Friday, January 2, 2009

Wall Street Breakfast: Must-Know News

Wall Street Breakfast: Must-Know News

by SA Editor Rachael Granby

  • 2009: Hoping for a turnaround, bracing for a thud. 2008 was a tumultuous, messy year, shaking investors' belief in basic market premises, including the value of the buy-and-hold strategy and the idea that stocks will outgain other assets over time. Volatility was startling, the stock market had its third worst year in over a century and the government spent billions of dollars frantically trying to plug holes in the economy. Some analysts believe a dismal '08 at least provided a bottom to this market, citing November's multiyear lows and the upswing that followed, though others expect another sag in 2009. Forecasters for 2009 have covered the full range of outlooks, from continued heavy losses to healthy recovery. Investors, meanwhile, are hoping 2009 brings a turnaround, but aren't counting on one.
  • Bank deal bonanza. Bank of America (BAC) completed its purchase of Merrill Lynch (MER) yesterday, ending Merrill's 95-year run as an independent broker. The purchase came out to around $33B in stock and has created what is now the largest U.S. bank with around $2.7T of assets. Also completed was the roughly $12.7B purchase of Wachovia (WB) by Wells Fargo (WFC). The merger more than doubles the size of Wells Fargo and creates the fourth-largest U.S. bank by assets.
  • Chrysler still on the hook. General Motors (GM) received $4B of federal money but Chrysler is still waiting for the first installment of its federal bailout. It's unclear why GM received money before Chrysler, but Treasury officials assure they are "working expeditiously with Chrysler to finalize that transaction." Officials added, however, that it's at their discretion on a case-by-case basis to decide when automakers receive emergency aid. CEO Robert Nardelli called discussions with the Treasury 'positive' and 'productive,' and expressed his hope that financing would be finalized as soon as possible.
  • City National's bank bailout gets a second look. The Treasury Department's inspector general is examining the decision to award bailout funds to City National Bank (CYN), part of a growing concern that the bank bailout isn't working well, or at all. In a document released this week, Treasury's Paulson admitted the difficulty of keeping track of the funds distributed and their effects on the economy. The City inquiry is not based on suspicion of any wrongdoing; it's being used as a case study review to see how the Treasury's bailout has been working and why certain institutions were selected to participate.
  • FDIC goes back to the future. With at least 171 banks on the FDIC's 'problem list,' the agency is turning to a tool last used during the savings and loan crisis. Called 'loss sharing,' the mechanism provides an incentive for healthy banks to take on the troubled assets of a failed institution, with the government agreeing to cover the majority of future losses. The FDIC tried out the model several times in 2008, including in its initial rescue effort for Wachovia (WB) and as part of an aid package to Citigroup (C), and is feeling out industry interest in the approach.
  • Steel industry looks for stimulus. The ailing U.S. steel industry (NUE, X, MT) is pressuring President-elect Obama for a public works initiative that could be worth $1T over two years to boost flagging demand for U.S.-made steel. "What we are asking," Nucor CEO Daniel DiMicco says, "is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a 'buy America' clause."
  • Time Warner wants its MTV. Viacom (VIA) and Time Warner Cable (TWC) reached a last minute deal on a new programming agreement, preventing popular Nickelodeon, Comedy Central and MTV television shows from being pulled off the cable service. The companies' previous contract expired New Year's Eve and failure to close a new deal would have affected 13.3M Time Warner customers. Details of the deal were not disclosed, though sources say a compromise was reached on the key issue of increasing affiliate fees.
  • UBS cashes out of BoC. UBS (UBS) sold its 1.3% stake in Bank of China for $808M, netting a $316.4M profit. A three-year lockup period on the holdings expired earlier this week. The sale marks the first withdrawal by a foreign strategic investor in a Chinese lender as firms consider cashing out of investments to bulk up their balance sheets. The lockup period also expired for Royal Bank of Scotland (RBS), Bank of China's second biggest shareholder with an 8.25% stake. RBS has not yet expressed an interest in selling the stake.
  • Quotables. Warren Buffett's Berkshire Hathaway (BRK.A) fell 32% in 2008, marking its worst performance in over thirty years. Buffett, however, appears unfazed. "It's happened to me three other times. It happened when it went from 90 to 40 back in 1974, and it happened in 1987. It went down 50 percent in 1998-to-2000. I mean, I hope I live long enough so it happens a couple more times."

Today's Markets

  • Hong Kong jumpstarts the new year with a solid gain. Elsewhere in Asia markets were modestly higher. Hang Seng +4.55% to 15,043. BSE +0.55% to 9,958. Kospi +2.9% to 1,157. Japan and China closed.
  • In Europe, markets start things off on the right foot. London +1.2%. Paris +2.3%. Frankfurt +1.9%.
  • U.S. stock futures are modestly higher, while oil retreats from Wednesday's huge gain. Dow futures +0.6% to 8780. S&P +0.6% to 906. Nasdaq +0.5%. Crude -6.4% to $41.70. Gold -1.7% to $869.40.

Friday's Economic Calendar

Seeking Alpha editor Eli Hoffmann contributed to this post.

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