MarketView for May 12

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Monday, May 12, 2008

 

 

 

 

Summary

 

Stock prices rebounded somewhat on Monday as a new and faster BlackBerry added a positive note to the technology sector. As a result, Research in Motion saw its share price end the day up $9.20, or 6.93 percent, to close at $141.97. The new Blackberry is directly aimed at RIM’s core base of business users.

 

A small decline in the price of crude oil also did its part to act as a stimulus to the markets, primarily because it caused a slight ease in the concerns over inflation. Crude for June delivery settled down 1.4 percent after speculators took profits resulting from the recent string of record gains in the price of crude oil. The decline trimmed worries about rising inflation two days before the government reports on consumer prices for April.

 

The NASDAQ extended its gains late in the session after news Hewlett-Packard is close to a deal to buy Electronic Data Systems for as much as $13 billion. Financial shares were also higher as the long-suffering bond insurer MBIA, which reported stronger-than-expected results, said the volume of new business appears to be rising.

 

Also contributing to the day’s momentum was an announcement by Citigroup that it was raising its aluminum price forecast, there by sending the Alcoa‘s share price up $2.57, or 6.58 percent to close at $41.61. Alcoa also was driven higher by Morgan Stanley, which raised its price target on the stock.

 

At the same time, the day’s momentum sent Caterpillar, another blue chip member of the Dow Jones 30 industrials, higher to end the day up $2.06, or 2.52 percent, to close at $83.82.

 

Citigroup also raised its share price target on Wal-Mart, stating that international growth should help offset weakness in the United States. As a result, Wal-Mart’s shares ended the day up 84 cents, or 1.47 percent, to close at $58.02.

 

Shares of Apple ended the day up $4.71, or 2.57 percent, to close at $188.16 after the company said it signed deals to bring the iPhone to four Asian countries later this year. Among other tech gainers, IBM rose $1.18, or 0.95 percent, to close at $125.24. The S&P semiconductor index closed up 1.2 percent.

 

Crude Prices Fall

 

Oil fell from a record high over $126 a barrel on Monday as a decline in China’s demand for crude, illustrated by a drop in imports, has raided concerns that the high prices for crude oil are beginning to reduce Chinese demand. China's April crude oil imports decreased against year-ago levels, the first monthly year-on-year decline in 18 months, although analysts said the dip was a one-off adjustment as refiners ran down stocks after unusually high March purchases.

 

Booming demand in emerging economies such as China and India have sent oil prices up six-fold since 2002, with the weak dollar also drawing a wave of speculators seeking a hedge against inflation over the past eight months.

 

Meanwhile, crude prices in the United States for June delivery settled down $1.73 per barrel at $124.23, off an earlier record high of $126.40 per barrel. London Brent crude settled $2.49 lower at $122.91 a barrel. The price of crude oil has increased about 13 percent since slipping to $110.53 per barrel on May 1, as supply disruptions in the North Sea and Nigeria, as well as demand for distillate fuels such as diesel took their toll on prices.

 

Oil's runaway gains prompted talk last week OPEC could consider boosting output before its next scheduled meeting in September should crude oil prices keep rising. However, oil officials from Ecuador, Qatar, the UAE and Iran said there were no plans for an early meeting as soaring prices were out of OPEC's control.

 

MBIA Posts Large Loss

 

MBIA, the largest bond insurer, posted a quarterly loss of $2.4 billion on Monday as it took charges on billions of dollars of exposure to bonds linked to subprime mortgages. Nonetheless, MBIA's managed a gain of 42 cents, or 4.45 percent, to close at $9.85, as the potential for charges had been telegraphed well in advance and the company said its new business volumes appear to be rising in the current quarter.

 

MBIA recorded losses of $3.7 billion from the change in credit derivatives' value in all of 2007, which resulted in net losses for the year of $1.9 billion. Monday's results left MBIA's shareholder equity, or the accounting value of assets minus liabilities, at $2.06 billion, down from $3.66 billion in the fourth quarter of 2007.

 

Last February, MBIA warned investors it might have to mark down the value of credit derivatives in the first quarter, given weakness in the credit market. The most recent charges wiped out 40 percent of MBIA's net worth, but the company said most of the charges did not represent actual expected losses, and the insurer is well capitalized.

 

The first-quarter loss amounted to $13.03 per share, versus a profit of $199 million, or $1.46 per share, a year earlier. Note that the latest results include pre-tax unrealized losses on insured derivatives, such as credit default swaps, of $3.58 billion.

 

The company recognized a total of $1.34 billion of pre-tax impairments and loss reserves linked to insured securities with housing exposure. Those impairments and loss reserves are expected to be paid out over four years.

 

MBIA has long been targeted by short sellers that say the bond insurer does not have enough money to cover the payouts it will have to make for collateralized debt obligations and bonds it insured that have exposure to subprime mortgages.

 

Rating agencies Standard & Poor's and Moody's Investors Service in January said they might cut the top credit ratings at MBIA's main insurance unit, MBIA Insurance Corp, in part because of questions about the insurer's capital. Fears the insurer would lose top ratings cratered both the broader stock market and MBIA shares, which have fallen more than 80 percent since October.

 

But MBIA has raised $2.6 billion this year, including selling $1.1 billion of common shares, $1 billion of surplus notes, and a $500 million investment from private equity firm Warburg Pincus, which also bought some common shares in the offering. The insurer has also taken steps including writing less new business and cutting its dividend to boost capital.

 

Meanwhile, S&P and Moody's affirmed MBIA Insurance's triple-A ratings, which are crucial to winning new business. MBIA said it generated $43.5 million of adjusted direct premium, a measure of the value of premium from new business earned in the quarter and expected from that new business in future quarters. The first-quarter figure was down 84 percent from a year earlier, but new business volume increased during the quarter, a trend that has continued in the second quarter.

 

Short sellers continue to be of the opinion that MBIA needs considerably more capital, but the company says it is rock-solid.

 

"MBIA continues to be a sound financial institution," Chief Executive Jay Brown said in a statement, adding that the company's balance sheet can withstand credit stress levels much worse than it is experiencing now. The company said it has no plans to issue common equity as part of its current capital plan.

 

MBIA said it believes it is about $1.3 billion below Moody's ideal capital level, even if it meets Moody's minimum capital requirement. The insurer plans to buy more reinsurance to boost capital, and to write new business that either does not affect capital or boosts it. MBIA expects to be in line with Moody's requirements within two quarters.

 

And in a letter to shareholders last week, Brown wrote that he suspected the declining market value of credit derivatives "will again be incorrectly described by the media as either new subprime losses or asset write-offs and will dominate the news coverage of MBIA."

 

Brown also said that although market inputs are used to determine the value of MBIA's credit derivatives, there is no real market for the insurer's positions, and the valuations do not reflect expected actual payouts.

 

Times Look Bad Says JPMorgan Chase

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Jamie Dimon, CEO of JPMorgan Chase said on Monday that while the current credit market crunch may soon be over, the economy could still face a deep and extended recession. The slump in mortgage and corporate loan markets could bottom out this year, Dimon said. At the same time, JPMorgan has side-stepped the losses and mark-downs that have hobbled its rivals during the past year.

 

Yet the economy may face a longer-term challenge even as financial markets begin to function again, the "slower burn" of a recession that may rival the severity of the 1982 contraction, he said.

These challenging conditions, marked by tighter bank credit, new rounds of mark-downs, further capital infusions and asset sales by banks, could last through next year and into 2010, he said.

 

If that happens, Dimon warned that New York-based JPMorgan and its national consumer lending businesses would suffer some significant losses, such as home equity losses doubling to $900 million by year-end. Dimon further warned that the bank would have to continue boosting loan-loss reserves if economic conditions deteriorate, further eating into profit.

 

In the current quarter, Dimon said subprime mortgage losses could rise to between $200 million and $250 million, with prime mortgages generating about $100 million in losses. Loss rates in JPMorgan Chase's massive credit card business are expected to reach 5 percent in the second quarter and rise to as high as 6 percent next year, while at the same time interest and fee revenue decline.

 

JPMorgan also expects to write down "several-hundred-million" dollars of auction rate securities, he said. JPMorgan’s share price ended the day up 67 cents, or 1.44 percent, to close at $47.24.

 

Hewlett-Packard is reportedly close to buying EDS

 

According to a report by the Wall Street Journal, Hewlett-Packard is in talks to buy Electronic Data Systems for between $12 billion and $13 billion, in an effort to better compete with IBM, currently the top computer services company.

 

The acquisition would be Hewlett-Packard’s largest since it spent $19 billion to acquire Compaq in 2002. News of the talks, first reported by the Wall Street Journal, sent the shares of EDS up $5.14, or 27.25 percent, to close at $24.00, bringing EDS’s market capitalization to about $12 billion. At the same time, Hewlett-Packard saw its share price fall $2.48, or 5.05 percent, to close at $46.64, amid skepticism that slow-growing EDS would provide more than a one-time boost to the share price, and might not be worth a premium of as much as 37 percent.

 

The logic for the acquisition, if it comes about, is simply that by merging with EDS, Hewlett-Packard becomes a considerably more potent competitor as it goes after large clients. Furthermore, the offer should not be of any great surprise. Hewlett-Packard has long considered an acquisition to beef up its tech services business, a sector that offers relatively stable income and high margins even in an economic downturn. But there was some skepticism about EDS being the right choice.

 

In April, EDS reported a 62 percent decline in first quarter profit, though the results did exceed Street expectations. Nonetheless, EDS faces intense competition from rivals in India and many believe that there is little catalyst for growth.

 

In addition to Hewlett-Packard and IBM, EDS currently competes with Accenture and Computer Sciences in the United States, as well as Indian companies Infosys Technologies Ltd, Tata Consultancy Services Ltd and Cognizant Technology Solutions.

 

To its credit, EDS has reduced its work force by thousands of jobs and thereby increased its profit levels. At the same time, the firm is also generating extensive revenues from ongoing contracts, including a lucrative win last year with the U.S. Navy.