Financial stocks as well as the commodity-related stocks led the market lower today. With today’s 2% decline, stocks are down about 3.5% year-to-date. The talk on the street has reverted back to a prolonged recession. Just two weeks ago everyone was optimistic for a big market rally and an economic recovery in the second half of this year…not so fast though!
Commodities were the biggest losers. Crude oil futures for February delivery fell 8%. The futures curve continues to steepen as traders are getting paid to wait to sell their oil as demand wanes. The difference between the February and March contracts is 16% and between the Feb ’09 and Feb ’10 contracts 56.5%. Wheat, soybeans, and corn were limit down (the maximum amount by which the price of a futures contract may decline in one day) thanks to a bearish crop report. Fertilizer, infrastructure, and steel stocks were also very weak. Natural gas futures actually finished the day up as the nation is being hit by a severe cold front. Gold and silver were also down big.
Money flowed back into the Treasury market as the flight-to-safety trade resumed. The yield on the 10-year note fell to 2.31% from 2.41%, and the yield on the 30-year bond fell to 2.99% from 3.055%. As yields decrease, prices increase.
In my opinion, as well as many of the analysts, the three financial companies with the fewest problems are JPMorgan (JPM), US Bancorp (USB), and Wells Fargo (WFC). However, these three names have led the market lower recently. USB actually made a new closing low today. Since the December 8th highs, JPM is down 34%, USB is down 27.5%, WFC is down 27.3%, and the XLF (financial ETF) is only down 20.75%. Is this decline in the best-of-breed companies telling us something – that the worst is yet to come? Or is the market wrong?
After the bell, JPMorgan announced it will release its fourth quarter results this Thursday instead of next Wednesday. I see this as a positive. JPMorgan might surprise investors with better-than-expected results and to prevent a further slide in its stock price it will report sooner rather than later.
The big financial news, though, had to do with Citigroup and Morgan Stanley. The two companies are near a deal that would involve Citigroup selling a majority stake of Smith Barney, its brokerage division, to Morgan Stanley for $2.5-3.5 billion. Why is this big news? Why did shares of Citi fall 17%?
Citigroup is in desperate need of more capital. The company has already tapped the federal government for $45 billion, and some are saying it will need more money to cover future losses. From this deal, Citigroup may recognize a gain of $10 billion after taxes.
What does not make sense, though, is why has Citigroup decided to sell its best business at the market bottom? Just a few weeks ago, CEO Vikram Pandit said Smith Barney would not be sold. It seems as though someone, most likely the government, is holding a gun to Citi’s head and forcing it to sell Smith Barney in order to improve its cash position. Morgan Stanley, on the other hand, is getting an absolute steal. The newly converted bank holding company is expanding its clientele and diversifying its business model. Last quarter, Smith Barney generated $2.576 billion in revenue which is about the price Morgan Stanley will pay for the business. A pretty sweet deal if you ask me.
Weakness in the financials could also be attributed to President Elect Obama asking Congress for the second $350 billion of TARP money. Stocks reacted negatively because the conditions for using the second allotment of TARP money will be very restrictive and unfavorable for the financial companies. In the letter to Congress, Obama’s team explained that there will be: 1) strict and sensible conditions of executive compensation and dividend payments, 2) full accounting of how money has been spent, 3) more transparency to measure lending by firms receiving financial rescue funds, and 4) sweeping efforts to address the foreclosure crisis (Source: CNBC TV). Obama also explained that he wants to enter his presidency with “ammunition” if problems were to arise.
An interesting piece of information: Today’s change in JPMorgan’s and Well Fargo’s market caps – 3.85B and 4.46B, respectively – exceeds General Motor’s total market cap of 2.5B. Market cap is the value of a company.
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