MarketView for November 21

Summary 

The one thing Wall Street dislikes more than anything else is uncertainty and as it became evident on Friday afternoon that Barack Obama was going to add Timothy Geithner, president of the Federal Reserve Bank of New York to his cabinet as Secretary of the Treasury, Wall Street saw it was good and acted accordingly with a strong late-in-the-day rally. Prior to the appointment becoming known, the markets vacillated between negative and positive territory, alternately weighed by jitters over the outlook for financials and the economy, but lifted as investors scoured the markets for bargains.

At he opening bell, stocks limped into the day after a back-to-back pummeling that had left the S&P 500 at an 11-year low, and spent most of the day drifting in and out of positive territory. Markets shot higher around 3 p.m. when NBC news reported that Timothy Geithner, president of the Federal Reserve Bank of New York, would be nominated, driving the Dow Jones industrial average and the S&P 500 indexes up more than 6 percent. Specifically, the news lifted uncertainty over who Obama would appoint to lead Treasury amid the worst economic crisis since the Great Depression.

Climbing energy companies also helped out the day as the price of oil rose from a three-and-a-half-year low. Exxon Mobil saw its share price rise more than 10 percent. Domestic sweet crude for January delivery settled up 51 cents per barrel at $49.93. Exxon was the largest gainer on the Dow, rising 10.7 percent to $75.81.

But Citigroup remained a weight on the markets, falling 20 percent to $3.77, following news reports that the company is considering selling pieces of its business or the entire company outright. Citigroup Chief Executive Vikram Pandit tried to downplay speculation that the bank might sell major businesses.

Pandit told employees that the company does not want to change its business model. Shares of were also down, falling 2.8 percent to $22.72. Investors found the news on Geithner compelling enough to set aside the uncertainty surrounding the fates of Citigroup and automotive companies General and Ford.

The failure of the automakers to secure an immediate government bailout to avert possible bankruptcy lingered, although GM and Ford recovered from earlier losses to close up 6.3 percent at $3.06, and 2.9 percent to $1.43, respectively.

For the week, the Dow lost 5.3 percent, the S&P 500 fell 8.4 percent, and the NASDAQ lost 8.8 percent. Friday's gains made it the best day in just over a week. Among the day’s strong gainers was Bank of America rose 2 percent to $11.47. 

Wal-Mart rose 4.5 percent to $52.92 after the world's largest retailer said Lee Scott was retiring as chief executive and it named Mike Duke, who heads Wal-Mart's international operations, as his successor. Microsoft ended the day up 12.3 percent to $19.68, after Oppenheimer upgraded the Dow component to "outperform."

So What Will Happen To Citigroup

Citigroup CEO Vikram Pandit tried to downplay speculation the banking giant might sell major businesses to restore its health and investor confidence, but shares still tumbled for a fifth straight day. Pandit told employees on Friday that the bank does not want to change its business model and plans to keep its Smith Barney brokerage.

He also said Citigroup had a solid capital position, and employees should not focus on the bank's falling share price because that is not what regulators and credit rating agencies worry about. Meanwhile, Citigroup's board is meeting today to discuss the bank's options.

Citigroup's market value fell to $20.5 billion on Friday. That's less than the $25 billion taxpayer-funded injection that Citigroup just received from the federal government, and a fraction of the $75 billion of capital that Citigroup has raised since the credit crisis began last year. The bank's market value topped $270 billion in late 2006.

Citigroup is looking at options including a sale of parts of the company, or a merger with another company. The word on the Street is that Citi may consider selling Banamex, Mexico's No. 2 bank, in a deal that could raise as much as $15 billion for Citigroup. However, Concerns are rising that the drumbeat of negative news about Citigroup could prompt customers or trading partners to flee.

Last Monday, Pandit set plans to shed 52,000 of Citigroup's 352,000 jobs by early 2009, and to move tens of billions of dollars in troubled securities onto its balance sheet. The bank is also pushing the SEC to reinstitute a temporary ban on short sales of financial stocks, a person familiar with the matter said.

The cost to protect Citigroup debt against default rose, suggesting that fixed-income investors see increased risk.To protect $10 million of debt against default for five years is being quoted at $500,000 annually, up from $395,000 annually on Thursday, according to Phoenix Partners Group. Banks in extreme distress that were recently taken over by regulators had much higher credit default protection levels.

Citigroup's debt protection costs signal that fixed-income investors expect either that Citigroup raises dilutive capital, or that the government intervenes in a way that does not hurt bondholders. Nonetheless, the falling stock price, on top of the job cuts, has employees on edge.

On Thursday, Saudi Prince Alwaleed bin Talal said he planned to increase his stake in Citigroup to 5 percent from less than 4 percent. The bank's largest individual investor called Citigroup's shares "dramatically undervalued."

Automotive Saga Continues

Detroit automakers began work on the turnaround plans demanded by Congress in return for a possible $25 billion rescue as General Motors said it will cut production more deeply and drop two of its controversial corporate jets.

Pushed to the brink of failure by a plunge in auto sales, GM said on Friday it would idle five North American plants for more time to cut production and keep inventories.

The company also said it would return two of its leased corporate jets amid intense criticism this week over GM executives' deluxe arrangements for traveling to Washington to plead for a federal bailout. GM is still leasing three corporate jets.

Congressional leaders agreed on Thursday to give Detroit automakers until next month to make their case for a rescue but demanded that GM, Chrysler and Ford show they have business plans that can keep them out of bankruptcy.

House Speaker Nancy Pelosi said she and Senate Majority Leader Harry Reid, the leaders of the Democratic majority, were sending a letter to the CEOs of the Detroit Three detailing what the high-stakes turnaround plans need to show.

"It will be up to them how they respond," Pelosi said.

The restructuring plans will have to show how management and labor are making concessions in order to clinch the government rescue portrayed by automakers as the only alternative to bankruptcy and massive job losses.

"Everybody has to participate in ensuring the viability of the auto industry," Pelosi said.

She added: "This isn't to be life support for three months, it's about viability for a long time to come," she said.

Democratic leaders threw down the blunt ultimatum to Detroit after failing to persuade the White House and congressional Republicans to support using some of a $700 billion financial rescue plan for an autos bailout. GM, Ford and Chrysler now have to demonstrate that investors, creditors, management and the United Auto Workers union would share in the sacrifice and cautioned that the window for a bailout was closing fast.

The decision on whether and how to save Detroit will likely fall to the administration of President-elect Barack Obama, who supports a bailout hinging on industry reform but has managed to steer clear of the bruising political debate.

A spokesman for Obama's transition team said on Friday that the incoming administration was not exploring the possibility of having the government support a prepackaged bankruptcy filing for the automakers, an alternative some have urged as a way for GM and Chrysler to shed excess production capacity, brands, workers and dealers.

A political dilemma for lawmakers is that the cost will be high in terms of lost jobs and benefits under the kind of sweeping restructuring needed to ensure the viability of the automakers, analysts said.

Any plan will likely mean lower wages for UAW-represented workers and restructuring GM's balance sheet by forcing creditors to swap out of secured debt at as little as 25 cents on the dollar plus stock warrants. At the same time, the bailout has been caught up in partisan politics from the start although lawmakers from both sides have been unflinching in their criticism of the industry.

Democrats have generally sought to promote the interests of organized labor and environmental groups, while Republicans have been feeling the heat from constituents concerned about the mounting cost of government bailouts.