MarketView for April 29

 

 

 

Summary 

 

Wall Street chalked up its best day in nearly two months on Thursday after a string of robust earnings reports, combined with news that Greece may be close to a bailout deal, thereby reducing the danger of a much wider sovereign debt crisis within the EU. News that Greece was readying severe austerity measures to secure a multibillion-euro aid package spurred widespread relief.

 

Continuing the generally favorable earnings season, Motorola exceeded expectations, sending its share price up 3.5 percent to $7.16. Visa also reported higher-than-expected earnings and raised its revenue outlook, unabashedly sending hopes soaring that there could soon be a revival in consumer spending. Visa's stock closed down 0.8 percent to $92.82 after hitting an all-time high at $97.14 on Monday

 

The Dow Jones industrial average and the S&P 500 index posted their largest one-day gains since March 5 while the Nasdaq rose the most since January 4. The S&P 500's percentage gain marked its largest daily advance in nearly two months. After spiking sharply this week, the.VIX volatility index, Wall Street's index of choice for gauging market volatility, fell 12.5 percent -- its largest decline in 14 months.

 

In a sign the mood was still cautious, the Dow and the S&P 500 came off session highs after ratings agency Moody's said a multi-notch credit downgrade for Greece is likely. S&P cut its debt ratings of Greece and Portugal on Tuesday, sparking a sharp sell-off in equities. Helping the Nasdaq was Palm, which rose 26.1 percent to $5.84 after Hewlett-Packard agreed to buy the smartphone maker for $1.2 billion. HP closed down 0.8 percent to $52.88.

 

In the health sector, Aetna reported better-than-expected quarterly profit and raised its forecast. The health insurer's stock rose 2.4 percent to $31.24.

 

Higher oil prices during the quarter sent the profit numbers for Exxon Mobil and ConocoPhillips higher, although Exxon said its earnings were hurt by the health reform legislation. Exxon's stock slid 0.8 percent to $68.66, but shares of ConocoPhillips gained 0.9 percent to $59.10.

 

The energy sector's gains were limited by fallout from the sunken Deepwater Horizon rig and the oil leak that followed in the Gulf of Mexico. Shares of oilfield services companies Cameron International and Halliburton fell over fears regarding their ties to the rig, owned by Transocean Ltd. Cameron International fell 13 percent to $38.70, Halliburton lost 5.3 percent to $31.60, while BP's New York-traded stock lost 8.3 percent to $52.56. Transocean fell 7.5 percent to $78.51 in New York.

 

In a sign more investors are starting to warm to equities, fund managers increased their already heavy investment in stocks in April and decreased bond allocations. Initial claims for unemployment benefits fell slightly less than expected in the latest week, the government said, but the numbers were less than the previous week.

 

Senate Launches Debate on Financial Reform

 

The Senate opened debate on Wall Street reform on Thursday with an amendment to bar use of taxpayer funds in any future government actions to dismantle financial mega-firms that get into trouble.

 

Seeking to start off on a bipartisan note in a debate expected to last two weeks or more, Democrats said the amendment from Senator Barbara Boxer would ensure taxpayers do not again come to the rescue of "too big to fail" firms. More than 100 amendments were circulating by midday in the Senate, although no votes were expected until Tuesday.

 

Senate Republicans had successfully blocked the Democrats' bill for three straight days as they sought concessions, but agreed on Wednesday to begin debate on the most sweeping financial reforms since the 1930s. As outlined by Democrats, the legislation calls for toughening rules for the $450-trillion over-the-counter derivatives market, potentially forcing banks to spin off their lucrative swaps trading desks.

 

That could hurt firms like Goldman Sachs and others that dominate that market. Analysts said the lengthy debate will weigh on bank stocks for weeks. A reform bill is expected to pass eventually, but first Democrats will offer amendments to harden it, while Republicans will seek to attach language to weaken it.

 

Any bill that passes the Senate would have to be merged with a version that cleared the House of Representatives in December. Unlike the months of Senate deal-making behind closed doors that led to this point, the floor debate will be out in the open, an important shift in the tactical dynamic. However, further procedural hurdles remain, both in passing individual amendments and later when the Democrats seek to end debate and pass the bill.

 

Democrats control 59 votes in the 100-member Senate, one shy of the 60 needed to overcome any filibuster that can block action. Republicans could deploy this weapon during the debate, but so could Democrats. Senate leaders may agree to limit use of the maneuver.

 

Republicans said they won a handful of concessions in exchange for their retreat from the three-day stand-off, but the details on that were not entirely clear. A Republican aide said Democrats made six concessions as part of the agreement to proceed to debate. One was to drop a proposal to set up a $50 billion fund to help pay for dismantling large financial firms that are in distress, the aide said.

 

The fund is part of the Democrats' proposal for an "orderly liquidation" process to unwind troubled firms, aiming to prevent more bailouts like the 2008 rescue of AIG and the shock bankruptcy of Lehman Brothers.

 

Boxer's amendment would fund this process by selling off the firm's assets when the process is through, or by levying an assessment on other financial firms.

 

Republicans are also expected to try to exempt auto dealers from the full reach of the Democrats' proposed new financial consumer watchdog. Auto dealers are already exempt under the House bill. The clout and independence of the consumer watchdog -- designed to regulate credit cards and mortgages -- is expected to come under fire from Republicans who say it goes too far. Some Democrats say it doesn't go far enough.

 

Higher Profits at Exxon and ConocoPhillips

 

Higher oil prices were partially responsible for higher quarterly profits for Exxon Mobil Corp and ConocoPhillips, although Exxon saw its earnings reduced by the recently enacted health reform bill. The healthcare costs, weak performance from its refineries and higher-than-expected exploration costs resulted in Exxon's earnings coming in lower than Wall Street forecasts, a stark contrast with rivals BP and Royal Dutch Shell, both of which exceeded market expectations when they released quarterly figures earlier this week.

 

Benchmark oil prices averaged nearly $79 a barrel in the first quarter, about $3 above the previous quarter and sharply higher than the $43 average of the first quarter of 2009. That strength offset weak margins from Exxon and Conoco's refinery operations, which have been hurt by weak demand for fuels such as gasoline and diesel because of the soft global economy. However, the steady rebound in many regions is expected to pull up fuel demand later this year.

 

Exxon's shares slipped 0.5 percent to $68.83 on the lower-than-expected earnings, but the losses were limited by the nearly $2 jump in crude oil prices on Thursday. Conoco's shares rose by 1.4 percent to reach $59.84 per share.

 

Smaller exploration companies Apache and Occidental Petroleum also saw increased profits during the first quarter, benefiting from a near doubling in the price of crude oil from a year earlier. Exxon's profit in the quarter rose 38 percent to $6.3 billion, or $1.33 per share.

 

Exxon’s oil equivalent production rose 4.5 percent from a year ago, fueled by the company's liquefied natural gas projects in Qatar, it said. Exxon's downstream arm, which includes its refining and marketing operations, posted profits of $37 million, well off the $1.1 billion it earned a year ago.

 

Conoco, the third-largest domestic oil company by market share, saw its profits rise sharply to $2.1 billion, but oil and gas output in the quarter fell to 1.83 million barrels of oil equivalent per day from 1.93 million BOE per day a year ago. Conoco, which is in the midst of a plan to shore up returns and reduce debt by selling $10 billion in assets, said on its conference call that it expects oil and gas output to be lower for the next several quarters.

 

Occidental Petroleum's first-quarter profit tripled from a year earlier to $1.1 billion, or $1.32 per share, while Apache Corp swung to a profit of $705 million, or $2.08 per share, from a $1.76 billion loss last year.

 

Apache, the largest U.S. independent oil and gas producer by market capitalization, reported a profit compared with a year-earlier loss and said its oil output in the quarter rose 68 percent from a year-ago, lifted by two new projects in Australia.

 

Shares of Apache fell 2.8 percent and Occidental shares rose 1 percent.

 

Yellen Nominated as Vice Chairman of Fed

 

President Obama nominated Janet Yellen, the president of the San Francisco Federal Reserve Bank and a renowned monetary policy "dove," to be the Fed’s vice chairwoman.

 

He also nominated Sarah Raskin, Maryland's financial regulation commissioner, and MIT economist Peter Diamond, who has written extensively about pensions and fiscal issues, to fill two open seats on the Fed's seven-person board. The trio, if approved by the Senate, would take their seats as the Fed faces the challenge of how to steer its way out of an unprecedented level of monetary stimulus.

 

Yellen, an experienced central banker viewed as emphasizing economic growth and employment over trying to protect against inflation, and therefore labeled a "dove" by Fed watchers, would replace Donald Kohn, a 40-year Fed veteran who is to retire from the Fed's No. 2 spot on June 23.

 

If all three are approved by the Senate, as expected, they would bring the board -- the epicenter of U.S. monetary policy -- to full strength for the first time in nearly four years. Yellen's policy reputation raises the prospect of a shift in emphasis to a more accommodative stance at the central bank as she takes on her new role. As a board member, Yellen will vote on policy all the time rather than one year in three as a regional Fed governor, she has already had a voice in the debate.

 

In tapping Yellen as Vice Chairwoman, Obama is selecting a top-flight economist with a long history of public service and ties to Democratic administrations. Yellen worked for President Bill Clinton as chair of the White House Council of Economic Advisers between 1997 and 1999, and was a governor on the Federal Reserve Board in Washington between 1994 and 1997. She commands wide respect within the Fed system, academia and from financial markets.

 

Raskin would be among the few policymakers with direct experience supervising banks. She has sought recently to tighten rules limiting the cost of short-term "payday" loans in Maryland.

 

Diamond co-authored a book on Social Security with Peter Orszag, now the director of the White House Office of Management and Budget that was critical of President George W. Bush's proposal to allow workers to invest in private accounts instead of receiving guaranteed benefits from the government.