Monday, November 17, 2008

Market Week Wrap-up

Trading was a mixed bag in markets this week. China got the ball rolling over the weekend, announcing a major infrastructure stimulus package that sent equity futures soaring before the open of trade on Monday. But fear about the fragile state of the economy is seldom far from anyone's mind these days, and with GM hitting 60-year lows in early trading Monday morning, the slide got under way and didn't stop until Thursday afternoon, when the S&P 500 broke below October's intra-day low and the DJIA briefly traded under 8000. The reversal was swift as bargain hunters jumped in and sent indices up more than 8% before the close on Thursday. For the week the DJIA -5%, the S&P 500 -6.2% and the Nasday -7.9%. In commodities, trading was headlined by the continued free fall in oil prices, with front-month crude plumbing 22-month lows, briefly trading below $55 on Thursday.

Several significant changes have altered the direction of the government's efforts to deal with the financial crisis. Treasury Secretary Paulson announced a major change in the TARP plan on Wednesday, saying that buying illiquid assets from financial companies would be too difficult, take too long and be too costly, thereby abandoning the initial goal of the program. Confirming the already obvious, he said that the main goal of the program was now to inject funding into banks and supporting asset-backed debt securities that are strictly consumer-specific, namely car loans, credit card defaults, and troubled student debt. Then on Friday, the FDIC unveiled a plan to modify 2.2M mortgage loans by offering mortgage servicers incentives to lower monthly payments for homeowners. The FDIC believes the plan is expected to prevent about 1.5M foreclosures in the US. FDIC Chairwoman Sheila Bair believes the Treasury has the authority under TARP to fund the program, with the FDIC managing payouts to banks to support the moves.

Shares of GM deteriorated all week long as politicians hemmed and hawed over whether to bailout the automaker or not. The New York Times weighed in, noting that while bankruptcy would be painful, it may be preferable to a government bailout that may only delay the steps GM needs to take to become a stronger company. A Goldman analyst suspends his ratings and price target on GM, noting the automaker needs $22B in capital to bring operations to positive free cash flow.

American Express was cleared to become a bank holding company on Tuesday night, giving it access to the Treasury's TARP program. Some reports indicated that AXP could request up to $3.5B in assistance, or 13.5% of its market cap, which would certainly give the company more flexibility in its funding situation but would not help it deal with the inexorable slowdown in consumer spending.

Both Goldman Sachs and Morgan Stanley extended their downward slide in the week. Goldman's CEO addressed a banking conference early in the week, optimistically claiming that its new bank holding company status would not change its strategy and insisting that bank deposits could lower its cost of funding. Ladenburg Thalmann's Dick Bove cut Goldman's price target to $70 from $80 and reiterated his sell rating in response. Meanwhile Morgan Stanley said it would resize and reshape its FX, commercial real estate, prime brokerage and property trading operations, noting that its total assets fell below $800B on October 31.

Freddie Mac unexpectedly released its third-quarter results on Friday, disclosing a loss of more than $25B. Under the standing commitment to make regular funding injections into the GSEs, the Federal Housing Finance Agency (FHFA) said today that it has asked the Treasury for $13B from its TARP program for FRE. However, the agency also noted that if it rules that FRE's assets are less than its obligations, the firm could enter receivership.

AIG was in headlines over the weekend after the government said it would its rescue plan for the crippled insurance giant. The New York Fed stated it would restructure the terms and reduce the size of its loan to AIG, while the Treasury said it would buy $40B in preferred shares from the firm under the TARP capital program. The firm also reported their Q3 results on Monday, including unsurprisingly huge losses and big declines in revenue. In other insurance news, state insurance regulators may loosen the capital requirements for insurance firms; according to Moody's, US insurance operations need more than $10B in added capital to maintain their risk-based-capital levels under current regulations. The National Association of Insurance Commissioners said they may issue recommendations on capital requirements in early December. Also on Friday the US Office of Thrift Supervision announced that it would allow insurers apply for Savings & Loan status.

Dow component Wal-Mart reported Q3 results in line with analysts' expectations this morning, although the retail giant lowered its full-year forecast by a hair and guided below targets for the coming quarter. WMT's CEO noted that he remains optimistic about the holidays, making him somewhat of a rarity among retail executives regarding this critical part of the year. Starbucks reported big EPS and revenue misses, while retailers Liz Claiborne and TJX Companies held things together in the quarter. But all three consumer-oriented names offered very pessimistic views for the coming quarter. LIZ's CEO warned that the new quarter has begun with "dramatically falling demand," while SBUX noted the next quarter would be its "toughest ever."

The tech sector has been hit by waves of negative news this week. On Wednesday Applied Materials beat estimates in its fourth-quarter report, but said it was launching a major restructuring program to help it deal with an expected 30% drop in orders in Q109. Intel said it sees business in the current quarter below expectations and slashed its revenue guidance and anticipated R&D spending. According to Intel, revenue is being affected by significantly weaker than expected demand in all geographies and market segments. In addition, the chipmaker said that the PC supply chain is aggressively reducing component inventories. On Thursday a semiconductor industry report noted that global silicon wafer area shipments contracted about 3% q/q in the third quarter of 2008, reflecting the increasing conservative mood in the industry. Then Sun Microsystems announced its own restructuring program on Friday, saying it would cut 15-18% of its workforce to cut costs in the face of the global slowdown.

In a sign of the destructive reach of the crisis, Google fell below $300/shr on Thursday, signaling trouble for a company once touted as next to "recession-proof." Citibank pulled GOOG from its Top Picks Live List and Jefferies cut its price target to $420 from $551, citing further deterioration in e-commerce and online advertising. Slowdown means bad news for cell phones too: Nokia offered a pessimistic view of the mobile phone industry, cutting its view on overall 2008 industry volume to 1.24B units from 1.26B, while its preliminary estimate indicates that 2009 volumes will be lower than 2008 numbers thanks to the economic slowdown. South Korea's SK Telecom scrapped a plan to create a business tie-up with Sprint Nextel due to worsening business environment.

In commodities worries of a long, deep global recession continue to entrench sentiment that demand destruction will likely overwhelm supply. Both the EIA and the IEA reduced their respectvie world demand outlooks for 2009, while reports out of China indicated that Sinopec has lowered its November refining output by roughly 10% due to lower demand. Copper futures followed a similar pattern, with steep declines during the first half of the week, although they did bounce moderately in the final two sessions. December copper remains well below $2 while mining names continue to announce production cuts to stem the tide of declining prices. Commodity markets in general were also weighed down by the surging dollar.

Government bond markets both here and across the pond experienced rising prices, lower yields and steepening curves throughout much of the week. Early in the week the BoE's quarterly inflation report go the ball rolling indicating the UK was likely in recession and inflation was likely to move below the important 2% threshold, leaving the door open for more aggressive rate cuts. A steady stream of ECB officials reiterated that they too saw inflation declining over the near term and hinted that more rate cuts will likely be needed. The benchmark spread in the US has widened out to 270 basis points, entering into an area that has coincided to a bottom in past cycles. The European traders took notice when the yield on the two-year GILT moved below that of the German Schatz. By the end of the week participants started to take notice that some of the hyped improvement that has been seen in interbank lending markets was starting to come undone. Friday saw the LIBOR rates reset higher for the second straight day helping push the US three-month TED spread back above 200 basis points. With the three-month T-bill offering a paltry 0.13% yields it remains clear counterparty fears continue to restrict the functioning of financial markets. Under these circumstances US Treasury Dept successfully auctioned off some $30B in 10 and 30-year paper.

In currencies the week began with risk appetite back in center stage following the Chinese government's weekend announcement of a $575B stimulus package. The carry-related pairs reacted to the news with strength while the greenback remained mixed. While commodities began on firm note, helping the CAD and AUD head higher, global growth concerns seeped right back into markets from Tuesday on, thanks to weak European equity markets and troubling economic data out of the Far East. China's CPI came in at -0.3% m/m, opening the door for aggressive easing at the PboC. And although China's October trade surplus beat expectations, the lower import targets suggested the win was for all the wrong reasons and only heightened concerns over the global slowdown. Japanese press report that the BoJ could cut interest rates following next weeks Japanese GDP data on Monday are weighing on the yen.

Emerging markets continue to simmer. Latvia's Parex Banka, the largest independent Baltic bank, was taken over by the Latvian government after panicked clients withdrew $109M in deposits. The ruble was buffeted by cross currents all week long. On Wednesday, Russia was forced to widen its ruble trading band for better FX flexibility, after spending a rumored $7.0B to defend the currency after it weakened well beyond the previously defended 30.41 mark. This come after the central bank sold a record $40B in October. FX markets are taking note of the pressure building on the Kremlin for a currency devaluation. Adding to Russia's headaches the Micex and RTS exchanges were both suspended limit down for several sessions this week. And as crude continues to weaken, Russian government finances look shakier. Finance Minister Kudrin is forecasted crude at an average of $50/bbl in 2009 while dealers are saying that the country's budget is based on oil at $95, meaning that Russia will likely tap its wealth fund to pay for the difference, further depleting FX reserves.

Europe moved decisively toward recession, with Germany and Italy officially declaring recession and the UK all but officially in recession (France reported a preliminary Q3 q/q GDP reading of 0.1%, technically keeping them on the brink). In its quarterly report, the BoE said the UK's Q109 GDP would be -1.8%. The pound has suffered mightily, plunging to multi-year lows among major pairs, with GBP/USD breaking through six-years lows and EUR/GBP continuing to hit fresh all time highs. Iceland seems to be looking to join Europe, with the prime minister saying on Friday that his government was reviewing its stance on EU membership and that the party conference has been moved up to January to discuss the topic.

The greenback has been mixed during the week as traders try to determine which sector of the global economy has been least impacted by the slowdown. The consensus view is certainly that the financial malaise has continued to deepen, exhibiting unprecedented intensity, scope and complexity. Later in the week the dollar price action was dictated by European crosses, with EUR/GBP continuing to make fresh all-time highs. On Friday dealers noted repatriation flows back into the euro as Germany's Henkel converts USD to EUR following its Ecolab divestiture. The headline US trade deficit showed a slight improvement, but (like the China trade data earlier this week) the data was "better" for all the wrong reasons as both imports and exports declined. The USD/CAD remains bid on the back of the lower trend in oil prices as front-month NYMEX crude posts fresh 20-month lows.

The G20 meeting in Washington this weekend will most likely focus on immediate stimulus measures, although it remains an open question whether governments can inject confidence into the financial system in the same manner as liquidity. Dealers are already wondering how disappointed markets would react if no coordinated economic stimulus plan comes out of the confab. Whatever happens, G20 finance ministers have signaled that one likely outcome of the summit will be more regulation of financial markets. On Friday the ECB's Trichet noted that the current circumstances are extraordinarily demanding, noting that a single unified global policy stance was undesirable, as different regions need different policies. Numerous central bankers echoed these comments throughout the day. Brazilian president Lula enthusiasm for any concrete results from the meeting, saying that a firm plan for concerted effort would not likely emerge from the meeting.

Trade The News Staff Trade The News, Inc.

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