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Monday, March 2, 2009

ADVFN World Daily Markets Bulletin - Mar 2, 2009

US Stocks at a Glance

BEFORE THE BELL: Stock Futures Indicate Dow To Fall

U.S. stock futures dropped Monday as financial giants like American International Group and HSBC Holdings took moves to raise more capital and as Warren Buffett said the economy would be in "shambles" this year.

Futures on the Dow Jones Industrial Average indicated a retreat below the 7,000 level, as the March contract dropped 147 points to 6,905.

S&P 500 futures fell 17.5 points to 716.70 and Nasdaq 100 futures fell 24 points to 1,093.00. U.S. stocks dropped on Friday, and closed the month with its worst performance since 1933. The S&P 500 dropped 10.9%, and has dropped 18.6% so far this year, the worst start to the year on record.

"The path to least resistance remains down," said Alec Young, market strategist at Standard & Poor's. He said Friday's job report might lead to a "real capitulation."

Mary Ann Bartels, a technical analyst at Merrill Lynch, said if there isn't a reversal soon another 10% downside could come.

"A reversal is needed this week or 700 to 665 on the S&P 500 are the next levels for the market to test, or an additional 5% to 10% downside," she told investors in a note to clients.

Monday's key report will be the Institute of Supply Management's report on manufacturing sentiment for February. Personal income data for January also will be released, as will January construction spending.

Over the weekend, Germany as well as some Eastern European countries opposed the idea of an Eastern European-wide bailout fund. The Hungarian forint dropped more than 2% against both the euro and the dollar.

Meanwhile, the euro dropped against the dollar on the Eastern European worries, and the dollar fell vs. the Japanese yen.

Oil futures dropped over $2 a barrel, while gold futures rose over $5 an ounce. Bond yields on U.S. government debt fell, and the three-month dollar LIBOR rate rose for the fifth straight session, to 1.27%.

HSBC, Europe's largest bank, dropped 20% in pre-open trade as it 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 banks also traded lower: Wells Fargo, which like HSBC has been one of the stronger banks during the credit crunch, lost 10%.

American International Group will receive more federal assistance of up to $30 billion, the U.S. government announced, as the insurer reported a fourth-quarter loss of over $61 billion.

Buffett's Berkshire Hathaway reported a drop in profit to $4.99 billion in 2008 from $13.21 billion. In his annual letter to shareholders, Buffett said he couldn't predict how stocks would perform this year and said he regretted investing in ConocoPhillips.

Overseas markets slumped, with the Nikkei 225 dropping 3.8% in Tokyo and the FTSE 100 down 4.2% in London.

Bonds

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 counter party 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 pre-market 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.

European Shares

European Stocks Seen Lower On Banking Woes
European stocks are expected to open lower Monday, tracking heavy falls in U.S. markets Friday and Asian markets overnight, on concern that the U.S. Treasury will need to increase its role still further in the nation's financial institutions to stabilize the troubled sector.

"The slow and steady demise of global banks continues to undermine market sentiment, both near and far," said Ben Potter, trader at IG Markets.

Potter called London's FTSE 100 index to open down 77 points, or 2.0%, at 3753.09, Frankfurt's DAX index down 62 points, or 1.6%, at 3781.74 and Paris's CAC-40 index down 51 points, or 1.8%, at 2651.48.

With Monday's focus tipped to be on the banking sector once again, HSBC Holdings' full year 2008 earnings are expected to gather much attention after the banking giant announced it will raise GBP12.5 billion through the largest-ever rights issue by a U.K. company.

"What is perhaps most worrying here is the fact that HSBC was seen as better placed than most of its peers, and essentially any hope that confidence was returning to equities has been quashed once again," said Matt Buckland, trader at CMC Markets.

Earlier, Asian share markets were sharply lower Monday amid worries about the health of the U.S. banking sector, with financial stocks coming under pressure.

Japan's Nikkei 225 was down 3.8% at 7280.15, while South Korea's Kospi Composite was down 4.1% to its lowest intraday level since December 5 and Hong Kong's Hang Seng index was down 3.7%.

Concerns about the financial sector weighed heavily on investor sentiment in the region after the Wall Street Journal quoted people familiar with the matter as saying American International Group Inc. would receive up to an additional $30 billion in Federal assistance as part of a revamp of its government bailout.

Citigroup's shares slumped 39%, as the U.S. Treasury Department said it will convert up to $25 billion of the bank's preferred shares to common stock, a move that could potentially dilute shareholders' ownership by more than 70%.

In the foreign exchanges, risk aversion prompted by the banking sector's woes sent the euro and Asian currencies tumbling, as sliding share markets prompted players to favor the dollar.

Risk aversion also sent spot gold higher, to $954.50 per troy ounce from $939.00 late in New York Friday, although Fairfax analyst John Meyer said the metal has room to fall in the near term.

"We are bearish on gold as profit-taking lowers prices following the run to the $1000 level. There is little sign of much activity from the jewelry market and investment inflows appear weak," said Meyer.

In the oil market, April Nymex crude oil futures were lower at $43.77 per barrel, down from $44.76 late New York Friday, after rising last week to one-month highs. They were hurt by Friday's poor U.S. gross domestic product data.

On the economic front, the euro-zone manufacturing purchasing managers' index for February is expected at 0900 GMT, while the U.K. February manufacturing PMI is due at 0930 GMT.

Forex

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 up tick 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.

Commodities

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

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