MarketView for November 21

 

 

Summary 

 

The major equity indexes fell sharply on Monday, making it the fourth consecutive session of losses. Monday’s decline could easily be laid at the doorstep of the so called "Super Committee" who essentially fell down on the job, admitting defeat in that they simply could not agree after three months as to how to proceed. If that was not enough bad news, the debt problems in Europe further sapped the Street’s confidence in equities.

 

Risky assets like commodities also fell, sparking a sell-off in shares of industrials and energy companies. Volume was lower than average, with investors more inclined to sit on the sidelines amid the uncertainty.

 

There are concerns that the Washington’s political stalemate will make it more difficult to pass extensions of simulative measures like payroll tax cuts, which could hurt our economy. In addition, investors are worried that the committee's inability to come to an agreement could result in another downgrade of the U.S. credit rating, though so far the major rating agencies have not commented and at this point such an action appears unlikely. However, Moody's Investors Service did make the comment that a recent rise in interest rates on French government debt and weaker economic growth prospects could be negative for France's credit rating.

 

Blue chips, which have been outperforming smaller-cap stocks, fell the most in Monday's slide, with the Dow Jones industrial average down more than 300 points at the low point of the day’s trading session. The Dow is off 0.3 percent for the year. The S&P 500 and the Nasdaq are off about 5 percent each year-to-date. Meanwhile, The S&P quickly fell through the 1,200 level seen as the next level of support. After that, support was seen at 1,187, representing the 61.8 percent retracement of the 2011 high to low slide.

 

Among blue-chip stocks, Bank of America fell 5 percent to close at $5.49. On the Nasdaq, Amazon lost 4 percent to close at $189.25. After the closing bell, Hewlett-Packard reported quarterly results that beat Wall Street's expectations. The stock rose 2.4 percent to $27.50 in extended trading.

 

About 7.78 billion shares changed hands on the three major equity exchanges, a number that was well below the current daily average of 8 billion shares.

 

Merger activity provided a bright spot as Pharmasset rose 84.6 percent to $134.14 after Gilead Sciences agreed to buy the company for $11 billion in cash. Gilead fell 9.1 percent to $36.26.

 

Economic data indicated that existing-home sales unexpectedly rose in October as low interest rates for mortgages and rising rents encouraged more people to buy homes.

 

They Failed

 

The failure of a congressional deficit-cutting "super committee" means the tough work of putting the United States' finances on a stable path will likely have to wait until 2013 at the earliest. Given the complexity of passing such legislation through Congress, it could even be 2014 before real progress is made. That timetable could test the patience of global financial markets that so far have been willing to continue investing heavily in the United States as Europe grapples with a spiraling debt crisis.

 

With the intensifying 2012 election campaign stoking already bitter partisanship in Washington, Congress will be hard-pressed to reform expensive government benefit programs and an archaic tax code that are seen as the keys to improving the country's fiscal health.

 

The super committee has squandered a rare opportunity to take major action against the United States' fiscal problems because it had extraordinary powers to quickly move legislation through a gridlocked Congress.

 

The likely fallout from the committee's inability to agree on at least $1.2 trillion in deficit-reduction over 10 years also means added difficulties in extending payroll tax cuts, unemployment benefits and other expiring tax breaks, which are seen as important economic stimulants. The hope had been to include them in any super committee deal that would have been spirited through Congress by December 23 under rules prohibiting amendments and procedural roadblocks.

 

Now they will have to find another way through the legislative maze. failure to extend the payroll tax cuts and enhanced jobless benefits could shave more than a percentage point off U.S. economic growth.

 

Moreover, there is little in the way of confidence among investors that the two political parties can bridge a yawning ideological divide over tax policy and who should shoulder the burden for reducing deficits. The Congress has had trouble passing even routine legislation this year, leading to repeated disruptions of government services.

 

Republicans are already making noises about altering the $1.2 trillion in automatic spending cuts, or sequesters, that are due to kick in 2013 as a result of the super committee's failure. They want to soften the planned $600 billion defense cuts. If Congress starts tinkering with the sequesters, the financial markets could become unnerved by the unraveling of savings seen as already "in the bank." However, there is not too much to worry about as President Obama has made it clear he will veto any such legislation.

 

 One thing is clear. The super committee will disband having not agreed on one penny of deficit-reduction. Instead, it will have actually contributed to the government's $1 trillion-a-year budget deficits, having spent government funds paying for staff and other expenses.

 

Greenberg Sues the Fed and the Government Over AIG Takeover

 

A company run by former American International Group Inc Chief Executive Maurice "Hank" Greenberg sued the United States government for $25 billion, calling the 2008 U.S. takeover of the insurer unconstitutional.

 

The lawsuit marks an unusual effort to force the government to pay shareholders, who have seen AIG's stock price tumble 98 percent since the middle of 2007, when the insurer's risky bets on mortgage debt through credit default swaps began to falter.

 

Greenberg's company filed a separate, related lawsuit against the Federal Reserve Bank of New York.

 

Starr International Co, which once had a 12 percent stake in AIG and was its largest shareholder, said the government illegally took a nearly 80 percent AIG stake without seeking a shareholder vote, hoping to provide a "backdoor bailout" for AIG trading partners such as Goldman Sachs Group Inc.

 

It said the bailouts that began on September 16, 2008 violated shareholders' rights to due process and equal protection, and a Fifth Amendment ban against taking private property for public use without just compensation, known as the "takings clause."

 

Greenberg, 86, runs Starr, and had led AIG for nearly four decades prior to his 2005 ouster.

 

"The government's actions were ostensibly designed to protect the United States economy and rescue the country's financial system," David Boies, a lawyer for Starr, said in the complaint.

 

"Although this might be a laudable goal, as a matter of basic law, the ends could not and did not justify the unlawful means employed," he continued. "The government is not empowered to trample shareholder and property rights even in the midst of a financial emergency."

 

Shareholders of other companies, including mortgage financiers Fannie Mae and Freddie Mac and Citigroup also saw their holdings diluted in the fallout from the 2008 financial crisis. It is unclear whether Starr's constitutional arguments might apply to them.

 

Starr sued the government in the U.S. Court of Federal Claims in Washington, D.C., which handles lawsuits seeking money from the government.

 

It sued the New York Fed, which gave AIG an initial $85 billion credit line, in the U.S. District Court in Manhattan. The bailouts eventually totaled $182.3 billion.

 

The $25 billion estimate reflects what Starr called the value of the government's stake on January 14, 2011, when it swapped AIG preferred stock for 562.9 million common shares. AIG was once the world's largest insurer by market value.

 

The bailouts began one day after Lehman Brothers Holdings Inc went bankrupt and Bank of America Corp agreed to buy Merrill Lynch. However, according to Starr, the AIG bailout was done as "a vehicle to covertly funnel billions of dollars to other preferred financial institutions" such as Goldman. Starr also called the 14.5 percent interest rate on the $85 billion credit line "punitive," and out of line with aid provided to comparable companies at the time.

 

Greenberg stepped down from AIG amid questions by regulators over its accounting practices. AIG in 2006 paid $1.64 billion to settle federal and state probes into its business practices, and in July 2010 agreed to pay $725 million to settle a shareholder lawsuit accusing it of accounting fraud and stock price manipulation.