MarketView for October 14

Summary

 

Early gains quickly evaporated on Tuesday as fears that the global economy may not avert recession took preference over a government plan to buy up $250 billion of equity in major banks in an effort to rescue the credit markets. However, financial shares did chalk up some gains after the Treasury's latest step to stabilize the financial system in hopes of averting further damage to the economy. The Treasury did not name the nine banks that will initially be participating in the program.

 

Citigroup and Bank of America ranked among the Dow's biggest percentage gainers. Citigroup climbed 18.2 percent to $18.62, while Bank of America surged 16.4 percent to $26.53. They are among the institutions widely reported to be included in the Treasury Department's plan to take equity stakes in banks to shore up the battered financial system.

 

 

A disappointing outlook from PepsiCo further fueled those worries, especially given that soft drink- and snack-makers are usually seen as holding up in economic hard times. PepsiCo's shares had their worst day since the 1987 stock market crash.

 

PepsiCo's weaker-than-expected earnings also deepened concerns about how consumer spending will hold up in the face of declines in home values and stocks, as well as tighter credit. PepsiCo's shares ended the day down 11.9 percent to close at $54.40.

 

Coca-Cola was the biggest drag on the Dow, on investor concerns that rival soft-drink maker Pepsi's weak results may signal weakness in the rest of the beverage sector. Coca-Cola shares fell 7.5 percent to $43.73.

 

The NASDAQ also underperformed throughout the day. Intel was among the top drags on the NASDAQ as investors worried about the chipmaker's quarterly results. Intel lost 6.2 percent closing at $15.93 on the NASDAQ, while an index of semiconductor stocks slid 5 percent. However,  after the closing bell, Intel's shares rose more than 4 percent after its earnings exceeded Street expectations.

 

Energy and materials companies also fell as the price of oil slid on growing worries that a recession would curb the demand for oil and other commodities. Chevron shares fell 1.9 percent to $68.54. Crude oil futures for November delivery settled down$2.56 per barrel at $78.63.

 

Apple fell 5.6 percent to $104.08 after it cut the price on its entry-level notebook computer to $999 in a move expected to attract budget-minded buyers at a time when recession fears loom over the global economy.

 

Johnson & Johnson 3Q Earnings Exceed Forecast

 

As a result of increased sales of consumer products and medical devices, Johnson & Johnson, reported third-quarter earnings that exceeded Wall Street expectations. However, sales of J&J prescription drugs rose only slightly in the period, following new generic competition for its Risperdal schizophrenia drug.

 

The company said on Tuesday it earned $3.31 billion, or $1.17 per share in the quarter. That compared with $2.55 billion, or 88 cents per share, in the year-earlier period, when the company took restructuring charges. The consensus on the Street was for $1.11 per share. Quarterly sales rose 6.4 percent to $15.92 billion, but would have been up only 3.3 percent if not for favorable foreign exchange factors.

 

The company raised its 2008 earnings forecast, excluding special items, to $4.50 to $4.53 per share, from its earlier outlook of $4.45 to $4.50 per share. However, Chief Financial Officer Dominic Caruso indicated that the strengthening dollar will crimp J&J's fourth-quarter global sales by 1.5 percentage points, in contrast to the company's earlier forecast that a weak dollar would boost sales by 3.5 percentage points. A strong dollar hurts the value of overseas sales, when converted back into U.S. currency.

 

According to the company, its third quarter sales of consumer products, which range from Band-Aids to Listerine mouthwash, rose 13.1 percent to $4.1 billion. Medical device sales rose 8.8 percent to $5.71 billion, although sales of the company's Cypher drug-coated stent fell more than 20 percent to $289 million due to competition with newer products and continuing safety concerns about the tiny heart devices. Prescription drug sales were up 0.2 percent to $6.11 billion, hurt by the U.S. patent expiration for Risperdal that in June opened the floodgates to a cheaper generic made by Teva Pharmaceutical Industries.

 

A New Era In Banking

 

The Administration ushered in a new era in banking on Tuesday with plans to take equity stakes totaling up to $250 billion in financial institutions, an incursion into the private sector that the White House called a regrettable last resort.

 

Markets initially rallied on the rescue plan, continuing the previous day's rebound, but recession fears soon took over and Wall Street stocks closed lower. Treasury Secretary Henry Paulson said government ownership of big stakes in banks was "objectionable" but necessary to head off the financial crisis.

 

"At a time when events naturally make even the most daring investors more risk-averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," Paulson said.

 

Governments around the world have pledged roughly $3.2 trillion in a variety of schemes that guarantee bank deposits, interbank lending and the purchase of new securities to shore up bank capital.

 

The Treasury Department will buy nonvoting preferred shares in major financial institutions, with stakes in each limited to $25 billion. Bank executives must accept standards of corporate governance and limits on their pay.

 

Paulson said nine banks that he described as "healthy institutions" had agreed to accept government stakes for the good of the U.S. economy, a government intervention unthinkable before the credit crisis, the worst since the 1930s Great Depression.

 

"These measures are not intended to take over the free market but to preserve it," President George W. Bush said.

 

Bush said the Federal Deposit Insurance Corporation would guarantee new bank debt and that the Federal Reserve would become a buyer of last resort of commercial paper -- the short-term loans that companies use to fund day-to-day operations.

 

Investors liked the bold government action but recession worries killed a rally in U.S. stocks. The third-quarter earnings season has begun and the Commerce Department is due to release third-quarter GDP data on October 30.

 

U.S. Treasuries fell on worries that the U.S. government would issue bonds to finance the bank rescue package. However, in a sign that lending may be picking up, overnight interest rates for interbank loans fell for the second day in a row.

 

However, in a reminder of the cost of bailout plans, the Treasury Department released scheduled budget figures showing a record $455 billion deficit for fiscal 2008. And the prospect of huge public stakes in private banks raised questions for European banks.

 

The crisis has provided a political boost for British Prime Minister Gordon Brown, who created the blueprint for the United States and other major economies to recapitalize their banks. Brown, who must call an election by mid-2010, has cut his deficit in the polls to 10 percent from 28 percent.

 

Within the United States, the measures are intended to stimulate interbank lending and the commercial paper markets, whose stagnation may have already pushed the U.S. economy into recession. Former U.S. Federal Reserve Chairman Paul Volcker has said that we are already in a recession.

 

Crude Prices Fall

 

The price of crude oil fell more than 3 percent on Tuesday as concerns the global economy could slip into recession and drag down demand outweighed optimism over the bank bailout plans. Crude futures for October delivery settled down $2.56 per barrel at $78.63 after hitting $84.83 earlier. London Brent crude settled down $2.93 per barrel at $74.53.

 

Slumping demand in the United States and other big consuming nations and the mounting financial crisis have dragged crude off record peaks over $147 a barrel hit in July. Further pressure has come as investors sell oil for safer haven investments.

 

China, the world’s second largest consumer of crude oil saw September crude imports rise 10 percent from a year earlier, clocking a second month of double-digit growth, as the country's majors made a limited restock amid signs of weakening demand.

 

OPEC has called an emergency meeting for November 18 to discuss the crisis and its effects on oil markets, with some members calling for production levels to be reduced. Yet, whether they like it or not, the prospect of a global recession could force OPEC members to be more tolerant of cheaper oil, although the threat of swelling stocks could force an output cut by early next year.

 

Some support for prices came on news OPEC seaborne oil exports, excluding Angola and Ecuador, fell 600,000 barrels per day in September. At the same time, oil traders are waiting for the weekly U.S. inventory data on Thursday.

 

Intel Posts Higher Than Expected Earnings

 

Intel reported a 12 percent rise in quarterly profit and said year-end revenue could be lighter than expected amid uncertain demand, but the outlook was better than feared. According to the world's largest computer chipmaker it expects revenue in the fourth quarter of $10.1 billion to $10.9 billion.

 

Intel's shares were up 4.5 percent at $16.65 in extended trading because the lowered outlook was better than many had hoped against the backdrop of a global financial crisis. Shares closed down 6.2 percent ahead of the report in regular session trading on the NASDAQ over fears it would do worse.

 

Intel said the average selling price for its microprocessors dipped as sales increased of its lower margin Atom processor for use in new mobile computers that are smaller than conventional notebooks. It said it generated $200 million in revenue from Atom chip sales.

 

"As we look to Q4, it is hard to know what impact the financial crisis will have on end customer demand," Chief Executive Paul Otellini said in a statement. He added that he was confident in his company's ability to outpace competitors "at a time when business levels are difficult to predict."