apple closed down 2.3 percent at $88.14, while Microsoft lost 3.7 percent to $19.32.

Target fell 4.1 percent to $31.68 after its quarterly profit fell and the company suspended its share buybacks in an effort to conserve cash. Shares of Lowe's were up 4.2 percent at $18.99 after the home improvement retailer reported quarterly profit that beat expectations. Although the company cut its full-year forecast, the new earnings view was only modestly reduced.

85 Companies Default On Debt

According to a report by Standard & Poor’s released on Monday, eighty-five companies worldwide defaulted on their debt in the year through November 11, a total of $284 billion, a number that is up sharply from the two previous years. By comparison, there were only 22 defaults for all of 2007 and 30 in 2006, the agency said in a statement.

Seventy of the 85 companies are based in the United States, five in Europe, four in Asia, three in Canada, two in Mexico and one in Russia, according to S&P. The United States is also number one when you are talking about the weakest links, which are companies rated "B-minus" or lower with a negative outlook. A "B-minus" rating in S&P's scale is a full six notches into speculative or "junk" status.

Seventy-five percent of the 207 weakest links worldwide are U.S. companies. The 207 companies have a combined $417.38 billion in debt with the media and entertainment, consumer products, forest products and building materials sectors accounting for most of the companies on the list.

The 12-month trailing global corporate speculative-grade bond default rate rose to 2.3 percent in October from 2.04 percent in September. The U.S. speculative-grade default rate increased for a 10th consecutive month to 2.86 percent in October from 2.68 percent in September. The default rate in Europe rose to 1.01 percent from 1.00 percent, while the emerging markets default rate rose to 0.82 percent in October from 0.17 percent in September.

S&P expects the U.S. rate to rise to an average 7.6 percent in the next 12 months, meaning another 125 issuers will default on their debt.

U.S. speculative-grade bond spreads are expected to remain elevated after rising to 1,416 basis points as of November 13, from 1,383 basis points at the end of October and 561 basis points at the start of the year.

The five most recent defaults are Canada-based Masonite International, a manufacturer of interior and exterior doors that missed an October 15 interest payment on $770 million of subordinated notes.

VeraSun Energy, an ethanol producer that filed for bankruptcy on October 31. Hawaiian Telcom Communications, which failed to make interest payments on a series of bonds on November 3; Pilgrim's Pride, the country’s largest chicken producer, which was unable to pay $25.7 million interest on November 3, and American Media Operations, which missed a November 1 interest payment on its notes.

VeraSun and Pilgrim's Pride have 30-day grace periods to meet their interest payments but S&P is expecting that they will be unable to meet future obligations.

Did They Use Their Money Or Our Taxpayer Money

Bank of America announced on Monday that it will increase its stake in China's third-largest bank, China Construction Bank, to 19.1 percent from 10.75 percent. Monday's decision should end speculation that surfaced earlier this year that Bank of America might sell some of its three-year-old investment to bolster its own capital, as losses mount from deteriorating consumer credit.

Bank of America said it will increase its stake in China Construction Bank by exercising the rest of an option to buy shares from China SAFE Investments Ltd, a state investment arm. Following the purchase, Bank of America will own 44.7 billion shares. The bank said it expects to close the transaction this month, and "remain a long-term and significant strategic investor" in China Construction Bank. The Chinese bank's market value is about $126 billion.

The investment has so far proven successful for Charlotte, North Carolina-based Bank of America, the third-largest U.S. bank by assets. Bank of America in June 2005 spent $3 billion for a 9 percent stake in the Chinese bank, and this July invested another $1.9 billion. The $4.9 billion total investment was worth $14.5 billion as of September 30, Bank of America said.

Shares of China Construction Bank have risen 75 percent since the bank's October 2005 initial public offering, despite falling by more than half from their October 2007 peak.

Bank of America announced the latest investment amid growing struggles at home. Last month, it cut its dividend in half after rising credit losses contributed to a 68 percent decline in third-quarter profit. The bank has already raised more than $22 billion of capital this year, and is getting $25 billion from the $700 billion government package to shore up the financial industry.