MarketView for October 29

Summary 

 

Stock prices ended the day lower on Wednesday as momentum faded in the last minutes of the trading day on concerns over the weakening corporate profit picture after a news report raised questions regarding General Electric's earnings outlook. In a move that has been the trademark of the market's volatility ever since Lehman’s bankruptcy filing in mid-September, the Dow Jones industrial average plummeted more than 300 points in the last 12 minutes of trading, erasing the possibility of posting the first two consecutive days of positive closing numbers in over a month.

 

General Electric's stock fell 4 percent in the last minutes of trading, only to end down 1.5 percent at $19.20. Aside from the GE news, reported by Dow Jones with less than 15 minutes left in the session, traders said hedge funds and mutual funds were dumping stocks to raise cash to repay clients and lenders, while other investors were eager to lock in some profit from Tuesday's huge rally.

 

Dow Jones reported that General Electric's Chief Executive Jeffrey Immelt said GE aims at keeping 2009 profits at the same level as this year, even if revenue drops 10 percent to 15 percent. However, after the closing bell, GE told CNBC that the CEO's comments were taken out of context and that Immelt gave no new forecast.

 

Trading was volatile after the Federal Reserve slashed interest rates by half a percentage point, the latest in the series of moves to keep the credit crisis from triggering a deep recession. Some traders had been speculating there would be a deeper cut.

 

Johnson & Johnson, down 4.1 percent at $61.53, was the top drag on the Dow after J.P. Morgan Securities downgraded the stock. Yet, there were some bright spots. The costs for banks to borrow dollars from each other over three months fell for the 14th straight day, suggesting that confidence was returning in the credit markets.

 

GM rose 8.2 percent to $6.76 on word that General Motors and private equity firm Cerberus Capital Management have resolved "major issues" in a proposed GM-Chrysler merger. Shares of energy companies headed higher as domestic crude futures for December delivery settled up $4.77 per barrel at $67.50.

 

Boeing climbed 1.8 percent to $49.80, making it one of the Dow's top advancers, after government data showed surging demand for aircraft drove an unexpected increase in September for new orders for long-lasting manufactured goods, also known as durable goods.

 

The NASDAQ received a lift from Apple, up 4.6 percent at $104.55, after a Sanford Bernstein analyst said the company is in an excellent position to launch a "substantial" stock-buyback program.

 

Durable Goods Orders Rise

 

The Commerce Department reported on Wednesday that durable goods orders posted the largest gain in three months, rising 0.8 percent, the result of a surge in demand for airplanes and autos, government data showed Wednesday. Orders had fallen by 5.5 percent in August, which was the biggest setback in nearly two years.

 

The September increase was the largest gain since a 1.4 percent rise in June, but all the strength came in the transportation sector. Demand for commercial aircraft, an extremely volatile category, shot up by 29.7 percent and orders for motor vehicles rose by 3 percent, the biggest gain in more than a year.

 

The increase in orders for motor vehicles likely reflected the use of incentive packages by automakers trying to spur lagging demand during a generally dismal sales year. Orders for motor vehicles and parts had fallen by a sharp 8.8 percent in August. Demand is expected to remain weak, reflecting the hard economic times, rising unemployment and sagging consumer confidence.

 

Outside of transportation, orders fell by 1.1 percent following an even bigger 4.1 percent drop in August. The back-to-back declines in these areas indicated the pressures facing manufacturing now as the economy appears to be falling into a recession. The government will release its first look at overall economic activity in the July-September period on Thursday. The classic definition of a recession is two consecutive decreases in GDP. The current thinking is that the worst financial crisis in seven decades, which erupted with force in September, has pushed the country into what could be a much more pronounced downturn than the past two relatively mild recessions in 2001 and 1990-91.

 

The 0.8 percent overall increase last month left orders for durable goods, products expected to last at least three years, totaling $207.8 billion. Outside of transportation, the weakness reflected declines in such areas as primary metals such as steel, where demand fell by 4.5 percent, and computers, where demand was down 1.4 percent.

 

Orders for non-defense capital goods, considered a good barometer of business investment plans, fell by 1.4 percent in September, the second monthly decline. Businesses are cutting back on their plans to expand and modernize in the face of spreading economic weakness.

 

December Crude Futures Rise

 

The price of crude settled up $4.77 per barrel, or 7.6 percent, at $67.50, then rose further to hit $68.28 in post-settlement trading. London Brent crude settled up $5.18 per barrel at $65.47.

 

he Energy Information Administration's weekly report showed that inventories rose 500,000 barrels last week, a million fewer barrels than expectations. Gasoline inventories decreased 1.5 million barrels last week, a surprise to analysts who predicted a build of 900,000 barrels.

 

Distillate stocks rose 2.3 million barrels -- above the 800,000-barrel increase forecast by analysts, while gasoline stocks fell by 1.5 million barrels compared with analysts expectations of a 1.2-million-barrel build.

 

Oil prices have fallen by 55 percent since peaking at $147 a barrel in mid-July. Meanwhile consumers are getting a bit of a break at the gas pump. Retail prices fell 4 cents overnight to $2.589 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. That is about 30 cents lower than prices were a year ago.

 

Gasoline futures rose 6 cents to $1.51 a gallon, while heating oil gained more than 7 cents to fetch $1.98 a gallon. Natural gas for November delivery increased 24 cents per 1,000 cubic feet, to $6.43 per 1000 cubic feet. The demand for gasoline over the four weeks ended Oct. 24 was 3.4 percent lower than a year earlier, averaging 8.9 million barrels a day, the Energy Department said.

 

At the same time, U.S. refineries ran at 85.3 percent of total capacity on average, a gain of 0.5 percentage point from the prior week. Analysts expected capacity to rise 0.3 percentage point to 85.1 percent.

 

Some OPEC members have said the producer group could cut oil production again to help support prices, after agreeing to a 1.5-million-barrel-per-day (bpd) reduction last week.

 

"If there is a surplus in the market, if nobody needs the production, then a decision might be taken," Kuwait Oil Minister Mohammad al-Olaim told reporters. Venezuela would back an additional OPEC production cut, possibly of 1 million barrels per day, if it were necessary to stabilize crude oil prices, President Hugo Chavez said on Tuesday.

 

Cuomo Warns Nine Bank Recipients of Government Aid

 

New York Attorney General Andrew Cuomo, warned nine banks receiving government money on Wednesday that using the funds for bonus payments may be illegal under state law. In letters sent to Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo, he also asked their boards to explain what mechanisms they have put in place to protect taxpayer money.

 

"Specifically, corporate expenditures and payments, made in the absence of fair consideration of undercapitalized firms, may well violate NY Debtor and Creditor Law 274, which deems such payments illegal fraudulent conveyances," Cuomo's letter said.

 

The letter said that "obviously, we will have grave concerns if your expected bonus pool has increased in any way as a result of your receipt or expected receipt of taxpayer funds from the Troubled Asset Relief Program." Cuomo asked the banks to provide the information by November 5. Earlier this month, AIG promised to recover executive payments and other compensation, cancel perks and institute reforms after Cuomo threatened legal action over its controversial spending.

 

"Cuomo demands detailed information regarding bonus pool allocations from the boards of directors of the nine banks," his office said in a statement accompanying copies of the letters. Cuomo objected to "extravagant" payments to AIG executives who ran the company into near-collapse, including a $5 million cash bonus and $15 million "golden parachute" to former CEO Martin Sullivan earlier this year. A $34 million bonus was also designated for the former head of the AIG Financial Products Unit, Joseph Cassano, whose unit generated the bulk of the firm's losses.

 

The Pressure Is On And It Should Not Be

 

Democratic Rep. Barney Frank, chairman of the House of Representatives Financial Services Committee, said on Wednesday that he favors more flexibility in how companies value assets, known as mark-to-market accounting. Mark-to-market should be left untouched. Its lack of prior implementation is a large part of the reason we are in the current financial mess.

 

Frank said he has no plans to implement accounting practices via legislation, or to scrap the mark-to-market rule, which forces financial companies to value certain assets at their current market prices. However, he said he wants to make it easier for companies to apply the rule during the financial crisis. "We will never legislate accounting," Frank said, “But there are modifications that we are looking at related to mark-to-market requirements.”

 

Frank was particularly critical of aspects of the current rule that trigger automatic consequences when institutions mark the value of their assets in line with market conditions, which currently often reduce their value. Banks can be forced to cut their lending activities when lower asset values shrink their balance sheets.

 

"I propose we not interfere with mark-to-market practices but not have the immediate consequences" they can trigger, Frank said. Frank and other lawmakers are urging banks, especially those that received billions of dollars under the government's plan to recapitalize the banking system, to lend more.

 

Frank criticized Treasury Secretary Henry Paulson for failing to put conditions that would have forced the nine banks that received the first $125 billion to lend money more quickly. He was also critical of banks that use the money to make acquisitions, such as PNC Financial Services Group proposal to acquire National City Corp last week, instead of lending it out.

 

Frank added that financial institutions should distinguish between the securities they are holding on their books for a lengthy time and those they are offering for sale when applying the mark-to-market provision.

 

Frank, a key architect of the government's $700 billion rescue plan, repeated that the country needs a new stimulus package to breathe new life into the economy. Such a package, which Frank said on Wednesday would likely total between $125 billion and $150 billion, would be designed to help states and cities, where jobs and building projects are now in jeopardy.

 

"We need to extend unemployment benefits and assist with infrastructure and construction projects," Frank said.

 

Frank was optimistic that the government would get back the $125 billion it used to recapitalize banks. But he said it may lose some money on the process under which the government buys up toxic assets from banks.