Markets & Finance

Wall Street Smells a Rate Cut


Investors celebrated Tuesday's expected easing a day early, with financials getting an added boost from cash infusions to UBS and MBIA

Major U.S. stock indexes ended higher on Monday, with market sentiment buoyed by expectations that another Fed rate cut on Tuesday will bring some relief to tight credit markets and stimulate the economy. Two new cash infusions into troubled financial companies likely sparked hopes of further relief to persistently tight credit markets.

The Dow Jones industrial average finished 101.45 points, or 0.74%, higher at 13,727.03. The broader S&P 500 index gained 11.30 points, or 0.75%, to trade at 1,515.96. The tech-heavy Nasdaq composite index was up 12.79 points, or 0.47%, at 2,718.95.

On the New York Stock Exchange, 19 stocks logged gains for every 12 that traded lower, while the ratio on the Nasdaq was 16-14 positive, amid fairly light trading volume, S&P MarketScope said. Financial, telecom and oil stocks all got a boost.

The markets had been favoring a more aggressive half-percentage point rate cut from the Federal Reserve's policy committee. But after Friday's positive jobs report, which showed nonfarm payrolls up 94,000 in November and unemployment unchanged at 4.7%, the bet is for a quarter-point easing of rates. More negative economic news later this week, however, could undo any stock market gains that result from a rate cut, however, some analysts are saying.

UBS (UBS) announced a further writedown of $10 billion of assets associated with the meltdown in the U.S. subprime market, and said it would post a net loss in the fourth quarter, reversing an earlier forecast of a profit. The Swiss bank also isn't ruling out the possibility of a loss for all of 2007. UBS sugar-coated the losses with news that it has sold a $11.5 billion stake to Singapore's GIC and an undisclosed investor in the Middle East, providing more evidence that major banks still have the ability to attract capital infusions when needed.

"While two new investors will ease the pain for now, the real question is how much more might be buried in the books at UBS?" Aite Group senior analyst Alois Pirker asked in an email note. Pirker predicts the losses will spur a fresh discussion, questioning whether proprietary trading belongs under the same corporate banner as wealth management and "arguing the case for a separate stock market listing of the wealth management arm.”

MBIA (MBI), the world's largest bond insurer, said Monday that it will receive a $1 billion investment from private equity firm Warburg Pincus. The capital injection will help the company maintain its AAA rating after an analyst's downgrade last week. Warburg Pincus is making an initial investment of $500 million in MBIA by buying 16.1 million shares of the company's common stock at $31 per share, a 3% premium to the stock's closing price on Dec. 7.

"We're see the ability for some of these oversold financial stocks to get some capitalization," said Art Hogan, chief market analyst at Jefferies & Co. in Boston, referring to UBS and MBIA. "If you’re going to celebrate a Fed rate cut, you’re going to buy into oversold financials," which account for about 20% of the S&P 500 Index.

Hogan said he expects the Fed to cut rates by a total of 75 basis points by April and said he wouldn’t be surprised to see a 50 basis point cut on Tuesday. "There's enough of a need on the financial side of the economy to inject liquidity into the system to prevent us from going into recession," and the Fed will probably put its concerns about rising inflation aside for the time being, he said.

Meanwhile, Columbia Management, a unit of Bank of America (BAC), announced it has closed the Columbia Strategic Cash Portfolio, a huge enhanced money fund for institutional investors, after major clients withdrew, having been hit by losses on complex asset-backed securities. Large investors will be redeemed "in kind," getting their share of the underlying securities in the $12 billion fund, while smaller investors will be given cash.

"We’re going to hear more of this, not less, as we sort of move forward," said Hogan. "Structured investment vehicles are causing these to no longer be attractive assets."

Referring to the fact that the BAC had been worth $33 billion just a few weeks ago, he said that once the value of these funds breaks below 100 cents on the dollar, the model breaks down and the funds are no longer viable. Faced with mass redemptions by investors, more money managers can either watch as their fund values drop or close them down just as Columbia has, he added.

In economic news, the National Association of Realtors' pending home sales index bounced 0.6% to 87.2 in October, compared with an upward-revised 86.7 reading in September. The data suggest there will be a gradual increase in existing home sales over the coming year but given how low sales were in the final months of 2007, total sales for 2008 will be only slightly higher than those in 2007, the NAR's chief economist, Lawrence Yun, said in a statement.

Otherwise, except for U.S. trade data, economic reports are fairly sparse until Thursday, when November retail sales, the November PPI, and October's business inventories will be closely watched for what they indicate about the strength of the economy.

January NYMEX crude settled 42 cents lower at $87.86 per barrel on Monday on talk that U.S. fuel inventories will rise as the economy slows and fuel demand softens, according to Action Economics said. Forecasts for warm weather were also having a negative effect on oil prices.

Among the stocks in the news Friday, Citigroup's (C) board is meeting Monday and Tuesday and may decide to appoint Vikram Pandit as its new CEO, the Wall Street Journal reported on Friday. Shares were up 1.3%.

American Mortgage Acceptance Co. (AMC) shares plunged 44.2% after it said it received margin calls on some of its repurchase facilities and interest rate derivative contracts. To meet these margin calls and boost liquidity for future cash needs, the company will sell the remainder of its Fannie Mae and Ginnie Mae debt securities and two commercial mortgage-backed securities. RBC Capital downgraded the stock to underperform from sector perform.

Myers Industries (MYE) shares fell 30.5% on news that GS Capital Partners (GSCP) has requested more time to complete its acquisition of Myers. In consideration for extending the closing date, GSCP has agreed to make a non-refundable payment to Myers of a previously agreed upon $35 million fee.

Adams Respiratory Therapeutics (ARXT) shares jumped 35.8% after it agreed to be acquired by Reckitt Benckiser Group plc for $2.3 billion. That will net Adams shareholders $60 for each share they own.

Celgene (CELG) shares dropped 14.3% after Standard & Poor's said it believes results from the Revlimid clinical trial may delay the drug's FDA approval for front line multiple myeloma, even though S&P reaffirmed its buy rating. Robert Baird says Revlimid's much anticipated front-line multiple myeloma data on a standalone basis were disappointing.

McDonald's (MCD) posted a 4.4% gain in November U.S. same-store sales, 11% higher European same-store sales and 12% higher Asia/Pacific, Middle East and Africa same-store sales. Globally, same-store sales were up 8.2% in November, the fast-food restaurant chain said. McDonald shares closed 2.9% higher.

European stocks finished higher Monday. In London, the FTSE 100 index rebounded from earlier selling to trade 0.16% higher at 6,565.40. In Paris, the CAC 40 index rose 0.56% to 5,750.92. Germany's DAX index climbed 0.49% to 8,033.36.

Major Asian markets finished mostly lower. Japan's Nikkei 225 index edged down 0.20% to 15,924.39. In Hong Kong, the Hang Seng index fell 1.18% to 28,501.10. The Shanghai composite index rose 1.38% to 5,161.92.

Treasury market

Treasuries weakened on speculation rate cuts by the Fed on Tuesday have been sufficiently discounted. Further, investment capital flowed into equities, although in fairly light volume, contributing to a bearish backdrop for Treasuries. The 10-year note fell 09/32 in price to 100-28/32 for a yield of 4.14%. The 30-year bond slid 16/32 to 106-13/32 for a yield of 4.60%.


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