From Briefing.com: Weekly Recap - Week ending 16-Jan-09
finance.yahoo.com
A bad start to the new year got worse this week as each of the major indices suffered material losses. The financial sector was at the heart of those losses as it plummeted 16% on the week amid a torrent of concerns about deteriorating credit quality and the seemingly unending need by the banks to raise capital to plug the gaping holes created by losses and writedowns on bad investments.
Bank of America (BAC) and Citigroup (C) were the biggest trouble spots this week. Shares of the former dropped as much as 46% at one point while shares of Citigroup fell as much as 59%.
Citigroup rattled investors with a decision to sell a controlling interest in its Smith Barney brokerage unit to Morgan Stanley (MS), which the market concluded was more of a forced sale than anything else to raise capital. Citigroup later announced, in conjunction with reporting an $8.3 billion fourth quarter loss, that it would be splitting into two units as it attempts to downsize its operations in meaningful fashion.
Ironically, it was Bank of America's effort to super-size its operations that got it into a heap of trouble with the market this week. Specifically, its acquisitions of mortgage giant Countrywide and former investment banking giant Merrill Lynch raised the bank's credit risk profile. That came back to hurt it in a big way as evidenced by Bank of America reporting its first loss in 17 years and needing an additional $20 billion in TARP funds to digest its Merrill Lynch purchase.
Bank of America said it lost $1.79 billion in the fourth quarter, yet that excludes a $15 billion loss at Merrill Lynch. The need for additional governmental aid rankled the market, which was dismayed by the seemingly poor due diligence performed by Bank of America ahead of the Merrill purchase.
What's done is done now, but the developments surrounding these two, major banks this week, as well as a disappointing earnings report from JPMorgan Chase (JPM) that was replete with an admission the bank is girding itself for a continued deterioration in the economy and additional loan losses, served as a wake-up call that there won't be a quick fix to the financial sector's problems.
Unfortunately, that also means there won't be a quick fix to the economy's problems.
President Obama (we'll give him the official title now with his inauguration only days away) has stressed on a number of occasions already the need to act quickly with a stimulus plan to get the economy growing again. His initial hope was to be able to sign a stimulus plan into law almost immediately upon taking office. It now sounds as if the congressional debate on the bill will extend into February.
In the past week House Democrats presented an $825 billion stimulus plan that calls for $550 billion in spending and $275 billion in tax cuts. There isn't any point in getting into the details since it will no doubt experience revisions, but it is worth noting that the overall figure is in the ballpark of what the market was expecting given views expressed by officials in the Obama administration.
The economic data in the past week certainly provided the new president with ample reason to stress the urgency of getting new stimulus flowing through the economy as soon as possible.
December retail sales were atrocious, declining 2.7% and falling for the sixth straight month. Industrial production in the fourth quarter declined at an 11.5% annual rate. The trade deficit narrowed sharply to $40.4 billion (from -$56.7 bln), with a $25 bln drop in imports and an $8.7 bln drop in exports reflecting a sharp contraction in overall global trade.
After two weeks below 500,000, weekly initial claims jumped 54,000 to 524,000. Although there was a 115,000 drop in continued claims, that improvement was quickly attributed to people having exhausted their jobless benefits. More companies, meanwhile, announced job cuts.
Both the PPI and CPI reports actually brought some relatively good news. Core prices stayed out of negative territory, providing a brief respite for the market from its deflation concerns but certainly not expelling them. CPI, for example, was up a scant 0.1% for 2008, which was the slowest rate of increase since 1954.
Separately, there wasn't much to cheer about on the earnings front. Alcoa came up short of lowered estimates, Intel reported a 90% drop in fourth quarter net income, and several companies, including Tiffany & Co. (TIF), KLA-Tencor (KLAC), Liz Claiborne (LIZ), NVIDIA (NVDA), Motorola (MOT), Genentech (DNA), Estee Lauder (EL), Johnson Controls (JCI), and Lubrizol (LZ) issued sales and/or earnings warnings.
In brief, the events that unfolded in the past week, which also included the ECB cutting its key lending rate another 50 basis points to 2.00%, the Senate approving the next $350 billion of TARP funds, GM providing a 2009 U.S. industry wide auto sales estimate that is the lowest in 27 years, and machinery orders in Japan being the lowest on record, provided a sobering reminder that this slowdown is global and deep.
To be sure, it made it apparent that rallies like the one seen at the end of 2008 are still to be viewed in a bear market context.
--Patrick J. O'Hare, Briefing.com
**For interested readers, the S&P 400 Midcap Index, which isn't included in the table below, declined 2.6% this week and is down 4.0% year-to-date.
Index Started Week Ended Week Change %Change YTD %
DJIA 8599.18 8281.22 -317.96 -3.7 -5.6
Nasdaq 1571.59 1529.33 -42.26 -2.7 -3.0
S&P 500 890.35 850.12 -40.23 -4.5 -5.9
Russell 2000 481.30 466.45 -14.85 -3.1 -6.6
09:19 am Bank of America (BAC)
Bank of America (BAC 8.32) reported terrible fourth quarter results and received an additional $20 billion from the U.S. government under the TARP.
For the quarter, Bank of America reported a loss of $0.48 per share, much worse than the First Call consensus which actually called for a profit of $0.08 per share. The loss excludes a $15.31 billion loss from recently acquired Merrill Lynch.
Revenues at Bank of America rose 22.5% year-over-year to $15.68 billion, but were well short of the $20.72 billion consensus.
Bank of America ended 2008 with a Tier 1 capital ratio of 9.15%.
Credit costs were steep for BAC at $8.54 billion, which includes boosting its reserves by $3 billion -- nearly double estimates as the consumer credit environment continues to deteriorate.
The government has stepped in to assist Bank of America, making a $20 billion investment under the TARP. The government will receive preferred stock carrying an 8% dividend rate. Additionally, the government has agreed to a loss sharing program on $118 billion in selected capital. Under the agreement, Bank of America would cover the first $10 billion in losses and the government would cover 90% of any subsequent losses.
Bank of America said that fourth quarter results were driven by escalating credit costs, including additions to reserves, and significant write-downs and trading losses in the capital markets businesses.
In light of continuing severe economic and financial market conditions, Bank of America slashed its dividend to $0.01 per share from $0.32 per share.
08:57 am Citigroup (C)
Citigroup (C 3.83) reported a massive loss for the fourth quarter and said it was splitting into two businesses, one focused on traditional banking and the other holding riskier assets.
For the quarter, Citi reported a loss of $1.72 per share, $0.41 worse than the First Call consensus that expected a loss of $1.31 per share. Revenues were $5.59 billion.
During the quarter Citi issued $45 billion of preferred stock and warrants to the U.S. Treasury as part of the TARP.
Citigroup said its Tier 1 capital ratio was approximately 11.8%. The bank also added $14 billion to its loan loss reserves.
In a move away from its "financial-services supermarket" model, Citi said it is splitting up into two business, Citicorp and Citi Holdings.
Citicorp will focus on traditional banking business across the globe. The new Citicorp will include the retail bank; the corporate and investment bank; the private bank, which serves wealthy individuals; and global transaction services.
Citi Holdings will include the company's non-core assets, including asset management and consumer finance segments, including CitiMortgage and CitiFinancial. The new unit will also be in charge of Citi's 49% stake in the brokerage joint venture with Morgan Stanley. In addition, Citi Holdings will take a pool of $300 billion of assets including loans and securities backed by residential and commercial real estate, and consumer loans. Those assets are part of a loss sharing agreement Citi has with the government.
08:22 am Intel (INTC)
Intel (INTC 13.29) reported fourth quarter earnings and revenues that were in-line with consensus estimates but much lower than the prior year's figures.
For the quarter, Intel reported earnings of $0.04 per share, in-line with the First Call consensus of $0.04, but down 89% year-over-year.
Revenues fell 22.8% year-over-year to $8.27 billion, slightly above the consensus estimate of $8.21 billion but in-line with the company's preliminary results issued last week. The results included a $1 billion negative impact from the previously announced reduction in the carrying value of the company's Clearwire investments.
Intel declined to provide a revenue outlook for its first quarter due to economic uncertainty and limited visibility, but the company did say that for internal purposes it is planning for revenue in the vicinity of $7 billion. The current consensus stands at $7.27 billion.
Gross margins are expected to decline to the low 40% range due to higher underutilization charges and start-up costs.
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