MarketView for April 9

 

 

Summary  

 

Wall Street received an unexpected jolt on Thursday, the last trading day in a holiday shortened trading week, as a result of Wells Fargo’s announcement that it expects to report record quarterly earnings. The broad S&P 500 racked up its fifth consecutive weekly advance and is up more than 26 percent since the 12-year closing low reached on March 9.

 

The health of the banking sector has been a key factor behind the mood of the stock market and is at the heart of the recession. The current rally to two-month highs first took off in early March when several major banks said they had made money at the beginning of the year. Shares of JP Morgan Chase rose 19.4 percent to $32.75, making it the Dow's top performer.

 

In the latest sign that the mood of consumers is on the mend, many retailers posted smaller-than-expected sales declines for last month, signaling shoppers may be loosening their grip on their pocketbooks. And the CBOE Volatility Index .VIX, also known as Wall Street's fear gauge, closed at its lowest level since September 2008.

 

Nonetheless, there was more evidence that companies continue to struggle with the recession's impact. After the bell, Boeing, a component of the Dow Jones industrial average, announced that it planned to cut airplane production in 2010, citing weak business conditions for commercial customers. Boeing also said its first-quarter earnings would take a hit, driving its stock down 4.2 percent to $37.50 in extended trading..

 

For the week, the Dow was up 0.8 percent, while the S&P 500 gained 1.7 percent and the Nasdaq was up 1.9 percent. Markets will be closed for the Good Friday holiday.

 

Investors also dumped defensive stocks in the consumer and health-care areas in favor of companies more tied to the economic cycle. Among losers, Merck was down 1.7 percent at $26.30, while Caterpillar gained 10 percent to $32.52.

 

President Obama plans to meet with top financial regulators on Friday to discuss the next steps with the "stress tests" being conducted on major banks,.On the economic front, data showed the number of workers filing new claims for unemployment benefits fell last week, but the number was still at a level signaling the job market had yet to bottom.

 

Some recent better-than-expected data in the retail and housing sectors also helped drive the market higher as investors bet on signs of stabilization. Among retailers, Macy's was up 15.1 percent at $11.88.

 

Berkshire Hathaway rose after the profit projection from Wells Fargo, one of the bank's largest investments. The gains came the day after Berkshire lost its "triple-A" credit rating. Berkshire's Class A shares rose 3.9 percent to $92,400.

 

Apple led the Nasdaq higher, rising 2.8 percent to $119.57 after Credit Suisse lifted its price target on the stock to $133 from $120.

 

Wells Fargo Is On A Roll

 

Wells Fargo told Wall Street on Thursday that it expects to post a record $3 billion first-quarter profit, causing its shares to soar 31.7 percent and providing a welcome jolt to the stock market and a still-troubled banking sector. The preliminary results suggest that lenders focused on traditional banking activities may handle the recession better than expected.

 

Wells Fargo is the fourth-largest U.S. bank, and the nation's first major lender to indicate how it fared in the January-March period. According to the bank, profit rose about 50 percent from $2 billion a year earlier. Excluding preferred stock dividends, the bank said quarterly profit was $2.3 billion to $2.4 billion, or 55 cents per share, on revenue of about $20 billion.

 

Wells Fargo took tens of billions of dollars of write downs when it bought Wachovia, which had been struggling with a giant mortgage portfolio. In the first quarter, however, the Wachovia businesses performed better than expected, Wells Fargo said.

 

Wells Fargo received $25 billion from the bank bailout plan known as the Troubled Asset Relief Program. The bank would like to repay TARP "as soon as practical" but that "the government will decide ultimately when that can be done." The bank said its tangible common equity ratio is about 3.1 percent, lower than many analysts prefer.

 

Wells Fargo said it made more than $100 billion of mortgage loans in the first quarter, and had $190 billion of applications, up 64 percent from the fourth quarter. It expects net charge offs of $3.3 billion, down from about $6.1 billion in the fourth quarter for Wells Fargo and Wachovia combined, and plans to add $1.3 billion to loss reserves.

 

Wells Fargo cut its dividend 85 percent in March, saving $5 billion a year. It also plans $7 billion of cost cuts, including $5 billion annually tied to Wachovia. The bank has no plans to shed the Evergreen Investments business, which Wachovia owned.

 

Economic News Continues To Improve

 

According to a report released on Thursday by the Labor Department, the number of workers filing new claims for unemployment benefits fell last week, government data showed on Thursday, but was still at levels indicating the labor market's contraction has yet to hit bottom.

 

The Labor Department also said the ranks of unemployed who have claimed more than one week of aid vaulted to yet another record in the last week of March as laid-off workers battled to find jobs amid a recession now in its 16th month.

 

Initial claims for state unemployment insurance benefits fell to a seasonally adjusted 654,000 last week from 674,000 the week before, the Labor Department said. However, the number of Americans still on benefit rolls after drawing an initial week of aid jumped to a record 5.84 million in the week ended March 28 from 5.75 million the prior week.

 

That lifted the insured unemployment rate, which measures the percentage of the insured labor force who are jobless, to 4.4 percent, matching the highest since April 1983, and up from 4.3 percent the previous week. Continuing claims have hit record highs for 11 consecutive weeks now, underscoring the difficulties of getting new jobs in the recession. Initial claims are being closely watched for clues as to when the downturn, which started in December 2007, might end.

 

Mounting unemployment is one of the challenges confronting the economy as it is eroding household incomes, which have already been decimated by the collapse in house and stock market prices, limiting their spending ability. The economy lost 663,000 jobs last month, driving the unemployment rate to 8.5 percent, a fresh 25-year high. While claims for unemployment benefits remain at lofty levels, recent data have shown some signs of growth sprouting on the battered economy's landscape.

 

In a separate report from the Commerce Department showed the country's trade deficit shrank in February to its smallest since November 1999, backing the view that the drop in first-quarter gross domestic product was probably not as steep as the previous quarter's 6.3 percent annual pace of decline.

 

The monthly trade gap totaled $26 billion, down more than $10 billion from the $36.2 billion deficit in January and marking a record seven consecutive months of decline. The percentage drop was the steepest since in October 1996. The narrowing deficit will add to growth in first-quarter gross domestic product, although the impact would be insufficient to overcome the drag on the economy from housing, inventories and business investment.

 

Exports of goods and services in February rose 1.6 percent from January, while imports fell 5.1 percent to their lowest since September 2004. The deficit with China in February shrank to $14.2 billion, a three-year low, from $20.6 billion in January. The February trade gap with Japan narrowed to $2.2 billion, its lowest since December 1984, from $4.3 billion.

 

In another report, the Labor Department indicated that import prices rose 0.5 percent in March, advancing for the first time in eight months, as petroleum costs increased 10.5 percent, their fastest increase since November 2007.

 

Retailers on Thursday reported smaller-than-expected sales declines in March.

 

Price Of Crude Higher Again

 

Oil prices rose nearly 5.8 percent on Thursday, fueled by a rally on Wall Street and data showing that the number of workers filing new claims for unemployment benefits fell last week. Sweet domestic crude for May delivery settled up $2.86 per barrel at $52.24. London Brent settled up $2.47 per barrel at $54.06. Oil has tracked the equities markets closely this year as investors seek signs of a potential economic recovery that would boost energy demand.

 

Oil prices had also climbed on Wednesday on weekly Energy Information Administration data showing a smaller-than-expected build in U.S. crude inventories and a big slump in distillate stocks.

 

Summers Confident Recovery Is Coming

 

The sense of "freefall" for the economy is likely to end in the middle of the year, though the road to recovery could take some time, Lawrence Summers, U.S. President Barack Obama's top White House economic policy aide, said on Thursday.

 

"I think the sense of a ball falling off the table -- which is what the economy has felt like since the middle of last fall -- I think we can be reasonably confident that that's going to end within the next few months and you will no longer have that sense of freefall," said Summers, director of the White House National Economic Council.

 

The recovery is likely to be slowed by "substantial downdrafts" in the economy.

 

"Economies don't go from losing 600,000 jobs a month to a terribly happy path overnight," Summers said in remarks to the Economic Club of Washington, noting that there are "still substantial strains in credit markets."

 

The decorated economist said it remained unclear how long it would take for the economy to return to strong, sustained growth, though he did cite "anecdotal" signs of improvements in credit markets that would allow inventory cycles to return to normal.

 

The unemployment rate, at a quarter century high of 8.5 percent, is likely to edge higher because unemployment typically lags an economic rebound and needs the economy to grow at a rate of 2.5 percent to remain stable.

 

"Even if we got a return to positive growth, an economy that was growing at 1 percent would be an economy with rising unemployment. I don't think we can hold out the prospect we'll stabilize at the current level," he said, deliberately declining to provide a forecast for peak unemployment.

 

The economy contracted at a 6.3 percent annual rate in the fourth quarter of last year, the steepest pace since 1982.

 

Summers said policy-makers needed to be wary of risks for both inflation and deflation, adding that near term deflation risks were part of the reason for the Obama administration's strong fiscal stimulus efforts and programs to support credit markets.

 

"I don't think the concern about deflation in the nearer term is one that can be entirely discounted," he said.

 

Asked about the ability of the world's largest economy to sell its debt going forward, the former Treasury secretary said the United States benefits from the fact that the U.S. dollar is regarded as a safe currency and should protect its status.

 

"On days when the markets are suggesting increased uncertainty, increased doubt about the global economy....those are days almost always when Treasury bond prices rise," Summers said.

 

"So it's important to remember how fortunate we are as a country to have a currency and a bond market that is seen in every way as a source of strength and it's a huge responsibility for us to keep it that way."

 

China has suggested that some thought should be given to letting some other measure of value be considered as the world's reserve currency, an idea the Obama administration has greeted coolly.

 

Summers called on U.S. trading partners to boost demand because the United States cannot be the single engine of economic growth for the world economy.

 

"It's clear that that can't be the growth paradigm going forward," Summers said.