Regulators step in at troubled ACA Capital

Bond insurer relinquishes authority to Maryland Insurance Administration; S&P earlier downgraded ACA.

NEW YORK (AP) -- The bond insurance unit of ACA Capital Holdings Inc. has agreed to turn over substantial control to Maryland insurance regulators, the company said in a Securities and Exchange Commission filing late Wednesday.
The agreement with the Maryland Insurance Administration gives regulators the authority to approve or reject any deals made by ACA to pledge assets, pay dividends or engage in "certain material transactions." ACA's bond unit also agreed not to object to any move by regulators to declare it delinquent on its obligations.
ACA has faced doubts over its future since Dec. 19, when Standard & Poor's downgraded ACA Financial Guaranty Corp. to the junk "CCC" rating from an investment-grade "A" rating. Like other bond insurers, ACA has substantial exposure to weakening credit markets, which has led to speculation it could have difficulty meeting its insurance obligations if defaults worsened.
In the SEC filing, ACA said that its insurance contracts typically include provisions that would have required it to post collateral in the event of a rating downgrade -- at least $1.7 billion in collateral based on its Sept. 30 obligations, ACA said. But, the company said it has received a waiver on those additional collateral requirements through Jan. 18.
ACA also said that it entered into the deal with Maryland regulators before the S&P downgrade.

Citi could cut dividend by 40%

Goldman Sachs analysts said the bank might write down billions more than expected and cut its dividend to preserve capital.

NEW YORK (AP) -- Citigroup could cut its dividend by 40 percent and write down billions of dollars more than expected in the fourth quarter, Goldman Sachs analysts said, forcing it to raise even more capital than it already has.
"Although we have seen many firms take the appropriate actions in recent weeks as they relate to write-downs and capital raises, we still believe it will be a couple of quarters before the current credit crisis is fully digested by the markets," wrote Goldman analysts William F. Tanona, Betsy Miller and Neil C. Sanyal in a note to investors late Wednesday.
The analysts said Citi could write off as much as $18.7 billion in the fourth quarter.
Goldman's projection estimates write-offs as much as 70 percent higher than the $8 billion to $11 billion Citi forecast in early November, when it ousted Chief Executive Charles Prince as the extent of its bad bets in mortgage-related debt became known.
They also suggested the bank could cut its dividend by 40 percent and may need to raise $5 billion to $10 billion more cash.
That would come on top of a $7.5 billion infusion Citi received when it sold a 4.9 percent stake to the Abu Dhabi Investment Authority in late November.
Goldman increased its estimate for a fourth-quarter loss to $1.33 per share, from 52 cents per share, based on the higher writedown prediction. Analysts polled by Thomson Financial, on average, predict a loss of 63 cents per share for the fourth quarter, which ends Monday.
Citi (C, Fortune 500) shares edged down 15 cents in premarket trading, from their close Wednesday at $30.45.
CIBC perdicts more losses for Merrill Lynch
The Goldman team also said they expect an additional $11.5 billion write-off from Merrill Lynch & Co., and increased their loss estimate for the broker to $7 per share for its fourth quarter, versus a prior forecast for a loss of $1.50 per share. Wall Street, on average, expects Merrill to report a loss of $2.78 per share, according to Thomson Financial.
Merrill (MER, Fortune 500) shares were trading flat in the premarket from their $54.54 close.
For JPMorgan, the Goldman analysts see a $3.4 billion writedown, and cut their profit estimate to 65 cents per share, from $1.04, noting in particular concerns about "higher charge-offs and provisions for the firm's consumer business, particularly credit cards and mortgage."
Analysts, on average, see JPMorgan (JPM, Fortune 500) posting a profit of $1.03 per share, according to Thomson Financial. JPMorgan shares closed at $44.94 Wednesday and were trading down slightly in very light trading early Thursday.

Pakistan violence could hurt stocks

Reports of death of Bhutto in suicide attack turns futures lower.

NEW YORK (CNNMoney.com) -- Stock futures turned lower early Thursday after former Pakistani Prime Minister Benazir Bhutto was killed in a suicide attack leaving a rally in Rawalpindi, Pakistan.
At 8:35 a.m. ET, Nasdaq futures were down after being up slightly before the first reports of her death shortly after 8 a.m., while S&P futures fell further into negative territory.
Trading had been expected to be light as many market participants continue their year-end holiday celebration, which could add to market volatility.

Oil was slightly higher ahead of the government's weekly inventory report, as prices rose from earlier lows following the report of Bhutto's dealth. U.S. light crude was up 8 cents to $96.05 a barrel in electronic trading.
Asian markets ended mostly higher, although Tokyo's Nikkei index lost 0.6 percent.European stocks gained ground, as London returned from an extended holiday, although those markets also fell off of earlier highs.
The dollar was flat against the euro and lower versus the yen.
Economic reports showed much weaker demand for durable goods than had been forecasts as November orders were up only 0.1 percent, rather than the 2.2 percent jump that had been forecast. Weekly initial jobless claims came in higher than forecasts.
The latest reading on consumer confidence for December will be released at 10 a.m. ET.
In corporate news, Internet search leader Google ( GOOG, Fortune 500) suffered a legal setback when a federal appeals court revived a patent infringement claim by HyperPhrase Technologies that had been dismissed earlier in the month.
Wal-Mart Stores (WMT, Fortune 500), the world's largest retailer, announced late Wednesday it is having problems processing gift cards due to what it described as an error in a third-party verifier's systems.
Hollywood had a good weekend ahead of Christmas, with a total box office of $160 million, up 34 percent from a year earlier. The leading movie was "National Treasure: Book of Secrets" from Walt Disney (DIS, Fortune 500), which sold $65.4 million in tickets over the extended five-day holiday.
Student lender Sallie Mae (SLM, Fortune 500) announced plans late Wednesday to sell common and mandatory convertible preferred stock in order to raise $2.5 billion. Shares lost nearly 6 percent in after-hours trading on the news.
The Wall Street Journal reported that News Corp. (NWS, Fortune 500) unit Twentieth Century Fox and Apple (AAPL, Fortune 500) are preparing to announce a deal in which Fox movies would be available for rent digitally through Apple's iTunes store.

Beware the dreaded R word

You don't know whether we're in a recession until months after it starts. But investing successfully requires looking forward, not backward.
By Allan Sloan , senior editor at large

(Fortune Magazine) -- Everyone and his brother seems to be talking about recession these days. It dominates every public investment discussion and is the topic 24/7 on cable TV. But let me tell you a little secret: When it comes to investing, the question of whether we're in a recession (or are heading for one) just doesn't matter.
How in the name of Alan Greenspan, Ben Bernanke and all the other economic saints and seers can I be so dismissive of something that's attracting so much attention? Because while the economy obviously matters a lot, both politically and economically, the "R" word is irrelevant to people who want to know how to place their bets on the markets.
Gather around the campfire, folks, and I'll tell you why.
It's actually elementary. Investing successfully is about looking ahead, while determining whether we're in a recession involves looking behind. Way behind. We won't know that a recession has started until months after it's begun. And by that time, things in the economy may well be getting better rather than worse - which might make it a good time to invest.
Now, exactly what is a recession? Opinions vary. Many people think that a recession is defined as two consecutive quarters in which "real" gross domestic product - GDP adjusted for inflation - declines. If you accept that definition, which I don't, you don't find out that a recession is underway until six months - two calendar quarters - after it has started. (Sorry, too late!) If you use what I consider the proper definition - a declaration by the National Bureau of Economic Research's business cycle dating committee that the economy has peaked - you may have to wait even longer. Nevertheless, I prefer the NBER version because it's the collective opinion of seven savvy people rather than a rote formula.
"We wait long enough so that the existence of a recession is not at all in doubt," Bob Hall, a Stanford business professor who chairs the cycle dating committee, told me in an e-mail. "We concentrate on finding the date of the peak in activity, usually at a time the press [has] lost interest in the question of whether we are in a downturn." Typically, Hall wrote, the committee makes its call six to 18 months after the downturn started - or economic activity peaked, depending on your point of view.
I won't bore you with all the grubby details, which you can find for yourself on nber.org. One thing that will leap out at you is the contrast between economic reality and what many people believe. For example, conventional wisdom is that the devastation wrought on Sept. 11, 2001, sent the U.S. economy into a tailspin. The reality, according to NBER, is that the economy was already in a recession, which had started in March 2001 (or, some committee members now feel, even earlier) and ended in November - two months after 9/11. The committee, however, didn't announce this until July 17, 2003. By then, the popular assumptions about the effects of 9/11 were set in stone.
I'm not naive, and I know that the question of whether there's a recession has enormous political implications for the 2008 elections, which is a major reason so many of my colleagues in the media are obsessed with it. But we're talking about investments here, not politics.
I have no idea if we're in a recession or heading for one. Nor do I know where the market is going over the next few months. If I did, would I tell you for $4.99 ($5.99 Canadian)? What I do know is that if you want to do well in the market, you've got to think ahead, not behind. The "R" word isn't helpful. What you need is the "F" word: foresight.