MarketView for December 11

 

 

Summary

 

The Dow Jones industrial average and the S&P 500 indexes chalked up a third straight day of gains on Friday after several solid consumer-related economic reports added to the building confidence that the economy is continuing to make gains as it shakes of the worst recession since the Great Depression. For the week, the Dow was up 0.8 percent, the S&P approximately flat and the Nasdaq gave up 0.2 percent.

 

November’s retail sales and a rise in business inventories in October pointed to a recovery in consumer spending. A private survey also showed consumer sentiment improved in early December.

 

The day's gains came even as the dollar strengthened, suggesting an inverse correlation between equities and the dollar may be fading. The inverse correlation had partly reflected carry trades whereby investors borrow a currency cheaply in order to invest in higher-yielding assets.

 

Bank of America closed up 2.8 percent at $15.63 and was one of the top performers on the Dow. United Technologies was up 2.2 percent at $69.40 and provided the Dow's biggest lift after the company said it expects profits to rise about 10 percent in 2010 on cost cuts.

 

Mining stocks also advanced after JPMorgan lifted its price target on five companies in the sector, including Alcoa and Freeport McMoRan. Alcoa closed out the day up 8.2 percent at $14.61.

 

National Semiconductor fell 3.6 percent to close at $14.73, pressuring the tech sector, a day after the company posted results that prompted concerns about its ability to regain market share.

 

Delta Air Lines closed up 13.9 percent at $11.25 and US Airways rose 10.5 percent to close at $4.83.

 

The Economy Continues to Expand

 

Consumers stepped up their spending in November and grew more optimistic this month, raising hopes a self-sustaining economic recovery was starting to unfold. A number of economic reports this week suggested the recovery is gaining momentum, pulling further away from the devastating recession that pushed unemployment to quarter-century highs and raising hopes the economy can return to normal growth as massive government support starts to fade.

 

The economy snapped four straight quarters of decline by growing at a 2.8 percent annual rate in the third quarter. The latest data suggests that growth in the fourth quarter could come in at 4 percent or higher.

 

According to a report by the Commerce Department, retail sales rose 1.3 percent last month, the largest advance since last August. It was the second straight monthly gain.

 

The strong sales data was seen boding well for the holiday shopping season, a view bolstered by a separate report that showed consumer sentiment improved in early December on signs of stabilization in the labor market.

 

The Reuters/University of Michigan Surveys of Consumers' preliminary index of sentiment for December rose to 73.4, just a touch below the year's high set in September, from 67.4 in November. Economists had expected a reading of 68.5.

 

The upbeat data fanned speculation that the Federal Reserve could be forced to start thinking about raising interest rates sooner than had been expected. That lifted the dollar to a two-month high against the euro, while the prospect of tighter monetary policy pushed prices for Treasurys lower.

 

The Fed is committed to keep borrowing costs near zero for an "extended period." Policymakers will assess the strength of the recovery, which has been built on low rates and government spending, at a meeting on Tuesday and Wednesday.

 

With the labor market starting to stabilize and household wealth rising, there is growing optimism that consumer spending will continue to gain strength. Compared with November last year, overall retail sales were up 1.9 percent, the first year-on-year gain since August 2008.

 

Sales in November were helped by strong receipts from gasoline stations, increased purchases of motor vehicles and parts, building materials and electronic goods, among others. Despite slightly lower gasoline prices at the end of November from the end of October, sales at service stations surged 6 percent, the largest increase since June.

 

Excluding motor vehicles and parts, retail sales rose 1.2 percent, the largest increase since January, after being flat in October. So-called core retail sales, which exclude autos, gasoline and building materials, rose 0.6 percent, a fifth straight monthly advance.

 

Sales of building materials made their biggest gain since April 2008 and purchases of electronics and appliances were the most in 10 months.

 

Bolstering the chances of a sturdy growth pace in the fourth quarter, business inventories unexpectedly rose in October for the first time in more than a year, a second report from the Commerce Department showed.

 

House Passes Meaningful Financial Reforms

 

The House of Representatives approved the biggest changes in financial regulation since the Great Depression on Friday, marking a win for the Obama administration and top Democrats in Congress. The sweeping bill, which will have to be reconciled with any measure the slower-moving Senate might eventually approve, aims to safeguard the financial system and ward off future crises of the type that punished the nation in the past year with its deepest recession since the 1930s.

 

The House voted 223-202 to pass the 1,279-page bill, which was hammered out in the months since last year's crisis convinced Democrats of an urgent need for reform. All of the chamber's Republicans and 27 Democrats voted against bill.

 

"This legislation brings us another important step closer to necessary, comprehensive financial reform that will create clear rules of the road, consistent and systematic enforcement of those rules, and a stronger, more stable financial system," President Barack Obama said in a statement.

 

The bill would create an inter-agency council to police systemic risk in the economy, crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and expose Federal Reserve monetary policy to unprecedented congressional scrutiny, among other reforms.

 

Republicans and an army of lobbyists for banks and Wall Street firms, whose profits may be threatened, have fought back for months to weaken and delay reforms, criticizing what they call an unneeded and costly intrusion on business. The battle will continue in the Senate, which is pursuing its own legislation -- more modest in some ways, more radical in others. Once a bill clears the Senate, the two chambers will have to agree on a compromise to send to Obama to become law.

 

The House bill faced a flood of amendments during floor debate this week, with mixed results for both sides. In a win for the banking industry, the House voted to reject a measure that would have allowed bankruptcy judges to change the terms of mortgages for distressed homeowners. Known as "mortgage cramdown," the measure was defeated in a 188-241 decision as a proposed amendment to the broader bill. The vote marked a reversal from the House's passage in March of a "cramdown" measure that later died in the Senate.

 

On another vote, Democrats beat back an attempt to weaken a key provision of the reforms bill -- the proposed creation of a Consumer Financial Protection Agency. An amendment proposed creating instead a council of regulators, which the White House said would let banks and mortgage and credit card firms "continue to get away with the practices that helped cause the financial crisis."

 

In a setback for corporate good-governance activists, the House rejected an amendment that would have required small corporations with market capitalization of less than $75 million to get external reviews of their internal financial controls under regulations passed after the Enron fiasco.

 

The amendment concerned applying certain audits under the 2002 Sarbanes-Oxley laws to small firms. By rejecting the proposal, which was supported by senior Democrats, lawmakers left an earlier amendment in the bill that would permanently exempt small firms from complying with the rules for audits.

 

The House approved a section of the reforms bill on Thursday that would impose regulation for the first time on the $450 trillion over-the-counter derivatives market, including credit default swaps like those at the root of AIG's problems. Regulators would be empowered to set position limits on financial and commodity-based derivatives, under the bill.

 

The House also backed an amendment from Democratic Representative Stephen Lynch to limit financial firms to 20 percent ownership stakes in OTC derivatives clearinghouses. If ultimately approved, the Lynch measure could affect Wall Street giants that dominate OTC derivatives markets -- Goldman Sachs Group Inc, JPMorgan Chase & Co, Citigroup, Bank of America Corp and Morgan Stanley -- and exchange operators such as Nasdaq OMX.

 

In a rebuke to the Federal Reserve, the bill would open up monetary policy decisions to audits by congressional watchdogs. The central bank fought the provision, arguing it could imply politics can sway Fed decisions and spook the markets.

 

House Financial Services Committee Chairman Barney Frank said the Fed audit provision could go too far.

 

"The Fed could be audited," Frank told CNBC television. But he added, "The amendment that was adopted went too far ... It could give the perception that monetary policy is not going to be independent and that would have an inflationary effect."

 

In addition to systemic risk regulation and the CFPA, the broader House bill would give the government new powers over large banks and set up new protocols for dealing with large firms, known as "too big to fail," that get into trouble. It would also impose new curbs on executive pay, strengthen protections for investors and, for the first time, set up a federal office to monitor the insurance industry.