MarketView for April 12

 

 

 

Summary 

 

Monday saw the Dow Jones industrial average closed above the psychologically important 11,000 level for the first time in almost 19 months as expectations of solid first-quarter earnings spurred buying in financial, energy and industrial sectors. The S&P 500, which is up 7.2 percent since the start of the year, rose to within 1 point of the 1,200 level, a critical resistance level. It is up 76.9 percent since hitting bottom in March 2009.

 

Alcoa rose 1.3 percent to $14.57 in regular trading, making it one of the Dow's top performers on a day when aluminum prices touched an 18-month high. After the market's close Alcoa kicked off the first quarter earnings season, posting earnings of 10 cents per share, excluding special items, which was in line with the Street’s consensus number.

 

News of an aid plan for Greece calmed worries about sovereign debt risk, helping sentiment on Wall Street. Helping to relieve worries about sovereign debt that could have repercussions through other parts of the continent, euro zone ministers signed off on a 30 billion euro ($40 billion) rescue package for Greece on Sunday. But they stressed that Athens had not yet asked that the plan to be activated.

 

Takeover news also underpinned the market, with power producer Mirant Corp agreeing to acquire RRI Energy. Mirant shares shot up 18.2 percent to $12.68, and RRI Energy gained 14.7 percent to $4.53. In addition, Palm the smart phone maker, has hired bankers to explore its options, including a sale of the company. Palm shares jumped 17.1 percent to $6.04.

 

Other companies scheduled to report this week are Google, up 1.2 percent to $572.73; General Electric, up 1.03 percent to $18.71, and JPMorgan Chase, up 0.4 percent to $46.14.

 

Caterpillar closed up 2.2 percent to $66.73 as a result of a brokerage firm upgrade.

 

In a sign of underlying optimism about the market's immediate prospects, the CBOE Volatility index .VIX, a popular measure of investor fear, hit its lowest close since July 19, 2007, closing at 15.58.

 

Alcoa Kicks Off Earnings Season

 

Alcoa posted a narrower first-quarter loss on Monday on higher revenue from metal prices, meeting Wall Street estimates and sending its shares up after hours. The company took substantial charges for shutting down two smelters and for changes in federal health-care reform, but it said its markets were gradually improving as both policy trends and consumer sentiment were positive for aluminum demand.

 

According to the company, its net first-quarter loss was $201 million, or 20 cents per share, compared with a loss of $497 million, or 61 cents per share, in the same quarter of 2009.

 

Alcoa reported an operating loss of 19 cents per share, while revenue rose to $4.89 billion from $4.15 billion. Excluding special items, the company reported a profit of 10 cents per share.

 

Alcoa said restructuring and environmental costs, primarily from the decision to permanently close two smelters in Badin, North Carolina, and Frederick, Maryland, totaled $135 million, or 13 cents per share.

 

It also took charges for tax impacts totaling $112 million, or 11 cents per share, primarily as a result of changes in federal health care laws; and $48 million, or 5 cents per share, for mark-to-market changes in derivatives and the impact of power outages.

 

Alcoa said results from continuing operations in the first quarter improved $72 million over the fourth quarter 2009, driven by higher realized prices for alumina and aluminum and productivity gains, which were partially offset by the impact of inventory accounting, lower volumes and higher energy costs.

 

Aluminum, used in automobile and aircraft manufacturing, and for kitchen wrap and beverage cans, reached a peak of $3,380 per ton in July 2008. But it slumped 35 percent later as the global economy went into recession and has only slowly risen. Although the metal was selling at an 18-month high over $2,400 per ton on Monday, it only gained about 3.3 percent during the first quarter.

 

The company reported increased business in its alumina, aluminum and engineered products sectors, but said there was a drop in its beverage can market as a result of its decision to curtail sales to a North American can sheet customer.

 

Palm Getting Ready to Place Itself in Play

 

Palm Ihas hired bankers to explore several options, including a sale of the company, whose smartphone line of products have suffered badly against both the iPhone and the BlackBerry. Palm is working with Goldman Sachs and investment banker Frank Quattrone's Qatalyst Partners.

 

Alternatives include the pursuit of additional capital investment or an attempt to reach a licensing agreement for its WebOS phone operating system software, the source said.

 

News that Palm had hired Goldman and Qatalyst was first reported by Bloomberg, and followed several days last week when the company's stock swung wildly on takeover rumors. For the week, Palm shares were up 32 percent.

 

Speculation about a sale of Palm has swelled, as sales of its Pre and Pixi handsets flag amid concerns that it cannot compete against Research in Motion Ltd's BlackBerry, Apple Inc's iPhone or phones powered by Microsoft Corp and Google Inc software.

 

However, Palm's exploration may not end with a sale, given Chief Executive Jon Rubinstein's optimism -- at least publicly -- that the company can be turned around. Last month, Rubenstein told analysts that "the issues we are facing are far from insurmountable" and that the long-term potential for Palm "remains strong." He reiterated that stance in an interview last week with Fortune magazine, in which he said Palm's transformation had merely "hit a speed bump."

 

Suitors would likely pay more than $1 billion for Palm. As of Friday's close, it had a stock market value of $870 million, and deals for technology companies are carrying a premium of about 30 percent these days, according to bankers. Any buyer would face additional integration costs.

 

Still, the price tag could be far lower than what Palm would have fetched last year, following the introduction of its Pre phone. In the past six months, the money-losing company's stock has tumbled 69 percent, and its market capitalization has tumbled from about $2.4 billion.

 

For years, Palm was considered a target for larger companies hoping to enter or expand in the mobile market. Analysts say its most valuable asset is the WebOS operating system, which yielded rave reviews but lackluster sales. Palm shipped a total of 960,000 smartphones in the February quarter, but only 408,000 of those went to consumers.

 

What may have pushed Palm to consider a sale is the intensifying competition in smartphones, among the hottest areas in consumer electronics. Not only does Apple have plans to improve its already popular iPhone, but Microsoft on Monday unveiled another new line of phones. Palm's effort earlier this year to bring its Pre and Pixi phones to Verizon -- after they had been exclusively sold by Sprint Nextel Corp -- failed to drive sales higher.

 

Interest in Palm could come from a number of corners, including computer makers and rival handset makers. HTC "opened discussions about an intent to acquire" Palm, Taiwan's Economic Daily News reported on Friday. Earlier in the week, rumors circulated about a potential bid from Lenovo Group. Dell Inc and Microsoft, as well as handset manufacturer Nokia and Motorola Inc have been named in the past as potential suitors.

 

NBER Cannot Make Up Its Mind

 

The economists who determine the dates when recessions begin and end have yet to agree on what seems to be a foregone conclusion on Wall Street: the recession is over. The National Bureau of Economic Research's business cycle dating committee said on Monday it was too soon to say precisely when the recession ended. At least one of its members wasn't convinced it has, underscoring how fragile the recovery remains even though the economy probably just wrapped up its third straight quarter of growth.

 

NBER is notorious for waiting so long to announce recession dates that its decisions are usually a non-event for investors. Indeed, even Monday's cautious non-decision did not stop the Dow Jones industrial average from hitting an 18-month high.

 

The group said in a statement that although most economic indicators had turned up, the committee thought it "premature" to pinpoint the month that the recession officially ended.

 

Economic data is subject to revisions, sometimes major ones that turn positive readings on gross domestic product or employment negative, making it hard for NBER to make a call. Comments from committee members suggested the reluctance to declare the downturn over was based on more than revisions.

 

"I think there's a risk -- less of a risk than a month ago, nevertheless a risk -- that this economy could turn back down again," committee member and Harvard University economist Martin Feldstein said on CNBC.

 

"If it did that sometime soon, I don't think we'd want to call the increase that we've seen in the last six months a recovery. I think we'd want to say that that was just a temporary rise in what was otherwise a longer economic downturn," he said.

 

However, fellow Harvard professor and committee member Jeffrey Frankel declared on his blog last week the recession was over, pointing to the Labor Department's report that employment rose in March.

 

Most Wall Street economists think the downturn probably ended in June or perhaps a couple of months later. The economy resumed growth in the third quarter of 2009, although employment continued to contract for several more months. Payrolls have recorded only two monthly gains since the recession started -- in November 2009 and March 2010.

 

Domestic economic growth has been more robust than Europe's, which slackened at the end of 2009, heightening concerns that the recovery might falter. Meanwhile, China has led a powerful resurgence among major emerging economies, helping to lift global output.

The NBER defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

 

That means it does not follow rules of thumb such as two consecutive quarters of GDP to signal a recession, nor does it declare a downturn over as soon as GDP turns positive.

 

A closer look at indicators the NBER watches helps explain its reticence. For instance, while real GDP has been growing since the middle of 2009, personal income flattened in February and industrial production growth has been inconsistent.

 

Harvard's Frankel said another problem for the NBER is that it must determine the month in which the recession ends, yet economic output is reported on a quarterly basis.

 

In response to a query from Reuters, he said the committee looks at both GDP and national income, a measure that gauges output based on income rather than spending. Gross domestic income did not turn positive until the fourth quarter of 2009, one period after GDP resumed growing.

 

The difference between GDP and GDI has been a hot topic of discussion among data watchers recently, particularly after a Federal Reserve economist released a paper suggesting that GDI gave a more accurate reading of the business cycle.

 

Of the data that is reported monthly, Frankel said labor market indicators were the most important. His favorite measure, total hours worked, troughed in October.

 

"Total hours worked tends not to lag behind economic activity as much as employment does, because firms start lengthening the workweek of their existing workers before they start hiring new workers," Frankel said.

 

The NBER said its committee did reaffirme that the recession began in December 2007.