US & World Daily Markets Financial Briefing 02-03-2009

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AIG, HSBC, Woodward Governor

U.S. stocks are down Monday. The Dow Jones Industrial recently fell 1.9% to 6927, and the S&P 500 lost 2% to 720.4. The Nasdaq Composite slid 1.2% to 1361. Among the companies whose shares are actively trading in the session are American International Group Inc. (AIG), HSBC Holdings PLC (HBC) and Woodward Governor Co. (WGOV).

AIG ($0.49, $0.07, 16.64%) reached a new deal with the U.S. government for continued support for its restructuring as the insurance giant posted a record quarterly loss on $64.1 billion in write-downs and charges.

HSBC ($28.52, -$6.28, -18.05%), Europe's largest bank, said it would raise $17.7 billion by selling discounted stock to existing shareholders as it reported 2008 net income dropped 70% and cut its dividend. HSBC also is shutting down its branch network of its U.S.-based HSBC Finance arm, leaving only the selling of credit cards.

Other financial companies trading lower included Bank of America Corp. (BAC, $3.50, -$0.45, -11.43%), CIT Group Inc. (CIT, $2.17, -$0.28, -11.28%) and Wells Fargo & Co. (WFC, $10.69, -$1.41, -11.65%).

Industrial-equipment maker Woodward Governor Co. ($13.50, -$3.72, -21.60%) cut its fiscal-year guidance on lower orders amid the deepening recession and said it would buy HR Textron from Textron Inc. (TXT, $5.13, -$0.52, -9.20%) for about $365 million in cash.

Allied Capital Corp. (ALD, $0.81, -$0.26, -24.54%) swung to a fourth-quarter net loss on another increase of investment depreciation as the leveraged-buyout financier named John M. Scheurer chief executive as it separates the position from that of chairman. The company said it doesn't expect to declare any dividends this year.

All three major ratings firms lowered their credit ratings on MGM Mirage (MGM, $3.12, -$0.39, -11.00%) after the casino operator's request to borrow $842 million under its $4.5 billion credit pact Friday. Moody's Investors Services lowered its probability of default rating three notches further into junk and cut its corporate family rating two notches to B3. Moody's said its ratings remain on watch for further downgrades.

American Capital Inc. (ACAS, $1.20, -$0.15, -11.11%) reported its fourth-quarter net loss widened, in what the company called "an extraordinarily difficult time for our shareholders". And as a result of the fall in asset values, the asset management company is now in violation of its financial covenants for $2.3 billion in unsecured credit and said it had yet to reach any new agreements that would keep it from a fire sale.
 
Brinker International Inc. (EAT, $10.71, -$0.29, -2.64%) entered a smaller $215 million unsecured, three-year revolving credit line to replace an existing pact, which was set to expire in October. The company had about $90 million outstanding on the old credit line as of Dec. 24. The company chose to reduce the size of the credit line because it anticipates lower borrowing needs due to the divestiture of Romano's Macaroni Grill, slowing restaurant growth and its focus on paying back debt.

Chesapeake Energy Corp. (CHK, $14.96, -$0.68, -4.35%) announced that it has cut back its production capacity by 7% through curtailing output at its Haynesville Shale joint venture with Plains Exploration & Production Co. (PXP, $18.36, -$0.78, -4.08%) and that more cuts are being weighed. Meanwhile, the companies agreed to an amendment to their midyear deal that gives Plains the ability to put off an $800 million drilling payment.

Dish Network Corp.'s (DISH, $10.28, -$0.97, -8.62%) fourth-quarter net income rose 24% on increased revenue despite another drop in subscribers, while sister company EchoStar Corp.'s (SATS, $14.90, -$1.48, -9.04%) net loss widened on write-downs and acquisition charges. Dish Network completed the spinoff of EchoStar on Jan. 1.

Moody's Investors Service warned of potential downgrades of Dynegy Holdings Inc.'s (DYN, $1.25, -$0.05, -3.85%) credit ratings after the power generator cut its 2009 guidance on lower expected power prices tied to lower natural-gas costs and reduced demand.

Edison International's (EIX, $26.50, -$0.72, -2.65%) fourth-quarter net income rose 2.8% as gains in its Southern California Edison retail business were nearly offset by weakness in its power-generation operation. Edison International also said it will withhold its 2009 outlook until the California Public Utilities Commission rules on new rates for SoCal Ed.

Investment fund Leucadia National Corp. (LUK, $12.33, -$2.30, -15.72%) late Friday reported it swung to a loss in the fourth quarter on a 76% drop in revenue.

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US Treasury To Provide AIG Up To Additional $30 Billion

The U.S. government is boosting its investment in embattled insurer American International Group Inc. providing the firm with an additional $30 billion in capital but also exposing U.S. taxpayers to additional risk.

The Treasury Department and Federal Reserve announced the third version of the government's bailout of the firm in a joint-statement made in conjunction with the firm's announcement of a fourth-quarter loss of $61.7 billion. In addition to providing up to $30 billion in additional capital to AIG in return for preferred stock, the Treasury Department said it would convert its existing $40 billion of preferred shares into new preferred shares that more closely resemble common stock.

Those steps will be coupled with changes to the Fed's existing $60 billion resolving credit facility for AIG. The Fed and the Federal Reserve Bank of New York plan to take up to a $26 billion preferred interest in two AIG life insurance subsidiaries - American Life Insurance Co. and American International Assurance Co. - as well as make $8.5 billion in new loans to benefit the domestic life insurance subsidiaries of AIG. In addition, the interest rate on the existing credit facility will be modified to reduce the existing floor.

AIG on Wednesday will issue new convertible preferred shares worth a 77.9% stake in the company as part of the overhaul of their government rescue. The company will also now have to comply with much more stringent executive compensation rules put in place by Congress as part of the recently-passed economic stimulus legislation.

The Fed and Treasury said the steps are meant to provide "tangible evidence" of the government's commitment to an orderly restructuring of AIG, and that the cost of not helping the company was judged to be too high.

"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," the Treasury and Fed said in a joint statement.

They noted that AIG, through the various financial contracts it has backed, is a "significant counterparty to a number of major financial institutions." That fact has all but required the government to backstop the firm, as a collapse of AIG would ripple through the market and affect the other major financial firms the government has poured hundreds of billions of dollar into in recent months.

"The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets in the last two months of the year and continued turbulence in the markets generally," the Treasury and Fed said.

Rating agencies reacted to the government's announcement by confirming a number of AIG's current ratings, an important step that will prevent the company from incurring additional losses because of a downgrade. Fitch Ratings confirmed its ratings on AIG's senior unsecured securities and certain insurer financial strength ratings, while Moody's Investors Service confirmed AIG's senior debt rating, giving the company a negative outlook but also confirming many of its insurer financial strength ratings.

The moves by the U.S. government are aimed at keeping AIG healthy enough so the firm can complete a restructuring and start to repay taxpayers for the assistance the firm has received. AIG's funding is already well above the $50 billion that Citigroup Inc. has received through three Treasury programs, as well as the $45 billion that Bank of America Corp. has taken. In both cases with the banks, however, the government has left the door open for providing additional funds and has provided guarantees on hundreds of billions of assets that could lead to huge losses down the road.

AIG Chairman and CEO Edward M. Liddy said in a release of the company's fourth-quarter results that the success of AIG's restructuring plan "centers on ensuring that the unique businesses that make up AIG can thrive on their own. He also cited the importance of "repaying our obligation to the U.S. government."

Meanwhile, AIG posted a net loss of $61.7 billion, or $22.95 a share, compared with a year-earlier net loss of $5.3 billion, or $2.08 a share. The latest results included the restructuring charges and write-downs.

The loss is the biggest quarterly loss in history, breaking the record set by Time Warner in 2002 amid its acquisition of America Online.

AIG's shares were recently up 9.5% at 46 cents in premarket trading. The stock is off 73% so far this year and 99% in the last 12 months.

The company said it will form a general-insurance holding company including its commercial insurance group, foreign general unit and other property and casualty operations, to be called AIU Holdings Inc. AIU will have its own board and management and its creation will help AIG prepare to possibly sell a minority stake in the business.

AIG also said it is considering combining its domestic life and retirement businesses as it looks to boost competitiveness. The combined units would have assets of $246.8 billion.

Liddy said the company has made "meaningful progress" in addressing its liquidity issues, but it is taking more steps to preserve the value of its business amid the economic and capital-market turmoil.

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European Stocks Led Sharply Lower By HSBC

European shares fell sharply on Monday, with banks taking another pounding as HSBC Holdings became the latest lender to ask shareholders for cash to shore up its balance sheet.

The pan-European Dow Jones Stoxx 600 index surrendered 3.8% to 166.44, with the banking sector losing fully 9.4%.

Shares of HSBC (HBC) fell 20% in London, plunging after the global banking heavyweight said that it intends to raise 12.5 billion pounds in the largest-ever rights issue by a U.K. company, while also reporting that its 2008 net profit fell 70% to $5.73 billion.

The lender will also largely shut down its HFC and Beneficial consumer-finance operations in the U.S.  Downbeat sentiment spread to other lenders, with shares of BNP Paribas down 9% in Paris and Deutsche Bank (DB) down 5.6% in Frankfurt.

"Even the strongest banks need to raise capital in order to deal with the impact of the current uncertain environment and fulfill higher expectations regarding capital levels," noted analysts at SNS Securities, speaking about the broader banking sector.

Regionally, the U.K.'s FTSE 100 index fell 4.3% to 3,665.34, the French CAC-40 index dropped 3.7% to 2,602.51 and the German DAX 30 index lost 3.1% to 3,725.01.

Asian stocks traded firmly in the red on Monday, while U.S. stock futures pointed to a broadly lower open after the U.S. government said that it will take new steps to assist insurance and financial-services giant American International Group.

Additionally, Berkshire Hathaway Chairman Warren Buffett said over the weekend that the economy would remain in "shambles" during 2009 and beyond, offering no prediction about what the future may hold for U.S. stocks.

Buffett, known as the "Oracle of Omaha," wrote in his annual letter to shareholders that his acquisition of shares in two Irish banks have turned out badly -- with losses of more than 89%.

AIB in focus Shares of one Irish lender, Allied Irish Banks , have fallen 97% in the last 12 months -- even after factoring in a 7.3% gain they registered on Monday.

Its 2008 net income fell to 885 million euros, from 2.1 billion euros at the same point last year, largely in line with expectations. AIB also said that it expects its balance sheet to remain resilient.

Meanwhile, Swiss-headquartered lenders under pressure included UBS (UBS), shares of which traded down 7.1%, as well as Credit Suisse Group (CS), down 9%, and Julius Baer Holding , down 9.3%.

The losses came as the Swiss nation's iconic private-banking model faces renewed threats from the pursuit of tax cheats by U.S. and European authorities. European leaders recently said they would make cracking down on tax havens a focus of a summit of the leaders of the Group of 20 nations scheduled for April.

Shares of lenders that have a significant presence in Eastern Europe also fell, with Unicredit down 7.1%, Societe Generale down 9.5% and KBC down 11.1%.

Over the weekend, German Chancellor Angela Merkel said she opposes setting up a European Union fund to help out struggling nations in Eastern Europe, according to media reports.

Credit Suisse equity strategists said that emerging and peripheral European countries account for about 30% of European gross domestic product -- and that they are facing a very deep recession.

"Core Europe is not immune to the problems of the periphery," they said, adding that they are expecting profits for European companies to fall 34% in 2009.

"Europe typically does not outperform until both lead indicators turn up and the Federal Reserve raise rates," they said. They're recommending an underweight position in Continental equities.

Ahold trades higher On the move following financial results, shares of Ahold traded up 2%.

The supermarket operator reported that fourth-quarter net income rose 8.8% to 285 million euros. "Despite the continued deterioration of the economic environment, in the first weeks of 2009 we have seen no significant changes in consumer behavior," Chief Executive John Rishton said.

Also after reporting quarterly results, shares of French media conglomerate Vivendi declined 1.6%.

The company swung to a net loss of 1.38 billion euros from a net profit of 521 million euros a year ago, due to a 1.5 billion euro impairment charge on its stake in NBC Universal. But adjusted profit, which excludes most non-recurring gains and charges, for the three months ended Dec. 31 increased to 656 million euros from 585 million euros a year earlier, beating analyst forecasts.

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Euro Enters NY Weaker Vs Dollar, Yen Up
 
The euro was under pressure versus the dollar going into the New York session Monday after euro-zone leaders failed to agree on an aid package for Eastern European countries and due to heightened risk aversion on data.

Manufacturing activity in the euro zone contracted for the ninth consecutive month in February, hitting a fresh record low that was below economist expectations.

The headline figure will add to pressure on European Central Bank policymakers to cut interest rates substantially from 2.0% when they meet Thursday, March 5.

Although another report showed the euro-zone's annual rate of inflation rose to 1.2% last month, an uptick for the first time since June 2008, economists don't expect such a move to continue with the economy slowing.

Meanwhile, in a weekend meeting, Germany opposed the establishment of a European Union fund to bail out countries throughout Europe, despite signs of growing financial strains. Some Eastern European countries opposed the proposal as well.

German Chancellor Angela Merkel also said that rules for joining the euro zone shouldn't be altered. That was another idea suggested to help struggling economies fast-track to euro-zone membership.

"The news will only add to the perception that too little is being done in Europe relative to the U.S. to prevent a deepening crisis both within and just outside of its borders," said Mitul Kotecha, head of global foreign exchange strategy at Calyon. He added that a slide below $1.25 appears "increasingly likely over coming days."

Monday morning, the euro was at $1.2610 from $1.2676 late Friday, and the dollar was at Y97.34 from Y97.67, according to EBS. The euro was at Y122.70 from Y123.83. The U.K. pound was at $1.4103 from $1.4323, and the dollar was at CHF1.1741 from CHF1.1698. The U.S. dollar was at from C$1.2700 late Friday.

The euro did get a brief reprieve with a slightly positive U.S. data release. The Commerce Department said Monday that U.S. consumers increased their spending in January, while the savings rate reached its highest level in nearly 14 years amid a deepening recession. That boosted the common currency versus the dollar some in intraday action.

Personal consumption rose 0.6% compared to the month before, and Personal income increased at a seasonally adjusted rate of 0.4% in January. Economists surveyed by Dow Jones Newswires forecast a 0.3% decrease in personal income during January, with a 0.4% gain in consumer spending.

Currencies could move more after a later release at 10 a.m. EST, the February ISM Manufacturing Index. Traders are also considering the impact of monetary policy meeting decisions this week from the ECB, Bank of England, Bank of Canada and Reserve Bank of Australia.

Analysts at ING say the dollar should stay in demand in response, as most expect rate cuts from all. The BOE particularly is poised to cut and take on quantitative easing, following fresh data Monday that showed the U.K. purchasing managers index for the manufacturing sector fell more than expected to a record low in February.

Separately, the dollar retraced some of the previous week's gains versus the yen overnight Monday. Japan's fiscal year end in March, which often results in yen support on repatriation flows. Analysts say this retracement may be brief though, as April typically sees a pickup in outflows again.

Canada Morning
 
The Canadian dollar is weaker but off earlier three-month lows Monday, after having found some relief in slightly better-than-expected Canadian gross domestic product figures for 2008's final quarter.

The Canadian dollar was pushed lower overnight after global risk aversion intensified when European Union leaders failed to come up with a plan for Eastern Europe. With global equity markets and commodity prices broadly lower in response, the Canadian unit sank to its lowest level since Dec. 5 at C$1.2886 before recovering on the back of the Canadian GDP data.

Canada's national statistical agency said that GDP in the last quarter of 2008 contracted only 3.4%, defying the most dire projections of a decline of 4.0% or more.

The dollar was recently at C$1.2830 from C$1.2689 late Friday.

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Top Energy Stories Of The Day

 
CRUDE FALLS $2 ON MACRO-ECONOMIC CONCERNS
Crude oil futures hand back more than $2 of last week's gains as concern surrounding the outlook for the global economy and associated energy demand weigh on sentiment.

 
RELIANT POSTS LOSS, INKS SALE OF TEXAS RETAIL OPS
Reliant Energy swings to a fourth-quarter net loss of $437.7 million, or $1.25 a share, amid $543 million in write-downs and hedging losses. The electricity supplier will be selling its Texas retail business, which is the bulk of its distribution business, to NRG Energy Inc.

 
OBAMA EMISSION PLAN TO RAISE ELEC RATES 40%
Duke Energy CEO believes a proposal by President Barack Obama to place a price on carbon emissions would drive up electricity rates in some areas of the U.S. by 40% and warned that it could also lead to "a redistribution of wealth."

INDIA'S RELIANCE: CHEVRON WILL EXIT HUGE REFINING VENTURE
Reliance Industries is one of India's largest conglomerates and will be buying back Chevron 5% stake in a mammoth new oil refinery. Chevron is exiting a project it once saw as the cornerstone of its market, specifically in Asia.

 
US OIL FUND INVESTIGATION SIGNALS MORE AGGRESSIVE CFTC
A probe into how the United States Oil Fund and others conducted themselves during a crucial trading period marks a renewed attempt by commodities regulators to rein in what they view as excessive oil market speculation.

 
CHINA OFFICIALS LOOK TO ENERGY TO REIGNITE ECONOMY
China's ruling Communist Party will be looking at ways to include the energy sector in efforts to revive economic growth when the National People's Congress opens in Beijing this week.

 
ASIA'S BIOFUEL DREAMS SHELVED AS CRUDE TUMBLES
Hopes of a biofuel bonanza for Southeast Asia, raised when sky-high oil prices made the search for alternative fuels a priority, have been shelved as global fortunes and crude prices nose-dive.

 
JAPAN UTILITIES TARGET OIL AS POWER DEMAND WEAKENS
Japan's downwards economic spiral is further undercutting its demand for fuel, with imports of crude oil shrinking at a faster rate than those of coal or natural gas, the country's main energy users say.

 
WRONG REASON TO TAP RESERVES
Unlike some of the other black holes into which Washington pours money these days, the Strategic Petroleum Reserve's value is grasped easily. If needed, it could replace about 44% of daily U.S. oil imports for more than five months, writes Liam Denning.

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