Morning Update

Fed Actions Help Stocks Maintain Traction

As has been the case in the past couple of sessions, stocks are solidly higher in early action after receiving a boost from more aggressive actions by the Federal Reserve to help further improve the credit markets. In equity news, Hewlett-Packard reiterated its 4Q profit results, Starbucks announced that its sees negative same-store results, and BHP Billiton shelved its $60 billion bid for Rio Tinto. On the economic front, 3Q GDP was revised slightly lower. Overseas, stocks are higher.


As of 8:39 a.m. ET, the December S&P 500 Index Globex futures contract is 18 points above fair value, the Nasdaq 100 Index is 3 points above fair value, and the DJIA is 111 points above fair value. Crude oil is down $0.80 to $53.70 per barrel, and gold is up $6.50 per ounce at $826.00. The overnight LIBOR rate increased 12 bp to 0.93%, and the three-month LIBOR rate rose 3 bp to 2.20%.

US output revised slightly lower

Preliminary 3Q GDP, the broadest measure of economic output, was revised from a decline of 0.3% on an annualized basis, to an annualized drop of 0.5%, in line with the Bloomberg forecast. Personal consumption worsened from a drop of 3.1% to 3.7%, lower than the estimate of a 3.2% decline, indicating that consumers pulled back further on spending amid the weakness in the economy and the problems in the credit markets. The core PCE Price Index, moderated from 2.9% in the initial 3Q reading to 2.6%, below the forecast to remain at 2.9%. Treasuries are higher.

Just ahead of the opening bell, the S&P/Case-Shiller Home Price Index for September will be released with economists expecting a decline of 16.9% year-over-year, after a 16.6% decline in August (economic calendar ). Also look for the Consumer Confidence Index, due out at 10 am ET, and if forecast to remain at 38.0.

The health of the housing market is being closely watched by market participants, as the stability in housing prices is key to consumers' balance sheets. The increasing rate of foreclosures lowers prices further, contributing to even more foreclosures in the future. Earlier this month, RealtyTrac reported that foreclosures were up 5% in October from September, reflecting a 25% increase from October 2007. Despite plans to receive capital injections, banks have been hoarding capital in fear of future needs to boost capital, as underlying mortgages continue to decline in value. The concerns on the prospects for deflation weighed significantly on markets last week.

Fed remains aggressive

The Federal Reserve announced more measures to try to shore up the consumer-finance market by creating the Term Asset-Backed Securities Loan Facility (TALF). The TALF is a facility that will help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). In related news, under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department-under the Troubled Assets Relief Program (TARP)-will provide $20billion of credit protection to the FRBNY in connection with the TALF.

Additionally, the Fed said it will also purchase up to $100 billion in Government Sponsored Enterprise (GSE) debt through a series of competitive auctions beginning next week and it will also purchase up to $500 billion in mortgage-backed securities backed by the GSEs Freddie Mac (FRE $0.45 ¹) and Fannie Mae (FNM $0.34).

US Treasury Secretary Henry Paulson is scheduled to hold a press conference at 10 am ET today. Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest commentary Recovery Watch 2009 that it is crucial to look not only at economic realities, but also at the reactions of policymakers in response to recessions. Read her entire article, and possible signs of recovery from a recession that she has believed we entered at the end of 2007, at www.schwab.com/marketinsight.

Major mining deal shelved

Stocks in Europe have erased early losses and are moving higher in afternoon action as banks and energy issues are leading the charge, despite the announcement that BHP Billion (BHP $33) is scrapping its more than $60 billion bid to acquire Rio Tinto (RTP $146). The mining giant blamed the recent precipitous decline in commodity prices and the seized credit markets, as well as, "continued deterioration of near-term global economic conditions," for its decision to walk away from the bid. Shares of RTP are down over 30%, while BHP is up over 10%. Banks are getting their support from continued optimism from Citigroup's (C $6) over $300 billion in government backing as well as comments from Bank of England Governor Mervyn King that financial institutions may need more capital as the "single most pressing challenge" facing policy makers is to revive the flow of credit through the economy. King's comments come after the UK's pre-budget report yesterday, which outlined a stimulus package that is more than 1% of its GDP.

Citigroup's aid and miners woes fade to lead Asia higher

After being closed for a holiday yesterday, stocks in Japan had their first chance to react to the news of Citigroup's governmental backing, as financials led a broad-based rally. Also, commodity issues, following steep gains in crude oil and gold prices yesterday, helped support an advance across Asia, as news of BHP Billiton's abandoned deal to acquire Rio Tinto came late in the day, after the close of the Australian markets. The run in mining issues came despite the announcement that Nippon Steel (NISTY $30), the world's second largest producer of metal according to Bloomberg, will double planned production cuts due to slowing demand. The company's president said the steel firm plans to lower output by about 2-2.2 million metric tons in the six months ending in March, as the "financial crisis has started to affect the real economies." He added that, "If steel demand gets worse, we may have to increase production cuts."