The stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players.

“I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets,” Douglas Elliott, a fellow at the Brookings Institution, a Washington think tank, told Reuters.

The U.S. bank stress tests have transfixed the world financial markets for weeks, exacerbating the ongoing financial crisis – worsening the U.S. recession and shaking economies around the world. That’s escalated the burden on the still-new Barack Obama administration and on the U.S. Congress.

The banks being tested include Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), JPMorgan Chase & Co. (NYSE: JPM), Wells Fargo & Co. (NYSE: WFC), and Goldman Sachs Group Inc. (NYSE: GS). All told, the 19 banks hold two-thirds of total U.S. bank assets.

“Most banks will have to raise capital in some form,” Friedman, Billings, Ramsey Group Capital Markets Group (NYSE: FBR) managing director Paul Miller told Reuters. “The capital raises will be much bigger than people think.”

Miller said that uncertainty about what the tests might reveal has made banks stocks “uninvestable” in the near term.

The issue for investors is that “you just don’t know how the government is going to view it,” Miller said.

Public release of the stress test results is set for Thursday. The government is scheduled to brief the top officials of the banks themselves tomorrow (Tuesday).

Although all but one of the 19 major U.S. banks the government has stress-tested reportedly passed, many skeptics believe the banks are still using all sorts of accounting dodges to keep from revealing just much they still hold in toxic assets and bad loans, National Public Radio reported.

Why wait for the U.S. Treasury Department’s bank stress test when Money Morning can highlight the four secrets that will let you separate the winners from the losers in the U.S. banking system?
Call it the “Money Morning Bank Stress Test.”

Money Morning Contributing Editor Martin Hutchinson last week evaluated the 13 largest U.S. banks and rated them as either “Zombies,” “Walking Wounded,” “Risky But Proud,” and “Hidden Gems,” and concluded that nine of the banks pose some degree of risk. But he also found that four of the financial institutions are “Hidden Gems” that might be worth a look for investors.
On Thursday, we’ll finally see how it all plays out.

Market Matters

Chrysler LLC filed for bankruptcy and then forged a potentially “game saving” partnership with mighty Fiat SpA (OTC ADR: FIATY), Italy’s largest car manufacturer.  General Motors Corp. (NYSE: GM) will be saying good bye to its Pontiac brand (any interest, Fiat?).  Bank of America’s Ken Lewis was stripped of his board chair, but will continue to put out fires from the chief executive office.   Earnings season moved forward and Exxon-Mobil Corp. (NYSE: XOM) did NOT set a new record for a change.  International Business Machines Corp. (NYSE: IBM) bucked the cost-cutting trend and actually raised its dividend.

With Treasury set to release the stress test results on Thursday, rumors are circulating that Bank of America and Citigroup may be in need of additional capital, though both are pleading their cases.  Meanwhile, Citi began lobbying for permission to pay retention bonuses to key employees [it worked for American International Group Inc. (NYSE: AIG) and Merrill Lynch (NYSE: SQD)], who may seek the greener pastures of other (ailing) financial institutions.

Telecommunications firms were in the spotlight early in the week as chipmaker Qualcomm Inc. (Nasdaq: QCOM) raised its revenue outlook and Verizon Communications Inc. (NYSE: VZ) actually announced increased earnings in the first quarter.  Verizon may be teaming up with Microsoft Corp. (Nasdaq: MSFT) to develop its own touch-screen cell phone to cut into Apple Inc.’s (Nasdaq: AAPL) iPhone market share.

Drugmakers Pfizer Inc. (NYSE: PFE) and Bristol-Myers Squibb Co. (NYSE: BMY) posted quarterly results that beat Wall Street expectations, as did The Dow Chemical Co. (NYSE: DOW) and Starbucks Corp. (Nasdaq: SBUX), though the latter’s major restructuring (store closures) prompted a 77% decline in profits.

MasterCard Inc. (NYSE: MA) confirmed that 2009 will be a challenging year, though rival Visa Inc. (NYSE: V) beat earnings estimates, as debit card usage increased, resulting in greater fee income.

The Procter & Gamble Co. (NYSE: PG) struggled last quarter, with weaker sales, as shoppers traded down to lower-priced consumer goods.  Exxon-Mobil, Chevron Corp. (NYSE: CVX), and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) were victims of the declining global demand for oil.  Still, Exxon’s long-term outlook remains strong as the company continues pouring money into development projects to be fully prepared once the recession ends.  In fact, management even boosted its stock dividend.

Economically Speaking

While the U.S. Federal Reserve seemed to offer some “cautious optimism” about the overall direction of the economy, the policymakers avoided any sugarcoating and hedged their comments for fear of an unforeseen development (such as the “swine flu,” also known as the A/H1N1 flu).

While the virus quickly expanded across the globe, most of the worst cases have been limited to Mexico, where the already depressed economy will be further impacted from business closures and travel restrictions.

When SARS (Severe acute respiratory syndrome) hit in 2003, China’s gross domesic product (GDP) was estimated to have been hurt by about 1%; According to early projections by Moodys Corp.’s (NYSE: MCO) Economy.com, the Mexican economy will contract by 6.2% in 2009 (revised from the -4.5% estimate to account for the flu).

The Fed plans to leave rates at near 0.0% and stands prepared to purchase more Treasury and mortgage-related securities to keep the economy moving in the right direction.

The first quarter’s gross domestic product (GDP) highlighted a relatively hectic week on the economic front.  While the economy contracted from January through March at a worst-than-expected 6.1% clip, analysts found some positives deep within the release, as consumer activity actually picked up during the quarter.

The spending component rose by 2.2%, after falling by 4.3% in the fourth quarter.  Additionally, a decline in inventories hindered the release; however, economists point out that such a reduction indicates that manufacturers have scaled back production and will not be burdened with excessive supplies that may need to be deeply discounted to be sold. As demand slowly returns, they will be able to boost production once again.

Meanwhile, consumer confidence surprisingly soared to levels not seen since November 2008, which is especially good news, since the consumer accounts for about two-thirds to 70% of the activity in the economy.

Weekly Economic Calendar

Source: Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday

Even bellwhether Wal-Mart Stores Inc. (WMT), which had managed to dodge the cold winds of recession over the past year, was clobbered by the economic meltdown.

The discount retailer missed big on its December same-store sales numbers.  And across the board, a chorus of large retailers chimed in with similar, disappointing news.

Altogether, it may add up to the worst holiday-shopping season in four decades, as rising unemployment and tightening credit forced consumers to the sidelines during the all-important fourth quarter.

Citing the impact of slower than expected sales at its Sam’s Club warehouse stores and international units, the WalMart posted a 1.7% increase in same-store sales. The world’s largest retailer also cut its fourth quarter earnings forecast.

“The current economy remains challenging for all businesses, and retailers have already seen customers pull back on discretionary spending,” Tom Schoewe, Wal-Mart’s finance chief told the Financial Times. “Consumers are very focused on value and necessities.”

At first, consumers had crowded discount stores seeking lower-priced goods, but surprised investors must now cope with a retail environment where even Wal-Mart seems vulnerable.

“I am shocked and disappointed,” retail analyst Britt Beemer, chairman of America’s Research Group, told CNNMoney.com.  Because of its low prices and aggressive discounts, Beemer had pegged Wal-Mart as the clear winner of the holiday shopping season and was expecting the retailer to post a 3% sales gain in December.

Overall, same-store retail sales dropped 1.7% in December, the International Council of Shopping Centers reported. Same-store sales measure sales at stores open for more than a year, and are considered to be an important indicator.  Sales declined 2.2% in the last two months of the year – the biggest such drop since the group started tracking the data in 1970.

Damage was widespread and deep, pummeling not only discounters but high-end marketers. Same-store sales at luxury retailer Neiman Marcus Group Inc. sank 28% in December. Saks Inc. (SKS) posted a 20% sales decline, twice as large as analysts estimated, even after markdowns of as much as 70% on designer goods.

Macy’s (M) said same-store sales fell 4% and it will close 11 underperforming stores in nine states, affecting 960 employees. The department store chain expects to earn between 90 cents and $1 per share for the quarter ending Jan. 31, below the consensus estimate of $1.12.

“This has been the most challenging economic environment in memory,” Macy’s CEO Terry Lundgren said in a statement.

Any sales rebound in the coming year will have to weather strong headwinds from surging unemployment.  Although initial unemployment claims fell last week, they are still up 42% over 2007, the Labor Department reported.  Continuing claims rose by 101,000 to 4.61 million in the week ending Dec. 27, the highest level since November 1982.

The Labor Department is set to release the December jobs report today (Friday). Economists had expected a loss of 500,000 jobs last month, but many are revising forecasts upwards.  A report from payroll processor ADP projected job losses of 693,000 as reported by Money Morning on Thursday, capping what could be the worst year of job losses since the end of World War II.

And in more bad news on the unemployment front, Walgreen Co. (WAG) the nation’s No.2 drugstore chain said it is eliminating about 1,000 jobs, or about 9% or its work force.

“That does not bode well going into January-February, where we go into a lull period and there’s really no reason to buy until spring,” Adrienne Tennant, an analyst at Friedman, Billings, Ramsey & Co. (FBR) in Arlington, Virginia, told Bloomberg Television.

Even the good news was bad. J.C. Penney Co. (JCP) same-store sales fell 8.1%, better than it and analysts had estimated. Kohl’s Corp.’s (KSS) dropped 1.4%, helped by last- minute shopping and “strong post-Christmas business.” Analysts had anticipated a 5.9% decline.

But the lackluster results at most discounters were a huge, negative surprise.  Costco Wholesale (COST) reported a 4% drop in same-store sales for December, a bigger decline than the 3.7% analysts had expected.

Target’s (TGT) December same-store sales fell by 4.1%. The retailer said this was in line with their expectations but that it had to slash prices to clear inventory.

“These markdowns, combined with additions to our accounts receivable allowance, will put additional pressure on our profitability in the fourth quarter,” the company said.

“This kind of discounting is a big concern,” Retail Metrics President Ken Perkins told Bloomberg TV. “January will be a heavy clearance month, with further downward margins pressure, and we might see more forecasts cut.”

It’s almost like Pavlov’s dog,” said Craig Johnson, president of retail-consulting firm Customer Growth Partners LLC in New Canaan, Connecticut.  “Consumers have become so accustomed to markdowns that nobody wants to pay full retail anymore.”

Source:Blue Christmas for Retailers as Slumping Economy Hammers Sales

The situation is dire. GM is burning through cash at a pace that could mean bankruptcy, and all three players are struggling with high costs, weak vehicle sales, frozen credit lines and dwindling cash reserves calling into question whether they can survive much longer without government help. The answer, of course, is that they probably can’t.

But it’s here that the debate turns political, the Detroit Free Press reports. Congressional Democrats are pushing for some form of auto-sector bailout – even an extension of the deal U.S. banks received as part of the $700 billion rescue plan crafted by the U.S. Treasury Department. But Republican lawmakers claim their Democratic counterparts are “pandering” to their own voter base, which includes widespread support of American unions.

Expect the debate to become heated and emotional as some lawmakers and other policymakers spotlight the massive job losses that a failure of one – or all three – of the carmakers would cause. And there would be massive ramifications beyond the Big Three themselves. As Money Morning has reported, the three automakers – all told – employ more than 200,000 Americans, and support millions of additional indirect workers employed by suppliers and dealerships.

The collapse of the automakers could ultimately cost the economy more than 2 million jobs. And the pain that would cause doesn’t even factor in the additional estimated 1 million Americans who rely on the U.S. auto companies for pension and healthcare benefits – chiefly retired autoworkers and their families.

Reaching a bailout agreement probably would require automakers and their supporters depends on the automakers and their supporters convincing skittish lawmakers that such a deal is critical for the health of the overall economy and that the U.S. government won’t be throwing good money after bad, the Free Press reported.

GM spokesman Tony Cervone even tried to spin it that way: “It’s a loan, it’s a bridge loan,” he said. “The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan.”

Second, Freddie Mac (FRE), seized by the government two months ago, asked the Treasury for $13.8 billion, after a record quarterly loss caused its net worth to fall below zero. More on this momentarily.

And third, the struggles also continue abroad. Foundering Asian economies came away from a weekend Group of 20 meeting in Washington on the worldwide financial crisis with the promise they’d have expanded access to financing programs from such sources as the International Monetary Fund (IMF).

Exporters throughout Asia that depend on credit to pay for raw materials and to finance shipments say business has plunged as access to needed credit has dried up, the International Herald Tribune reports. Access to IMF loans could help governments in South Korea, India, Indonesia and other economies where investor anxiety about a possible scarcity of foreign currency has driven down exchange rates, said Citigroup Inc. (C) economist Yiping Huang.

Leaders of the world’s top industrialized nations also pledged to give developing countries a bigger role in global financial bodies — a move long sought by China’s leadership. And while Beijing welcomed the step, China’s leaders gave no indication whether the country might respond by using its $2 trillion in reserves to help expand a global bailout fund. China last Sunday unveiled a $586 billion stimulus, some of which will come from that foreign-reserve fund.

Target Corp. (TGT), Home Depot Inc. (HD), and AnnTaylor Stores Corp. (ANN) (among others) report earnings, though poor results are already forgone conclusions.  A hectic economic calendar will be highlighted by the widely anticipated inflation data as falling energy prices work through the economy.  (Just a few months ago, such releases were feared…How quickly things can change.)

Market Matters

Looks like the Feds could use a mulligan (do-over).  When the $700 billion bailout plan was first announced, one of its primary goals was to resurrect the balance sheets of ailing banks by buying underwater assets.  Additionally, direct government investments were supposed to encourage bank-lending activity that would help thaw out the frozen credit markets.

Well, just a few weeks after its creation, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. announced that the government will not buy troubled assets (that no one seems to know how to value), meaning the plan will instead focus on enhancing consumer lending.  Meanwhile, as a Money Morning investigative report demonstrated, some healthy institutions have received direct investments, but used the proceeds to purchase struggling competitors and have not increased lending in a way that would stimulate economic growth.  Non-banks also have been recipients of the government’s generosity, as insurance giant American International Group Inc. (AIG) received $40 billion in new capital from this package, under the terms of its newly structured bailout. All told the deal’s worth more than $150 billion.

American Express Co. (AXP) applied for (and received) approval to become a commercial bank in order to tap into the government resources.  While certain tweaks should have been expected to ensure that the bailout effectively achieves its goals of repairing the financial system, the actions this week did little to generate any investor confidence. President-elect Barack Obama is asking a Congressional lame-duck session to approve $25 billion to $50 billion in rescue aid for Detroit’s crumbling auto industry. He also wants to appoint a czar or board to oversee the auto industry’s rescue and reconstruction, both Money Morning and Bloomberg News reported.

With foreclosures soaring by a full 25% in October from last year’s level, Fannie Mae (FNM) and Freddie Mac (FRE) [now literally part of “the government” – somewhat ironic given that it was the pressure from foreign-government bondholders that forced the federal government to put the two mortgage giants into conservatorship, a Money Morning investigative story demonstrated] announced plans to modify hundreds of thousand of loans by reducing mortgage rates or even forgiving a portion of the outstanding principal.

Freddie, the mortgage-finance giant that had a negative net worth of $13.7 billion at the end of the third quarter, asked the Treasury Department for $13.8 billion and says it expects to receive the money by Nov. 29. The net loss widened to $25.3 billion after the company wrote down tax assets and providing for bad mortgages and securities, Bloomberg News reported Friday.

As the government tries to avert a financial-market collapse spurred by the worst housing slump since the Great Depression, Freddie’s demand adds to the government’s growing burden as it tries to avert a collapse in financial markets, Bloomberg said. The U.S. pledged $100 billion each to Freddie and larger rival Fannie Mae when it placed them into conservatorship in September. Fannie said this week it may need more money at the end of the year.

“You could very well get losses north of $100 billion on both of these companies,” Paul Miller, an analyst at FBR Capital Markets (FBR) in Arlington, Va.

Freddie Chief Executive Officer David M. Moffett, 56, named in September when the government seized control of the company, increased write-downs for bad mortgages and securities and took a charge against most of Freddie’s so-called deferred tax credits. Fannie CEO Herbert M. Allison Jr., 65, took similar steps earlier this week, causing the Washington-based company to record a $29 billion loss.

Like Fannie and Freddie, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC) have increased their efforts to stem foreclosures by aiding struggling borrowers by streamlining and modifying its loans.  Speaking of Citi, its CEO announced plans to slash total compensation expenses by 25%, or up to 60,000 jobs. And rumors have its chairman among those to be given his walking papers (A Reuters report Saturday stated that Citi would cut 10% of its 352,000-person work force).  Not to be outdone, Morgan Stanley (MS) will be cutting close to 10% of its institutional securities and asset management units.  In non-financial news, Sun Microsystems Inc. (JAVA) plans to reduce its workforce more than 5,000 jobs; Intel Corp. (INTC) and Best Buy Co. Inc. (BBY) offered pessimistic outlooks; Circuit City Stores Inc. (CC) filed for bankruptcy protection (just in time for the holidays), and retailers J.C. Penney Co. Inc. (JCP) and Macy’s Inc. (M) issued weak earnings reports.

In fact, after posting a $44 million loss for the third quarter, Macy’s may be looking to consolidate down to two divisions from its current four, Womens Wear Daily reported Friday. Sources told the trade journal that plans were calling for Macy’s Florida in Miami and Macy’s Central in Atlanta into the New York-based Macy’s East and San Francisco-based Macy’s West division, the industry trade journal reported.

Wal-Mart Stores Inc. (WMT) fared better than many competitors, the company also warned of a challenging quarter ahead.

Early last week, as was reported in this column a week ago today (Monday), China announced a $586 billion economic stimulus package that served to give a jumpstart to the global markets.  Unfortunately, the euphoria was short-lived (so what else is new?) as investors focused on the weak earnings reports, the uncertainty about the domestic automakers, and the restructured bailout plan.  Three days of intense selling meant $1 trillion of lost shareholder wealth.  With the Dow Jones Industrial Average plunging below the 8,000 level, bottom-fishers re-emerged late Thursday, propelling the index to a 900-point swing and its third-largest point gain ever. Volatility continued Friday as investors worried about the weak retail numbers (see below) and sold positions heading into the weekend (especially late in the session).  Oil prices fell below $60 a barrel to a 20-month low; gasoline pushed closer to a national average of $2 a gallon with consumers in Des Moines, Iowa (of all places) paying as low as $1.75.  At least, that’s good news for those “gloom-and-doom” retailers.   (Maybe they should tap into the bailout fund as well?)

Economic Matters

How quickly things can change. In June, the Organization for Economic Cooperation and Development (OECD) projected global economic growth to increase by 1.7% in 2009, as the agency believed the financial crisis had all but ended.  Remember, last summer, most U.S. Federal Reserve watchers also expected the next rate move to be higher as Federal Reserve Chairman Ben S. Bernanke and friends seemed more concerned about threats of inflation (with oil at a record of $145 a barrel) than any domestic (or global) recession.  Fast-forward to the present, the OECD now claims the developed nations of the world have slipped into a collective recession, and 2009 will bring a consolidated decline of 0.3% in GDP for its 30-member countries (with the U.S. suffering a 0.9% contraction).

By contrast, in a recent Wall Street Journal survey, the 54 participating economists believe that the domestic economy will begin to rebound by mid-2009 and slight growth will emerge by the fourth quarter.  (No shortage of contradictory predictions from “experts” these days.)  These same economists overwhelmingly believe that President Obama should reappoint Bernanke as the central bank chairman in 2010.  Late in the week, Bernanke stated that the world’s central bankers have pledged to work together to resolve the global financial crisis and even opened the door to another rate cut (below the current 1.0% target level for the benchmark Federal Funds rate).  U.S. President George W. Bush welcomed world leaders to the G20 economic summit by praising the benefits of capitalism (that some may be doubting these days) and warned against excessive government regulations (despite the ever-expanding global bailout plans).

[Editor’s Note: For Money Morning’s take on the U.S. economy, U.S. stock market and such other key 2009 topics as the state of economies in China, Latin America and Japan, and the outlooks for the prices of gold, oil and food, check out our “Money Morning Outlook 2009” series, which is just under way. We’ll also be looking at sovereign wealth funds, retail sales, alternative energy, IPOs, mergers and acquisitions, and more.]

A light week in the economic calendar brought little stress relief to investors (not to mention retailers).  Friday’s retail sales release was reported as a 2.8% decrease in October, the largest percentage decline on record.  While U.S. auto lots have been transformed into veritable ghost towns these days, the complete and utter lack of consumer confidence these days also resulted in lower sales of furniture, clothing, and virtually everything else.

However, a few eternal optimists remain who point out the reduced prices at the pumps should serve as an economic stimulus package of its own over the next few months.  Further, the plans to renegotiate mortgage terms will help many borrowers get a better handle of their cash-flow positions (without suffering foreclosure).

Weekly Economic Calendar

Source:U.S. Automakers, Freddie Mac and Foreign Exporters Next in Line for Bailout Handouts

American Express won the Fed’s approval unanimously and without the application’s standard 30-day waiting period because of “the unusual and exigent circumstances affecting the financial markets,” according to a Fed statement.

High unemployment and a severe drought of credit are plaguing the consumer market, causing them to spend less. Worse, it’s caused many to be unable to pay existing debts such as credit cards.

October was the first month in 15 years that credit card companies weren’t able to sell bonds backed by customer payments, Bloomberg reported. And this upgrade to commercial bank status allows American Express – the fourth-largest U.S. credit card company – access to government funds.
American Express becomes the third major institution to switch over to a commercial bank in as many months, joining Goldman Sachs Group, Inc. (GS) and Morgan Stanley (MS).

In the past year, American Express has lost nearly half its market value as it posted four consecutive quarters of declining profit.

Mixed Analyst Reactions

Oppenheimer Holdings, Inc. (OPY) analyst Meredith Whitney said that the approval will give American Express a more stable mix of funding and allow it to cut borrowing costs.

“Whether institutions like it or not, the only prudent thing to do is assume a protracted worst-case funding scenario,” Whitney said in a note to investors, Reuters reported.

While she maintained her “perform” rating on American Express’ stock, she said that “concerns for American Express and other consumer lending-related stocks continue to be worse-than-expected credit losses.”

Scott Valentin of Friedman, Billings, Ramsey Group, Inc. (FBR) wasn’t as generous, the Associated Press reported. While maintaining his “underperform” rating and $22 target price for American Express stock, Valentin said the company’s earnings and model “are under severe stress in the current environment.”

Source:American Express Now a Commercial Bank