One Stop Market

The stock market regained about 40% of yesterday’s massive 8.9% sell-off. Stocks were in positive ground after General Electric (GE 17.61, +2.11) gave a better-than-feared business update and then surged to session highs in the final minutes of trade after General Motors (GM 4.85, +0.26) outlined its plan for government aid.

The S&P 500 rose 4.0% in a volatile session, with all ten sectors posting a gain. Volume was slightly above average and on pace with Monday’s level.

General Motors and Ford outlined to Congress how the automakers would use $25 billion in loans from the government. Ford asked for a $9 billion loan, saying it will focus on more fuel efficient vehicles and downsize its dealer-base, among other initiatives, to reach at least breakeven by 2011. GM requested $12 billion in government term loans and a $6 billion line of credit in case the downturn persists. GM plans to start repaying the loans as early as 2011.

November U.S. auto sales results were dismal. On year-over-year basis, sales plunged 41% at GM, 31% at Ford, 47% at Chrysler and 34% at Toyota (TM 62.00, +3.44).

General Electric was the best-performing stock. The conglomerate said it expects fourth quarter earnings on the low end of its previous guidance, but this was better than many analysts had expected. GE also said it will keep its dividend unchanged in 2009. At Monday’s closing price, GE’s dividend represented a hefty yield of 8%.

The financial sector (+7.9%) outperformed following its 17% plunge in the previous session. Goldman Sachs (GS 65.10, -0.66), however, was a notable underperformer. The Wall Street Journal reported that Goldman is likely to report a net loss of as much as $2 billion in its later quarter, which would be five times worse than the consensus estimate.

In earnings news, Sears Holdings (SHLD 36.03, +4.19) and Beazer Homes (BZH 1.37, -0.13) posted larger-than-expected third quarter losses. Staples (SPLS 16.32, +1.20) reported a slightly higher-than-expected profit.

Separately, The Federal Reserve said due to the strains in the financial markets it will extend three liquidity facilities through April 30, 2009. The facilities aim to increase liquidity for asset backed commercial paper and financial firms.

Despite the gains in stocks, Treasuries advanced as investors speculated that the Federal Reserve will buy longer-term Treasuries. The 10-year note rose 15 ticks to send its yield down to 2.67%.

Oil prices had a volatile session, eventually falling 3.8% to $47.42, which is the lowest level since May 2005.

A sharp sell-off in the stock market Monday snapped a five-session winning streak as inventors digested a weak manufacturing survey, the possibility that the Federal Reserve may buy longer-term Treasuries, word that the U.S. economy officially entered recession in December 2007 and concerns regarding financials.

The S&P 500 dropped 8.9%, settling near its lows following a late session surge surge in selling interest. Volume was slightly above the year-to-date average. The decline was broad-based, with 498 of the components within the S&P 500 posting a decline.

The financial sector (-17.0%) got hit the hardest. Oppenheimer analyst Meredith Whitney said the U.S. credit card industry may cut credit lines by well over $2 trillion, or 45%, over the next 18 months, citing risk aversion, funding challenges and regulatory and accounting changes. Whitney’s opinion is well respected after she correctly predicted much of the turmoil on Wall Street.

Weakness in commodities (-3.6%), with oil dropping 9.5%, weighed on the energy (-10.3%) and material sectors (-9.8%).

In economic news, Federal Reserve Chairman Ben Bernanke said the U.S. economy remains under stress despite the efforts of the Fed and other Policy makers. To help alleviate the stress, he laid out possible further policy actions, including lowering the fed funds rate, purchasing longer-term Treasuries or agency securities on the open market.

The latter comment, along with a flight-to-safety bid, sparked a rally in Treasuries, with yields of both the 10-year note and 30-year bond dropping too record lows. The 10-year note rose 48 ticks to yield only 2.75% and the 30-year bond rose more than four points to yield 3.23%.

The November ISM Index, a national manufacturing survey, declined to 36.2 from the October reading of 38.9. This was worse than the consensus estimate of 37.0 and, represents the most contraction in U.S. manufacturing since 1982. The survey shows continued signs of dropping prices, with the ISM Prices Paid Index declining to 25.5 from October’s reading of 37.0. The industrials sector dropped 8.5%.

The National Bureau of Economic Research announced that December 2007 marks the end of a 73 month expansion in the U.S. economy and the beginning of a recession. Assuming the U.S. is still in a recession, the duration of decline the peak to trough decline will surpass the recessions of 2001 (8 months) and 1990/1991 (8 months), marking the longest recession since 1981/1982 (16 months).

Black Friday sales were better-than-feared.  Depending on the research firm, sales were up between 2% and 7% year-over-year. However, there are concerns that the sales came at the expense of steep discounts and buying has since tapered off. Retailer stocks dropped 9.3%.

In the end, the S&P 500’s decline of 80 points erased nearly all of last week’s 96 point gain. The index is up 10.2% from its multi-year low reached on Nov. 21, and down 44.4% this year.

The Thanksgiving holiday made for a short week of trading, yet the major indices still made huge moves that no doubt left investors something added to be thankful for when the closing bell rang Friday.

Government action was a key catalyst for this week’s rally, as a rescue of Citigroup (C), the unveiling of President-elect Obama’s economic team, and an $800 billion plan of attack for getting credit flowing smoothly again for consumers drove a continuation of buying efforts that perked up in the prior week after the S&P 500 hit a new low for this bear market and touched levels seen in 1997.

The gains were extreme in many cases.  The market itself soared 12%; however, it ended the week at a level that was 21% higher than the low seen only five sessions ago.

The financial sector played a huge part in the big gains. 

Buyers returned to the beaten-down area after the government said it would provide a guarantee for the bulk of $306 billion of troubled assets identified at Citigroup.  In turn, the government also said it would take an additional $20 billion of TARP funds and inject it into Citigroup by purchasing the bank’s preferred stock.

While there were other provisions for the relief the government provided to Citigroup, the main thrust for the market was (a) that Citigroup wasn’t going to be allowed to fail (b) that Citigroup wouldn’t have to sell core assets at distressed prices to raise capital (c) that common shareholders were spared in the rescue plan and (d) that it was reasonable to expect other financial companies would get similar guarantees if need be.

On the heels of the Citigroup rescue, the Federal Reserve, in conjunction with the Treasury Department, announced Tuesday that it is creating a new $200 billion facility focused on getting liquidity flowing in key asset-backed securities markets that help facilitate auto loans, student loans, credit card loans and small business loans.

In addition, another $600 billion will be allocated for the purchase of direct obligations of government-sponsored enterprises and mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae in an effort to help drive down mortgage rates and improve conditions in the housing market, which lies at the heart of the financial crisis.

Word of the latter initiative did help drive down mortgage rates and improved the general tone of the market, as there was a measure of relief in the thought that the government is finally concentrating its attack in the right place.

Even so, there remained an underlying sense of skepticism with respect to the stock market rally given that more bad economic news was heard and knowing that past rally attempts following government rescue plans have all failed.

Furthermore, there was reason to question the sustainability of the rally considering the 10-year note yield reached its lowest level on record (2.91%) in the midst of it and that Libor rates went up across a number of time horizons, including the widely-watched overnight and 3-month rates.

If there were strong conviction behind the idea that the latest initiatives were going to be successful in getting banks to lend willingly again, it seems that Libor rates should have come down. 

The wrinkle here in assessing the situation is that banks typically aim to bolster their cash holdings to meet increased year-end funding needs, so it is too presumptuous at this juncture to think the bump in Libor rates meant there wasn’t confidence in the government’s efforts to inject liquidity into the financial system.  That could be the case, yet there won’t be a better understanding of the matter until after the new year.

For this week anyway, participants largely set aside such concerns and took advantage of deeply marked-down equity prices.  To wit, Citigroup surged 111% this week while General Motors (GM) jumped 71%.  Pulte Homes (PHM) and Goldman Sachs (GS), up 50% and 48%, respectively, were examples of other big gainers.

From an economic standpoint, there wasn’t much good news.  Q3 GDP was revised down to -0.5% from -0.3%, durable orders slumped 6.2%, existing home sales fell 3.1%, new home sales dropped 5.3%, personal spending declined 1.0%, and weekly initial claims, while improved from the prior week, continued to register a reading above 500,000.

The consumer confidence report, remarkably, showed an increase from the prior month as falling gas prices helped sentiment, yet the confidence reading remained at historically depressed levels.

That the market managed to look past any worrisome news, including a well-orchestrated terrorist attack in Mumbai, India, suggested it had gotten to a point where prior selling efforts had been exhausted.

The selling this month has been significant, too.  Despite the big gains in this final week of trading, the market still declined 7.5% in November.

The coming week is sure to bring more Christmas music… and a test of the newfound bullish bias.

The stock market has traded in choppy fashion as investors digest several economic reports and news that the government is taking steps to shore up consumer lending.

At midday, the stock market is posting a modest gain as strength in financials (+1.5%) helps to offset weakness in tech (-1.2%).

The Federal Reserve created a program that will purchase direct obligations of housing-related government-sponsored enterprises, such as Fannie Mae (FNM 0.51, +0.17) and Freddie Mac (FRE 0.60, +0.15).  The Fed is taking this action to reduce the cost and increase the availability of credit to purchase houses.  The Fed will purchase up to $100 billion in direct GSE obligations and up to $500 billion in mortgage-backed securities.

In addition, the Fed created a Term Asset-Backed Securities Loan Facility so market participants can meet the credit needs of households and small businesses by supporting asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration. The New York Fed will extend $200 billion in loans for the consumer credit facility, while the Treasury will extend $20 billion in TARP funds.

In economic news, consumer confidence rose in November, but remains at extremely depressed states as the economic turmoil takes a toll on sentiment. November consumer confidence rose 6.1 to 44.9 from October when confidence fell to an all-time low of 38.8, according to the Conference Board.  Economists expected confidence of 39.5.

The preliminary GDP report revised the contraction in the economy during the third quarter to 0.5% from 0.3%, which matched expectations. Third quarter consumption was revised to -3.7% from -3.1%, which was a larger decline than the expected reading of -3.2%.

The November Richmond Fed Manufacturing Index, a regional manufacturing survey, fell to -38 from -26 in October, which was worse than the expected reading of -27.  This represents contraction in manufacturing in the Richmond region.

Home prices continue to show weakness, with prices in 20 major metro areas falling 17.4% in September compared to the previous year, according to S&P/CaseShiller.

In corporate news, BHP Billiton (BHP 38.58, +5.16) withdrew its $68 billion hostile takeover bid for Rio Tinto (RTP 99.07, -46.92) due to global events and fall in commodity prices and deepening global crisis, according to the Wall Street Journal.

Hewlett-Packard (HPQ 34.77, -0.93) is a laggard despite posting fiscal fourth quarter results and fiscal year 2009 earnings guidance that met its preannouncement made earlier this month.

Oil prices are under pressure, dropping 5.9% to $51.30 per barrel.  Commodities as a whole are down 1.8%.

President-Elect Obama is currently hold a news conference on his economic plans.

Stocks and commodities soared Monday on news of a government rescue plan for Citigroup (C 5.85, +2.08) that includes a direct $20 billion investment and $306 billion in asset guarantees.  The S&P 500 rose 6.4%, with gains exacerbated by short-covering and bargain hunting.

Shares of Citi plunged 60% last week, sparking the need for a bailout. The Treasury will buy $20 billion in Citigroup preferred stock using TARP funds, bringing the Treasury’s total investment in Citi to $45 billion. In addition, the Treasury, Fed and FDIC will provide guarantees for up to $306 billion of troubled assets in exchange for $7 billion in preferred stock and warrants for 254 million shares of common stock at a strike price of $10.61. Citi will absorb the first $29 billion in losses on the troubled assets and then 10% on any remaining losses, while the government will cover the remaining 90% in losses. 

Under the deal, Citi must get an executive compensation plan approved by the government and must not pay a quarterly dividend larger than $0.01 without government consent.

President-elect Obama unveiled his economic team, confirming that New York Fed President Tim Geithner is the Treasury Secretary nomination.  Obama said that a “big” economic stimulus package is needed, but did not give any specific numbers.  Obama did not say he would postpone raising taxes on the richest Americans as some had hoped for, but will listen to what his economic team says about letting the Bush tax cuts expire.

In economic news, existing home sales continue to show signs of stabilization at very depressed levels. October existing home sales fell 3.1% month-over-month on a seasonally adjusted annual basis to 4.98 million, which is close to the consensus estimate of 5.00 million.  The median home price decline of 11.3% year-over-year to $183,300 is the largest on record.

All ten sectors posted a gain. The financial sector rose the most, spiking 18.5% — the most in its 20 year history — with Citi climbing 55%.  Defensive sectors underperformed on a relative basis as utilities rose only 1.3% and Treasuries fell as investors showed an increased willingness to take on risk.

Meanwhile, commodities rallied 5.4% as oil prices spiked 9.1% to $54.48 per barrel and gold rose 4.0% to $823.70 per ounce.  The strength in the stock market and a 2.4% decline in the dollar fueled the buying interest.

The S&P 500 is now up 14.9% from its more than 10-year low reached on November 21, but is still down 42.0% year-to-date.

  S&P futures vs fair value: +13.60. Nasdaq futures vs fair value: +21.30.  Futures suggest the stock market will extend Friday’s rally.  The big news this morning is that Citigroup (C) will be receiving government guarantees, liquidity access and capital.  As part of the plan, Citi will get $20 billion in exchange for preferred stock and the Treasury and FDIC will guarantee against the possibility of unusually large losses up to $306 billion in troubled assets in exchange for $7 billion in Citi preferred stock.  Citi had already received a $25 billion investment from the Treasury following the first round of TARP purchases.  Citi is up 26% in premarket trading. Meanwhile, President-Elect Obama will lay out his economic plan, including a fiscal stimulus package, later today, according to reports. Separately, oil prices are up 3.6% to $51.71 per barrel as the dollar falls 1.5% against a basket of currencies.

Thanks to a late-session surge, the stock market closed at its session high with a gain of 6.3%. Though the rally was impressive, stocks still finished the week 8.4% lower due to heavy losses earlier in the week.

Those heavy losses prompted bargain hunters to bid stocks higher. Whether the push was merely rooted in short-term interest or marked a true turning point for the stock market will only be seen in time.

The move was supported by relatively heavy volume. Nearly 2.4 billion shares traded hands on the New York Stock Exchange this session, compared with average volume of 1.5 billion shares this month.

Despite the strong finish, stocks traded in mixed fashion throughout much of the session, and struggled to find direction. During that time the financial sector stood out as a notable laggard. At one point the financial sector was down 7.5%, which marked the sector’s lowest level since 1995. However, it finished 3.4% higher.

Weakness in the financial sector stemmed from the large-cap names included among other diversified financial services companies (-3.8%), such as Citigroup (C 3.75, -0.96). Speculation continues to surround Citi’s fate. Reports indicate the financial services giant is weighing its strategic options, but the stock extended its downturn and fell through the prior session’s low to its worst level since 1992.

While financials lagged, energy posted the largest advance. Energy finished the session 11.7% higher. A 2% rebound in crude oil futures helped give energy a lift. Crude settled around $50.40 per barrel, though it actually fell to a new multiyear low of $48.25 per barrel midway through the session.

It appeared that Dell (DELL 9.30, -0.51) was going to provide stocks with some support after it posted better-than-expected earnings per share results for the third quarter. However, shares fell under pressure as investors and analysts critiqued the quarterly report.

The tech sector still finished with a 5.8% gain, though, thanks largely to strength among large-cap tech stocks.

The renewed interest in stocks caused Treasuries to fall substantially, especially at the long end of the curve. The 10-year Note fell 49 ticks, while the 30-year Bond dropped 117 ticks. The downturn reverses some of the gains Treasuries made in the prior session.

Investors got a little bit of clarity regarding the future face of the Treasury team; President-Elect Obama has nominated New York Fed President Geitner for Treasury Secretary. Obama is expected to announce the rest of his economic team Monday.

S&P futures vs fair value: +17.60. Nasdaq futures vs fair value: +20.00.  

After registering record lows in the prior session, stock futures are indicating an upward start to trading Friday. 

Dell (DELL) posted better-than-expected earnings per share results for the third quarter.  However, Dell also reported negative operating cash flow for the quarter.  HJ Heinz (HNZ) topped earnings expectations for its latest quarter, and also reaffirmed its outlook. 

Retailer Gap (GPS) beat the consensus third quarter earnings per share estimate, and provided an in-line outlook. 

KeyCorp (KEY) has cut its quarterly dividend to $0.625 per share from $0.1875 per share. 

According to an article from The Wall Street Journal, Citigroup (C) has begun weighing the possibility of auctioning pieces of the company or even selling it outright.  Meanwhile, a New York Times article stated that Citi’s executives are not actively exploring selling the company or splitting it up. 

Wednesday marked an ugly session on Wall Street, with the S&P 500 and Nasdaq tumbling to their lowest levels in five years and the Dow dropping to a five-year closing low. Concerns over the fate of U.S. automakers, disappointing economic data, a dour outlook from the Fed and the market’s inability to hold its lows fueled the selling interest.

The major indices ended the session at their worst levels, in above average volume.  The Dow, Nasdaq and S&P 500 fell 5.1%, 6.5% and 6.1%, respectively.

October CPI fell by the largest amount on record, which is good news in terms of the inflation outlook, but also represents the weakness of the economy. Specifically, CPI fell 1.0% month-over-month as energy prices plummeted 8.6%. Prices also declined outside of energy, indicating weak demand — core CPI fell 0.1% as used car prices dropped 2.4% and apparel prices fell 1.0%.

The latest new residential construction data fell to the lowest levels on record, and provide another weak point for fourth quarter GDP calculations. October housing starts declined 4.5% month-over-month to a seasonally adjusted annual rate of 791,000, which was slightly higher than the consensus estimate of 780,000. Building permits dropped 12% to a seasonally adjusted annual rate of 708,000, which was worse than the consensus estimate of 774,000.

The Federal Reserve’s 2008 and 2009 projections, released today in the FOMC Oct. 29 meeting minutes, mirrored the latest economic data, with the Fed reducing forecasts for GDP growth and inflation. For 2008, the Fed expects the economy will grow between 0.0% and 0.3%, down sharply from its previous forecast of 1.0% to 1.6%. The 2009 forecast now calls for growth between -0.2% and 1.1%, down from the previous forecast of 2.0% to 2.8%. The Fed also raised its unemployment forecast.

The minutes hinted at the likelihood of further monetary easing, as some FOMC members saw potential for further rate cuts.

Although weakness was broad-based with losses posted by all ten sectors and 492 of the 500 components within the S&P 500, the financial sector got hit the hardest with a decline of 11.5%.

Citigroup (C 6.45, -1.91) tumbled 23% to its lowest level since 1995. Citi said it will buy the remaining $17.4 billion in structure investment vehicles it advised.

Automakers (-21.2%) got clipped as executives from General Motors (GM 2.77, -0.32), Ford (F 1.27, -0.41) and Chrysler, and the head of the UAW testified before the House Financial Services Committee in an attempt to secure a government loan. There were plenty of opponents in the House, which was similar to views that were expressed by Senate Banking Committee members yesterday. GM’s CEO said on CNBC that the company is doing everything it can to avoid bankruptcy, as he sees a high risk that a Chapter 11 filing (restructuring) could turn into a Chapter 7 (liquidation). Reports that Toyota Motor (TM 59.64, -3.61) is going to cut North America production also weighed on automakers.

A risk aversion trade lifted Treasuries, with the 30-year bound rallying 3 points to yield 3.94% — marking the lowest yield since the 30-year bond was introduced in 1977. The 10-year note rose 44 ticks to send its yield down to 3.36%.

In commodity trading, crude prices fell 2.4% to $53.10 per barrel. The government’s weekly energy inventory showed a larger-than-expected build in crude and gasoline stockpiles, indicating decreased demand.