Morning Update

Bank of America Deal Aids Shares

Traders are shrugging off a big loss at Bank of America after the government said it will provide $20 billion in new capital and backstop some of the losses from its purchase of Merrill Lynch, which is overshadowing the weak economy and troubles in the financial sector. Citigroup also reported a sizeable loss and will separate into two units, while Intel matched reduced expectations. In economic news, consumer prices continued to decline, while Treasuries are falling amid the increase in equity prices. Global markets are stronger.

As of 8:38 a.m. ET, the March S&P 500 Index Globex futures contract is 10 points above fair value, the Nasdaq 100 Index is 11 points above fair value, and the DJIA is 97 points above fair value. Crude oil is up $0.26 to $35.66 per barrel, and gold is up $24.30 at $931.60.

Dow member Bank of America (BAC $8 ¹) swung to a 4Q loss, slashed its quarterly dividend to $0.01 per share, and will receive assistance from the federal government for the purchase of Merrill Lynch. In 4Q, the company recorded a net loss of $1.8 billion, or $0.48 per share, down from a net profit of $0.05 per share a year ago and worse than the Reuters estimate of a $0.10 per share profit. The results did not include a preliminary loss at Merrill Lynch of $15.3 billion.

Bank of America said Merrill's results were driven by "severe capital markets dislocations," which forced the banking giant to turn to the government for assistance. The government will receive $20 billion in preferred stock at a dividend of 8%, and it has agreed to provide protection against further losses on $118 billion in selected capital market exposure. Meanwhile, the poor performance at BAC was caused by escalating credit costs - the provision for credit losses more than doubled to $8.5 billion versus a year ago - and significant write-downs and trading losses in the capital markets businesses. BAC cited the deepening economic recession and the extremely challenging financial environment, which "significantly intensified" in 4Q.

Dow member Citigroup (C $4) reported a net loss of $8.3 billion, or $1.72 per share, and announced plans to separate into two units, Citicorp and Citi Holdings. Citicorp will include "core" Citi properties and will have a presence in high-growth emerging markets around the world. Citi Holdings will be a group of non-core businesses including brokerage and asset management and local consumer finance such as CitiFinancial and CitiMortgage. It will also encompass assets covered by the loss-sharing agreement with the government in the ring-fenced portfolio.

Intel (INTC $13) confirmed 4Q revenues fell 23% to $8.2 billion and said EPS fell 89% to $0.04 per share, matching the Street's reduced forecast amid falling worldwide demand. The Dow component and leading maker of microprocessors for PCs said that due to the uncertain environment and limited visibility, it will not provide a revenue outlook at this time. But for internal purposes it is planning for revenue in the "vicinity of $7 billion." The gross margin is expected to fall from 4Q's 53% to the low 40s. Intel said "snap-back" demand is unlikely in the current downturn but gross margins will probably return to the historic range in 2H09.

Subsiding inflation

Led by an 8.3% drop in energy, the Consumer Price Index fell 0.7% in December, less than an expected decline of 0.9% per Bloomberg. The core rate, which strips out food and energy, was unchanged and just below the forecast of 0.1%. The three-month compounded annual rate of core inflation is now -0.3%, indicating that the steep recession that has engulfed the US economy has brought core inflation to roughly zero in a very short time. Year-over-year (y/y), core inflation fell from 2.0% to 1.8%. The headline rate fell from 1.1% y/y to 0.1%.

Industrial production and capacity utilization for December will be released just before the market opens. A 1.0% drop in production is expected and capacity utilization is forecast to decline from 75.4% to 74.5% as businesses cut back amid rising inventories and declining sales. Also, look for preliminary University of Michigan consumer sentiment at 10 a.m. ET. A drop from 60.1 to 59.0 is expected.

Treasuries are solidly lower amid the improvement in equities. The bond market will close at 2 p.m. ET today in observance of the Martin Luther King holiday on Monday. The stock and bond markets will be closed on Monday.

Europe powers ahead

A fresh injection of capital into Bank of America is brightening spirits in Europe, helping shares register sharp gains and snap a seven-day losing streak. Banking stocks are pushing ahead on the news, while the mining and steel sectors are among the biggest gainers in afternoon action. Retail is also receiving strong support after the Dutch supermarket Royal Ahold (AHONY $11) reported 4Q sales that came in at the top end of the Street's estimates, and Carrefour (CRERF $34 ), the world's second biggest retailer, is also rising despite reporting the smallest rise in quarterly revenue growth in over five years amid cutbacks by consumers. Sales are expected to remain sluggish, the company said.

US plan to support BoA ignites Tokyo advance

The US government's plan to assist Bank of America and short covering sparked strong gains in Tokyo, with the Nikkei 225 Index closing up 2.6%. Banking stocks warmed to the news that Banks of America will receive aid, while shares of Sony (SNE $23), Honda (HMC $21), and Toyota (TM $64) all posted strong gains as the yen weakened and aided exporters. Elsewhere, Sony Ericsson, a joint venture between Sony and Ericsson (ERIC $7), swung to a 4Q net loss of 187 million euros versus a 373 million euro profit a year ago. Sony Ericson said revenues fell and it shipped 24.2 million phones in the quarter, down from 30.8 million a year ago as the global recession hampered sales.

South Korea's LG Display (LPL $8) posted a record net loss in 4Q as a fine tied to price-fixing, falling demand, and falling prices pressured results of the world's second-largest maker of flat-panel LCD screens. The company said a recovery in demand seems difficult in 1Q but it looks as if the LCD market has passed the "worst phase" in December.