MarketView for December 8

 

 

Summary

 

The markets sold off as investors sought safe-haven assets such as the dollar and Treasurys on signs that the global economy is still struggling. Additionally, some of the latest corporate reports raised doubts with regard to consumer spending, a key requirement for the recovery to take hold. Investors sent the dollar and Treasury prices higher in response to the day's news.

 

A disappointing earnings forecast from Dow Jones industrials component 3M Co. and a weak sales report from McDonald's Corp., another Dow company, pulled stocks lower. 3M saw its share price fall 1 percent to $77.11 after the company reported a weaker-than-expected outlook, while McDonald's closed down 2.1 percent at $60.61 after reporting disappointing sales for a second straight month. The reports overshadowed an increased profit forecast from FedEx, which gained 2.7 percent to $89.88 after forecasting second-quarter earnings in excess of Street estimates..

 

Reports from both Britain and Germany indicated that manufacturing remains weak, while Japan's government approved $81 billion in stimulus measures to keep its economy out of recession. Credit rating agencies warned about debt problems in Dubai and Greece.

 

Fitch downgraded Greece’s credit rating one step to BBB+, the third-lowest on the investment-grade scale, and said the outlook for the rating is negative. Standard & Poor’s yesterday put Greece on watch for a possible downgrade.

 

Moody’s, the third major credit rating agency, said on Tuesday that deteriorating public finances in the U.S. and U.K. may “test the Aaa boundaries” for their debt ratings.

 

The reliability of sovereign credit has been under heightened scrutiny since Nov. 25, when Dubai World, a state- owned holding company, said it would seek a standstill agreement on its debt. Dubai World has since said it’s in talks to renegotiate $26 billion of loans.

 

Nakheel PJSC, the Dubai World property developer, had a first-half loss of 13.4 billion dirhams ($3.65 billion) as revenue fell and it wrote down the value of land and property, according to a document obtained by Bloomberg News. Debt restructuring by Dubai state-run companies may almost double to $46.7 billion as more of the emirate’s businesses need help making payments, Morgan Stanley said.

 

Commodities also fell in price as the dollar rose. The dollar gained 0.5 percent against a basket of six other major currencies, pressuring risk-associated assets such as crude oil, which settled down 1.4 percent per barrel at $72.96. A stronger dollar makes commodities more expensive for buyers overseas, and hurts profits at companies that have large international operations. In addition, equities faced pressure from a stronger dollar after Dubai's unresolved debt problems and Fitch Ratings' downgrade of Greece's bond rating scared investors and sent them running for risk free bonds.

 

After the closing bell, Texas Instruments Inc raised its fourth-quarter earnings target and said revenue would be at the high end of its forecast range, but shares of the chipmaker fell 2.4 percent to $25.71.

 

Exxon Mobil was down 1.1 percent at $72.95 and Chevron fell 1.8 percent to $76.76.

 

However, the news was not all bad. The S&P 500 may rally another13 percent to 1,250 by the end of next year as interest rates remain low, revenue grows and investors pour money into stocks, Goldman Sachs wrote.

 

“Continued profit margin resiliency from prior aggressive cost reductions should drive strong returns in early 2010 and push the S&P 500 towards 1,300,” the report said. The rally may stall during the second half of the year as investors begin to anticipate a series of interest-rate increases by the Federal Reserve, Goldman said.

 

ISM Outlook Improves

 

The outlook for economic growth is looking up in 2010, leading to a rebound in manufacturing and services sector revenues, but the weak dollar poses risks, the Institute for Supply Management said on Tuesday. According to the ISM, its panel of purchasing and supply executives expects a 5.7 percent net increase in overall revenues for 2010, compared to a 10.7 percent decrease reported for 2009.

 

The services sector expects to see a 1.3 percent net increase in overall revenues for 2010 compared to a 4.5 percent decrease reported for 2009, the ISM said in its semiannual economic forecast. This is good news for an economy struggling to overcome the worst recession in decades. But, considering the manufacturing sector's heavy reliance on exports, the weak dollar presents potential rewards as well as risks.

 

"About 80 percent of our manufacturers export so there are some positives if other parts of the world -- China, India, Europe -- are recovering faster than the U.S. that we pick up some business coming from overseas," Norbert Ore, chairman of the ISM manufacturing business survey committee, said in a teleconference for journalists.

 

"The downside of the dollar is it makes American assets cheap and it's much more possible for offshore companies and so on to be able to buy American assets. So at a certain point I don't think it's an overall positive for the economy for the dollar to get past a certain point."

 

The dollar is currently down about six percent this year versus a basket of major currencies that is widely used to gauge its overall strength. Its slide presents a broad range of risks, including inflation since the United States is a massive importer, especially of oil but also a broad range of other products and inputs necessary for industry.

 

"In the non-manufacturing sector when you look at the valuation of the dollar there is not as much exporting being done," said Anthony Nieves, chairman of the ISM non-manufacturing survey committee. "Where the negative impact is, there is a lot of import going on and so the cost of products and services coming in (leads to) an increase in expenses."

 

The ISM report said manufacturing purchasers are predicting strength in both exports and imports in 2010. "They also expect the dollar to weaken on average against the currencies of major trading partners." ISM added.

 

In its report, the ISM mentioned high energy costs among their top five concerns, in addition to the weak economy, healthcare and benefits costs, the credit crisis and taxes.

 

Elsewhere, the report said capital expenditures in manufacturing are expected to decrease by 4 percent next year from a 7.8 percent decrease in 2009, ISM said in a statement.

 

Manufacturers expect employment in the factory sector will increase by 1.5 percent, while labor and benefits costs are expected to increase an average of 1.4 percent in next year. The ISM manufacturing panel is forecasting the prices they pay will increase 0.2 percent during the first four months of 2010 and will rise a further 2.4 percent during the balance of 2010, with an overall increase for 2010 of 2.6 percent.

 

On the services side, employment is expected to continue to contract in 2010 by 0.6 percent.

 

Respondents in the services industries expect the prices they pay for materials and services will increase by 1.1 percent during 2010, while they are forecasting overall labor and benefit costs will remain unchanged for 2010, ISM said.

 

Business Roundtable Outlook Improves

 

Optimism among chief executives regarding the economy rose to a one-year high as more said they expect stronger sales and plan to boost spending while limiting hiring. The Business Roundtable’s economic outlook index increased this quarter to 71.5, the highest since July-September 2008, from 44.9 in the previous three months. Readings higher than 50 are consistent with economic expansion.

 

Sixty-eight percent of the 111 executives surveyed said they expect sales to grow, compared with 51 percent in the third quarter, and 84 percent plan to either increase capital spending or hold it steady. Most respondents said they would limit hiring, posing a hurdle for the recovery next year.

 

“These results are in line with an anticipated slow and uneven recovery,” Ivan G. Seidenberg, chairman of the Business Roundtable and chief executive officer of New York-based Verizon Communications Inc., said on a conference call with reporters. “CEOs are continuing to see an uptick in expectations for sales, which translates into increased capital spending.”

 

The survey, completed between Nov. 5 and Nov. 30, showed that CEOs estimate the economy will expand 1.9 percent in 2010. Fifty percent of executives said there would be no change in employment at their company during the next six months, and 31 percent projected a decrease. Nineteen percent said they planned to increase headcount. In the third quarter, 47 percent said the number of employees at their firms would be unchanged, 40 percent forecast a drop, while 13 percent anticipated adding to payrolls.

 

The employment results are more pessimistic than those reported by Manpower. The world’s second-largest provider of temporary workers said 12 percent of the more than 28,000 companies it surveyed planned to hire additional staff in the first quarter, matching the share that anticipated more cutbacks. Seventy-three percent projected payrolls will be unchanged.

 

The economy has lost 7.2 million jobs since the recession began in December 2007. Labor Department data last week showed job losses eased. Payrolls fell by 11,000 in November, the smallest decline since the start of the recession.

 

Job openings declined by 80,000 in October to 2.51 million, the Labor Department reported today. The number of unfilled positions was down by 2.3 million, or 48 percent, since peaking in June 2007.

 

President Barack Obama today proposed new spending on transportation and tax credits to help spur hiring by small businesses. Obama said yesterday he will look at “selective approaches” to using a portion of the $700 billion Troubled Asset Relief Program to bolster employment, such as opening up more credit for small-and medium-sized businesses.

 

Thirty-three percent of CEOs surveyed said health care proposals in Congress are their greatest cost concern. That was followed by 18 percent citing pension costs and 17 percent citing labor.

 

The Business Roundtable is an association of 161 CEOs of corporations representing a combined workforce of 12 million employees and almost $6 trillion in annual revenue.

 

Job Openings Decline in Number

 

Job openings fell by 80,000 to a seasonally adjusted 2.51 million, the Labor Department reported in its monthly Job Openings and Labor Turnover Survey. The job openings rate, a gauge of how many jobs were still open at the end of the month, was steady at 1.9 percent.

 

The drop in job openings means there were 6.3 job seekers competing for one position in October, considering that the number of unemployed people had risen by 558,000 to 15.7 million.

 

The labor market, the greatest casualty of the recession, has started to inch toward stability. However, skepticism over the strength of the economic recovery that started in the last quarter has seen companies reluctant to hire workers on a wide scale.

 

The Labor Department report showed the number of new hires fell by 95,000 to 3.97 million in October, causing the rate of hiring to dip to 3.0 percent from 3.1 percent in September.

 

Given the weak labor market, fewer workers are quitting their jobs. Job separations fell by 122,000 to 4.20 million in October, the department said. The job separations rate, which measures all terminations of employment, slipped to 3.2 percent from 3.3 percent in September.

 

Cisco Moving Ahead

 

Cisco Systems CEO John Chambers reiterated the company's long-term target of 12 percent to 17 percent annual revenue growth, citing an economic recovery and expansion into new markets. The top network equipment maker has fallen short of such growth rates in the past year as customers cut back on technology spending, but Chambers, at a financial analyst conference, said conditions had improved in recent quarters.

 

"Most of our customers on a global basis had cut just about everything they could cut over the last 18 months,'" Chambers said on Tuesday. Chambers also said Cisco would continue to aggressively push into new markets through acquisitions, as well as development of advanced technologies.

 

Having already established market leadership in its main servers and routers business, Cisco is expanding into data center servers as well as consumer markets to support long-term growth.

 

The company's strategy is to turn emerging technologies into profitable entities, and to then integrate them with the rest of the business to contribute to overall growth.

 

Cisco's acquisition of the maker of Flip video camcorders, as well as its development of high-definition videoconferencing systems called TelePresence, are examples of that strategy. Both products help drive Internet traffic, which in turn creates demand for routers and switches.

 

Chambers also said the company plans to make sure its various technologies, including the Flip camera as well as its videoconferencing, e-mail and messaging services, eventually work together.

 

Acquisitions have helped Cisco, which turns 25 years old this week, grow into the world's biggest network equipment maker with annual revenue in excess of $35 billion. When John Chambers became chief executive in 1995, it had around $1 billion in revenue.

 

Chambers said Cisco's leadership had mastered deal making, enabling it to pick up its pace of acquisitions since October 1, when it announced plans to buy Norwegian videoconferencing firm Tandberg ASA.

 

"In 45 days we did four acquisitions around the world, three of them outside the U.S.," he said. "We didn't even break a sweat," he said. However, the Tandberg acquisition initially faced strong opposition from the Norwegian company's shareholders, thereby requiring Cisco to raise its offer.