Thursday, June 26, 2008

US Financial Crisis Bulletin: Citigroup Sinks to 10-Year Low; GM Drops to 53-Year Low; Stocks Hit Hard

Citigroup sinks to 10-year low, Goldman urges short sale

Thu Jun 26, 2008 10:57am EDT
By Neha Singh

BANGALORE (Reuters) - Citigroup Inc shares fell to their lowest level in nearly a decade after a Goldman Sachs & Co analyst said investors should sell the largest U.S. bank's stock short as losses mount from troubled debt.

In morning trading, the shares were down $1.03, or 5.5 percent, at $17.82 on the New York Stock Exchange. The shares were among the biggest drags on the Dow Jones industrial average and Standard & Poor's 500, which both fell more than 1 percent.

They also touched their lowest level since October 1998, the month that Sanford "Sandy" Weill merged his Travelers Group with Citicorp to create Citigroup.

William Tanona, the Goldman analyst, added Citigroup to Goldman's "Americas conviction sell" list and cut his price target on the stock to $16 from $20.

He recommended a "paired" trade in which investors sell Citigroup shares short, betting on a decline, and buy Morgan Stanley shares.

The analyst said Citigroup might take $8.9 billion of write-downs for the April-to-June period, leading to its third straight quarterly loss. He also said the bank might need to cut its quarterly dividend for a second time this year, after lowering it 41 percent to 32 cents per share in January.

Tanona's forecast suggests deeper problems for Citigroup Chief Executive Vikram Pandit, who is trying to turn the bank around after nearly $15 billion of losses in the last two quarters, and more than $46 billion of credit losses and write-downs since the middle of 2007.

"We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales," the analyst wrote.

Pandit became chief executive in December, replacing Charles Prince, who resigned under pressure the previous month. Weill had hand-picked Prince as his replacement when he gave up the top job in 2003.

Last week, Chief Financial Officer Gary Crittenden said on a Deutsche Bank conference call that Citigroup could take substantial write-downs this quarter.


Tanona said Citigroup might write off $7.1 billion related to collateralized debt obligations and associated hedges related to monoline insurers, $1.2 billion for other asset classes and $600 million for structured note liabilities.

He now expects Citigroup to lose 75 cents a share this quarter, compared with his earlier forecast of a profit of 25 cents. He also expects a full-year loss of $1.20 a share, compared with his prior view for a profit of 30 cents.

As of May, Citigroup had raised some $42 billion since last fall, including injections from sovereign wealth funds, data compiled by Reuters News show.

Tanona said the bank may now need to issue common stock or sell assets to raise capital, because regulators may forbid it from issuing more preferred or convertible securities. He also said halving the dividend could preserve $3.5 billion a year.

"Given the firm's current level of earnings power, we do not believe the dividend is safe," Tanona wrote.

A Citigroup spokeswoman declined to comment.

On June 24, Merrill Lynch analyst Guy Moszkowski projected $8 billion of write-downs for Citigroup.

Tanona also downgraded the U.S. brokerage sector to "neutral" from "attractive," saying deteriorating fundamentals will likely prolong any recovery from the credit crunch.

He projected a $4.2 billion second-quarter write-down for Merrill Lynch & Co, leading to a quarterly loss for the largest U.S. brokerage.

"We expect write-downs for Citigroup and Merrill to outpace what we saw from Morgan Stanley and Lehman Brothers Holdings recently, due to Citigroup's and Merrill's large exposures to ABS CDOs (asset-backed security CDOs) and associated hedges with the monolines," Tanona wrote.

Brad Hintz, a Sanford C. Bernstein & Co analyst, on Thursday projected a $3.5 billion second-quarter write-down for Merrill. Banc of America Securities analyst Michael Hecht made the same forecast earlier this month.

On June 17, Goldman analysts led by Richard Ramsden said U.S. banks may need $65 billion more capital to cope with a global credit crisis that will not peak until 2009.

(Additional reporting by Tenzin Pema in Bangalore; Editing by Vinu Pilakkott)

GM drops to 53-year low, Goldman urges "sell"

Thu Jun 26, 2008 1:14pm EDT
By Kevin Krolicki

DETROIT (Reuters) - Shares of General Motors Corp hit their lowest level since 1955 and dragged down the auto sector on Thursday after Goldman Sachs cut the struggling U.S. industry's largest manufacturer to a "sell" rating and warned it would have to raise capital.

The panicky slide in GM (GM.N: Quote, Profile, Research, Stock Buzz) shares capped a period of growing concern about liquidity risks to U.S. automakers and suppliers from a domestic auto market reeling from record gas prices and the impact of a housing slump and tighter credit.

The Goldman Sachs warning, including the unusual "sell" call on the U.S. auto industry's largest player after a period of sharp stock price declines just ahead of the close of the second quarter, prompted selling across the sector.

GM Chief Executive Rick Wagoner said the embattled automaker had enough liquidity to carry it through the year and had financial flexibility beyond that.

"We've got a very good, solid funding base under any scenario we see, solid through the end of this year," Wagoner told reporters after an economic event hosted by U.S. presidential candidate Barack Obama. "We have a lot of options to fund beyond that."

Chrysler LLC, for its part, denied rumors it was facing a cash crunch or that it had been driven to filing for Chapter 11 bankruptcy. Those rumors had driven down loan prices for the privately held automaker, according to Reuters LPC.

"The rumor is without merit," Chrysler spokesman Dave Elshoff said. "There is no basis for the rumor."

Debt and equity markets were affected by growing concern for the deepening risks for the auto sector. The cost to insure the debt of GM and Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz) hit records.

GM shares were down nearly 11 percent in early afternoon trade and touched a low of $11.21.

Major GM suppliers were also hammered. Shares in American Axle & Manufacturing Holdings (AXL.N: Quote, Profile, Research, Stock Buzz), which supplies axles for GM trucks, dropped 12 percent. Lear Corp (LEA.N: Quote, Profile, Research, Stock Buzz), downgraded to a "sell" rating by Goldman, tumbled 18 percent.

Shares in Ford, which had its price target cut by Goldman, dropped almost 5 percent.

With the Thursday price fall, GM's market cap fell to less than $6.5 billion. The company has the smallest market capitalization in the Dow Jones industrial average .DJI, of which it has been a component since 1925.

Next above GM in terms of market value in the Dow is Alcoa Inc (AA.N: Quote, Profile, Research, Stock Buzz), with a market cap of about $30 billion. Walt Disney Co's (DIS.N: Quote, Profile, Research, Stock Buzz) cap is 10 times GM's at about $60 billion and Exxon Mobil Corp (XOM.N: Quote, Profile, Research, Stock Buzz) is the leader at about $460 billion.

GM shares have lost 38 percent over the last month as more evidence has piled up that U.S. auto sales weakened further in June, raising doubts about the prospect for the second-half recovery that GM and other major automakers had anticipated.

Fitch Ratings on Wednesday cut debt ratings on GM and Chrysler ratings deeper into the "junk" category," citing the fallout from weaker sales and high gas prices.

Fitch also said it would review Ford ratings over the next six weeks, which could also result in a downgrade.


All three U.S. automakers, which have been hardest hit by the collapse in demand for pickup trucks and SUVs, have faced scrutiny in recent days over whether they have sufficient liquidity to ride out the current downturn.

Billionaire investor Kirk Kerkorian, who has invested about $1 billion in a contrarian bet on Ford, has offered to provide more capital to support the automaker's turnaround.

Kerkorian's chief auto adviser, Jerry York, told Reuters on Wednesday that he did not expect the U.S. auto market to bounce back in the second half of this year with an only limited rebound in 2009.

Earlier this week, Chrysler drew down a $2 billion credit line from Cerberus and Daimler AG (DAIGn.DE: Quote, Profile, Research, Stock Buzz), the German car maker that sold off a roughly 80 percent stake in Chrysler to Cerberus last year.

Under terms of the sale, Chrysler had until August to draw on the credit line, which included $1.5 billion from Daimler. The credit line pays interest fixed at 7 percentage points above the London interbank rate, Daimler has said.

Chrysler, which lost $1.6 billion in 2007, has said it ended the year with $9 billion in cash. Its U.S. sales are down 23 percent so far this year.

Analysts have also fixed their sights on GM, which ended the first quarter with $31 billion in cash and undrawn credit. Deutsche Bank and JP Morgan both warned last week that GM would be forced to borrow heavily to shore up its liquidity position.

Goldman Sachs analyst Patrick Archambault, who also cut his ratings on Tenneco Inc (TEN.N: Quote, Profile, Research, Stock Buzz), said he expected GM shares to continue to underperform as market fundamentals deteriorate. He cut his six-month price target on GM stock by $8 to $11.

"We think GM's automotive cash flow burn this year and next is likely to lead it to look to raise capital, which we believe could lead to significant shareholder dilution and/or a cut to the company's dividend," Archambault said.

(Reporting by Kevin Krolicki in Detroit, Eric Yep and Dilipp S. Nag in Bangalore; Editing by Himani Sarkar and Dave Zimmerman and Gunna Dickson)

US stocks hit by financial sector downgrades

By Jeremy Lemer in New York
Published: June 26 2008 14:06

A trifecta of spiking oil prices, poor corporate earnings reports, and more bad news from the banking sector sent US stocks scuttling lower on Thursday morning.

Technology stocks led the downward trend after Oracle and Research in Motion disappointed markets late Wednesday with forecasts of slower growth and a profits miss respectively.

In early trade on Thursday, the two companies fell 2.5 per cent to $21.99 and 11.5 per cent to $126.01 respectively, while the technology sector as a whole slumped 1.8 per cent.

Fourth-quarter results from Nike added to the gloom as the athletic-shoe maker reported a drop in US profits due to higher spending in order to advertise new sneakers. Nike shares fell 8.5 per cent to $60.30 in the first hour.

The broader consumer discretionary sector fell back sharply, losing 2.2 per cent in short order as oil prices jumped $3.

General Motors also suffered, falling 11 per cent to $11.43 - its lowest level since 1955 - after Goldman Sachs recommended selling shares in the automaker. Soaring gas prices and tumbling consumer confidence could hit performance, the investment bank said.

According to data from Bloomberg, profit for S&P 500 companies is expected to grow 6.6 per cent in 2008. Analysts were predicting 15 per cent growth at the start of the year.

The biggest weight on sentiment, however, was another round of downgrades for financial stocks.

Goldman said in a note that Citigroup may take as much as $9bn in writedowns in the second quarter and added the bank to its “conviction sell” list.

Goldman also cut its recommendation on brokerages from “attractive” to “neutral” arguing that fundamentals continue to deteriorate and that a recovery will take longer than originally anticipated.

Citigroup fell 5.4 per cent to $17.84 in early trading - its lowest level since 1998.

Merrill Lynch also dropped sharply, falling 3.8 per cent to $34.11, after Brad Hintz, an analyst at Sanford C. Bernstein, said the brokerage was likely to post losses in the second quarter and 2008 after writing down the value of mortgage-related assets.

The financial sector as a whole lost 2.3 per cent while an index of investment banking stocks fell 2.6 per cent.

The benchmark S&P 500 slumped 1.3 per cent to 1,305.13 points in early trade - its lowest level in three months. The Dow Jones Industrial Average gave up 1.1 per cent to 11,680.42 to hit its lowest level since October 2006. The Nasdaq Composite dropped 1.9 per cent to 2,356.31.

On Wednesday, Wall Street stocks gained the most in two weeks, as oil retreated and consumer facing stocks rallied strongly. Indices pared but held onto gains after the Federal Reserve kept rates on hold for the first time since September, noting that inflation risks had increased.

“The major benchmark interest rate was kept on hold at 2 per cent as many had expected.” said Claire Collingwood, a dealer at CMC Markets. “However the accompanying statement did leave many scratching their heads. The overall tone was rather more dovish than expected and served to allay fears of a rate hike in the near future.”

So far this year, the S&P 500 has dipped 10 per cent, hit by slowing economic growth, rising input costs and a stream of writedowns on credit-assets at banks.

The consumer staples sector also came under some pressure on Thursday, dropping 0.4 per cent.

ConAgra Foods reported fourth-quarter net income of $201.3m, well ahead of expectations. But the company reported lower sales than forecast and predicted fiscal 2009 earnings that undershot Wall Street projections.

ConAgra fell 3.7 per cent to $21.33.

Homebuilders rallied in the last session but struggled on Thursday after Lennar, the second-biggest US homebuilder, reported a fifth straight quarterly loss and one that was larger than expected.

Revenues fell, average prices slumped and new orders tumbled. Stuart Miller, chief executive, said: “The remainder of 2008 will likely see further deterioration in overall market conditions.’’

Lennar fell 5.9 per cent to $13.71, while DR Horton and Centex slipped 7 per cent to $11.64 and 6.2 per cent to $14.43 respectively.

A report by the National Association of Realtors showing existing home sales rose 2 per cent to a 4.99m annual rate in May after falling for the previous two months, had little impact.

Still, an analyst at Lehman Brothers warned that “we judge this to be a fleeting gain and look for sales to decline through the rest of the summer, bottoming in September”, as foreclosed homes add to already glutted inventory and depressed prices.

In the background, new and revised macroeconomic data did little to improve the mood. Initial jobless claims were unchanged at a seasonally adjusted 384,000 last week, but the four-week average, a smoother and preferred measure, rose to its highest level since October 2005.

Ian Shepherdson, chief US economist at High Frequency Economics, said: “The bottom line here is that layoffs are rising as companies begin to realise that the credit-driven go-go days are over and aren’t coming back. Funnily enough, they don’t seem much impressed by the Fed’s view that downside risks have diminished. Claims, remember, lead growth.”

Meanwhile, revised data on GDP showed the economy expanded at an annual rate of 1 per cent in the first quarter, up slightly from a preliminary estimate of 0.9 per cent issued last month.

Copyright The Financial Times Limited 2008

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