MarketView for December 1

 

 

Summary

 

The Dow Jones industrial average chalked up its highest close in 14 months on Tuesday as a weak dollar boosted natural resource companies' shares and economic data reinforced hopes for a sustainable recovery. Sentiment also received a lift as concerns receded about the impact of Dubai's debt trouble after news that Dubai World planned to restructure about $26 billion in debt.

 

The dollar's decline sent shares of commodity-oriented companies, such as U.S. Steel, up 1.2 percent at $45.18; Alcoa rose 2.2 percent to close at $12.80, and Newmont Mining Corp was up 3.8 percent at $55.66.

 

Pending sales of previously owned homes rose more than expected to their highest level in 3-1/2 years in October. However, concerns over a possible debt default by Dubai World triggered a sell-off in stocks globally on Friday.

 

The dollar index fell 0.6 percent as waning anxiety about Dubai limited the greenback's safe-haven appeal. The index measures the dollar's performance against a basket of major currencies.

 

Sweet domestic crude oil futures settled up $1.09 per barrel at $78.37. Shares of Exxon Mobil rose 1.3 percent to close at $76.04.

 

Construction spending was flat in October, according to the Institute for Supply Management. The ISM said that the manufacturing sector expanded in November, though the expansion was less than expected.

 

Staples saw its share price rise 4.8 percent to close at $24.44 after it reported adjusted third-quarter earnings that exceeded expectations and forecast sales growth in its fourth quarter.

 

Shares of troubled insurer AIG rose 8.6 percent to $30.84 after it closed a pact with the New York Federal Reserve Bank that slashes its debt under a credit facility by more than half.

 

Crude Rallies

 

The price of crude oil rose more than $1 to above $78 a barrel on Tuesday, lifted by a weaker dollar and solid manufacturing data from China that raised hope of a rebound in energy demand. Domestic sweet crude for January delivery settled up $1.09 per barrel at $78.37. In London, Brent crude settled up 88 cents per barrel at $79.35.

 

Oil has rallied from below $33 last December but has held in a narrow band of $70 to $82 over the past two months. Some analysts see little chance that prices would push above the range, given ample supplies and little sign of strengthening demand.

 

Auto Sales Are Up

 

Auto sales edged higher in November led by an outsized gain for Hyundai and mixed results for rivals that the industry said pointed to a recovering economy. Hyundai posted a 46 percent gain in sales for November and said it was on track to take a 4 percent share of the U.S. auto market this year, up by a third at a time when the rest of the industry has been reeling.

 

The Korean carmaker benefited from a recent marketing push and lineup of fuel-efficient cars. Hyundai has taken share in a tough market on the strength of a lineup of fuel-efficient small cars and marketing that has wooed car shoppers worried about losing their jobs. Hyundai said it had expected the U.S. economy to show more sustained strength by now.

 

Toyota Motor saw a rise of nearly 3 percent in November sales. Nissan reported about a 21 percent increase in sales. Honda sales were off nearly 3 percent.

 

As a group, domestic automakers lost share during the month, with Ford Motor distancing itself again from domestic rivals General Motors and Chrysler. Ford posted flat sales while Chrysler, now under management control of Italy's Fiat SpA, said sales fell 25 percent from the same month a year earlier. GM's sales fell 2 percent.

 

Ford, the only domestic automaker to have avoided a taxpayer-funded restructuring in bankruptcy, set a sharply higher target for North American production in the first quarter. It expects production to rise 58 percent from the previous year when it had cut back output as the auto market slid toward its weakest level since the early 1980s.

 

However, auto sales results were pushed lower by a quirk in the calendar. November had only 23 selling days for dealerships -- two fewer than the same month a year earlier. On the adjusted and annualized basis tracked by industry planners and analysts, the U.S. auto market came just short of a sales rate of 11 million units in November. That is up from 10.4 million a year ago and in line with analyst estimates.

 

Results confirmed the industry is on the mend after a deep four-year downturn. However, sales are coming back from historically low levels. Sluggish consumer confidence and rising unemployment could make any recovery slow and uneven.

 

Domestic auto sales have dropped more than 25 percent through October this year. The year is expected to end with an annual sales rate of about 10.5 million units, the lowest level since the early 1980s.

 

However, the current forecast on the Street is for a modest rebound in sales next year into the 11 million to 12 million unit range.

 

In an encouraging development for the battered industry, the sales uptick for November came without the kind of blowout discounts that automakers have relied on in the past. Ford said incentive spending per vehicle was down between 15 and 20 percent across the industry in November from a year ago.

 

GM was the most aggressive in discounting, spending an average of $4,270 per vehicle sold in November. GM has had to discount more heavily in part to support sales of its Hummer and Saab brands.

 

A sale of Hummer to a Chinese equipment maker is pending. GM said it has received expressions of interest in Saab after a tentative deal for the Swedish brand collapsed last month, and its board would evaluate potential bids between now and the end of December.

 

GM said sales of the four brands it is keeping -- Chevy, Cadillac, GMC and Buick -- were up 6 percent from a year earlier in November, a sign its turnaround is taking hold.

 

The automaker plans to increase North American production by 75 percent in the first quarter of 2010 from the same period in 2009 when GM was slipping toward a government-supported bankruptcy.

 

Manufacturing Makes It Four in a Row

 

The manufacturing sector grew for the fourth straight month in November, though at a slower pace, and questions remain about the staying power of the incipient economic recovery. The Institute for Supply Management said on Tuesday its index of national factory activity decelerated to 53.6 in November from 55.7 in October. The median forecast of 70 economists surveyed by Reuters was for a reading of 55.0 in November. Readings above 50 indicate expansion in the manufacturing sector, while numbers below 50 show contraction.

 

But the ISM report's employment index for the manufacturing industry slipped to 50.8 in November from 53.1 in October, which had been the strongest showing since April 2006. New manufacturing orders rose to 60.3 in November from a 58.5 reading in October.

 

Housing May Be Showing Signs of Life

 

There is growing evidence that the housing industry may be slowly emerging from a three year slump. Pending sales of previously owned homes rose unexpectedly to their highest level in 3-1/2 years in October, suggesting the housing market recovery was gaining steam.

 

The National Association of Realtors said its pending home sales Index, based on contracts signed in October, rose 3.7 percent to 114.1, rising for a ninth straight month. This is the longest streak of gains since the series started in 2001. Housing construction contributed to economic growth in the third quarter for the first time since 2005.

 

Recovery is being supported by the popular $8,000 tax credit for first-time buyers, low mortgage rates, and falling house prices. The government last month extended the tax incentive into next year and added a $6,500 credit for home owners buying a new residence. It had been due to expire on November 30.

 

"The credit is helping unleash a pent-up demand from a large pool of financially qualified renters," said NAR economist, Lawrence Yun.

 

Construction spending was flat overall in October at $910.8 billion despite the biggest surge in homebuilding in more than a decade, the Commerce Department said on Tuesday in a report that sharply revised the prior month's data.

 

Instead of rising by 0.8 percent as it said a month ago, the Commerce Department now says September construction spending slumped by 1.6 percent, its sharpest monthly fall since a 2.8 percent decline last January.

 

Spending on homebuilding was up 4.4 percent in October, more than recovering from a 2.0 percent dip in September. It was the biggest monthly gain in private residential spending since a matching 4.4 percent rise in March 1998.

 

Plosser Approves of Winding Down – Timing Crucial

 

It is a good sign that many of the Federal Reserve's emergency facilities are winding down organically as the economy recovers and markets are no longer reliant on them, Philadelphia Federal Reserve Bank President Charles Plosser said on Tuesday.

 

Plosser, answering reporters' questions after a speech to an economic seminar, said he hoped conditions won't be considered "unusual and exigent" past the date many facilities authorized under Section 13 (3) of the Federal Reserve Act are set to expire.

 

A number of these emergency facilities are set to expire in February and their extension would require the Fed to determine conditions in markets are still "unusual and exigent".

 

"I hope conditions won't be unusual and exigent," past those dates, Plosser said.

 

Asked whether the Fed's mortgage-backed securities purchase program should be kept alive past its expiry date at the end of the first quarter as St. Louis Fed President James Bullard has advocated, Plosser said he didn't see a necessity for that at the moment.

 

"I don't know what keeping it open means. We're either buying or we're not," Plosser said. "I don't right now see a necessity (to extend the program), the economy is improving."

 

The Federal Reserve must be prepared to raise interest rates if necessary before the jobless rate has fallen to "acceptable levels", or risk losing its inflation-fighting credibility, a senior Fed official said on Tuesday.

 

Philadelphia Federal Reserve Bank President Charles Plosser said he has become more confident in the sustainability of the U.S. economic recovery even once government stimulus fades, and stressed the Fed must take a forward-looking approach.

 

Plosser, who will not have a vote on the Fed's policy-setting committee until 2011, said he expects the economy to grow at around three percent over the next two years.

 

"Looking ahead, I see an economy that will be growing over the next two years, which means real interest rates will be rising," he said.

 

The Philadelphia Fed chief, who is known as an inflation "hawk", said that "increases in interest rates may be appropriate before unemployment or other measures of resource slack have diminished to acceptable levels."

 

"Failure to act in this manner risks continuing to inject liquidity into a growing economy at a rate that will create inflation above desirable levels later in the cycle," he said.

"If this were to happen, the Fed would lose its credibility to preserve low and stable inflation," he said.

 

The unemployment rate is currently at a 26-1/2 year high of 10.2 percent and Plosser said he expects it to edge higher before beginning a gradual decline.

 

"The recovery of jobs from this very severe recession will take time. It is likely to take a couple of years before we see the unemployment rate back to more acceptable levels," Plosser said.

 

Plosser said he is not expecting strong consumer spending growth in the coming quarters and that it will take time before the Fed can be fully confident in the health of the financial sector.

 

Uncertainty about fiscal policy could contribute to a weaker than normal recovery, Plosser warned.

 

With this backdrop, near-term prospects for both deflation and inflation "seem mostly benign", but the outlook for inflation is becoming more hazy, Plosser said.

 

"Unfortunately, the prospects for inflation over the next two to five years are much more uncertain in my view, and apparently in the view of the market as well," he said.

 

Plosser said that without timely and appropriate steps to withdraw or restrict the extraordinary amount of liquidity the Fed has provided to the economy, the inflation rate will likely rise to unacceptable levels.

 

"The great challenge facing the Fed is getting those 'appropriate steps' right," he said.

In addition to slashing interest rates sharply as the global financial crisis gathered pace last year, the Fed also instituted a number of emergency lending programs to keep the financial system afloat and promote economic recovery.

 

Minutes of the Fed's November policy meeting released last week showed Fed officials had not yet reached consensus on how best to orchestrate an exit from their emergency policy measures.

 

The need for the Fed's extraordinary provision of liquidity will "continue to dissipate" in coming months, Plosser said.

 

November Sales Provide Some Insight on Holiday Sales

 

When retail chains report November sales this week, investors will learn whether they have gone far enough to protect profits against a weak start to the holiday shopping season. Early data on weekend shopping from Thanksgiving Day on Thursday through Sunday showed a slight increase in retail sales, pressuring shares from Wal-Mart to J.C. Penney Co and Saks.

 

To get a clearer picture of how holiday sales are faring, analysts said they are waiting for retailers to release their own sales figures on Wednesday and Thursday.

 

While many large retailers including Costco, Target and Kohl's will release sales figures on Thursday, the data will lack results from key holiday retailers, including Wal-Mart, Best Buy and Amazon.

 

Data released over the weekend pointed to a muted sales start for the holidays. ShopperTrak said sales rose 0.5 percent on Black Friday. The National Retail Federation, the trade group for the retail industry, said customer traffic hit record levels, but consumers spent nearly 8 percent less on average on deals like $3 coffeemakers at Target or $10 toys at Walmart.