MarketView for September 12

 

 

Summary  

 

It was another one of those days when Wall Street waits until the bottom of the ninth to turn things around. Of course it is the end result that counts and by the closing bell, all three major equity indexes were in positive territory. Part of the reason was new or rumors, you pick, that Italy was trying to obtain some financial aid in terms of bond sales to China. Italy has asked China to make "significant" purchases of Italian debt, the Financial Times reported on its website on Monday. Nonetheless, Monday saw Italy having to pay sharply higher interest to attract interest in its debt issues

 

Meanwhile, the trading day began with concerns over a possible downgrade of France's top banks by Moody's Investors Service, but sentiment improved as various European officials succeeded in tamping down fears that political and financial leaders were losing control of the situation. At the same time, Wall Street's comeback suggested some easing of worry that the global economy was lurching toward another recession.

 

Nasdaq led the day with merger news helping to support tech shares. NetLogic Microsystems ended the day up 50.8 percent to close at $48.12 percent after wireless chipmaker Broadcom agreed to buy the company for about $3.7 billion. Broadcom shares ended the day down 1.1 percent to close at $33.06.

 

Besides technology, financials were among the best performers on the S&P 500. Fears Europe's credit crisis would act as a drag on both the nation’s financial sector and our economy have been pressuring financial stocks for months, sending shares of some to at least two-year lows. While Monday's gains ended a two-day losing streak, the S&P 500 index is still down 13.6 percent since July 22, roughly when the recent market downtrend began. Much of the recent selling has been tied to worries over the euro zone debt crisis. Volume on the three major equity exchanges was 8.3 billion shares, a number that was above last year's average of about 7.6 billion shares.

 

In another sign leaders have stepped up to the plate, euro zone officials said Treasury Secretary Timothy Geithner will attend a meeting of euro zone finance ministers on Friday to show unity in the face of market turmoil and risks to growth.

 

Mounting fears of a Greek debt default also resulted in downward pressure on stocks. Because of the possible debt default by Greece and the exposure French banks have with their Greek bond holdings, it is possible that Moody's will move to downgrade those banks.

 

A backdrop to the market's early losses was a weekend meeting of the Group of Seven industrialized nations, which failed to come up with fresh proposals for boosting global growth. Barclays Capital, citing "higher levels of economic uncertainty," cut its full-year target for the S&P 500 stock index by about 9 percent to 1,325.

 

30,000 Workers on the Chopping Block

 

Bank of America’s chief executive, Brian T. Moynihan, vowed on Monday to eliminate $5 billion in costs annually by 2014, a move that will eliminate at least 30,000 jobs at the company, which employs 288,000 people and is the largest bank in the United States.

 

In a widely anticipated speech at an investor conference organized by Barclays in New York, Mr. Moynihan outlined his plan to make Bank of America, the largest bank in the United States, more efficient and profitable even if that means sacrificing scale. “We don’t have to be the biggest company out there,” he said. “We have to be the best.”

 

While he did not specify the number of jobs that might be involved, the company announced shortly after his speech that 30,000 jobs are to be eliminated under the company’s Project New BAC cost-cutting initiative. The initial recommendations by the architects of New BAC, which takes its name from the company’s ticker symbol, were reviewed last Thursday and Friday by the company’s top management in Charlotte, N.C.

 

“As the decisions are implemented, employment levels in the areas under review during Phase I are expected to be reduced by approximately 30,000 jobs over the next few years,” the bank said in a statement. “The company expects that attrition and the elimination of appropriate unfilled roles will be a significant part of the anticipated decrease in jobs.”

 

The first part of New BAC involves the consumer banking operations of the company, as well as its home loan, technology and support operations. Other parts of the business, including Bank of America Merrill Lynch, will be reviewed in the second phase, which begins in October and continues through March 2012.

 

Out of $73 billion in annual expenses, Mr. Moynihan plans to cut at least $5 billion by shutting some of its 63 data centers, eliminating overlapping deposit systems and trimming layers of back-office staff accumulated during the acquisition binge undertaken by his predecessor, Ken Lewis. In addition, Warren Buffett invested $5 billion in the bank and Mr. Moynihan has sold of $15 billion of assets not directly related to the direction he wants to take the bank.

 

While the speech fell short of the bold blueprint many analysts had been expecting, Bank of America shares ended the day up one percent to close at $7.05. Nonetheless, the shares are still down nearly 30 percent since the beginning of August.

 

During the question-and-answer part of the session, Mr. Moynihan was asked whether Bank of America had been asked by the federal regulators to raise capital at the time of Mr. Buffett’s investment. Mr. Moynihan said they had not.

 

A shareholder asked him: “Can you or would you bankrupt Countrywide?” Mounting losses at Countrywide Financial are still plaguing the bank; three years after Bank of America bought it for $2.8 billion when Countrywide nearly collapsed into bankruptcy as its financing dried up.

 

Mr. Moynihan answered that in dealing with the troubled mortgage giant, the bank “looks at all our options on everything.”

 

When the questioner followed up by asking Mr. Moynihan if he was saying that bankrupting Countrywide was a viable option, Mr. Moynihan again demurred. “There are options around all this stuff that we continue to work on,” he said.

 

Investors, including the federal government and the insurance giant A.I.G., want to recover tens of billions of dollars from the big banks for losses on securities they assembled from now-troubled subprime mortgages.

 

Then there is the investigation by state attorneys general into mortgage servicing abuses, which could cost the big banks more than $20 billion in a proposed settlement that so far they’ve been unable to finalize. “The attorneys generals settlement is part of what can move us forward, but the settlement has to be reasonable for the company and reasonable for shareholders,” Mr. Moynihan said.

 

JP Morgan Whining

 

The United States should consider pulling out of the Basel group of global regulators, Jamie Dimon, chief executive of JPMorgan Chase, said in an interview with the Financial Times. Dimon said he was supportive of forcing banks to have more capital but argued that moves to impose an additional charge on the largest global banks went too far, particularly for U.S. lenders.

 

He was quoted as describing new international bank capital rules as "anti-American".

 

"I'm very close to thinking the U.S. shouldn't be in Basel anymore. I would not have agreed to rules that are blatantly anti-American," he said in the interview. "Our regulators should go there and say: 'If it's not in the interests of the U.S., we're not doing it'."

 

The Basel III capital rules are designed to increase the safety of the financial system by making banks build up risk-absorbent "core tier one" capital to at least 7 percent of risk-weighted assets. The biggest, including JPMorgan, have to reach 9.5 percent.

 

Dimon also criticized liquidity rules, arguing that regulations that viewed covered bonds as highly liquid but discounted government-backed, mortgage-backed securities in the United States were unfair.

 

He added that other details hit investment banking activity core to U.S. banks hardest because of the threat that Asian banks, in particular, could take U.S. market share due to the combination of U.S. domestic and global rules.

 

"I think any American president, secretary of the Treasury, regulator or other leader would want to see strong, healthy global financial firms and not think that somehow we should give up that position in the world and that would be good for your country."

 

Greece’s Cash Running Out

 

Debt-laden Greece has cash to operate until next month, the country's deputy finance minister said on Monday, highlighting the country's need to qualify for the next tranche out of its ongoing EU/IMF bailout.

 

Filippos Sachinidis's statements confirm what many have already suspected, and that is that Greece only has enough cash for the next several weeks.

 

"We have definitely maneuvering space within October," Sachinidis said in an interview on television channel Mega, responding to questions how much longer the government will be able to pay wages and pensions.

 

"We are trying to make sure the state can continue to operate without problems," he added.

 

Greece's international lenders threatened last week to withhold the sixth bailout payment of about 8 billion euros ($11 million) because of the country's repeated fiscal slippages. The Greek government announced on Sunday a new property tax to make sure it will meet its budget targets and qualify for the tranche. The EU's Commissioner for Monetary Affairs, Olli Rehn, welcomed the move, saying it went "a long way" toward meeting the country's targets.