MarketView for December 3

Summary 

Stock prices managed a late in the day rally once again on Wednesday with much of the activity being directed at companies that traditionally are recession proof, such as Coca-Cola. Coke’s shares were up 5 percent, making it one of the top advancers among the Dow Jones industrial 30 stocks. McDonald's was another standout, rising more than 4 percent. Large biotechnology stocks, also seen as a defensive hedge against the weakening economy, were another hot spot.

The rise in defensive stocks helped offset concerns sparked by another round of disappointing economic data and gloomy corporate outlooks from companies such as Freeport-McMoRan Copper & Gold, which suspended its dividend, cut its 2009 capital expenditure budget and reduced its copper output.

Nonetheless, if you combine today’s gain with that of yesterday, the S&P 500 index has reclaimed about 70 percent of the ground lost in Monday's big sell-off. The benchmark index has risen in seven of the last eight sessions, gaining 15.7 percent from an 11-year low set in late November.

Shares of Gilead Sciences, up 4.7 percent at $46.17, and Amgen, up 5.2 percent at $57.47, were among the NASDAQ’s leaders on the belief that the administration of President-elect Barack Obama might be more favorable to their prospects.

The NASDAQ also received a lift from interest in the shares of large-cap technology companies after Cisco Systems said it was not planning any layoffs at this time. That reassuring view sent Cisco shares up 4.5 percent to $16.01. Shares of Research in Motion reversed an earlier slide, triggered by its profit warning, and ended the session up 4.4 percent at $38.96.

Before the opening bell, ADP Employer Services reported that the private-sector cut a larger-than-expected 250,000 jobs in November, the most in seven years, two days before the release of the government's unemployment figures.

The data was more evidence as to the extent of the recession, which began a year ago and has been marked by the housing downturn and rising unemployment. A bleak jobs picture creates a major headwind as the market attempts to recover from lows going back nearly 11 years.

Sentiment was also jolted by a report that showed the vast services sector contracted further in November, sending the non-manufacturing sector gauge of the Institute for Supply Management down to a record low.

During the latter portion of the day’s trading session came the release of the Federal Reserve's Beige Book, an anecdotal report across 12 regions, which showed economic activity had weakened throughout the United States since early October.

Shortly before the closing bell, the Wall Street Journal reported that the Treasury Department is considering a plan to stem the fall of home prices by lowering mortgage rates through Fannie Mae and Freddie Mac, which helped fuel the late rally. Fannie Mae rose 2.4 percent while Freddie Mac gained 6.5 percent.

Productivity Better Than Expected

The Labor Department reported Wednesday that productivity, the key ingredient for rising living standards, rose at an annual rate of 1.3 percent in the July-September quarter. That's down from the 3.6 percent growth rate in the second quarter, but slightly higher than the 1.1 percent increase initially reported a month ago. Although wage pressures increased, both developments were better than expected.

Wage pressures, as measured by unit labor costs, rose at an annual rate of 2.8 percent, after having declined at a 2.6 percent rate in the second quarter. The rate of increase in the third quarter was the biggest jump since a 4.5 percent rate in the fourth quarter of last year, but was below the 3.6 percent advance originally reported.

The Fed closely monitors developments in productivity and wages to see if inflation is getting out of hand. But the central bank was likely to view the recent developments as temporary and not long-run trends.

We are lucky the downward revision in productivity was not larger given that overall output, as measured by the gross domestic product, was revised to show a decline of 0.5 percent at an annual rate, a larger decline than the 0.3 percent decrease that was originally reported. Still, the 1.3 percent rise in productivity was the weakest showing since a 0.8 percent rise in the fourth quarter of 2007.

Rising wages and benefits are of benefit to workers. However, if those gains outstrip increases in productivity it can create serious inflation problems as businesses are forced to boost the cost of their products to cover the higher wage demands. If workers are more productive then businesses are able to increase their pay and cover the costs with the increased output of goods and services.

The Fed was likely to view the latest development in productivity and labor costs against the backdrop of an economy that has fallen into a recession. During a recession, output falls, which hurts productivity, but rising job layoffs keep a lid on wage pressures.

Inflation concerns practically disappeared last month after a report showed that consumer prices in October took their biggest monthly plunge in the six decades that records have been kept.

The big fall in prices in October primarily reflected the fact that energy prices, which had been surging earlier in the year, are now declining sharply.

The Fed, trying to get the country out of the recession, cut interest rates by a full percentage point in October. The federal funds rate, the interest rate that banks charge each other, fell to 1 percent, a level seen only once before in the past half-century. A panel of economists with the National Bureau of Economic Research announced Monday that the country has been in a recession since December 2007, making the current downturn the longest in a quarter century. The 1981-82 recession lasted 16 months.

Crude Still Looking For The Basement

Crude oil futures continued their downward trend on Wednesday as the demand for gasoline continued to crumble under the weight of a financial crisis, prompting OPEC to consider another round of production cuts. The downturn in the energy market has prompted oil producer group OPEC to consider another round of cuts to oil output when it next meets December 17 in Algeria.

"For sure we will cut in Oran (Algeria)," Qatari Oil Minister Abdullah al-Attiyah told reporters on the sidelines of a petrochemical conference in Dubai. "I don't know by how much. We will discuss it there,” OPEC’s secretary-general said in remarks published on Wednesday inidcating that oil producers needed at least $70 to $80 a barrel or more for crude to meet their development needs.

Crude futures for Dec delivery settled down 17 cents per barrel at $46.79 after hitting a 3-1/2-year low of $46.26 earlier in the session. Brent crude was unchanged at $45.44.

A report from the Energy Information Administration released Wednesday showed domestic crude demand 6.2 percent behind a year-ago while crude oil and refined fuel inventories slipped unexpectedly across the board.

Valero Energy, the nation's largest oil refiner, said it was keeping its gasoline-production units at around 85 percent of capacity due to soft demand.

Day Of Reckoning For The Automotives

For the Big Three domestic auto manufacturers, it is the day of reckoning as they prepare for make-or-break congressional hearings on their request for $34 billion in government bailout loans, while lawmakers considered options, including letting one or more of the Detroit Three declare bankruptcy.

Congressional staff received briefings by General Motors, Ford and Chrysler on the companies' restructuring proposals and the types of loans they want. The proposals, submitted on Tuesday by the automakers, had been demanded by congressional Democrats as a stipulation for consideration of the loans.

House and Senate aides said there was no clear legislative path to how any financial aid could be arranged for the automakers.

"All options are on the table," Sen. Robert Menendez told CNBC television one day before he and other members of the Banking Committee are due to question Ford's CEO Alan Mulally, GM's CEO Rick Wagoner and Chrysler's CEO Bob Nardelli at a hearing. The CEOs drove to Washington from Detroit after being criticized for flying in corporate jets to Washington last month to ask for billions of dollars in government loans.

GM, Ford and Chrysler each submitted separate plans that require individual responses. Ford wants a $9 billion line of credit that would only be tapped if the recession worsened and auto sales declined further. GM and Chrysler said they face possible failure if they do not receive government loans. GM wants $4 billion and Chrysler $7 billion by year's end. GM is also wants another $8 billion in early 2009 and a $6 billion line of credit if its cash position deteriorates further.

Congressional aides said there was little appetite to address a sweeping industry restructuring when legislation is considered next week. A proposal needs 60 votes in the Senate to overcome procedural hurdles and receive support from the White House. In November, divisions mainly along party lines in that chamber ended proposals to help the industry.