MarketView for April 24

4
MarketView for Friday, April 24
 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Friday, April 24, 2009

 

 

 

Dow Jones Industrial Average

8,076.29

p

+119.23

+1.50%

Dow Jones Transportation Average

3,137.76

p

+28.92

+0.93%

Dow Jones Utilities Average

326.95

q

-0.72

-0.22%

NASDAQ Composite

1,694.29

p

+42.08

+2.55%

S&P 500

866.23

p

+14.31

+1.68%

 

 

Summary  

 

Stocks rallied on Friday as earnings showed companies have weathered the recession and economic data raised hopes the economic cycle may have hit a bottom.

 

Investors were also undeterred by a government release of a much anticipated concept paper on stress tests for the 19 biggest U.S. financial services companies.

 

American Express (AXP.N) gave the most fuel to the Dow's rise, shooting up nearly 21 percent to $25.30 a day after reporting results that topped analysts' expectations, helped by aggressive cost cutting.

 

Ford Motor Co (F.N) also posted a smaller-than-expected first-quarter loss and said it was on track to at least break even in 2011 and did not expect to seek U.S. government loans, sending its shares up 11.4 percent to $5.

 

Economic data also fed the buying frenzy after durable goods orders slipped in March, but fell far less than Wall Street expected. Sales of new single-family homes dropped, but inventories plummeted at a record pace.

 

For the week, the Dow fell 0.7 percent and the S&P slid 0.4 percent, while the Nasdaq rose 1.3 percent. The declines for the blue-chip Dow average and the broad S&P 500 snapped a six-week streak of gains.

 

In contrast, the Nasdaq extended its winning streak to seven straight weeks, its longest string of gains since early May 2007.

 

On the financial front, the Federal Reserve said the top 19 U.S. banks need to hold a "substantial" amount of capital above regulatory requirements to weather a potential worsening of the economic recession, according to the Fed's white paper on bank stress tests.

 

"This is very, very basic. You come out of this knowing that the banks have to build up a buffer (for) a tighter, more challenging credit market. They do that anyway," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

 

Microsoft was the largest gainer on the Nasdaq, up 10.5 percent at $20.91, after investors cheered cost-cutting efforts. Investors also appeared to be relieved that the release of Microsoft's Windows 7 operating system was on track and they overlooked a fall in profits.

 

Shares of Amazon.com closed up 4.8 percent at $84.46, adding another lift to the Nasdaq after the company exceeded profit and sales estimates.

 

Worries about the banking sector's health helped drive the market to 12-year lows early last month, and since those significant lows, the benchmark S&P 500 has rebounded 28 percent.

 

Crude Rises Above $51 per Barrel

 

The price of crude oil futures rose nearly 4 percent on Friday, settling above $51 per barrel as a result of support from firmer stock markets and a weaker dollar. Domestic sweet crude for May delivery settled up $1.93 per barrel, or 3.9 percent, at $51.55, after rising as high as $51.75. London Brent crude settled up $1.56 per barrel at $51.67. The gains were due in part to better than expected earnings and relatively robust durable goods orders.

 

Oil prices have been tracking equities closely in recent weeks as investors look to stocks for signs of an economic recovery that could revive demand for fuel. Weakness in the dollar also buoyed oil and other commodity prices by raising the purchasing power of buyers using other currencies. However, weak global demand for oil during the recession has pushed inventories in consumer nations to historic levels, keeping a lid on price gains.

 

Crude oil Inventories in the United States, are the highest in almost 19 years, according to the Energy Information Administration. Oil storage tanks are also close to capacity elsewhere. According to some estimates, oil companies have stored about 100 million barrels of oil on ships at sea. That is more than the world's daily oil demand of roughly 84 million barrels.

 

The oil market has stagnated around $50 a barrel for most of this month, nearly $100 below last July's all-time high of $147.27.

 

Home Inventories Fall

 

The supply of unsold new homes fell sharply during March making it the largest decline in more than 45 years, government data showed on Friday, offering hope the distressed housing market is stabilizing.

 

As they work on decreasing supply, builders also appear to be holding off on adding new homes. A separate Commerce Department report showed applications for permits to build new homes were off 8.5 percent in March from February and 44.6 percent from March 2008. That seemed to be the key factor in the reduction in inventories, as buyers have not snatched up increasingly affordable homes despite the median new home price dropping to $201,400 from $208,700.

 

The Commerce Department said March sales slipped 0.6 percent. However, February sales were much stronger than originally estimated. The report showed they rose 8.2 percent, compared with the 4.7 percent gain previously registered. A revision to the March sales numbers will be released next month.

 

Inventory levels are down a record 33.7 percent since March 2008, and the supply of homes available for sale shrank to 10.7 months' worth in March from February's 11.2 months. The March decline brought home sales to a 356,000 annual pace.

 

Durable Goods Orders Fall

 

A report on durable goods orders by the Commerce Department indicated continued economic weakness persists in manufacturing, and possibly the economy with new orders for manufactured goods down 0.8 percent in March.

 

Orders have fallen for seven of the last eight months, the Commerce Department said. The sole rise in that period, in February, was revised down to 2.1 percent from the 3.5 percent previously reported. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, gained 1.5 percent in March after rising 4.3 percent in February.

 

Transportation equipment orders recorded the largest drop in March, the Commerce Department said, falling 1.4 percent to $37.9 billion. That category has now fallen in five of the last six months.

 

The near future for transportation-related orders does not look promising, either. Unfilled orders for equipment have fallen for six months in a row, according to the Commerce Department, and dropped 1.5 percent last month. All unfilled orders for durable goods have been down for the last half year and fell 1.4 percent in March.

 

The Fed Is Getting Down and Dirty

 

The Fed is getting down and dirty some say and according to others it is being realistic as it states that the 19 largest banks must hold substantially more capital than usually required so they could withstand a more severe economic downturn, and indicated it might not let the industry off the hook easily.

 

The Fed said the tests conducted at major banks are aimed at ensuring the institutions have enough capital in reserve to continue to lend in potentially bleaker conditions, and are not a measure of banks' current solvency.

 

"It is important to recognize that the assessment is a 'what if' exercise intended to help supervisors gauge the extent of capital needs across a range of potential economic outcomes," the Fed said in a paper outlining the methodologies regulators employed.

 

The results of the tests will be released during the week of May 4, and regulators hope that by outlining the methodology they employed, investors will have a way to gauge the results. Some banks with too thin a capital cushion will have six months to find private funds, others may need to accept an immediate infusion of taxpayer dollars.

 

The 19 banks tested, which include Citigroup, JPMorgan Chase and Wells Fargo, hold two-thirds of the assets and more than one-half of the loans in the domestic banking system. The paper detailed the asset categories regulators were examining, offered a framework for how they would determine the size of potential losses, and outlined a process for reconciling regulators' figures with the banks' own assessments.

 

However, it did not quantify the size of the capital buffers banks may need to build.

The banks were given the results of the tests on Friday. The Fed is expected to release at least an industry wide assessment, and the White House said it expects some of the banks to release their own results.

 

"Our strong inclination is to provide transparency," White House spokesman Robert Gibbs told reporters. "I think you'll see some banks release some of the results and we'll release what we deem applicable."

 

The Fed said most banks have capital levels well in excess of the amounts required to be deemed well capitalized. However, it said heavy losses had lowered capital and choked off lending. It also said the amount of additional capital any bank might need would vary, depending on their risk profile.

 

Examiners subjected the banks to scenarios in which the economy shrinks by as much as 3.3 percent this year and in which unemployment goes as high as 10.3 percent next year. The baseline scenario for house prices built in a 14 percent fall this year, and 4 percent next year, but the Fed also considered a more adverse scenario of a 22 percent this year and 7 percent next year.

 

The economic assumptions were laid out weeks ago, and investors had hoped the paper released by the Fed would fill in the holes by showing how different types of assets would get hit if the economy continued to deteriorate.

 

The Obama administration hopes the stress tests restore confidence in the banking sector, which has been battered by losses from the collapse of the housing market, a spike in credit defaults and the painful recession.

 

A senior Fed official said on Friday that although some see signs the recession may be ending, doubts remain. The tests are likely to require some institutions to come clean about losses and commit to a course of action to regain health. Those salvage plans could include government assistance and, at the extreme, result in the firing of senior managers.

 

The institutions undergoing stress tests also include: Bank of America, Goldman Sachs, Morgan Stanley, MetLife, PNC Financial, US Bancorp, Bank of NY Mellon, SunTrust, State Street, Capital One, BB&T, Regions Financial, American Express, Fifth Third Bancorp, Keycorp and GMAC LLC.

 

Corporations Not Seeing For Quick End To Recession

 

3M and Honeywell have joined the growing throng of industrial giants that have said the economy has deteriorated more quickly than expected and in turn have cut their 2009 profit forecasts. According to the companies’ comments on Friday, their businesses have deteriorated faster than initially feared and saw no signs of significant improvement soon.

 

"We are no doubt in difficult times. More difficult than I foresaw four months ago," Dave Cote, Honeywell's chief executive, told analysts on a conference call. "We don't know exactly how long these challenging economic times will continue."

 

3M, which makes products ranging from Scotch tape to optical films for liquid crystal displays, cut its 2009 per-share profit forecast by about 9 percent at its midpoint, and Honeywell cut its view by 10 percent.

 

"I do not expect to see much in the way of end-market improvements until at least the third quarter, or possibly even the fourth quarter," said George Buckley, 3M's CEO. "The year will turn out to be somewhat more challenging than we had originally expected."

 

Honeywell shares fell 4.4 percent on the outlook news, while 3M's rose 3.3 percent. That divergence reflected concerns that even Honeywell's lowered forecast was overly optimistic, while 3M's was more reasonable.

 

Honeywell, the world's largest manufacturer of cockpit electronics, now expects the aerospace market to be far weaker than it had forecast in December. It lowered its forecast for commercial jet activity and said it expects shipments of new corporate aircraft to fall by 25 percent or more this year.

 

Business jets have become a powerful symbol of corporate excess in this downturn, after the heads of Detroit's big automakers were chastised by Congress for flying to Washington in private planes to ask for money.

 

3M, which makes a wide range of automotive components, ranging from lighting to liners used to dampen noise, saw its sales to the auto industry decline by 50 percent as nervous consumers shied away from buying new cars.

 

ITT and Xerox also joined the growing list of companies that have lowered their 2009 profit forecasts. And earlier this week, Caterpillar, Danaher and Eaton warned they would earn less this year than they previously expected.

 

3M, a component off the Dow Jones industrial average, stated that it expects full-year earnings to come to $3.90 to $4.30 per share, down from its prior forecast of $4.30 to $4.70. Honeywell said it now expects to earn $2.85 to $3.20 per share for 2009, which would represent a profit drop of 15 percent to 24 percent from the $3.76-per-share 2008 profit. Honeywell believes aviation demand could bottom out later this year, CFO Dave Anderson said.

 

ITT, which makes wastewater pumps and military equipment, cut its full-year earnings forecast to a range of $3.20 to $3.60 per share, below its February view of $3.60 to $4.00. It cited a slowdown at its commercial markets.

 

In the technology sector, Xerox, which makes printing equipment and supplies, cut its 2009 profit target to a range of 50 to 55 cents per share, down from a prior target of $1.00 to $1.25 per share.

 

3M shares closed up $1.79 to $56, Honeywell fell $1.42 to $30.96, ITT slipped 2.9 percent to $41.08 and Xerox was up 4.5 percent to $6.00.