Stocks poised for another advance

NEW YORK (CNNMoney.com) — Wall Street was set for a higher open Thursday after Treasury Secretary Tim Geithner offered reassuring comments about U.S. banks, investors awaited chain store sales and General Motors posted a quarterly loss that beat expectations.

At 7:16 a.m. ET, the Dow Jones industrial average, S&P 500 and Nasdaq-100 futures were higher.

Futures measure current index values against perceived future performance and offer an indication of how markets may open when trading begins in New York.

U.S. stocks surged Wednesday after early reports of the government’s so-called stress tests suggested that the major banks are better capitalized than some had thought.

Geithner further reassured investors when he said in a TV interview Wednesday night that none of the 19 banks that were tested are at risk of insolvency.

David Jones, chief market strategist at IG Markets in London, said that “reassuring noises” from Geithner about the financial health of the banks, and a positive ADP report on the job market on Wednesday, helped to fuel investor sentiment.

“I think, at the moment, the market is in a good frame of mind about the jobless numbers,” said Jones.

Retailers: A number of retailers were due to release their April same-store sales.

Investors will be watching the results closely to see whether consumers are starting to spend again.

Corporate results: General Motors (GM, Fortune 500) reported a quarterly loss of $6 billion, which was better than expected. The automaker also said that sales fell 21% as it burned through $10 billion in the first quarter.

Another ailing behemoth, AIG (AIG, Fortune 500), releases its financial results after the closing bell.

Cisco (CSCO, Fortune 500) reported a drop in quarterly profit and sales late Wednesday, but the tech bellwether said it sees signs of a turnaround.

Banks: Regulators are due to reveal the results of their stress tests on 19 of the largest U.S. banks after the market close, but there has been a flurry of leaks in the run-up to the official release.

According to reports, Bank of America (BAC, Fortune 500) may need roughly $34 billion in capital while rivals Wells Fargo (WFC, Fortune 500) and Citigroup (C, Fortune 500) have also been frequently mentioned in recent days as facing capital shortfalls.

Job market: At 8:30 a.m. ET, the Labor Department will release its weekly report on initial jobless claims. Economists expect 635,000 claims to have been filed in the week ended May 2, according to a consensus of economists surveyed by from Briefing.com.

World markets: Asian stocks finished the session in positive territory, with Japan’s Nikkei soaring nearly 5%. European markets were also higher, ahead of an expected rate cut from the European Central Bank. 

Oil and money: The dollar rose against the euro and the yen, but slipped versus the British pound. Oil prices jumped $1.45 a barrel to $57.79.

ECB cuts key interest rate to new record low of 1%

FRANKFURT, May 7 (Reuters) - The European Central Bank cut its benchmark interest rate by 25 basis points to a new record low of 1.0 percent on Thursday, as expected.

But the ECB kept its overnight deposit rate, which is acting as a floor for money markets, at 0.25 percent, narrowing the gap between its policy rates instead of cutting the lowest of these to zero.

The ECB also cut its marginal lending rate by 50 basis points to 1.75 percent, from 2.25 percent — keeping the rate corridor symmetrical. The new rates will take effect on May 13.

All 79 economists polled by Reuters had expected the ECB to cut the main refinancing rate to a new record low of 1.0 percent this month. Euro zone inflation is low and the economy is shrinking fast, although some data have shown signs of improvement.

Analysts and markets are now awaiting President Jean-Claude Trichet’s news conference at 1230 GMT, when he is due to announce whether the ECB will use more alternative policy measures to support the economy.

The ECB is tipped to extend the maximum terms for its liquidity operations but could also follow other central banks into direct asset purchases.

Markets are also keen to see whether Trichet will say that 1 percent is the bottom of the current rate cycle and if he signals that the ECB plans to keep rates low for some time. (Reporting by Krista Hughes; editing by David Stamp)

Marchionne to head Chrysler

MILAN (AP) — Fiat Group CEO Sergio Marchionne will become the chief executive of Chrysler after the U.S. automaker emerges from bankruptcy, a Fiat spokesman confirmed Thursday.

Marchionne, the 56-year-old dual Canadian and Italian citizen, has been tipped for the job since the Italian automaker reached a deal to take a 20-percent stake in the bankrupt Chrysler. Chrysler CEO Bob Nardelli has said he would step down when the bankruptcy is complete, which would make room for Marchionne.

U.S. President Barack Obama’s administration has said Chrysler could comes out of a “surgical” bankruptcy in 30 to 60 days — much more quickly than usual.

Marchionne, meanwhile, also is in talks to take over General Motor’s operations in Europe — Germany’s Opel, Britain’s Vauxhall and Sweden’s Saab, and Fiat confirmed that it is also interested in GM’s Latin American operations.

Marchionne’s vision to create the second largest automaker in the world and the largest in Europe has startled analysts, who wonder if he can pull it off. Marchionne, who returned the loss-making Fiat since taking over as CEO in 2004, has said that automakers will need to made some 5.5 million autos a year — more than twice Fiat’s current production — to survive.

“In a way all of this has come a little bit too fast,” said Howard Wheeldon, a senior strategist at BGC Partners. ” One would like to see two or three years of really strong results in Europe and in Italy for Fiat before they delve out this far and fast. I am extremely worried about this German thing and their wanting to become No. 2 in the world. It will end in tears.”

Fiat’s vision is to spin off Fiat Group Automobiles, which includes the Fiat, Lancia and Alfa Romeo brands, to create a new car company including Chrysler, GM Europe and, now, GM’s Latin American operations. Fiat said the new company would make over 6 million cars.

Fiat would leave the company’s debt — which was euro6.6 billion at the end of the last quarter — with Fiat Group SpA, which will also retain the Ferrari and Maserati brands, Fiat said.

Unlike the Chrysler deal, where Fiat assumed no debt, Fiat said talks in Germany include assuming Opel’s debt.

Marchionne, who was in the United States for talks with GM executives, was to depart Thursday for more talks in Germany.

He met Monday with Chancellor Angela Merkel and her Economics Minister, Economy Minister Karl-Theodor zu Guttenberg, who said Fiat is seeking euro5-7 billion ($6.6-9.3 billion) in short-term financing from governments in countries where GM Europe operates. Europe-wide, which could be covered by loan guarantees from various governments. That would also include Britain, Spain Belgium, Poland.

Germany’s Handelsblatt daily said Fiat presented a 46-page paper “Project Phoenix” to the Economics Ministry that confirms that Opel’s engine factory in Kaislerslautern is threatened with closure, as zu Guttenberg said. The work force at two other factories, in Ruesselsheim and Bochum, are to be reduced but not closed.

Opel employs some 26,000 people in Germany and the nation’s powerful unions have been reluctant to embrace Fiat’s plans amid fears that jobs will be slashed.

Marchionne turned around the loss-making Fiat since taking over in 2004, ending a 17-quarter string of losses that held until the current crisis hit Fiat’s bottom line in the first quarter of this year.

Marchionne’s achievements have also won him favor with the Obama administration, which has tapped Fiat to take on a 20-percent stake in the bankrupt automaker Chrysler and supply it with small car technology that it lacks and help it expand beyond its only market, North America.

UBS auto analyst Philippe Huchois agreed that Marchionne was moving swiftly, but “if someone can do it, I would put money on him.”

“From the beginning, he considered this a nonsensical industry in terms of the amount of capital being spent. The real world has provided him with an opportunity that fits his need to reduce capital. Those opportunities didn’t exist six months ago,” said Huchois.

AP Writer Melissa Eddy contributed to this report from Berlin.

Bank of America told to find $34bn more capital

The US government has told Bank of America that it needs to bolster its capital cushion by as much as $34bn (£22.6bn) after a stress test found weaknesses in the bank’s ability to withstand any further shocks.

Bank of America’s executives learned of the figure from treasury officials before today’s public release of the results of tests on the 19 largest US financial institutions.

As many as 10 banks, including major players such as Citigroup and Wells Fargo, are likely to be told that they need extra capital. But BoA’s shortfall could be the largest of any bank.

The North Carolina-based bank, which is the largest US high-street player in terms of deposits, has been financially weakened by its purchase of the troubled Wall Street brokerage Merrill Lynch, which lost $15bn in the final quarter of last year. Angry about the deterioration in the bank’s condition, shareholders last week voted to strip the chief executive, Ken Lewis, of his title of chairman.

A BoA spokesman declined to comment yesterday, but the bank’s chief administrative officer, Steele Alphin, told the New York Times that he was disappointed by the treasury’s findings.

“We’re not happy about it because it’s still a big number,” said Alphin. “We think it should be a bit less.”

BoA has a few options to generate the money. It could sell assets - a lock-up provision expires this week allowing BoA to sell a portion of its stake in China Construction Bank, worth about $8bn. Several subsidiaries could be put on the block, including First Republic, a bank acquired as part of BoA’s purchase of Merrill Lynch.

But with few investors willing to subscribe for public fundraisings by troubled banks, BoA may have to go further by converting part of the US government’s $45bn in preferred shares to common equity, bolstering the tangible funds at its disposal.

Experts believe the government could set a target of 3% to 4% for banks’ tangible common equity to risk-weighted assets.

Paul Miller, a banking analyst at FBR Capital Markets, calculated that a target rate of 4% would require 11 of the 12 leading commercial banks to raise capital - including BoA, Citigroup, Wells Fargo, US Bancorp and Sun Trust. The only exception with a high street network would be JP Morgan, although Wall Street firms such as Goldman Sachs and Morgan Stanley would also be judged secure.

“Banks will most likely bolster their capital levels by converting preferred equity [including government bailout money] into common equity, as it is the cheapest and easiest route,” said Miller in a research note. “However, we encourage banks to use the recent market rally to raise money in the open market.”

Conceived by the Obama administration as a way to reassure the public and the markets over the soundness of the banking system, the treasury’s stress tests have become an increasingly delicate political issue. The treasury was initially reluctant to make its findings public but has agreed to publish them after the US stockmarket closes today. Rumours have been rife about the findings. Certain reports have suggested that Citigroup may have to raise up to $10bn.

Banking commentators are concerned that the public may misinterpret negative results as a judgment on the security of deposits fully insured by the government-backed Federal Deposit Insurance Corporation.

“The government has to control the dissemination of these results very carefully,” said Gerard Cassidy, of RBC Capital Markets. “They have to point out that there’s not a single bank out of these 19 that will fail in the US. They’ve got to get it into people’s heads and into the marketplace.”

GM Loss Is Smaller Than Estimates as Bankruptcy Deadline Nears

May 7 (Bloomberg) – General Motors Corp. posted a $5.9 billion first-quarter loss that was narrower than analysts’ estimates as it pressed stakeholders to forgive $44 billion in debt before a government-imposed June 1 bankruptcy deadline.

Excluding some costs, GM’s loss of $9.66 a share was smaller than the average $10.97 loss estimate from 11 analysts surveyed by Bloomberg. The net loss widened to $5.98 billion, or $9.78 a share, from $3.3 billion, or $5.74, GM said today in a statement. Revenue tumbled 47 percent to $22.4 billion.

Chief Executive Officer Fritz Henderson said this week he still wants to avoid taking the 100-year-old automaker into court protection. Such a step is more probable now, he said, as bondholders resist a plan ordered by the Obama administration to exchange $27 billion in debt for equity in a reorganized GM.

GM had $11.6 billion in cash at the end of March, a decrease from $14.2 billion as of Dec. 31. The biggest U.S. automaker used $10.2 billion more in cash than it generated from operations, which was partially offset by new government loans.

GM is surviving on $15.4 billion in emergency federal aid. Before today, losses at the company totaled $82 billion since 2004, its last profitable year.

President Barack Obama set the bankruptcy deadline on March 30, giving GM 60 days to restructure out of court. He rejected the company’s original plan to shed 47,000 jobs this year and cut about $28.5 billion in union and bond debt, saying it wasn’t enough to return the automaker to viability.

Dropping Pontiac

Under the survival plan unveiled April 27, GM agreed to kill the Pontiac brand, added two more plant closings and said at least 7,000 more union jobs will be eliminated by the end of next year.

GM fell 19 cents, or 10 percent, to $1.66 yesterday in New York Stock Exchange composite trading. The shares declined 39 percent in the first quarter.

The company’s 8.375 percent bonds due in July 2033 rose 0.35 cent on May 5 to 8.4 cents on the dollar, yielding 98 percent, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority.

GM probably will be removed from the Dow Jones Industrial Average after almost 74 years, John Prestbo, the editor and executive director of Dow Jones Indexes, said in an interview yesterday.

The Obama administration’s directives to GM included asking Rick Wagoner to step down as CEO and chairman, elevating Henderson to CEO and naming director Kent Kresa as chairman. Kresa is now replacing a majority of the 11-member board.

U.S. Control

GM’s April 27 plan envisions that the U.S. would control at least 50 percent of 60 billion shares in a restructured company, and a union-run health-care fund would get 39 percent. Unsecured bondholders would get 10 percent and existing shareholders would get 1 percent, GM said.

Bondholders would get 225 shares in the new automaker for each $1,000 in principal. Upon completion of the exchange, GM would do a 1-for-100 reverse split of the stock.

Without support from 90 percent of the bondholders by May 26, GM plans to file for bankruptcy, Henderson said after unveiling the offer.

Bondholders countered that offer with a proposal that GM give them 58 percent of the equity in the reorganized company. Henderson told reporters earlier this week that the U.S. Treasury has indicated it “would not be supportive of shareholding in excess of 10 percent” for the bondholders.

The discussions among GM, Obama’s car task force and the bondholders are unfolding against a U.S. auto market that shrank 34 percent last month.

On April 23, GM announced as much as 9 weeks of downtime at 14 North American plants through mid-July to adjust output to match dwindling demand.

Since then, the automaker has added back a week of production at a Texas sport-utility vehicle plant and two weeks at a Michigan truck plant. GM said yesterday it canceled a scheduled vacation week at its Oshawa, Ontario, car plant because of strong demand for the new Chevrolet Camaro.