Archive for October, 2008

U.S., China kick off global round of rate cuts (Reuters)

Wednesday, October 29th, 2008 | Finance News

NEW YORK (Reuters) –
The United States and China kicked off what is likely to be a global round of interest rate cuts, part of a barrage of measures deployed around the world to fight a deep economic slowdown.

Norway also cut interest rates and Britain indicated it may lift self-imposed limits on government borrowing to counter a recession that stems from the financial crisis triggered by the collapsed U.S. housing bubble.

"The markets got the (U.S.) rate cut that they expected and a policy statement that was decidedly downbeat on the economy," said Stuart Hoffman, chief economist at PNC Financial Group in Pittsburgh, Pennsylvania, after the U.S. Federal Reserve cut interest rates by half a percentage point on Wednesday.

Japan may cut rates on Friday and the European Central Bank and Britain are expected to add to the monetary easing next week as authorities remain fearful that the worst financial crisis in 80 years will cause a long global recession.

U.S. regulators are finalizing a new federal program to provide up to $600 billion in government guarantees of home mortgages to help prevent foreclosures, a source familiar with the talks said. [ID:nN29488864] The program could be announced as soon as Thursday, the source said.

The International Monetary Fund approved an emergency short-term liquidity facility for emerging market economies to help them weather the credit crisis.

The Fed said the pace of U.S. economic activity appeared to have slowed markedly and it expected inflation to moderate as a result of lower energy and commodities prices.

Major U.S. stock indexes rallied more than two percent before falling back to close lower.

Analysts welcomed the move but said it had already been priced in and the outlook remains grim.

"Bigger picture, I don't think anyone believes that any interest rate cuts are going to affect the underlying issues surrounding mortgage-related and consumer-related credit," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.

China, increasingly appearing to be the world's last engine of economic growth, cut its interest rate to 6.66 percent from 6.93.

Norway's central bank cut rates by half a percentage point to 4.75 percent, signaling more moderate cuts ahead to help shield the oil-fueled economy from the crisis.

WORLD STOCKS RISE, DOLLAR DOWN

The interest rate cuts, and expectations of the U.S. cut, lifted world stock markets and sent the U.S. dollar plunging to its biggest one-day drop in 23 years, sparking a 7 percent surge in oil.

Japan's Nikkei index ended up 7.7 percent and European shares climbed 7.5 percent.

Wall Street followed Tuesday's 10 percent rally, its second-biggest rise ever, with a volatile day. The Dow ended down 0.82 percent and the S&P 500 fell 1.11 percent, reversing a rally after the Fed cut.

The Dow lost more than 300 points in the last 12 minutes after a news report raised questions about General Electric's earnings outlook. After the close, GE said its CEO's comments had been taken out of context and there were no new forecasts. The news service corrected its report, and GE stock rebounded after-hours.

The report had revived fears about corporate profits, on a day when two of the largest U.S. auto parts makers, BorgWarner Inc and Tenneco Inc, said the economic crisis would mean more job cuts and plant closings.

General Motors Corp reported an 11 percent drop in third-quarter auto global sales and said global sales for the industry dropped about 7 percent. GM has asked the U.S. government for some $10 billion to support a merger with smaller rival Chrysler, sources said.

The former head of the U.S. National Bureau of Economic Research, Martin Feldstein, was quoted as saying the United States has entered a recession that will last longer and do more damage than any since World War Two.

Economists expect U.S. GDP figures on Thursday to show a 0.5 percent decline in July-September, according to the median of forecasts in a Reuters poll, and many see that as the start of a contraction lasting at least nine months.

As the U.S. presidential campaign hit the final stretch before November 4, Republican John McCain questioned Democratic rival Barack Obama's readiness for the White House, saying he would be bad news for small business.

Obama, who polls show is trusted more on the economy by voters, said McCain's policies would hurt the middle class.

British finance minister Alistair Darling said Britain is moving into recession and the government will need to spend more and forget about its self-imposed limits on borrowing for the time being.

EYES ON JAPAN, EUROPE NEXT

The Bank of Japan will consider cutting rates on Friday but will watch market conditions before deciding, a source with knowledge of the matter told Reuters.

The European Central Bank and the Bank of England are expected to ease policy at their regular meetings next week. The ECB is expected to cut a half point off rates to 3.25 percent, according to a Reuters poll.

Governments have pledged about $4 trillion to support banks and restart money markets to try to stem the crisis set off by the bursting of a bubble in the U.S. housing market.

There were more signs that the acute financing difficulties were easing. The closely watched rates that banks charge each other to borrow dollars fell again as central banks continued to inject extra liquidity into the system.

As credit lines have dried up, a growing number of governments have had to look for help from global lenders.

The IMF, European Union and World Bank agreed to a $25.1 billion economic rescue package for Hungary.

Ukraine, Belarus, Pakistan and Iceland are also in various stages of seeking, securing or considering IMF help.

South Korea denied speculation it was seeking IMF support but said it would ease won liquidity requirements on banks to help bring down their funding costs.

IMF officials have said the fund may need additional resources in a prolonged crisis and European Commission President Jose Manuel Barroso said on Wednesday China and the Gulf countries could do more to help the IMF support countries hit by the financial crisis.

The U.S. Federal Reserve established four new currency swap lines with Brazil, Mexico, South Korea and Singapore, to ease dollar funding shortages.

(Reporting by Reuters bureaus worldwide; Editing by Chizu Nomiyama, Gary Hill)

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Investors eye Exxon Mobil call options before earnings (Reuters)

Wednesday, October 29th, 2008 | Finance News

CHICAGO (Reuters) –
Speculators on Wednesday scooped up call options in Exxon Mobil Corp (XOM.N), hoping to catch a share price rally on prospects of a positive earnings report, according to one options analyst.

Shares of the world's largest non-government-owned energy company fell 21 cents to $74.65 on the New York Stock Exchange after notching a session high of $77.99.

Options traders loaded up on Exxon calls as its shares rose earlier in the session, helped by sharp gains in crude oil futures and a Wall Street rally after the Federal Reserve cut interest rates. U.S. stocks fell in a steep sell-off late in the day.

Exxon Mobil is due to deliver third-quarter results before the opening bell on Thursday. Analysts expect the company to report a profit of $2.38 per share, according to Reuters Estimates.

"Basically option traders are speculating that Exxon Mobil will report third-quarter profits that would match or beat Wall Street expectations," said Joseph Hargett, senior equities analyst at Ohio-based options research firm Schaeffer's Investment Research.

"Betting on Exxon Mobil at the moment is pretty much a bet that crude oil prices are going to continue to rise."

In late trading on the New York Mercantile Exchange, December crude hit a session high of $69.24. It earlier settled up 7.6 percent at $67.50 a barrel.

SENTIMENT DRIVER

One indicator of sentiment is Exxon stock's put-to-call open interest ratio for the top three months. It stood at 0.95 and lies in the 76th percentile of its annual range, data from Schaeffer's Investment Research shows.

That means speculative options traders are a bit more pessimistic on the company's prospects. But Hargett noted the influx of call activity on Wednesday is a shift in sentiment, reflecting expectations of share price gains.

"As a contrarian, I would view this surge of call activity negatively because it means that option traders are expecting positive earnings and that Exxon meeting Wall Street expectations may not be enough," Hargett said.

Roughly 74,000 calls and 72,000 puts traded in Exxon Mobil on Wednesday, 1.6 times its normal combined volume, according to option analytics firm Trade Alert.

A call conveys the right to buy the company's shares at a fixed price within a specified time period while a put enables an investor to sell the stock at a preset price and time.

The busiest option was the November $80 call strike, where 14,537 contracts were situated at $2.20 a contract.

For this trade to break even, Exxon shares would have to rally 10 percent between now and November 21 options expiration. By entering this trade, investors are indicating they are bullish on Exxon for the near-term, Hargett said.

Technically the stock has not looked great.

The shares are down 20 percent for the year. Stiff resistance is at the 20-week moving average at around $78.48 and the security has not closed above that trendline since the week of July 4, Hargett added.

"This overhead resistance could cripple a November $80 call position if Exxon Mobil's recent momentum fades," he said.

(Editing by Leslie Adler)

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Stocks end mixed in late slide after Fed rate cut (AP)

Wednesday, October 29th, 2008 | Finance News

NEW YORK – Wall Street received the interest rate cut it wanted, but still turned in a baffling late-day performance Wednesday, shooting higher and then skidding lower in the very last minutes of trading as some investors rushed to cash in profits after the previous session's big advance. The major indexes ended the day mixed, with the Dow Jones industrials falling 74 points — only the third time in October that the blue chips had just a double-digit close.

Analysts were divided over why the market turned around so abruptly. Some cited reports of a lackluster profit forecast at General Electric Co. — a Dow component that dropped nearly 4 percent from its late-session high — and others contended investors were simply looking to cash in gains after the Federal Reserve's decision to lower its fed funds rate by a half-point to 1 percent.

"It was a panic sell in the last two minutes," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, referring to reports that GE was aiming at 2009 profits to be little changed from 2008. The reports were subsequently called into question, and a GE spokesman said the statements were taken out of context.

Because of the last-hour confusion, it was likely that it would take the opening of trading on Thursday to get a better read on how the market feels about the Fed's rate cut and its accompanying economic statement. At the same time, the Commerce Department's expected reading on the gross domestic product for the third quarter will most likely shape trading.

The market waffled while it was still digesting the Fed's afternoon announcement, then advanced for most of the final hour of trading. Until shortly before the close, it looked like Wall Street was feeling more confident about the economy and would extend its huge rally from Tuesday, which propelled the Dow Jones industrials up nearly 900 points.

Policymakers spelled out a weakening of economic conditions in the U.S. and abroad, citing first a drop in spending by American consumers. The Fed also reiterated that it expects government steps, including its own efforts to increase liquidity, to improve credit market conditions and the economy over time.

Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, said the Fed's overall tone conveyed it regards the economic troubles as somewhat typical of a weak economy and not the kind of intractable problems that signal a deep recession is imminent.

"They more or less indicated elevated concerns about the economy but nothing in it suggests any real panic but that this is just one more step in their program to restore the financial system to complete functioning."

But the final hour of trading on Wall Street over the past month has seen turnarounds in sentiment as well as prices, and the late-session volatility that has become the norm was in force again Wednesday.

"We set ourselves up in the last hour with a golden opportunity to lock in profits," said Ryan Larson, senior equity trader at Voyageur Asset Management, a subsidiary of RBC Dain Rauscher.

He said that very late in the day, more investors were putting a somewhat downbeat spin on the Fed's statement, which Larson said indicated policymakers are willing to lower the fed funds rate below 1 percent if necessary. Traders started thinking, "if they're willing to go under 1 percent, there must be serious problems that we don't know about yet," he said.

The Dow was up as much as 298 points in the last quarter hour of the session, giving it a two-day gain of more than 1,187 points, when it began to slide. It closed down 74.16, or 0.82 percent, at 8,990.96. During the 21 trading days so far this month, the Dow has logged gains or losses of fewer than 100 points only twice — on Oct. 1 and Oct. 14; the month has seen unprecedented volatility, with the blue chips recording their largest ever advance, 936 points, and their largest ever decline, 778 points.

Broader stock indicators were mixed. The S&P 500 index fell 10.42, or 1.11 percent, to 930.09, and the technology-heavy Nasdaq composite index advanced 7.74, or 0.47 percent, to 1,657.21.

Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange, where consolidated volume totaled 7.01 billion shares compared with 6.93 billion shares traded Tuesday.

Some traders expressed frustration at the market's finish.

"You cannot have moves like this and have any sort of investor confidence," said Joe Saluzzi, co-head of equity trading at Themis Trading LLC.

The credit markets had a lukewarm response to the Fed move. The yield on the three-month Treasury bill, regarded as the safest investment around and an indicator of investor sentiment, fell to 0.58 percent from 0.74 percent Tuesday. A drop in yield indicates an increase in demand. Meanwhile, the yield on the benchmark 10-year Treasury note rose to 3.86 percent from 3.84 percent late Tuesday.

Light, sweet crude rose $4.77 to settle at $67.50 a barrel on the New York Mercantile Exchange as the dollar fell against other major currencies. With many commodities priced in dollars a weaker greenback makes prices rise.

It was clear from Wednesday's trading that Wall Street is nowhere near moving away from the volatility that has devastated stock prices this month. And many investors are hesitant to re-enter the market after being hit hard — even with Tuesday's jump, the three major stock indexes are still down more than 30 percent for the year, battered since last month's freeze-up of the credit markets. The troubles with the credit markets have made it harder and more expensive for businesses and consumers to get loans.

While signs have emerged that the government action to revive credit markets is starting to work, investors remain skittish over the effects of the prolonged credit freeze on the economy, which relies on lending to feed growth.

Investors are hoping the latest rate cut will complement the government's still-unfolding efforts to aid the commercial paper market, where companies turn for short-term loans, and the banks themselves. The Treasury Department this week is investing directly in banks, hoping the cash will make them more likely to issue loans.

Wall Street's rally Tuesday helped lift trading in most markets overseas. Japan's Nikkei stock average jumped 7.74 percent. Britain's FTSE 100 rose 8.05 percent, Germany's DAX index slipped 0.31 percent, and France's CAC-40 rose 9.23 percent.

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