Stocks Edge Ahead
Final 3Q GDP was left unchanged, showing an annual rate of decline of 0.5%, and stocks did not react and are holding onto modest gains ahead of two key housing reports later this morning. In other news, the ratings agencies continue to offer gloomy outlooks for the automakers, while Red Hat beat the Street's profit estimate, and Textron cut guidance and announced layoffs. Treasuries are lower and world markets are mixed.
As of 8:34 a.m. ET, the March S&P 500 Index Globex futures contract is 4 points above fair value, the Nasdaq 100 Index is 4 points above fair value, and the DJIA is 48 points above fair value. Crude oil is down $0.06 to $39.85 per barrel, and gold is down $2.80 per ounce at $844.40. The overnight LIBOR rate rose 1 bp to 0.12%, and the three-month LIBOR rate was unchanged at 1.47%.
Standard & Poor's said that despite the nearly $21 billion in loans provided by the US and Canada, bankruptcy risk remains high for the Big Three and it is not likely to raise credit ratings above the 'CCC' category in the near future. In addition, S&P lowered its issue-level ratings on the unsecured debt of General Motors (GM $4) from 'CC' to 'C.' At the same time, the agency revised its recovery rating on GM's debt to '6' from '4', indicating that lenders can expect to receive negligible (0 to 10%) recovery in the event of a payment default. S&P cited US and Canadian government loans, which it says will lead to a significant decrease in value for unsecured debt holders in the event of a bankruptcy or a default in payments.
Moody's cut its corporate family rating and probability of default rating of Ford (F $3) to 'Caa3' from 'Caa1' and said the outlook is negative. The downgrade reflects the increased risk that Ford will have to undertake some form of balance sheet restructuring in order to achieve the same UAW concessions that GM and Chrysler are likely to achieve as a result of the recently-approved government bailout loans. Moody's said that Ford must have UAW parity with its domestic competitors and if it does not need government funding, the UAW is unlikely to make concessions unless creditors also bear some of the pain.
Red Hat (RHT $12) reported 3Q adjusted profits of $0.24 per share, easily topping the Reuters forecast of $0.17, on a 22% rise in revenues to $165.3 million. The provider of Linux software said the weak economy helped the company because businesses must look for "low-cost, more flexible alternatives, which favors open source and Red Hat." The company offered mixed guidance for 4Q.
Textron (TXT $15) said it plans to exit all of Textron Financial Corp's commercial finance business. As a result of continued market stress and the impact of the exit plan, Textron intends to increase the reserves at the unit. The company also downwardly revised 4Q profit guidance because of weakness at its manufacturing business and it plans to eliminate about 2,200 positions, or about 5% of its workforce.
GDP left unrevised, market looks to housing data
Final 3Q GDP was left unrevised at an annualized decline of 0.5% as expected. Personal consumption dipped 3.8%, versus the preliminary figure of 3.7%, and just below the Bloomberg estimate of a 3.7% drop. The core PCE Index increased 2.4%, down from the prior number of 2.6%, and the GDP Price Index increased 3.9% versus the earlier figure of 4.2%. Treasuries remain lower.
New home sales and existing home sales for November will be released at 10 a.m. ET. New home sales for November are expected to fall 4.2% to 415,000 units on an annual basis. Existing home sales are expected to be drop 1.0% to 4.93 million units on an annualized basis.The deepening recession and weak consumer confidence have pressured sales and the last flare-up in the credit crisis has forced lenders to tighten credit standards, which has added to the woes in the housing market. Final University of Michigan consumer sentiment will also be released and a drop from 59.1 to 58.8 is anticipated.
Europe holds its ground
Stocks in Europe are off the peaks of the session but remain in positive territory and are trying to snap a four-day losing streak. Travel and leisure stocks are benefitting from oil that dipped below $40 per barrel but auto and automotive-related shares are limiting gains among the major indices. Defensive issues are also bolstering the market. In economic news, 3Q GDP in the UK was revised downward from the initial report of a 0.5% quarter-over-quarter decline to a decline of 0.6%, the biggest drop in 18 years. Manufacturing led the drop in activity and the economy also experienced weakness in the service sector. Separately, UK mortgage approvals fell to a new low in November, signaling that housing continues to decline.
China leads sell-off after disappointing rate cut
China's Shanghai Composite Index slid 4.6% and led a broad-based sell-off in Asia after traders had their first chance to react to a disappointing rate cut by the People's Bank of China. Beijing has now cut rates by five times since September but the latest 27 bp reduction in its key rate was seen as a disappointment by many given the magnitude of the downturn in developed nations and growing signs that China's previously fast-growing economy has stalled, or worse, has begun to contract.
Stocks in South Korea closed down 3%, with automakers among the big losers after Toyota (TM $6) announced it will report an operating loss. Kia Motors closed down nearly 15%, and Hyundai Motor (HYMLF $58) lost 10.4%. The market in Japan was closed for a holiday.
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