MarketView for April 11

 

 

Summary 

 

It was a mildly unpleasant day in terms of the major equity exchanges on Monday with energy shares selling off as a result of lower oil prices. Add to that the fact that suddenly the Street is concerned that corporate earnings this earnings season may not be as bullish as was previously expected.

The number of shares changing hands on the three major exchanges was 6.73 was well below the 2010 average of 8.47 billion shares.

 

Suddenly, there are concerns on the Street that higher costs for raw materials could put the guidance numbers of many companies under ever increasing examination. Why this is suddenly an issue on Wall Street is beyond comprehension. The possibility has been known for some time.

 

Profits for S&P 500 companies are seen rising 11.4 percent from a year ago, according to Thomson Reuters data, but much of that may be priced into shares. The S&P 500 is up over 5 percent this year. Optimism over earnings contributed to recent gains, despite turmoil in oil-producing regions and the disasters in Japan. Despite the S&P 500's gains this year, light trading volume has prompted questions about the strength of the rally.

 

Nonetheless, after the close of regular trading, Alcoa reported first quarter earnings that exceeded estimates. Alcoa also made it clear that its outlook for the rest of 2011 and into 2012 remains positive. Yet, the company’s revenue number for last quarter was less than expected and as a result the shares fell 3.6 percent to $17.13 in after-hours trading.

 

Energy shares were lower after crude futures moved downward on profit-taking. Domestic sweet crude settled down 2.5 percent and Goldman Sachs recommended taking some profits off the table with regard to energy stocks. As a result, Occidental Petroleum closed down 3.2 percent at $100.42.

 

In corporate news, Tenet Healthcare said it has sued its suitor, Community Health Systems, claiming the rival hospital operator admitted patients for unneeded stays to overbill insurers, including Medicare. Shares of Tenet closed down 14.7 percent at $6.44 while Community fell 36 percent to $25.89.

 

NYSE Euronext on Sunday rejected a joint buyout bid from Nasdaq OMX Group and Intercontinental Exchange, stating that it was continuing on with an earlier bid from Deutsche Boerse AG. Nasdaq reaffirmed that its offer was superior to Deutsche Boerse's lower offer. NYSE shares fell 2.9 percent to $37.59 while Nasdaq OMX fell 1.5 percent to $28.03 and ICE was unchanged at $120.55.

 

Also in deal news, Endo Pharmaceuticals said it would buy American Medical Systems for about $2.6 billion while Level 3 Communications agreed to acquire Global Crossing for $1.9 billion in stock. Endo rose 0.5 percent to $41.06 while American Medical was up 32 percent to $29.50. Level 3 rose 18.1 percent to $1.70 and Global Crossing surged 69 percent to $24.97.

 

Biogen Idec rose 7.2 percent to $78.55 and was the top percentage gainer on the Nasdaq 100 after the company's experimental multiple sclerosis drug met the main goal in the first of two important late-stage studies.

 

Alcoa Reports

 

Alcoa reported a first-quarter profit that exceeded estimates, but its revenue missed Wall Street's target sending its shares down 3 percent in after-hours trading on Monday. Revenue for the quarter rose 22 percent to $5.96 billion, helped by rising prices for aluminum and alumina -- the raw material for the metal -- but it fell behind the Street’s forecast of $6.08 billion. To make matters worse, Alcoa's output of alumina, or aluminum oxide, used in the production of aluminum metal, fell slightly in the first quarter to 4.0 million metric tons from 4.2 million in the fourth quarter of 2010.

 

In its earnings release, Alcoa said income from continuing operations, excluding special items, was 28 cents a share.

 

Net first-quarter earnings were $308 million, or 27 cents per share, compared with a net loss of $201 million, or 20 cents per share in the same quarter of 2010, the Pittsburgh-based company said.

 

Alcoa said the improvement was driven by higher realized prices for aluminum and alumina.

 

The price of aluminum has climbed more than 30 percent in the past year, from around $1,990 per ton during the first quarter of 2010. On Monday, aluminum jumped to $2,720 a ton, a level last seen in August 2008, before ending down $24 at $2,689 a ton.

 

Chairman and Chief Executive Officer Klaus Kleinfeld told Wall Street analysts the company still expected global aluminum demand to grow by 12 percent this year with some industrial sectors, such as heavy trucks, growing even more.

 

"We expect the aerospace market to grow 7 percent in 2011 -- that's actually up 1 percent from our previous estimate," he said, adding it was driven by Boeing and Airbus having a production backlog of six years.

 

For the automotive sector, Kleinfeld said: "If the recovery continues to be strong, we expect overall on a global basis growth between 5 percent to 11 percent."

 

For heavy trucks and trailers, Alcoa has increased its growth estimate to a range of 5 percent to 10 percent and for North America, Kleinfeld said he was projecting truck and trailer growth at the rate of 45 percent to 50 percent this year.

 

The beverage can segment, he said, was expected to be flat globally, while the weakest sector is still commercial building and construction, with moderate weakness in North America and Europe despite healthy growth in China.

 

"In North America we expect further contraction of minus 4 percent to minus 8 percent. That pretty much shows that when it comes to commercial building and construction in North America, that's a pretty fragile market still."

 

Fed Staying Pat 

 

Two key officials  at the Fed said on Monday that the Fed should stick to its super-easy monetary policy, arguing inflation is not a threat and unemployment remains too high.

 

Underlying U.S. inflation trends are subdued and long-term price expectations are contained, despite rising commodity costs, Janet Yellen, the Fed's influential Vice Chair said. She argued the recent run-up in energy prices was more of a damper on consumer spending than an inflation risk, saying broad-based price increases are unlikely without substantial gains in wages, which have been largely stagnant.

 

"I anticipate that recent increases in commodity prices are likely to have only transitory effects on headline inflation," said Yellen, echoing remarks from Fed Chairman Ben Bernanke last week.

 

"This accommodative policy stance is still appropriate because unemployment remains elevated, longer-run inflation expectations remain well anchored, and measures of underlying inflation are somewhat low," Yellen said.

 

New York Fed President William Dudley voiced a similar tone, stating that the Fed should not be too enthusiastic about tightening monetary policy soon because the economy continues to operate well below its full potential.

 

Oil prices could push up headline inflation, Dudley said, but central bankers shouldn't overreact as the rise is likely to be temporary and could lead to a monetary policy mistake, he said in Tokyo. U.S. crude prices fell on Tuesday but remained near $110 a barrel.

 

"If inflation expectations became unanchored, the Fed would have to respond. I don't see any signs that expectations are becoming unanchored," Dudley said.

 

Their comments, which echo remarks by Fed Chairman Ben Bernanke last week, suggest the Fed is committed to completing its $600 billion bond-buying stimulus program as scheduled, and that growing market chatter about possible policy tightening may be premature.

 

The European Central Bank by contrast last week raised rates for the first time since the end of the recession and hinted at the possibility of more. Many emerging economies, including China, have also been attempting to tighten lending conditions; fearing years of rapid growth may be turning inflationary.

 

Fed policymakers are trying to distinguish between increases in "highly visible" prices like food and gasoline and a broader, more entrenched trend of cost rises that would warrant higher interest rates. A number of more hawkish presidents of regional Fed banks have begun to argue that rate hikes might be needed before the end of the year.

 

Yellen's remarks, however, emphasized a number of lingering weaknesses in the economy, including a battered construction sector.

 

"A sharp rebound in economic activity -- like those that often follow deep recessions -- does not appear to be in the offing," Yellen said.

 

She argued that there was reason to be skeptical of the sharp recent decline in the jobless rate to 8.8 percent in March from 9.8 percent in November.

 

"The decline that we've seen partly reflects a drop in labor force participation," she said. "While the labor market has recently shown some signs of life, job opportunities are still relatively scarce."

 

Yellen dismissed the notion that structural factors beyond the reach of monetary policy accounted for a very large proportion of the rise in joblessness during the recession.

 

She said markets had already priced in the end of Fed bond purchases in June, and should take the end of the policy in stride.

 

In a research paper published on Monday, Chicago Fed President Charles Evans also argued commodity price gains should not be mistaken for a harbinger of inflation.

 

"If commodity and energy prices were to lead to a general expectation of a broader increase in inflation, more substantial policy rate increases would be justified," Evans said in the paper, which was co-authored by Chicago Fed researcher Jonas Fisher. "But assuming there is a generally high degree of central-bank credibility, there is no reason for such expectations to develop."