MarketView for April 28

 

 

 

Summary 

 

Share prices began to regain some lost ground on Wednesday after the Federal Reserve pointed to signs of strength in the economy, comments that gave some relief to investors worried about possible debt defaults in Europe. The Fed's comments on the economy and its statement that it would keep interest rates low for an extended period lifted bank shares. JPMorgan Chase rose 2.5 percent to close at $43.46. At the same time, bottom feeders began to go after the shares beaten-down in Tuesday's selloff after debt downgrades for Greece and Portugal.

 

Worries about some euro zone nations' fiscal health have weighed on global markets for months. Some investors said the Fed had Europe's turmoil in mind when designing its policy statement.

 

The policymaking Federal Open Market Committee said in a statement after a two-day meeting, "Economic activity has continued to strengthen and ... the labor market is beginning to improve." Those comments helped to ease investors' concerns about events across the Atlantic when Standard & Poor's cut its credit rating on Spain by one notch, citing a more protracted period of sluggish growth than previously expected.

 

Energy and financial shares were the top gainer, with Exxon Mobil adding 1.4 percent to $69.19. Exxon also raised its second-quarter payout to 44 cents per share from 42 cents in the first quarter.

 

Earnings season stayed in high gear, with Dow Chemical up 5.9 percent to $31.83 after reporting a profit that beat expectations. Comcast posted slightly better than expected quarterly earnings and strong cash flow growth, sending its shares up 1.9 percent to $18.81.

 

Broadcom rose 1.7 percent to $35.41 a day after reporting a first-quarter profit that exceeded expectations, along with guidance above the consensus estimate.

 

Teva Pharmaceutical continued to weigh on the Nasdaq after regulators warned the company about manufacturing violations at a California plant, according to a letter released on Tuesday. Teva's shares closed down 1.7 percent at $58.66.

 

Crude Prices Remain Level

 

The price of crude oil remained relatively level on Wednesday at just below $83 per barrel as declining gasoline inventories helped offset investor concern about European economies after Standard & Poor's downgraded Spain's credit rating. Gasoline inventories fell unexpectedly last week even as refineries ramped up operations, the U.S. Energy Information Administration reported in weekly data, a sign of recovering demand for fuel. EIA data also showed that crude stocks and distillate stocks rose last week.

 

Sweet domestic crude for June delivery settled up 24 cents per barrel at $82.68). London Brent for June delivery was down 20 cents at $85.58 per barrel. Brent retained an unusually high premium to NYMEX crude, of $2.91 a barrel, after reaching a $3.65 a barrel premium to NYMEX barrels in earlier trade, the largest since August of 2009.

 

The discount for front-month crude contracts relative to contracts a month later narrowed from its widest settlement level since December on Tuesday, at $2.56 a barrel, to $2.38 a barrel in Wednesday's trading.

 

The discount, known as contango, has been driven in part by a rapid rise in oil stocks in Cushing, Oklahoma, where NYMEX futures are delivered. EIA data showed that Cushing stocks rose for a sixth straight time last week, but only modestly, by 500,000 barrels.

 

Oil and other dollar-denominated commodities tend to move in the opposite direction to the dollar, as a weaker dollar makes them cheaper for other currency holders and vice versa.

 

Ali al-Naimi, Saudi Arabia's oil minister, indicated that current oil prices are at "sustainable levels." But he also warned that politically motivated policies in energy consumer nations to move away from reliance on oil and other fossil fuels may put world energy security at risk, hurting oilfield investments. Saudi Arabia has plans to spend $107 billion in its energy sector over the next half decade, Naimi said.

 

Fed More Upbeat – Rates To Remain Low

 

The Federal Reserve offered a more upbeat view of the economy and employment prospects on Wednesday, even as it left interest rates on hold near zero and promised to keep them low for an extended period. Despite the financial turmoil in Europe, the Fed once again reiterated that it is keeping benchmark borrowing costs in a zero to 0.25 percent range. At the same time it also said that consumer and business spending were picking up steam.

 

"Economic activity has continued to strengthen and ... the labor market is beginning to improve," the Fed said in its policy statement, an upgrade from a March description of employment as merely "stabilizing."

 

However, the Fed also pointed out that there remains a continuing reluctance on the part of employers to add new workers. And it again reiterated a closely watched statement that rates were likely to remain exceptionally low for an "extended period" because of low inflation and high unemployment. "Inflation is likely to be subdued for some time," the Fed said.

 

Kansas City Federal Reserve Bank President Thomas Hoenig dissented for a third consecutive time. He is opposed the ultra-low rates pledge on the grounds that it could lead to "a build-up of future imbalances." Hoenig is also that it will curb the Fed's flexibility to raise rates if and when such an action is needed.

 

"The pace of economic recovery is likely to be moderate for a time," the Fed said, repeating a phrase it employed after its last two meetings in January and March.

 

Despite some speculation that the central bank might openly refer to the possibility of asset sales, the statement contained no such mention, although that does not necessarily mean the matter was not discussed. The Fed's interventions have had some success in restoring financial stability.

 

Instead of the subprime mortgages that saddled homeowners and banks with bad debts, current worries focus on the heavy debt loads of some euro zone nations and the possibility their woes could be the precursor to a broader sovereign debt crisis among advanced nations. In recent weeks, Fed officials have said the debt troubles in Greece and some other euro zone nations were not yet directly affecting us, though they continue to watch for signs of a renewed liquidity crunch.

 

Hewlett-Packard Acquiring Palm

 

Hewlett-Packard announced that it has agreed to acquire Palm for $1.2 billion in an effort to compete with Apple and Research in Motion. The news was a surprise because the long-running takeover speculation surrounding Palm had shifted in recent weeks to focus on potential Asian bidders, such as China's Lenovo.

 

An early pioneer in handheld devices, Palm once dominated the market but has since been surpassed by Apple's iPhone and Research in Motion's BlackBerry. Palm put out a new mobile operating system, webOS, last year but even that has been overshadowed by Google's Android software.

 

In a sign of Palm's struggles, the company on Wednesday slashed revenue expectations for the current quarter, saying slow product sales have led to low order volumes from carriers.

 

Shares of Palm, which is 30 percent owned by private equity firm Elevation Partners, rose 27 percent to $5.88, above HP's $5.70 cash offer. Some investors could be betting on a higher bid, while others could be covering short positions on the heavily shorted stock.

 

HP said the deal for Palm, which both boards have approved, valued the company at $1.2 billion including debt. Based on Palm's latest filing, the deal values Palm's 167.892 million shares outstanding at $957 million.

 

According to Gartner, Palm held a 1.2 percent share of the global smartphone market in 2009, compared to Nokia's 41.1 percent, RIM's 19.9 percent and Apple's 14.4 percent.

 

Despite Palm's shortcomings, persistent takeover rumors have attracted many investors to the heavily shorted stock. For example, Philip Falcone's hedge fund Harbinger Capital Partners LLC bought Palm shares on April 12, when they were trading between $5.43 and $6.29, and had a 9.48 percent stake.

 

Todd Bradley, executive vice president of HP's computer division, said the company plans to "invest heavily" in Palm, increasing spending on sales and marketing and research and development in the hope of spurring the developer community into writing more applications for the platform.

 

Palm's app universe now has more than 2,000 applications, dwarfed by Apple's App store, which has closer to 200,000 apps.

 

Bradley also said Palm's platform is attractive for an entire ecosystem of mobile devices, from smartphones to slate devices to netbooks. "Coupled with our scale, global reach and investments in the ecosystem, we expect we will see solid growth," he said.

HP said in a statement that the acquisition would likely close during its third fiscal quarter ending July 31.