- Discomfort over the government's latest attempt to rescue Citigroup from
itself and an ugly -6.2% preliminary annualized GDP reading forced US equity
futures sharply lower in the pre-market. The DJIA skidded to within 40 points
or so of breaking the key 7,000 level after the open, before a nervous rally
sent equity indices back toward positive territory by mid morning. Technology
stocks are showing relative strength while energy and bank companies are
weighing on the indices. To say markets remain skittish would be an
understatement as traders anxiously await this afternoon's week, and month end
closing levels. Technicians are paying close attention to the Nov 741 low on
the S&P and the Dow 2002 low just below 7200 among others. Treasury spreads
are widening out once again as the 10-year has reclaimed 3% for the first time
since early in the month.
- Citibank is dominating headlines and markets this morning. Late last night
the media widely reported that the Treasury and Citi had finished hammering out
a deal for converting the government's preferred stock into common shares,
warning that the government would only move forward with the conversion if Citi
was able to persuade private investors to do so as well. The Treasury released
the final details of the deal this morning: Citi will offer to convert nearly
$27.5B in preferred stock sold to private investors and the public and up to
$25B in government-held preferred stock into common shares, at a conversion
rate of $3.25 a share, raising the government's stake to 36%. Citi will pay the
Treasury an 8% annual dividend, while dividends on outstanding preferred shares
have been suspended. Singapore,
whose sovereign wealth fund owns 11% of Citi, confirmed that it supports the
conversion deal; Prince Alaweed is also on board with the arrangement. Citi CEO
Pandit said that the move was not an easy choice, but believes that confidence
is key and that the deal takes the confidence issue "off the table."
Citi CFO Crittenden stated that the intent of the aid package was to eliminate
any need for more capital, but warned that it doesn't guarantee that this will
be the case. Shares of Citi broke below $2 in pre-market trading and opened
down more than 30% around $1.70. Bank of America lost more than 15% before the
bell on the news, while other major banks fell significantly. Citi and the
other financials are off their worst levels in mid morning trading.
- In other corporate news, Dell offered a mixed quarterly report yesterday,
beating earnings estimates but missing revenue targets. Dell's CFO noted that
the company is seeing continued weakness in demand in the current quarter and
believes there could be a protracted slowdown. Note that yesterday afternoon,
HP's CFO remarked that IT budgets are under pressure and that HP saw enterprise
demand fall in January. Shares of Dell were trading up 3% mid morning, while HP
was down 2.5% or so. Two more retailers, Gap and Kohl's, managed to beat
earnings targets for Q4. Gap did miss revenue estimates by a bit, while Kohl's
guided below par for the coming quarter and the full year. Waste management
name Republic Services missed earnings targets and guided well under expectations
for 2009, prompting investors to dump shares, with RSG down 12% in the early
- In currencies, the greenback maintained a firmer tone during the New York
morning thanks to risk aversion and safe haven flows, in spite of US GDP
registering its weakest reading since 1980 (note that the weak US reading was
complemented by weak GDP and trade data from key emerging market regions).
EUR/USD headed toward the 1.26 level, softer by over 80 pips from its Asian
opening level, GBP/USD tested 1.4115 before consolidating while USD/CHF held
above the 1.17 area. The yen retraced from its lowest levels against the majors
aided by risk aversion stemming from lower equity markets and profit-taking
from shorter-term traders on month-end positioning. The USD/CAD pair tested the
1.27 level for one-month highs as commodity related currencies were hurt by
lower oil prices. The Mexican Peso (MXN) hit all-time lows against the USD
above 15.00. Note that the bigger government stake in Citi is expected to have
implications for some of its foreign units, including Mexico's second-largest
bank Banamex, fueling rumors of a possible sale.
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