MarketView for September 25

Summary

Wall Street ended its losing streak of the past three days on hope that  Congress was moving closer to a compromise agreement on the Administration’s requested $700 billion financial-sector bailout to be used to thaw out the credit markets and revive lending.

All three key equity indexes ended up at least 1 percent, with bank shares such as JPMorgan Chase and Bank of America leading gains after Senate Banking Committee Chairman Chris Dodd said lawmakers had reached a "fundamental agreement" on the principles of a rescue plan.

The package to which Congress tentatively agreed would make available an initial $250 billion immediately, the Wall Street Journal reported, and would contain limits on "golden parachutes" paid to company executives. At the same time, the Treasury Department declined to comment on earlier statements from Sen. Charles Schumer, the New York Democrat who chairs the congressional Joint Economic Committee that a deal could be reached Thursday.

Bank shares spearheaded Thursday's rally, with Bank of America up 4 percent at $34.37 and JPMorgan up 7.3 percent at $43.46. An index of financial shares jumped 2.6 percent. Companies seen as economic bellwethers, such as IBM, rose on hopes the rescue package would spur a pickup in consumer and business spending. IBM, the Dow's top advancer, rose 3.1 percent to $120.11. Nike rose almost 10 percent to $65.01 after the company’s earnings exceeded estimates.

Fear that Congress would delay or water down the bailout had weighed on stocks in recent days, and the three major indexes were still down some 3 percent for the week. However, the consensus of opinion seems to be that getting a rescue package voted into law was crucial to preventing an even deeper freeze in bank lending around the world and a bigger swoon for stocks.

Economic Data Not Pretty

Orders for durable goods and sales of new homes fell in August while jobless claims moved up sharply last week, according indicating a weakening economy. According to the Commerce Department, new orders for durable goods such as new cars and refrigerators were down a sharper-than-expected 4.5 percent. It was the largest monthly drop this year, as demand for nearly every major category of manufactured item softened.

If you exclude transportation, August durables orders were down 3 percent after edging up 0.1 percent in July. The fall in orders excluding transportation was the steepest since the beginning of 2007. Transportation orders were down 8.9 percent in August after rising 2.8 percent in July. Non-defense capital goods excluding aircraft, seen as a barometer of business spending plans, were down 2 percent after increasing by 0.4 percent in July. 

At the same time, the Commerce Department reported that sales of new single-family homes fell 11.5 percent last month from July's level to an annual rate of 460,000, the slowest rate since 1991. The median sales price fell 5.5 percent to $221,900, the lowest in nearly four years. At that sales pace there is a 10.9 months' worth of homes for sale, little changed over the past five months. Housing market conditions are considered the worst since the Great Depression.

The Labor Department reported that new claims for jobless benefits jumped 32,000 last week to a seasonally adjusted 493,000, though it was primarily because of the impact of hurricanes Ike and Gustav. The department estimated that about 50,000 of last week's claims were caused by the hurricanes so some of those jobs may be restored when businesses resume operations.

Last week's jobless claims total was the highest since September 29, 2001, in the aftermath of terror attacks on New York and Washington. Companies have cut their payrolls every month this year and joblessness is expected to worsen, with many economists saying the United States may already be in recession.

JP Morgan Chase Buys Washington Mutual

JPMorgan came to the rescue of Washington Mutual on Thursday, buying the ailing thrift's banking assets after WaMu was seized by the Federal Deposit Insurance Corp. This is the second time in six months that JPMorgan Chase has taken over a major financial institution crippled by bad bets in the mortgage market.

The deal will cost JPMorgan Chase $1.9 billion, and the bank said in a statement it planned to write down WaMu's loan portfolio by approximately $31 billion. JPMorgan Chase, which last March acquired Bear Stearns, said it would sell $8 billion in common stock to raise its capital position.

The FDIC, which insures bank deposits, said it would not have to dip into the insurance fund as a result of the seizure. There had been concerns that the fund, which took a big hit after the seizure of IndyMac Bank, could be depleted by a WaMu seizure.

WaMu, the nation's largest thrift, has roughly $310 billion in assets and was searching for a lifeline after piling up billions of dollars in losses due to failed mortgages. WaMu has seen its stock price plummet by 87 percent this year, and it suffered a ratings downgrade by Standard & Poor's earlier this week that put it in danger of collapse.

JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states.

Washington Mutual ran into trouble after it got caught up in the booming part of the mortgage business that made loans to people with bad credit, known as subprime borrowers. Troubles spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.

Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005. At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans.

As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.

At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans. In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.

WaMu became one of the first retail banks to seek outside cash in the wake of the credit crisis when it agreed to sell equity securities to an investment fund managed by TPG Capital and to other investors this spring, raising $7.2 billion in fresh capital. Last July the bank reported a $3 billion second-quarter loss, the largest in its history, as it boosted its reserves to more than $8 billion to cover losses on bad loans.

Earnings Up Future Down At RIM

Research In Motion warned on Thursday that profit in the current quarter would come in lower than analysts had expected because of higher costs related to its newest BlackBerry smartphones, sending its shares down nearly 20 percent.

In addition to a light earnings-per-share outlook, the company revealed a gross-margin forecast that was softer than many had anticipated. RIM blamed increased expenses related to its latest handsets like the BlackBerry Bold, a high-end model targeting the company's mainstay base of corporate users.

The disappointing news came as Waterloo, Ontario-based RIM reported a profit in its second quarter that was in line with forecasts. The company also said its enterprise business, mainly corporate customers, was still robust, even as economic uncertainty prevails in the U.S. market.

For the three months ended August 30, RIM's earnings came in at $495.5 million, or $0.86 per share, from $287.7 million, or $0.50 per share in the same period a year ago. The results were in line with the company's June forecast.

RIM co-CEO Jim Balsillie told analysts in a conference call that the company's newest, feature-rich handsets have higher costs associated with them, which in turn affects margins.

"This is particularly the case with the BlackBerry Bold and other unannounced 3G product platforms," he said. It's also difficult for RIM to pass on all those higher costs to consumers and still keep next-generation BlackBerry prices at attractive levels, Balsillie added.

RIM has recently announced BlackBerry models aimed at the broader consumer market, including a flip-phone BlackBerry Pearl. It is also preparing to launch a touch-screen version of its smartphone to compete more directly with Apple's iPhone.

Analysts and investors have long held concerns that some of RIM's large corporate clients could scale back BlackBerry purchases and upgrades as the economic downturn takes hold, hurting the company's performance. The recent turbulence on Wall Street has underscored those concerns.

Balsillie has said that he sees a limited impact at most because the U.S. financial-services industry, which has been rocked by the downturn, makes up only a small part of RIM's subscriber base.

On Thursday, he said corporate clients were still buying BlackBerrys and that the enterprise business "remains strong."