Morning Update

Government Debt and Banks in View, Redux

Futures are pointing lower after Citigroup priced a share offering that was lower than the government’s initial cost and Greece received the second credit rating downgrade this month. Overseas markets were lower on concerns that a rate hike cycle, contemplated after yesterday’s Fed meeting, could begin given an economic recovery, but that an early exit could be detrimental given still festering problems including government deficits that could necessitate lower spending or raising taxes. The dollar is continuing to gain support, pressuring shares of commodity-oriented companies. Bank of America is making news, appointing insider Moynihan to the CEO post. In equity news, FedEx reported earnings that beat the street, but gave disappointing guidance, while General Mills posted profits that were better than expected on lower commodity costs. Initial jobless claims unexpectedly rose, and Treasuries are higher. Overseas markets are lower.

As of 8:36 a.m. ET, the March S&P 500 Index Globex future is 8 points below fair value, the DJIA is 63 points below fair value, and the Nasdaq 100 Index is 12 points below fair value. Crude oil is lower by $0.71 at $71.95 per barrel, and the Bloomberg gold spot price is down by $23.28 at $1,114.63 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 1.0% at 77.79.

Citigroup (C $3) raised a total of $20.5 billion, consisting of $17 billion in a 5.4 billion share common equity offering priced at $3.15 per share, and $3.5 billion in “tangible equity units,” securities that make quarterly payments of 7.5% a year and include a requirement to buy Citi shares in 2010. The common equity offering price of $3.15 is less than the $3.25 the US government paid when it acquired its stake in September, and as such, the government decided not to divest shares, but expects to do so in the next 12 months according to a Treasury official. Citi said the Treasury won’t sell any of its shares for at least 90 days.

Bank of America (BAC $15 1) announced that Brian Moynihan would be promoted to the CEO position, taking over for Ken Lewis, who had previously announced that he would depart the firm on December 31. In commenting after the announcement, Moynihan, the head of the company’s consumer banking unit, said that “Our core businesses are the right ones, we just have to execute.” He added that “As the recovery takes hold, we need to do a better job with risk management.”

FedEx (FDX $87) reported 2Q EPS of $1.10, four cents higher than analyst forecasts, on revenue of $8.6 billion. The company previewed the quarter last week, announcing that earnings results would come in at $1.10 per share. However, FedEx gave 3Q EPS guidance of $0.50-0.70, lower than the consensus $0.84, and a full year EPS forecast of $3.45-3.75, versus the Street’s estimate of $3.61. The company said that US volumes have not improved as much as international air shipments, and said that the forecast “reflects the current market outlook for fuel prices and a continued modest recovery in the global economy.”

General Mills (GIS $69) reported 2Q profits of $1.54 per share ex-items, beating analyst estimates of $1.45 per share, on revenue of $4.08 billion, which was in line with the Street’s forecast. Gross margin increased 12.4 points as commodity costs fell. The maker of Cheerios cereal and Progresso soup raised its full-year projection to $4.52-4.57 per share from an earlier forecast of as much as $4.45.

Initial jobless claims unexpectedly rise

Weekly initial jobless claims (chart) increased by 7,000 claims to 480,000, versus last week's figure which was slightly downwardly revised to 473,000. The Bloomberg consensus called for claims to decrease to 465,000. The four-week moving average, considered a smoother look at the trend in claims, fell to 467,500 from 472,750, and continuing claims increased by 5,000 to 5,186,000. Treasuries continued their move higher after the news.

Later this morning, the Conference Board will release the Index of Leading Economic Indicators for November, expected to rise 0.7%, which would mark the eighth consecutive monthly increase (economic calendar). Also, the Philadelphia Fed’s Business Activity Index will be released, which is anticipated to fall to 16.0 in December from 16.7 in November. The Philadelphia Fed Index will be the second regional economic report for the month of December, and traders will be watching to see if the weakness reported Tuesday in the Empire Manufacturing Index, a measure of manufacturing in the New York region, will be duplicated. The Empire Manufacturing Index fell from 23.51 to 2.55 on weakness in new orders and shipments, as well as deterioration in current and expected employment indexes. Respondents said that while input prices had picked up a bit, the prices received index moved further into negative territory, suggesting that price increases are not being passed along.


European shares fall, government of Greece receives yet another downgrade

Stocks in Europe are lower, after Standard & Poor’s (S&P) became the second credit ratings agency to lower the rating for the sovereign debt of Greece in just over a week, by one level to BBB+ from A-, following Fitch’s downgrade on December 8 to BBB+. S&P said that the rating could be lowered further if the government fails to gain sufficient political support to implement a credible, medium-term deficit reduction program. Earlier this week, Greece’s Prime Minister said “In the next there months we will take those decisions that weren’t taken for decades” to cut the country’s deficit. He said he would cut the deficit, currently at 12.7% of GDP per Bloomberg, below the EU’s 3% limit by 2013, and begin reducing debt. Measures considered include an overhaul of the tax system, asset sales, and cuts to military spending. Greece’s Finance Minister later said the 2010 deficit-reduction target would be 8.7% of GDP.

Elsewhere, consumer shares in the UK were under pressure after a disappointing report on retail sales was released, as sales unexpectedly fell 0.3% in November, versus the estimate that sales rose 0.5%, although the prior month was revised higher to 0.6%. In equity news, UK Business Secretary Peter Mandelson said that any bid for confectioner Cadbury PLC (CBY $51), which is resisting an offer from Kraft Foods Inc. (KFT $27), must “respect the company’s heritage and work force,” but stressed that he has “no statutory power to intervene in this case.” Shares of CBY are lower and KFT shares are indicated higher.

Asian shares slump, led by China

Shares in Asia fell on concerns about the impact that new equity offerings would have on existing publicly traded companies and the prospect that faster global economic growth would signify the start of interest rate increases. Chinese companies are set to offer ten IPOs this week, hoping to raise more than 1 trillion yuan ($146 billion), draining liquidity from markets as investors sell existing holdings to fund purchases of new issues. Adding to the negative sentiment and fueling concerns about asset bubbles, Hong Kong’s central bank said that the city is at risk of “sharp corrections” in asset prices after property prices have surged this year, and the Chinese central bank released a survey yesterday that showed almost half of Chinese view inflation as excessive. The Shanghai Composite fell 2.3% and Hong Kong’s Hang Seng dropped 1.2%. Elsewhere in Asia, the Japan’s Nikkei 225 Index fell 0.1%, after the Leading Index of Economic Indicators fell to 89.4 from 89.7 in October. In equity news, carmaker Brilliance China Automotive said that the company and Toyota Motor Corp. (TM $84) were in talks to expand with cooperation on minibus production, and may consider “equity cooperation.” Toyota did not comment on the matter. Elsewhere, Australia’s S&P/ASX 200 Index rose 0.2% and South Korea’s Kospi Index fell 1.0%.