SG Rights at 39% Discount, Banks Fall

123jump.com Staff
11 Feb, 2008
New York City

Societe Generale priced its rights offering at a discount of 39%, more than expected, as investors braced for more losses in the financial sector. SG fell 4% after the issue of rights. Stocks in the sector fell after a comment from the German Finance Minister indicated that subprime loan losses could reach $400 billion. UBS and Commerzbank droped 3% and Aviva fell 4%. IKB Deutsche Bank fell 22% on the worries that bank will report more losses. Russia reported trade surplus declined by 5%.

[R]10:00PM Frankfurt, 4:00PM New York, 8:00AM Sydney – European markets fell after financial stocks declined across the region. Societe Generale fell 4% after it priced its rights offering at 39% discount to Friday’s close price.[/R]

European Markets

In London FTSE 100 Index closed lower 76.30 or 1.32% to 5,707.70, in Paris CAC 40 Index decreased 26.95 or 0.57% to close at 4,682.70 and in Frankfurt DAX index lower 23.74 or 0.35% to close at 6,743.54. In Zurich trading SMI decreased 99.45 or 1.34% to close at 7,347.50.

North American Markets indexes

Dow Jones Industrial Average gained 57.88 or 0.48% to a close of 12,240.01, S&P 500 closed up 7.84 or 0.59% to 1,339.13, and Nasdaq Composite Index traded up 15.21 or 0.66% to a close of 2,320.06. In Toronto TSX Composite closed up 141.58 or 1.09% to close at 13,130.92.

Of the 30 stocks in Dow Jones Industrial Average, 20 closed higher, 10 closed lower, and none were unchanged.

American International Group led the decliners in the index with a fall of 11.7% followed by losses in Microsoft of 1.2%, in JP Morgan Chase of 1.1%, and in Altria of 0.9%. General Motors led the gainers in the index with a rise of 5.2% followed by increases in Home Depot of 2.6%, in Boeing of 2.1%, in Caterpillar of 2%, and in Intel of 2%.

Of the stocks in S&P 500, 326 closed higher, 169 fell, and 5 were unchanged. Of the index stocks, 54 rose more than 3% and 19 stocks fell more than 3%.

AIG led the decliners in the S&P 500 index with a fall of 11.7% followed by losses in Loews Corp of 8.4%, in MGIC of 8%, in Washington Mutual of 7%, and in MBIA of 7%. JDS Uniphase led the gainers in the index with a rise of 13.8% followed by increases in Big Lots of 13%, in Darden Restaurants of 8%, in Family Dollar of 6.7%, and in International Game Technology of 6.6%.

South American Markets Indexes

In Latin Markets Brazil led the gainers in the region with a rise of 2.65% followed by increases in Mexico of 2.14%, in Colombia of 2.02%, in Chile of 1.43%, in Peru of 1.38%, and in Argentina of 0.43%.

Asian Markets

In Hong Kong Hang Seng index decreased 853.35 or 3.64% closed to 22,616.11. Australia ASX 200 index decreased 120.40 or 2.13% to close 5,537.60. Markets in Japan and Vietnam were closed today.

In South Korea Kospi Index decreased 55.90 or 3.29% to close at 1,640.67, in Thailand SET index closed lower 2.29 or 0.28% to 804.15 and Indonesia JSE Index edged decreased 49.71 or 1.88% to 2,589.38. Sensex index in India decreased 834.00 or 4.78% to 16,630.91.

Bond Yields decreased on 10-year U.S. bonds to 3.61% and on 30-year bonds fell to 4.40%.

[R]Commodities, Metals, and Currencies[/R]

Crude oil added $1.86 to close at $93.63 per barrel for a front month contract, natural gas increased 23 cents to $8.54 per mBtu, and gasoline futures increased 3.93 cents to close at 239.65 cents per gallon.

Gold increased $5.80 in New York trading to close at $928.10 per ounce, silver closed up 43 cents to $17.545 per ounce, and copper for front month delivery increased 1.40 cents to 355.35 per pound and in London copper futures increased $175.00 to $7,740.00.

Wheat futures fell 45 cents in Chicago trading and closed at $10.48 per bushel. Sugar declined 0.05 cents to 12.66 cents per pound. Soybean future closed down 13 cents to $13.26 per bushel.

Dollar edged lower but traded near record lows against euro to $1.4524 and edged lower against yen to 106.97.


[R]3:00PM New York – AIG drops 12% after it reports material weakness in evaluating its portfolio of swaps and declares sharply higher loss of $4.9 billion.[/R]

American International Group Inc reported that it may lose $5.96 billion in a portfolio of credit default swaps on securities based on home loans which earlier was estimated to have a loss of only $1.604 billion. AIG ((AIG)) stock fell 11.66% or $5.92 to $44.76.

The method used to value these securities relies on market prices and not on the ratings issued by rating agencies on the debt securities. AIG in a filing with the SEC clarified that the current method used to evaluate these securities did not include the provision for accelerated amortization of in the senior collateralized debt obligations known as CDOs.

The previous filings in September 30, 2007, October 31, 2007, and November 30, 2007 did not include losses from these provisions and are now revised to gross decline in valuations to $5.9 billion. After taking into account certain benefits related to cash flow in the structure of the debt and the benefit of the spread differential the loss is estimated at the end of November 2007 was $1.6 billion, sharply lower than the current revised estimate.

The current method of loss estimation does not include losses in the month of December 2007. Fitch, a rating agency, is likely to lower AA rating of AIG because of the current market conditions and a material weakness cited by its auditor PriceWaterhouseCoopers.

The filing with the SEC noted in a foot note that “AIG has not yet determined the amount of the increase in the cumulative decline in fair value of super senior credit default swap portfolio to be included in its December 31, 2007 financial statements.

AIG is still accumulating market data in order to update its valuation of the super senior credit default swap portfolio. AIG currently expects that the adjustment for cash flow diversion features will be included in determining the fair value of super senior credit default swap portfolio at December 31, 2007.

However, as a result of current difficult market conditions, AIG is not able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs, and therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of super senior credit default swap portfolio at December 31, 2007.”

The filing also noted in the last paragraph that AIG has been advised by its independent auditors, PricewaterhouseCoopers that they have concluded that at December 31, 2007, AIG had a material weakness in its internal control over financial reporting and oversight relating to the fair value valuation of the super senior credit default swap portfolio.

AIG’s assessment of its internal controls relating to the fair value valuation of the AIGFP super senior credit default swap portfolio is ongoing, but AIG believes that it currently has in place the necessary compensating controls and procedures to appropriately determine the fair value of super senior credit default swap portfolio for purposes of AIG’s year-end financial statements.


[R]1:00PM New York, 6:00PM London – UK stocks fell after the annual trade and service deficit rises 10% in 2007. Producer price inflation jumps 5.7% in January.[/R]

Stocks in London trading fell after a report on manufacturing showed that producers passed on rising inflation from oil and gas prices to consumers. The producer price index jumped the most in 17 years. Annual trade deficit in goods and services in 2007 rose to £51.0 billion, an increase of 10%.

Market Sentiment

In London trading FTSE100 stocks fell 1.32% or 76.3 to 5,707.70.

Of the 102 FTSE 100 stocks 19 gained and 83 dropped. William Morrison led advancers with a rise of 1.39% followed by a rise of 1.3% in GlaxoSmithKline.

UK Trade Deficit Rises in December

The Office of National Statistics reported today that UK’s deficit on trade in goods and services narrowed from the revised deficit of £4.8 billion in November to £4.7 billion in December.

Surplus on trade in services slipped to £2.9 billion from £3.1 billion in November, while the deficit on trade in goods was £7.6 billion, compared with a revised deficit of £7.9 billion in November.

According to the statistics office, exports fell by £200 million and imports fell by £500 million in December.

The trade deficit with the EU was unchanged from the previous month at £3.5 billion. Furthermore, both exports and imports gained by £200 million.

Although there were increases in exports of oil and chemicals, exports of capital goods declined. Also, there were rises in imports of chemicals and cars, but imports of oil were lower.

Deficit with non-EU countries narrowed to £4.1 billion compared with the £4.4 billion in November, with exports falling by £400 million and imports falling by £700 million. While there was a rise in imports of fuels other than oil, imports of oil and aircraft fell.

On the overall, the volume of exports, excluding oil and erratic items was 3.5% lower in December than in November.

UK’s deficit on goods and services in 2007 rose to £51.0 billion from £46.4 billion the 2006.

Producer Price Inflation Rises in January

Separately, ONS also reported today that output price annual inflation for all manufactured products jumped 5.7% the most since 1991, while input price annual inflation rose to 19.1%, the most in 12 years, from 12.2% in January.

In addition, the output prices measure for all manufactured products grew 1% month-on-month in January. The ''narrow'' output prices measure, excluding volatile sectors, increased 3.1%.

Input prices measure of UK manufacturers’ materials and fuels advanced 2.9% month-on-month on increases in crude oil prices. The index rose 2.6% between December and January. The ''narrow'' input prices measure rose 7.3% year-on-year and gained 2.3% in seasonally adjusted terms between December and January.

Gainers and Losers

William Morrison led gainers in the FTSE 100 stocks with a rise of 1.39% followed by rises in GlaxoSmithKline of 1.31%, in Compass Group of 1.23%, in Smith & Nephew of 1.14%, and Imperial Tobacco of 0.97%.

Copper for three months delivery rose 2% to $7,855 in morning trading on the London Metals Exchange and lead gained 2.5% to $2,712 a ton. Kazakhmys Plc advanced 0.80% and Antofagasta increased 0.62% on the back of rising metals prices. Separately China forecasted more snowstorms in the next ten days which increases the likelihood of metals production disruptions.

Resolution Plc led decliners in the FTSE 100 stocks with a fall of 6.15% followed by losses in Old Mutual of 5.59%, in Aviva Plc of 4.92%, in Shire Plc of 4.53% and Alliance & Leicester 4.15%.

Financial stocks also fell on the dim view from the G-7 at the weekend that there were still downside risks to global economic growth. Standard Chartered and Barclays shed 3% and 2.88% respectively. Financial stocks were on the defensive after Societe Generale priced its rights offering at a discount.

Homebuilders also dropped after Goldman, Sachs & Co. downgraded them, citing that they were still vulnerable to the housing slowdown that is expected in 2008 and 2009. Home Retail Group edged down 2.58%, Hammerson declined 1.79% and Taylor Wimpey slipped 1.66%.

Company News

The Financial Times reported today that property developers David and Simon Reuben are shelving plans to convert a loan into an equity stake in business class only airline Silverjet.


[R]1:30PM New York – Dow Jones replaces index members. European markets close lower and Asian markets fell sharply.[/R]

Dow Jones Indexes the publisher of Dow Jones Industrial Average decided to replace Honeywell International and Altria with Bank of America and Chevron. The overhaul in the index after three years reflects the current changes in market place.

The 111 year old index was last revised on April 19, 2004 according to a press release from Dow Jones and the current selection will be effective with the opening on trading on February 19.

“We saw that the financials industry was under-represented – notwithstanding the current turbulence – and that the oil and gas industry’s growing importance to the world economy called for another representative to join ExxonMobil Corp,"" said Marcus W. Brauchli, managing editor of the Wall Street Journal.

While Dow Jones industrial Average is one of the most often quoted indexes in the financial press, much of the investments linked to the stock market has moved to a broader index S&P 500 and other broader indexes such as Russell universe of indexes. DJIA is a price sensitive index but S&P 500 index is a market cap weighted index.

Altria, formerly Philip Morris Cos., has been in the industrial average since Oct. 30, 1985. It adopted its current name in 2003. Last year it spun off Kraft Foods, Inc. It has announced the spin-off next month of Philip Morris International, Inc., which will leave it as a purely domestic tobacco company.

Honeywell is being dropped because it is the smallest of the industrials in terms of revenue and earnings. Additionally, the role of industrial companies relative to the overall stock market has been shrinking in recent years, Brauchli said. AlliedSignal acquired Honeywell in late 1999 and adopted that name for the new entity.

Chevron has been in the industrial average twice before. The first time, as Standard Oil Co. of California, was from February 1924 to August 1925. The company re-joined The Dow in 1930, but was replaced on Nov. 1, 1999. The Chevron name was adopted in 1984.

European indexes traded in a tight range but rise in oil lifted energy stocks in the region. Venezuelan President, who is frequently at odds with the U.S. international policies, issued a blistering threat to halt the flow of oil to the U.S. The crude oil price edged higher but energy markets appear to take comments in stride.

Stocks in Asia fell after a gloomier statement from the G7 Finance Ministers. The statement indicated a likely decline in the world economic growth and estimated that the losses linked to U.S. subprime could rise to $400 billion.

International Markets Indexes

In Hong Kong Hang Seng index decreased 853.35 or 3.64% closed to 22,616.11. Australia ASX 200 index decreased 120.40 or 2.13% to close 5,537.60. Markets in Japan and Vietnam were closed today.

In South Korea Kospi Index decreased 55.90 or 3.29% to close at 1,640.67, in Thailand SET index closed lower 2.29 or 0.28% to 804.15 and Indonesia JSE Index edged decreased 49.71 or 1.88% to 2,589.38. Sensex index in India decreased 834.00 or 4.78% to 16,630.91.

In London FTSE 100 Index closed lower 76.30 or 1.32% to 5,707.70, in Paris CAC 40 Index decreased 26.95 or 0.57% to close at 4,682.70 and in Frankfurt DAX index lower 23.74 or 0.35% to close at 6,743.54. In Zurich trading SMI decreased 99.45 or 1.34% to close at 7,347.50.


[R]12:00PM New York – Yahoo hopes to get more than $50 billion offer from Microsoft and evaluates other alternatives to remain independent.[/R]

Yahoo formally rejected offer from Microsoft indicating that nearly $45 billion offer “substantially undervalues” Yahoo. Microsoft edged 1.7% lower and Yahoo edged 1.1% higher.

“The Board believes that Microsoft''s proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments”, the press release from Yahoo noted.

Investors appear to be divided in two camps, in one camp investors believe that the deal will be difficult to consummate and two company cultures sharply different. In the second camp, investors believe that the deal will provide Microsoft an opportunity leverage a common advertising platform and garner larger share of online advertising market.

Yahoo appears to be pursuing limited alternatives including the one to outsource its search ads and technology to Google, if U.S. anti-trust approves such a deal. Yahoo, portal, garners a large share of display advertising, but has failed to leverage to increase revenue in the other forms of ads such as text links or search based ads.

Microsoft offer is at 62% premium to the Yahoo stock price before the offer may be hard to beat. In the absence of another offer on table Yahoo board may have a tough time to convince shareholders to reject this offer. Yahoo stock has languished in the last one year and drifted to $20 range as investors increasingly appear impatient with management turnover and a lack of progress in the search related business.

Yahoo board is likely to argue that its European business and stakes in Alibaba.com and Yahoo Japan alone are worth more than $17 per share and the current offer does not reflect valuations of these businesses.

It appears that Yahoo is looking for an offer that is higher than $35 per share which will increase the value of the company above $50 billion. While Microsoft has the ability to pay such a price, justification of the deal becomes harder. If the online ad market slows in the near future and the integration of the two companies takes longer or harder to achieve, impatient Microsoft shareholders may punish the stock.


[R]9:00AM New York, 6:30PM Mumbai – The gloomier outlook on world economic growth from the world’s wealthiest nations Finance Ministers and central bankers hurt investor sentiment in India and Asia. Reliance Power traded 17% lower on its first day of trading.

Market Sentiment

The markets in India witnessed heavy sell-off on Monday with the benchmark index falling 4.8% or 833 to end the day at 16,630 levels. In broader markets, Nifty CNX 50 slid 5.1% or 263 to close at 4,857 levels.

Reliance Communication, Hindustan Unilever, Mahindra & Mahindra, State Bank of India, NTPC, Reliance Industries and ITC Limited were among top decliners.

Technology stocks attracted fresh investor interest. Infosys Technologies, TCS and Satyam Computer ended firm. The market had witnessed recovery from lower level in mid-afternoon trade after State Bank of India cut in lending rate by 25 basis points.

However, the recovery proved short-lived and the market plunged again in late session. The market breadth was extremely negative as only four of the Sensex 30 shares advancing.

On BSE traded stocks, only 243 stocks advanced, 2,459 shares declined while 35 stocks remained unchanged.

Daily turnover on the BSE stood at 7,659.43 crore rupees while daily turnover on the National Stock Exchange was at 19,725 crore rupees.

Reliance Power recorded the highest turnover of 2,640.27 crore rupees on BSE. Reliance Energy, Reliance Natural Resources, Reliance Industries and Reliance Petroleum were among most active stocks on the BSE.

New Listing News

Market debutant, Reliance Energy was the worst hit. The Anil Dhirubhai Ambani Group company settled at 372.50 rupees on BSE, a discount of 17.22% over IPO price of 450 rupees.

It debuted at 547.80 rupees, a premium of 21.73% from the IPO price. Investors who had subscribed in the Reliance Power IPO have incurred a loss of 77.50 rupees per share while retail investors who had got a discount of 20 rupees per share, have suffered a loss of 57.50 rupees per share.

India''s biggest share offer by Reliance Power was oversubscribed 73 times. It received 4.7 million applications, beating the previous record of 1.95 million from an offering by Reliance Petroleum in 2006, promoted by Mukesh Ambani. The stock ended the day at 372 rupee levels, down 17.2 per cent or 77 rupees.

Economic News

The G-7 Finance Ministers and Central Bank Governors said in a statement released on Saturday that the world economy is expected to slow down and emerging market economies are likely to grow at a slower pace.

The tone of the statement, since last statement issued on October 19, 2007, has changed considerably and takes a dimmer view of the world economy but appears to show a rift among ministers and bankers.

The G-7 also noted that financial institutions prompt disclosure of their losses based on proper valuations accompanied by measures to reinforce their capital base play an important role in reducing uncertainty, improving confidence and restoring the proper functioning of the financial markets.

On only one issue there appeared to be an agreement that banks must rebuild their balance sheets and must be encouraged to be transparent in declaring their losses from the leveraged and risky housing loans. German Finance Minister Peer Steinbruck said during a press conference after the meeting that there appeared to be agreement among members that the U.S. sub-prime loans related losses may reach $400 billion.

The International Monetary Fund said India''s economy will grow at less than 8% this year. Last week, Government had projected that the economy will grow by 8%.

Gainers and Decliners

Of the BSE shares, Larsen & Toubro fell 6.1% to 3,311.55 rupees. Torrent Power slid 15.9% to 140.60 rupees, Tata Power fell 12.3% to 1,174.1 rupees and Power Grid Corporation of India lost 7.1% to 98.1 rupees.

ICICI Bank was down 2.9% to 1035.7 rupees.

State Bank of India fell 6.7% to 2045.25 rupees. The bank on Monday reduced its benchmark prime lending rate by 25 basis points to 12.5%. The new lending rates would be effective from 16 February 2008.

Satyam Computer jumped 3.4% to 423.85 rupees, Infosys Technologies moved up 0.5% to 1,558.75 rupees, TCS gained 0.4% to 903.2 rupees and Wipro advanced 0.3% to 423.50 rupees.

Reliance Update

Reliance Industries fell 6.07% at 2,274.85 rupees. Reliance Power debuted below IPO price. Reliance Energy, which holds 45% in Reliance Power, shed 19.4% to 1,582.30 rupees.

International Markets

In Hong Kong Hang Seng index decreased 853.35 or 3.64% closed to 22,616.11. Australia ASX 200 index decreased 120.40 or 2.13% to close 5,537.60. Markets of Japan were closed today.

In South Korea Kospi Index decreased 55.90 or 3.29% to close at 1,640.67, in Thailand SET index closed lower 2.29 or 0.28% to 804.15 and Indonesia JSE Index edged decreased 49.71 or 1.88% to 2,589.38. Sensex index in India decreased 834.00 or 4.78% to 16,630.91.


[R]6:00AM New York, 6:00PM Hong Kong- Asian markets fell sharply after a gloomy statement issued by G7 meeting of ministers and bankers.[/R]

Hong Kong stocks plummeted on the first day of trading after the Lunar New Year holiday on the latest statement by the G7 meeting of finance ministers and central bank governors. The statement took a dim view of the global economic outlook and noted that subprime loan losses in the U.S. may reach $400 billion.

Trading volumes were also thin as the markets in China were shut. Markets in Japan, Taiwan and Vietnam were closed today.

Market Sentiment

In Hong Kong trading the Hang Seng Index fell 3.6% or 853.35 to 22,616.11, and the China Enterprises index of H shares, or Hong Kong-listed shares in mainland companies, declined 4.11% at 12,530.60.

Daily turnover on main-board was HK$76.43 billion compared withTuesday''s HK$85.03 billion, the last full day of trading last week.

G-7 Finance Ministers and Bank Governors Statement

The G-7 Finance Ministers and Central Bank Governors said in a statement released on Saturday that the world economy is expected to slow down and emerging market economies are likely to grow at a slower pace.

The tone of the statement, since last statement issued on October 19, 2007, has changed considerably and takes a dimmer view of the world economy but appears to show a rift among ministers and bankers.

The G-7 also noted that financial institutions prompt disclosure of their losses based on proper valuations accompanied by measures to reinforce their capital base play an important role in reducing uncertainty, improving confidence and restoring the proper functioning of the financial markets.

On only one issue there appeared to be an agreement that banks must rebuild their balance sheets and must be encouraged to be transparent in declaring their losses from the leveraged and risky housing loans. German Finance Minister Peer Steinbruck said during a press conference after the meeting that there appeared to be agreement among members that the U.S. sub-prime loans related losses may reach $400 billion.

Global Equity Losses

The China Peoples Daily reported today that Standard & Poor’s said on Saturday global equity markets lost a cumulative $5.2 trillion in January as global financial turmoil persisted, with 50 of the 52 global equity markets ending the month in the negative territory.

Emerging markets fell 12.4% in the month, while developed markets lost 7.8%. In particular, stocks in the Asia-Pacific region dipped 7.5%, with markets in China plunging 21.4%.

New Legislation for Financial Institutions

The Peoples Daily Online also reported today that China Banking Regulatory Commission is developing ordinance of bankruptcy of banking and financial institutions in order to set up a market oriented bailout system.

Losers & Gainers

Financial stocks tumbled after Goldman Sachs slashed its target for China’s financial institutions by 21% and 31% on prevalent inflationary pressures on the domestic market and the global credit market crunch, which, according to the G-7 Finance Ministers and Central Bank Governors, still persist.

Banks are now due to report 2007 financial results. Bank of Communications slumped 6.02%, China Construction Bank shed 5.47%, Bank of East Asia plummeted 3.82% and Bank of China climbed down 4.43%.

Reuters news reported the Bank of East Asia fell after it said that chief executive and chairman of the bank David Li will continue with his duties after agreeing to pay a civil penalty of $8.1 million to the U.S. Securities and Exchange Commission for trading in shares in Dow Jones.

HSBC slipped 4.04 % to HK$109.30 on reports the bank will sell will sell 300 branches in France to refocus on emerging markets.

Oil companies also fell as well. Sinopec declined 4.22% to HK$8.40, PetroChina fell 4.49% and CNOOC slipped 6.45%.

Chalco declined 5.85% to HK$11.58 after parent company Chinalco expressed reluctance on raising its stake in Rio Tinto International.

Datang Power gained 1.89% to HK$5.40 on speculation it will capitalize on the current power shortages.

Earnings Update

Xinhua News Agency reported PetroChina had sales of Rmb655 million in non-oil business at its filling stations last year, adding that the company will ""achieve an overall increase in profitability by 2010"".

Separately, the online edition reported that carmaker Chery Automobile has set up a joint venture with Quantum LLC, a subsidiary of Tel Aviv listed Israel Corp. in order to tap markets in Europe and U.S.

Quantum spent $225 million for a 45% stake in the JV, while Chery will provide technology and land worth a controlling 55% stake.

Asian Markets

In Hong Kong Hang Seng index decreased 853.35 or 3.64% closed to 22,616.11. Australia ASX 200 index decreased 120.40 or 2.13% to close 5,537.60. Markets of Japan were closed today.

In South Korea Kospi Index decreased 55.90 or 3.29% to close at 1,640.67, in Thailand SET index closed lower 2.29 or 0.28% to 804.15 and Indonesia JSE Index edged decreased 49.71 or 1.88% to 2,589.38. Sensex index in India decreased 834.00 or 4.78% to 16,630.91.