Four at Four: OPEC Gets Burned

http://feeds.wsjonline.com/~r/wsj/marketbeat/feed/~3/uzE2rFAN7Gw/

from WSJ.com: MarketBeat by David Gaffen

This is a situation the market has not witnessed in some time: declines in oil, the dollar, bond yields and stocks. Collectively, they suggest a deflationary outlook, and there’s no better evidence of it than oil falling more than $3 a barrel in the wake of a larger-than-anticipated production cut from the Organization of Petroleum Exporting Countries. “They really shrugged off that OPEC production cut,” says Scott Magnuson, commodity trading advisor at MF Global. “The perception of another six to seven months of grinding slow agonizing conditions is going to take any demand out of crude at this point.” Crude dropped 8% to settle at $40.06 a barrel, its lowest price since July 2004, and other energy commodities continue to slump as well — heating oil is down 45% on the year, and RBOB gasoline is off 59% on the year. At the same time, the Treasury market continues to rally, as investors push into long-dated bonds in anticipation of declining prices. The equity market was mixed, hanging together after Tuesday’s 5% surge on the back of the Fed’s actions, but the clear intent by the central bank is to push investors to riskier assets. Whether the banks will respond through more lending (and really, that’s the only way they make any money) or returns in fixed income will prove strong as a result of the ridiculous yields offered in corporate debt remains to be seen, but it is the Fed’s only choice. Some have not cottoned to this, as Bennet Sedacca of Atlantic Advisors wrote earlier in the day that his firm “will look to continue to protect our investors’ capital as we have done to date.” Still, the Fed is going to keep its thumb on the scale, and fighting the Fed only works for so long. “As the effects of the government programs seep into the market, we might make some headway here,” says Paul Brigandi, vice president of trading at Direxion Funds.

Securing credit lines and making shoes fit. All in a day’s work. (Macys.com)

The fragile nature of the credit markets is such that any company that manages to re-negotiate credit facilities is cheered, even if such moves potentially create more trouble down the road. Macy’sInc. rallied 18% Wednesday and insurance costs against a possible default on the company’s debt fell sharply in response to the company’s announcement that it had worked out a new $2 billion credit agreement with its lenders. The agreement carries higher fees and pricing, but it solves liquidity issues, as analysts were concerned about an impending $950 million in debt that set to come due in 2009. “Although management maintained that its prior credit agreement was sufficient, the company wanted to take extra measures to reassure investors and position itself more conservatively given the environment,” write analysts at Thomas Weisel Partners. “We applaud their decision.” According to Phoenix Partners, it now costs $675,000 to insure $10 million in bonds against default for five years, down from $1 million on Wednesday. The move is not without risk. The retail environment is still ugly, particularly for department stores, and this will cost the company more money down the road in interest expense. But Thomas Weisel analysts estimate that the cost would not be more than nine cents a share per year more than the prior facility, if it is entirely drawn.

With analysts continuing to parse the actions taken by the Federal Reserve, one of the high-flying technology companies that led the 2006-2007 rally is largely being forgotten about as it gets set to report earnings Thursday. Research in Motion is due to detail its most recent quarterly results as it finishes out its first truly tough year as a publicly traded stock. Shares were down 65% before Wednesday’s trading, when the stock rose 2.3%, and options activity points to a bit of optimism just before expiration on Friday. It hasn’t been an easy year, with three consecutive quarters of earnings disappointments. “The macro is once in a lifetime awful and cell phone industry data points are discouraging,” write analysts at American Technology Research. “Risk appetite is low and there is a feeling of apathy among the investment community.” With that in mind, options players were staking out bets on a quick bounce in the shares before expiration. The stock closed at $41.20 a share, and more than 18,000 call options changed hands at the $40 strike price at about $2.52 each, implying another $1.30-move in the stock. The $45 out-of-the-money calls were also active, traded at 72 cents each, which suggests about an 11% move before expiration. “There are people willing to speculate that this is a stock that can move this market in a big way,” says William Lefkowitz, head of options strategy at vFinance Investments.

People are eating more at home. (Columbia Pictures)

Folks gotta eat, as the saying goes. So even though the likes of Newell Rubbermaid may struggle, General Mills Inc. boosted its earnings outlook on strong sales. With people eating more at home, the company was able to forecast an increase in its fiscal-year earnings outlook. The company’s baking products sales rose by 16%, and its Pillsbury USA unit posted a 12% gain in sales. “Its portfolio of product offerings continues to outperform even in this turbulent environment,” write analysts at Stifel Nicolaus. One part of the company’s strategy that backfired was its hedging program, which resulted in a $269 million charge due to the sharp decline in commodity costs. Still, General Mills would likely prefer lower commodity costs, despite the volatile nature of those prices of late. Expectations are for further declines in commodity costs, notwithstanding the possibility of food companies dealing with some sort of extortion-level prices from egg thieves.