Morning Update

Citigroup Bailout Bolsters Markets

Following the late-day rise of almost 500 points in the Dow, markets are higher today on news that Citigroup will receive capital and a government guarantee on troubled assets. Johnson & Johnson announces an acquisition. President-elect Barack Obama is expected to introduce his economic team, following an announcement Saturday of an aggressive stimulus plan. Treasuries are lower. European markets are higher, but Asian markets are lower.

As of 8:29 a.m. ET, the December S&P 500 Index Globex futures contract is 13 points above fair value, the Nasdaq 100 Index is 23 points above fair value, and the DJIA is 114 points above fair value. Crude oil is up $1.31 to $51.24 per barrel, and gold is up $26.40 per ounce at $818.20. The overnight LIBOR rose 11 bp to 0.81%, and the three-month LIBOR rate increased 1 bp to 2.17%.

Late Sunday, Dow member Citigroup (C $5) entered an agreement to receive an injection of $20 billion in capital and a guarantee worth up to $306 billion in troubled assets from the U.S. government. The deal calls for Citi to absorb the first $29 billion in losses it sustains from residential mortgages, leveraged loans, collateralized debt obligations and other assets. Three government agencies, the Treasury Department, the Federal Reserve and the FDIC, will stand behind 90% of the remaining losses, which could amount to $249 billion. For the injection, the government will receive preferred shares in the bank and a dividend rate of 8%, and warrants to buy 254 million common shares at $10.61. In return Citi will cut its quarterly dividend to $0.01 per share and agree to restrictions on executive compensation and bonuses. There was no demand that current management step down. Citi will also modify mortgages to stem foreclosures. Shares are sharply higher.

President-elect Barack Obama is expected to announce his economic team today, with the expectation that Federal Reserve Bank of New York President Timothy Geithner will be nominated Treasury Secretary helping boost the Dow by almost 500 points on Friday. Other members include Larry Summers as head of the National Economic Council, Peter Orszag to head the Congressional Budget Office and Gov. Bill Richardson as Commerce Secretary.

Citing the risk of falling into a deflationary spiral, Obama announced an aggressive two-year stimulus plan in a Saturday radio address. The plan aims to create or save 2.5 million jobs by 2011 by rebuilding infrastructure, modernizing schools, and developing alternative energy sources and more efficient cars.

Housing data on tap

October existing home sales will be out later today, with economists surveyed by Bloomberg estimating a 5.00 million unit annual pace, down from the 5.18 million reported for September. September spiked to a one-year high, as price declines in foreclosed homes boosted sales, with foreclosure-related sales comprising 35-40% of sales. However, since the last reading the economy has taken a leg down, tightening access to credit, increasing unemployment and lowering consumer sentiment. Treasuries are down modestly.

European shares lifting

Stocks in Europe are higher today on news that Citigroup has been given a lifeline. German property lender Hypo Real Estate Holding AC (HRX $2) rose on news it received a 20 billion-euro debt guarantee from the government's rescue fund. Standard Chartered Plc (STAN $7), U.K.'s third largest bank, fell on plans to raise capital. Swiss drugmaker Roche Holding AG (ROG $156) climbed after releasing news that showed the Avastin cancer drug helped women with breast cancer live longer without their disease progressing than chemotherapy alone. The German Ifo Institute measure of business confidence fell to 85.8 in November from 90.2 in October, the lowest level in almost 16 years, and below the survey of economists by Bloomberg forecast of 88.7. The U.K. is expected today to outline a stimulus plan worth more than 15 billion pounds, or about 1% of GDP.

Asian markets mixed

Asian markets opened lower, as Friday's worries about Citigroup in the U.S. carried over into market sentiment. Losses were pared after the announcement of the Citigroup rescue plan. The Australian S&P/ASX Index closed up 0.25%, the Hang Seng Index ended down 1.6% and Japan's market was closed for a holiday. Suncorp-Metway Ltd. (SUN $7) Australia's third- largest insurer, fell after increasing its forecast for bad loans. Chinese stocks were down in disappointment that the government did not cut the interest rate over the weekend, as some investors had speculated. The Chinese government unveiled a list of possible investments that total $1.4 trillion, demonstrating how some of the $586 billion stimulus plan announced Nov. 9 might be spent. Investors remain skeptical, with the belief that many of the projects were already underway or planned.