MarketView for April 16

Summary  

Stock prices moved sharply higher on Thursday as expectations of reassuring results from bellwethers, including Google, lifted technology shares, while JPMorgan's better-than-expected earnings number added to bank stabilization hopes.

Encouraged by recent signs pointing to the idea that the economic slump may be abating, Wall Street is now taking the position that technology earnings would show upside surprises, sending the price of Google's shares up 2.4 percent to $388.74 ahead of the Web search leader's results after the close. And after the close, Google delivered, reporting a stronger-than-expected first-quarter profit. Its share price rose  5 percent to $408.00 in after-hours trading following the results and then slipped to $385.41.

Hewlett-Packard closed out the regular trading day up 5 percent to $36.60, while IBM gained 2.6 percent to $101.43. Apple’s shares climbed 3.2 percent to $121.45.

Before the opening bell, JPMorgan's announced results exceeded Street expectations as debt trading and underwriting revenue surged. The news got Wall Street's day off to a solid start, adding to a string of encouraging results from other banks, including Wells Fargo's strong preliminary figures last week.

Regions Financial said it will post a first- quarter profit, pushing the regional banking company's shares up 34 percent to $6.70. Shares of JPMorgan climbed 2.1 percent to $33.24, while Citigroup, due to post quarterly results on Friday, rose 1.01 percent to $4.01.

In a sign that some of the fear that has been festering on Wall Street may be receding, the CBOE Volatility Index .VIX, or VIX, fell for the third straight day, hitting its lowest close since late September.

Meanwhile, Rosetta Stone's strong debut suggested equity investors were becoming more willing to take on risk. Rosetta Stone's initial public offering was only the third to price this month, making April the best month since last July. Rosetta Stone rose to $25.12 on the New York Stock Exchange, up 40 percent from its IPO price of $18.

Also boosting sentiment were stronger-than-expected quarterly results from Harley-Davidson, which boosted consumer spending hopes. Harley’s shares rose 5.7 percent to $18.11.

Optimism about the technology sector also received a boost from cell phone maker Nokia after the company announcement that a drop in demand for its products was stabilizing, driving its shares up 11.4 percent to $14.88.

But in one sign of the recession's impact on consumers, General Growth Properties, the second-largest domestic mall owner, on Thursday filed for Chapter 11 bankruptcy protection, making it one of the biggest victims of the credit crisis yet.

The day's economic data provided a mixed picture. The Philadelphia Federal Reserve's survey of regional manufacturing showed a less drastic contraction, while the Commerce Department data showed March housing starts fell 10.8 percent to a seasonally adjusted annual rate of 510,000 units, the second lowest on record dating back to 1959.

Economic Data Says Recession Still But Could Be Receding

The number of people claiming jobless aid hit a record in early April and groundbreaking for new homes slumped last month, but a top Federal Reserve official voiced hope the recession was ending.

"Today, the economy is still very weak, but there are some encouraging signs that support cautious optimism," Federal Reserve Bank of Atlanta President Dennis Lockhart said.

Wall Street stocks, taking heart from expectations of reassuring results from corporate bellwethers as economic conditions start to turn the corner, closed higher, with the Dow Jones industrial average rising 1.2 percent to 8,125. New claims for jobless aid dropped unexpectedly last week in a potentially brighter sign for employment, although the timing of the Easter and Passover holidays might have skewed the data -- while a steep decline in new housing starts may help work off a heavy overhang of unsold homes.

In addition, contraction in factory activity in the mid-Atlantic region slowed in April, according to a survey by the Philadelphia Fed. Its business index came in at minus 24.4 from minus 35 in March. There have also been other promising signs the severity of the recession may be fading. Nokia said on Thursday that mobile telephone destocking, as shops run down inventories before putting in new orders, had bottomed in some markets. In addition, officials have clearly begun to talk up the recovery. Fed Chairman Ben Bernanke noted tentative signs of stability this week and Lockhart repeated this theme.

The Commerce Department said housing starts fell 10.8 percent in March to a seasonally adjusted annual rate of 510,000 units, the second lowest on records dating back to 1959, from February's 572,000 units. Analysts polled by Reuters had expected an annual rate of 540,000 units for March.

Separately, the Labor Department said the number of U.S. workers filing new claims for jobless benefits unexpectedly fell 53,000 last week to 610,000. But so-called continued claims rose to a record 6.02 million in the week to April 4. The most severe U.S. recession in a generation has already cost five million jobs, driving the unemployment rate up to 8.5 percent in March, and many economists see it heading higher.

The four-week average of new jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, fell to 651,000 from 659,500 the week before.

The Federal Reserve, in a regular survey of business conditions, said on Wednesday the labor market remained soft with lay-offs and hiring freezes widespread. But five of its 12 regional banks saw the pace of decline in the economy slowing. The Fed also said there were signs the housing market was stabilizing, with an increase in the number of prospective buyers improving confidence.

House hunters are being lured by very low mortgage rates following hefty efforts by the Fed to drive down home loan costs. It has cut key interest rates to almost zero and pumped over $1 trillion into credit markets, including massive buying of mortgage-backed securities, to encourage spending and investment. However, a report earlier on Thursday from RealtyTrac showed U.S. foreclosure activity was up 46 percent in March from a year earlier, hitting a record high as programs stunting the torrid pace of failing mortgages expired.

Stress Test Results To Be Released

Regulators on Thursday released some details about their bank "stress tests," moving to bolster the credibility of a process some investors worry might not reveal the financial sector's true health. An official at the Federal Reserve said on Thursday that results of the tests, designed to see how the nation's 19 largest banks would fare should the recession prove unexpectedly severe, would be made public on May 4.

Regulators will try to prove the rigor of the tests by releasing a document on April 24 that will explain the underlying assumptions, the official said. The document will outline the methodologies employed and serve as a guide on how to interpret the results.

The test results will include a capital recovery plan for banks that regulators determine would be short of capital if the economy's downturn gathered steam and unemployment shot unexpectedly higher. Experts say the results must be believable and the recovery plans clear, or officials risk further destabilizing the financial system in a way that will send the weaker banks into a downward spiral.

Regulators have not made final decisions on how to present the results, the Fed official said. Regulators will disclose at least some of the information, but no decision has been made on whether banks themselves will disclose some as well.

The results are expected to distinguish which banks are strong and on the path to recovery, and which firms remain in need of government aid -- and subject to caps on executive pay and other restrictions. Stronger banks are likely to fare much better at attracting private capital and removing any stigma associated with taxpayer funds. Some banks have already declared themselves among the strong.

JPMorgan Chase Chief Executive Jamie Dimon said on Thursday "we think we'll do fine under any stress tests measurement," adding that the bank could immediately repay the $25 billion it received from the government. Goldman Sachs similarly trumpeted its health on Tuesday, saying it has a "duty" to repay $10 billion in taxpayer aid. It sold $5 billion in stock toward that effort. Wells Fargo surprised the markets last week, saying it expected to post a $3 billion first-quarter profit.

Regulators plan to hold discussions with the banks about the standardized stress tests from April 24 through May 4. Once the test results are announced, banks found to need more funds will have six months to raise the capital from the private markets or can take an infusion of taxpayer money.

Announced in February, the tests are designed as an exercise to provide credible information on the health of the U.S. banking sector. Regulators hope that once investors have the results, they can accurately evaluate the health of banks' balance sheets, and private capital will return to the sector, stabilizing the financial system and increasing lending. More than 200 examiners have spent weeks poring over the banks' portfolios and asset valuations.

Treasury has laid out some details of the economic scenarios it used to stress test the banks, but the rigor of the test alone will not make the results believable, Brookings' Elliott said.

Treasury has said any new capital injections would come from the $700 billion financial rescue fund approved by Congress in October. Treasury officials estimate they have about $134.5 billion they could still tap.