MarketView for December 7

 

 

Summary

 

The S&P 500 and Nasdaq ended the day slightly lower on Monday, while the Dow Jones industrial average remained virtually unchanged, reversing earlier gains. The primary reason for the drop were comments by Federal Reserve Chairman Ben Bernanke that had Wall Street concerned once again regarding the degree and speed with which the economic recovery is taking place. Financial and technology shares were among the day’s worst performers. For example, Microsoft closed down 0.6 percent at $29.79 and Intel ended the day down 0.4 percent at $20.37.

 

Speaking at the Economic Club of Washington, Bernanke said inflation could remain subdued, but the U.S. unemployment rate could remain elevated for some time. Bernanke said the U.S. economy faces "formidable headwinds," including a weak labor market and tight credit conditions that have persisted despite the Fed's efforts to support the economy.

 

Wall Street has been looking for a clue as to how the Fed might unwind its economic stimulus efforts after a report on Friday showed employers cut far fewer jobs than expected in November were reassured.

 

While Bernanke’s remarks initially added some momentum to the markets and sent the dollar lower, the gains had evaporated by the afternoon. Bank of America closed down 2.4 percent at $15.89 and JPMorgan Chase fell 1.2 percent to $41.25.

 

Citigroup Inc shares ended down 2.2 percent to $4.03 on news that it is in a disagreement with the Treasury Department and the Fed over the amount of additional capital required for Citigroup to be able to exit the Troubled Asset Relief Program.

 

Bernanke Upbeat

 

Federal Reserve Chairman Ben Bernanke on Monday said the economy's recovery remained fragile and unemployment may be high for some time, thereby making it clear that an early increase in interest rates is likely not in the cards..

 

Three days after news of a surprise drop in the unemployment rate prompted some on the Street felt that the Fed might push ahead with plans to raise rates earlier than had been expected, Bernanke said the Fed was sticking to its pledge to hold benchmark borrowing costs at exceptionally low levels for an "extended period."

 

"We still have some ways to go before we can be assured that the recovery will be self-sustaining," he told the Economic Club of Washington. "Also at issue is whether the recovery will create the large number of jobs that will be needed to materially bring down the unemployment rate."

 

Those comments drove the dollar and prices for Treasury bonds lower, while offering temporary support to stocks.

 

"Right now we are still looking at the extended period given that conditions remain -- low rates of utilization, subdued inflation trends, and stable long term inflation expectations," he said. "That remains where we are."

 

Bernanke said tight credit and the weak job market still posed "formidable headwinds" to recovery, but he said officials would need to consider recent signs that the economy was gaining strength at their meeting on Tuesday and Wednesday.

 

Financial markets will parse the Fed's policy statement next week closely for any fresh clues, but Bernanke suggested the central bank remains focused on nurturing the recovery.

 

While underscoring the recovery's fragility, Bernanke went to considerable effort to refute the idea that the Fed's easy money policies are setting the stage for runaway inflation.

 

"Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road?" he asked. "The answer is no. The Federal Reserve is committed to keeping inflation low and will be able to do so."

 

Bernanke said that although the Fed will continue to monitor inflation closely, it appears likely to remain subdued for some time and could in fact move lower.

 

The challenge the Fed faces in withdrawing its massive support for the economy is not how to do it but when, he said.

 

The central bank has all the tools it needs, and could raise rates even if its balance sheet -- swollen by purchases of mortgage-related debt and longer-term Treasury securities -- remains large, Bernanke added.

 

He said the Fed's ability to pay interest on the reserves banks hold at the Fed would be "an important tool" to push borrowing costs higher, and said there were a number of ways it could withdraw money from the financial system.

 

"If necessary, we always have the option of reducing the size of our balance sheet by selling some of our securities," he said.

 

Bernanke, who is in the midst of a contentious Senate confirmation process for a second four-year term as Fed chairman, used his remarks to push back against congressional proposals he argues would hurt the bank.

 

He praised the contribution the 12 regional Federal Reserve banks make to monetary policy by bringing insight into conditions around the country. Some lawmakers have proposed greater congressional control over those regional banks.

 

Bernanke also renewed criticism of a congressional proposal to audit Fed monetary policy decisions, saying it could undercut the Fed's independence. The Senate Banking Committee held a hearing on Bernanke's nomination last week, but has not yet set a date for a vote. His current term expires on January 31.

 

Crude Prices Fall On Concerns Regarding Future Economic Growth

 

The price of crude was lower on Monday as weak demand for crude in the wake of the economic downturn continued to pressure prices, outweighing last week's strong job report. Sweet domestic crude for January delivery settled down $1.34 per barrel at $74.13. Brent crude settled down 89 cents per barrel at $76.63.

 

 

Oil and product inventories have increased as a result of the economic downturn and the subsequent decline in the demand for energy in general and crude oil in particular. Meanwhile, crude oil stockpiles were up again last week.

 

Oil markets have looked to macroeconomic factors this year for signs of a recovery from the recession that could support oil demand. At the same time, Saudi Arabia's oil minister Ali al-Naimi on Saturday described the current oil price as stable and "perfect" for consuming and producing nations alike at around $75 a barrel.

 

With no output changes expected at OPEC's Luanda meeting later this month, brimming stocks on land and an estimated 165 million barrels of crude oil and refined products in floating storage are sending investors further out along the oil futures curve in search of trading profits.

 

MetLife Forecasts 50 Percent Growth in 2010 Operating Earnings

 

MetLife, the country’s largest publicly traded life insurer, said it expects full-year 2010 operating earnings are expected to increase by about 50 percent to between $3.3 billion and $3.6 billion, or $4.00 to $4.40 a share. In increase is attributable to a reduction in costs, improved investment returns and higher revenue. However, the company said it did not see a return to historical growth levels until at least 2011.

 

MetLife Chief Executive Robert Henrikson said at an annual investor conference the company sees revenue growing by up to 8 percent in 2010 as it lures customers away from weaker rivals. "It is about a flight to MetLife," said Henrikson. "It is a good story."

 

Life insurers were particularly susceptible to the upheaval in credit markets in 2008 and early this year, which led to large losses on the sector's holding of trillions of dollars in investments. But as markets have recovered, MetLife and its next biggest rival, Prudential Financial, have emerged stronger than some peers, helping each to win more business.

 

MetLife said it expects improved investment profit and lower expenses will also help its bottom line in 2010. The company met its target of $400 million in cost savings a year ahead of schedule and raised its forecast for savings in 2010 to $600 million. While it expects "meaningful" earnings recovery in 2010, it does not expect to return immediately to the level of growth it notched up before the credit crisis.

 

"We are a long way from where the company can perform," said Chief Financial Officer William Wheeler. He added that the company's earnings performance would not be "back to normal" until 2011 or 2012.

 

The company forecast an operating return on equity in 2010 of 10 percent -- significantly below the 15.2 percent operating ROE it posted in 2007, before the worst of the credit crisis.

 

For the fourth quarter, MetLife forecast operating earnings of 90 cents to 95 cents a share. Operating earnings exclude some investment losses and are the most common measure used by Wall Street analysts.

 

Meanwhile, Henrikson said MetLife is "wide open to really accretive" acquisitions, or deals that could significantly bolster growth.

 

Job Market Continues To Improve

 

The job market rose slightly in November according to a report issued days after government data showing the lowest number of job cuts in that month since December 2007, the Conference Board, a private research group, reported on Monday. According to the Conference Board, its employment trends index edged up to 90.8 from a downwardly revised 89.2 in October, originally reported as 89.3.

 

The index is down 9.4 percent from a year earlier, according to the group. In October it was down 13.2 percent.

 

Although the small amount of job losses in November suggests a sign of growth, "the pace of hiring is likely to remain subdued because the economic recovery is expected to be weak throughout the first half of 2010," said Gad Levanon, Senior Economist at The Conference Board.