MarketView for September 14

 

 

Summary   

 

The major equity indexes were slightly higher on Monday as reports of more merger activity, added to a string of recent deals, suggesting that investors Wall Street as continuing to add value. Optimism over the potential deals overshadowed concerns about trade friction between the United States and China after Washington imposed special duties on Chinese tire imports.

 

Shares AES, a power company, were up 4.5 percent after a Wall Street Journal report that China's sovereign wealth fund was in talks to take a stake in AES. Sprint Nextel Corp rose 10.1 percent after a British newspaper reported Germany's Deutsche Telekom AG was considering a bid for the company. Shares of AES ended at $14.79 while shares of Sprint closed at $4.15.

 

On the Nasdaq, shares of Dendreon rose 15.1 percent to $27.43 a result of renewed speculation that the company, which is developing a vaccine for prostate cancer, could become a takeover target.

 

Meanwhile, banks, which are key beneficiaries of M&A activity, were among the day leading performers, with the shares of JPMorgan Chase up 2.9 percent at $43.75.

 

In other merger news, Cadbury reiterated its stance on a takeover bid from Kraft Foods over the weekend as Cadbury's chairman, Roger Carr, said it was an "unappealing prospect" being absorbed into Kraft's low-growth, conglomerate business model. Kraft, which went public last week with a bid for the British confectioner, rose 0.04 percent to $26.11.

 

Shares of domestic tire manufacturers were also higher, including Goodyear Tire & Rubber up 3 percent to $17.78 and Cooper Tire & Rubber up 7.1 percent to $15.60.

 

China's commerce ministry said Sunday it launched an anti-dumping investigation into imports of chicken products and automotive exporters.

 

President Barack Obama, speaking in New York one year after Lehman Brothers' collapse sent world markets into a tailspin, called on financial firms not to fight regulatory reform, but there was little market reaction.

 

Crude Oil Down

 

The price of crude futures fell on Monday, weighed down by trader concerns over possible increased enforcement of position limits and about a decision by the Federal government to impose special duties on Chinese tires. The duties could open the door for a host of trade complaints against China, the world's second largest oil consumer, raising tension ahead of the G20 meeting.

 

Domestic sweet crude futures for October delivery settled down 46 cents per barrel at $68.83. London Brent crude settled down 50 cents per barrel at $67.19.

 

The CME Group, which runs the New York Mercantile Exchange where oil primarily trades, on Friday sent an advisory warning to traders and brokers of tighter enforcement of existing position limits on NYMEX, CME, and other exchanges as of September 14.

 

Some oil traders apparently interpreted the advisory as a CME warning it could soon offer fewer exemptions for exceeding position limits in the future. The government has proposed imposing position limits in oil and some other commodity markets as a step toward curbing speculation and volatility following crude's record run to near $150 a barrel in 2008.

 

Bank of America Settlement Rejected by Judge

 

U.S. District Judge Jed Rakoff on Monday rejected Bank of America's and the SEC's $33 million settlement over Merrill Lynch bonuses as a contrivance that deprives shareholders of the truth. In rejecting the settlement for a third time, saying it "cannot remotely be called fair," Rakoff ordered the SEC and BofA to prepare for a trial by next February 1.

 

He said he had a "distinct impression" that the settlement was "a contrivance designed to provide the SEC with the facade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry -- all at the expense of the sole alleged victims, the shareholders."

 

Rakoff's decision comes as the Charlotte, North Carolina-based bank and its Chief Executive Kenneth Lewis face a deadline by the end of Monday from New York Attorney General Andrew Cuomo to provide more details about Bank of America's purchase of Merrill.

 

Cuomo is trying to determine the details of Merrill's $15.8 billion fourth-quarter loss, including who knew what before December 5 shareholder votes at both companies to approve the merger. The merger closed on January 1.

 

Rakoff faulted the SEC for accepting the bank's effort to invoke attorney-client privilege and avoid disclosing what its executives and lawyers knew about its authorization for Merrill to pay up to $5.8 billion of bonuses; although it was clear the bank "blatantly" lied about the payouts.

 

The judge also questioned why shareholders victimized by the bank's management should be responsible for any fine, especially as the bank would not admit to wrongdoing.

 

Rakoff's decision came as President Barack Obama, marking the one-year anniversary of Lehman Brothers Holdings's bankruptcy, urged financial companies on Monday not to fight regulatory reform.

 

The settlement was to resolve SEC charges that the bank misled shareholders about having authorized the bonuses by not mentioning it in proxy statements for the merger. Yet Rakoff said it "suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."

 

Bank of America agreed to buy Merrill after less than 48 hours of talks on the same weekend that Lehman was collapsing. However, many of the bank's alleged disclosure shortfalls came around the December 5 shareholder vote on the merger, when markets remained unsettled. The merger closed on January 1.

 

"The niceties about disclosures to shareholders were considered to be secondary," said Ronald Gilson, a law professor at both Columbia University and Stanford University.

 

Rakoff called it "absurd" to accept the SEC argument that a fine would help shareholders "better assess the quality and performance of management," after they were "lied to blatantly" over the purchase of Merrill. The case is SEC v. Bank of America Corp, U.S. District Court, Southern District of New York (Manhattan), No. 09-6829.

 

Obama Warns Wall Street

 

President Barack Obama warned financial firms on Monday to heed the lessons of Lehman Brothers' collapse a year ago and get behind a regulatory overhaul he wants Congress to pass this year. Obama went to Wall Street to highlight another top priority of his administration -- updating financial rules to prevent another economic collapse.

 

While the economy and the financial system are showing signs of recovery, Obama said that was not an excuse to avoid reform. "Normalcy cannot lead to complacency," Obama said.

 

"Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we're still recovering, they're choosing to ignore those lessons."

 

Lehman, once the fourth-largest U.S. investment bank, filed for bankruptcy on September 15, 2008, triggering a global financial crisis that also helped propel Obama to the presidency as Americans welcomed his cool response to the problem.

 

Financial reform will be a key issue at a G20 summit of leading developed and developing nations in Pittsburgh next week but progress on Obama's agenda has been slow.

 

Obama's speech also sought to show other countries his administration is serious about tackling weaknesses and excesses in the U.S. financial system that are blamed for setting off the global crisis.

 

"As the United States is aggressively reforming our regulatory system, we're going to be working to ensure that the rest of the world does the same," he said.

 

Under a proposal put forward in June, the Federal Reserve would get new powers to monitor big financial firms and a new Consumer Financial Protection Agency would be created. Obama emphasized the CFPA as he outlined his proposals, indicating it has become a top priority.

 

"This crisis was not just the result of decisions made by the mightiest of financial firms. It was also the result of decisions made by ordinary Americans to open credit cards and take on mortgages," he said, adding some lenders were deceitful even as some people took on loans they could not afford.

 

"This is in part because there is no single agency charged with making sure that doesn't happen. That's what we intend to change."

 

Many of the overhaul provisions are controversial and the legislation has bogged down in Congress, possibly delaying reforms until 2010 or resulting in a watered-down package. Obama told financial firms not to wait for a law to pass before they started making reforms, urging them, for example, to put 2009 senior executive bonuses up for shareholder votes.

 

Despite heavy rhetoric in the United States and Europe about reining in executive pay, there has been little real action as Wall Street and London fret about losing their competitiveness as leading financial centers and companies work to insulate top earners from the effects of any changes.

 

Obama said there would be no return "to the days of reckless behavior" and that Wall Street could not expect further taxpayer bailouts without repercussions.

 

"Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall," he said, adding he wanted to work with financial firms to make sure regulation did not stifle innovation.

 

One lawmaker at the center of efforts to overhaul U.S. financial rules said the legislation will be completed. "We are very much on track," Barney Frank, chairman of the House of Representatives Financial Services Committee, said on Monday. "This will be done.

 

Time Is Precious To Chrysler

 

Facing dwindling sales, time will be precious and crucial in Italy's Fiat SpA effort to reinvent Chrysler’s auto operations. After a quick makeover in Chapter 11 and some $14 billion in U.S. government funding, Chrysler has been given a clean balance sheet and much-needed small car technology from its new partner. However, its sales remain under pressure and repairing Chrysler's product difficulties will not be fast, easy or cheap.

 

Chrysler's domestic sales fell 15 percent in August, when overall industry sales rose 5 percent, while its market share fell to 7.4 percent in August, down from 11 percent in 2008.

 

After freezing product development to conserve cash under former owner Cerberus Capital Management, Chrysler faces a dearth of new model launches. As a result, Chrysler lacks small and fuel-efficient cars. The company’s truck-heavy lineup was called "woefully uncompetitive" by Consumer Reports in its latest issue.

 

With an average fuel economy of 28 miles per gallon for its fleet, Chrysler has the least fuel-efficient lineup among major automakers. The average for General Motors is 31 mpg, Toyota 36 mpg and Honda 37 mpg, according to U.S. government data.

 

Chrysler Chief Executive Sergio Marchionne, who also heads Fiat, said last month that the U.S. automaker was still burning cash but the rate had slowed. He predicted the automaker would start to see "healthy margins" when U.S. industry-wide auto sales improve to 13 million to 14 million units -- a range not expected until 2011 at the earliest.

 

Meanwhile, Chrysler's current lineup remains heavily tilted toward larger vehicles and its quest to build competitive smaller cars has been marked by a series of missteps and false starts. Sales of the Sebring sedan -- once touted as a car that would take on perennial best-sellers from Toyota and Honda -- have plunged 70 percent this year to just under 16,000 units. By comparison, Toyota's Camry midsize car sold 238,612 units through August.

 

Fiat took a 20 percent stake in Chrysler in return for giving Chrysler access to its car platforms and small-engine technology. No cash changed hands. Chrysler estimated the cash value of the alliance would total up to $10 billion in terms of the cost to develop vehicles, platforms and powertrains from scratch.

 

Fed’s Yellen Says Recovery Underway

 

The economy is starting to climb out of a "deep hole" but with a tepid recovery likely it will remain vulnerable to shocks, Janet Yellen, president of the San Francisco Fed said on Monday.

 

Yellen said that the Fed's policies need to protect against "disinflationary forces" that currently pose a bigger threat to the economy than the possibility of inflation.

 

"The economy seems to be brushing itself off and beginning its climb out of the deep hole it's been in," Yellen said. The severe recession probably ended in the summer, and the U.S. economy will grow in the second half of 2009 as housing, manufacturing and even consumer spending start to show some signs of life, she said.

 

Yellen, a voting member of the monetary policy-setting Federal Open Market Committee in 2009, said that consumers could not be relied on to power a recovery.

 

"It may well be that we are witnessing the start of a new era for consumers ... The destruction of their nest eggs caused by falling house and stock prices is prompting them to rebuild savings," said Yellen.

 

Yellen said views on the inflation outlook have coalesced into two diametrically opposed views, but threw her weight behind those worried on falling prices -- a consequence of high unemployment and substantial "slack" in the economy.

 

"With slack likely to persist for years, it seems likely that core inflation will move even lower, departing yet farther from our price stability objective," Yellen said.

 

Yellen said fears that the Fed would be pressured to "monetize" the growing U.S. budget deficit were "real, growing, and disruptive" -- but also misplaced. "We at the Fed are and will remain fiercely independent from politics. We have the means -- and we certainly have the will -- to tighten policy when the time is right."