Wednesday Look Ahead: GM Drives IPO Through Market Riddled with Worries, Muni Meltdown Continues

General Motors drives its massive IPO to market Wednesday, against a backdrop of worry about a China-led slowdown and the possible bailout of Ireland.


The General Motors stock offering is expected to price Wednesday after the close and is seen as a bright spot in a market that has become soured on sovereign debt worries and the threat of Chinese tightening. There also is growing disillusionment with the effectiveness of the Fed's quantitative easing program, as Fed officials came out in defense of it both on television and in web and newspaper interviews.

The dollarstrengthened Tuesday, as stocks and commodities sold off, and Treasury bonds saw a flight-to-safety bid. Even as the stock market sagged, GM was able to up the size of its much-anticipated offering by 30 percent. GM is expected to price its 478 million shares at about $22.4 billion, the higher end of a new range of $32 to $33 a share. The stock would start trading Thursday.

European finance ministers were to meet for a second day Wednesday in Brussels. The fate of an Irish aid package remained uncertain Tuesday evening. According to reports, an 80 billion euro plus aid package could be split between the Irish banks and government. The IMF late Tuesday said it was working with the European commission and European Central Bank at the request of the Irish government on the best way to provide any needed support.

"We need to wait another day to see what comes out of Europe," said UBS director of floor operations Art Cashin. He said the market was trading "two-thirds Ireland, one-third China" Tuesday.

China's rising inflation rate has been fuel for speculation that it will move to tighten. Early Wednesday, Chinese Premier Wen Jiabao said his government is preparing steps to tame price rises, adding his voice to official efforts to reassure consumers irked by a rapid rise in the price of food.

Shanghai's stock market tumbled 4 percent Tuesday on fears rising rates would curb the country's strong growth. Commodities were particularly stung by the speculation. The Reuters/Jefferies CRB index of commodities futures fell 3.2 percent. Gold was down 1.5 percent to $1,228.90 per ounce, and oil was down nearly 3 percent at $82.34 per barrel.

A U.S. inflation measure, the consumer price index, is reported Wednesday at 8:30 a.m. Housing starts and building permits are reported at 8:30 a.m. Investors will also be watching for Boston Fed President Eric Rosengren's speech at 8 a.m.

Several retailers report quarterly earnings Wednesday, including B.J.'s Wholesale,Target, and Limited Brands. Applied Materialsreports earnings after the bell.

Whither Markets

The Dow fell 178 points or 1.6 percent to 11,023 Tuesday, while the S&P 500 slid 1.5 percent to 1178, just above a key support level.

"I think it's still premature for investors to worry," said Harris Private Bank chief investment officer Jack Ablin. "The only cause of concern is if people are looking through Ireland to Spain. Ireland is about the same size economy as Greece."

Ablin said the market has watched the Irish situation for days but has just become concerned about systemic risk. "The only real risk really is a political risk, not a financial risk. I think this could potentially set the stage for disgruntled EU members to leave the union," he said.

German Chancellor Angela Merkel spoke to that concern late Tuesday, stating that she did not believe the Euro zone was in danger but that there is better economic coordination and those that are not as competitive must improve.

Ablin said the stock market sell off should provide an opportunity to get into areas that he has been eyeing but found pricey, like REITs.

"These headlines are going to ebb and flow and this is part of the reason, I think this is not a straight shot up. This is not necessarily the beginning of a multi-year bull market, but one that's likely to be secularly sideways and that's going to plague us until 2015," he said.

The dollar gained about 0.6 percent against the Euro, to a level of $1.3489 Tuesday. Treasurys gained, driving the yield on the 10-year to 2.849 percent. The yield had been above 2.9 percent for part of the day as the Treasury market continued to see selling pressure which gave way in the afternoon.

Nomura Americas chief Treasury strategist George Goncalves said that early selling was part of the same unwind trade that drove stocks and commodities lower. "We had all markets benefit from the speculation of (quantitative easing) QE2, even before the news came out. Now that we know what we're up against and how it's orchestrated, all markets will be affected if there's any downside. A lot of the weak longs have been folding. It's not an asset allocation trade between stocks and bonds. All boats rose together. Now they're coming down together," he said.

He said positions had become overbuilt. "I'm welcoming this move. Let's see where we settle. It's happening at year end. People are not going to take on major new risk at year end. It may create a drifting kind of market at the lows, but then we'll see some renewed animal spirits as we get into 2011," he said.

"When all the dust settles, when all the asset classes settle, we'll see where the leadership is, and I'm of the view the leadership should come from risk assets because the world economy is growing," he said.

Muni Mess

The flood of new municipal issues continued to swamp that market Tuesday, as well as add a weight to Treasury prices. The rush of new issuance collides with a growing lack of confidence in the ability of local and state governments to pay back their debt, as tax revenues decline.

"Starting at 10, running to 2 pm. today, there were 65 deals that needed to have bids submitted to them competitively, and on a negotiated basis, there were at least another 40 deals being priced this week," said Peter Delahunt, senior vice president and national sales manager at Raymond James.

Traders, in the stock and bond market, have been eyeing the MUB municipal ETF which took a steep dive as spreads widened in the municipal bond market. The yield on the 30-year AAA Municipal Market Data index has risen from 3.71 Oct. 12 to 4.42 Tuesday.

"I'm not going to fool anyone and say municipals aren't incredibly stressed and facing huge budgetary problems, but for the most part the bond holders are protected. It would take the act of politicians to violate their own laws to pay for other services before they pay the debt service," Delahunt said.

"QE2 prompted investors to become much more concerned with inflation protection. So, the negative bias in bonds exists from the bond market back drop in Treasurys, and that negative bias has been furthered by media headlines and fears of a credit crisis. That has been motivating fund outflows which created further demand imbalances. We're getting huge supply, at the same time we're seeing people shy away from the bond market," he said.

The heavy supply is in part the result of issuers that need to raise capital for budgetary reasons, as well as those who need to act before year end. "The BAB municipal issuers that want to issue in the form of Build America bonds and receive a 35 percent subsidy rate on the coupon payment from the Treasury need to do it before the legislation suspends at year end because there's uncertainty about whether it will be extended," he said.

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