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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Thursday, December 17, 2009
Summary
Stock prices were sharply lower on Thursday, sending
all three major equity indexes into negative territory as the dollar's
rebound spurred safe-haven traffic and thereby reducing demand for
riskier assets. At the same time, a less than ebullient outlook from
economic bellwether FedEx had transportation shares foundering. FedEx
forecast third-quarter profit below analysts' expectations, pushing its
stock down 6.1 percent to $84.47. Financial services stocks were also down after
influential banking analyst Meredith Whitney cut her earnings estimates
on Goldman Sachs and Morgan Stanley. Whitney trimmed earnings estimates
for Goldman and Morgan for 2010 and 2011. Goldman Sachs shares dropped
2.5 percent to $160.93, while Morgan Stanley shed 4 percent to $29.12. The dollar index, which measures the performance of
the dollar against a basket of major currencies, rose nearly 1 percent,
hitting its highest level in more than three months. The dollar's spike
coincided with a slide of nearly 3 percent in the price of gold. The
sell-off in gold futures hurt the shares of domestic gold miners. An unexpected increase in new claims for jobless
benefits in the latest week illustrated the bumpy road for the economic
recovery. The jobless claims number was in sharp contrast to a report
from the Federal Reserve Bank of Philadelphia, whose index showed
factory activity accelerated rapidly in the Mid-Atlantic region during
December. Citigroup fell 7.3 percent to $3.20 after the bank's
stock and bond offering attracted weak demand and priced much lower than
expected, prompting the Treasury Department to delay a plan to sell its
Citigroup stake, sometime within the next 12 months. Research In Motion's stock was up 10.8 percent to
$70.40 in after-hours trading after the company reported
better-than-expected quarterly results. Oracle was up 4.2 percent to
$23.84 in after-hours trading after posting adjusted earnings that
topped Wall Street's estimates. Nike rose 3.2 percent to $65.25 in in afterhours
after posting second-quarter earnings that topped consensus estimates of
71 cents per share by a nickel. The Senate Banking Committee approved the nomination
of Federal Reserve Chairman Ben Bernanke for a second term, sending it
to the full Senate for a confirmation vote. The outcome of the vote
appeared to barely affect stocks. Among other factors influencing the market's tone was
the impact of Friday's quarterly expiration of December options and
futures, also known as quadruple witching. This often adds high levels
of volatility as players adjust and/or exercise their derivatives
positions.
Economic Reports Overwhelmingly Positive
Factory activity in the mid-Atlantic region hit a
4-1/2 year high in December and a gauge of future economic conditions
rose last month, adding to a growing base of data showing a continuing
economic recovery. On the negative side, the number of new applications
for unemployment insurance rose unexpectedly last week, an indication
that the recovery in labor market will be a slow one at best. According to the Philadelphia Federal Reserve Bank,
the business activity index for its sector of the country rose to 20.4
from 16.7 in November, easily exceeding Street expectations for a
decline to 16.0. A reading above zero indicates growth in the region's
manufacturing sector. There were, however, some areas of weakness in the
survey, with orders and shipments slipping. Still, the rise in factory
activity in the mid-Atlantic states helped offset worries that national
manufacturing activity was slowing after a barometer of activity in New
York State fell unexpectedly in December. Meanwhile, the Conference Board said its index of
leading economic indicators rose 0.9 percent after a 0.3 percent gain in
October. It was the eighth straight monthly rise. Separately, initial claims for unemployment benefits
climbed by 7,000 claims to 480,000 last week. The surprise rise in
weekly claims occurred during the week that coincides with the
government's monthly survey of employers for its closely watched report
on payrolls. The four-week moving average for new claims -- viewed
as a better measure of underlying trends -- fell to the lowest level
since September 2008. It was the 15th weekly decline in a row. At
467,500, the measure is closing in on the 450,000 level that some
analysts say will signal labor market stability. Employers last month cut the fewest jobs in more than
a year and the unemployment rate edged down to 10 percent from a 26-1/2
year high of 10.2 percent in October. This view was backed by the
Philadelphia Fed survey's employment index, which touched its highest
level in two years.
Fed Buys $16 billion of agency MBS The Federal Reserve bought $16.0 billion net of
agency mortgage-backed securities in the latest week, the New York Fed
said on its website on Thursday. That is unchanged from the previous
week's net purchases. The purchases brought the U.S. central bank's
purchases of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and
Ginnie Mae to roughly $1.087 trillion since January. The Fed said it bought $28.925 billion gross of
agency MBS from Dec. 10 through Dec. 16. At the same time, it sold
$12.925 billion in mortgage securities. The Fed aims to buy $1.25
trillion of agency MBS in a bid to bring down mortgage rates and to
stimulate the battered housing sector and the overall economy.
Senate Panel Backs Bernanke for Second Term
Federal Reserve Chairman Ben Bernanke's nomination to
a second term cleared a Senate panel on Thursday despite some lawmakers'
misgivings, setting the stage for a contentious Senate debate and vote
in January. The Senate Banking Committee backed Bernanke on a 16-7 vote,
with one Democrat joining six Republicans in opposition. Several senators voiced concern over perceived Fed
missteps they said laid the groundwork for the financial crisis. Others
criticized actions the Bernanke-led central bank has taken since the
crisis broke. "I strongly disapprove of some of the past deeds of
the Federal Reserve while Ben Bernanke was a member and its chairman,
and I lack confidence in what little planning for the future he has
articulated," said Senator Richard Shelby, the panel's top Republican,
who voted against confirmation. Public resentment over taxpayer bailouts of financial
firms has fed an unusually high level of opposition to Bernanke's
nomination. Four years ago, he sailed through the panel and Senate floor
on voice votes with just one Republican stating opposition. While Bernanke is widely expected to be confirmed for
a second four-year term, he seems certain to receive a high number of
"no" votes when the full Senate takes up his nomination after it
reconvenes from a holiday break on January 19. Bernanke could get even
more than the 16 opposing votes former Fed Chairman Paul Volcker drew in
1983 after triggering back-to-back recessions with double-digit interest
rates. Even some lawmakers who
said they support him favor trimming some of the Fed's authority over
financial firms. Bernanke's current term expires on January 31,
although he could continue to serve as acting chairman even if his
nomination is not approved by then. The obstacles Bernanke faces in the
Senate were underscored by the no vote of Shelby, who is influential
among Republicans, and the opposition vote from Democratic Senator Jeff
Merkley. Their votes could embolden other lawmakers of both parties to
oppose the nomination. Senate leaders will need to corral a super majority
of at least 60 votes to overcome efforts to block the nomination, and a
full-day debate is likely to unfold, giving disgruntled lawmakers ample
opportunity to air their grievances. Bernanke and the Fed have become lightning rods for
anger over financial excesses and government bailouts of big financial
firms, such as insurer American International Group. The Fed chief has
defended the central bank's aggressive actions to shore up the financial
systems as necessary to avoid a second Great Depression. It is widely agree that the economy would have
suffered considerably more damage without the central bank's support of
private firms. Nonetheless, the economy is still suffering through the
worst recession since the 1930s. With the unemployment rate in double digits for the
first time in more than a quarter century, public resentment over the
taxpayer-funded rescue of the banking sector runs high. Tapping that anger, lawmakers are looking at steps
that could diminish the Fed's regulatory role and subject its interest
rate decisions to congressional audits, meaning Bernanke faces the
prospect of leading a diminished institution. "I strongly support this nomination. But I want to be
clear with my support comes my insistence that we carefully examine the
role of the institution that runs the risk of becoming too complicated
to succeed," the panel's chairman, Democratic Senator Christopher Dodd,
said. Many lawmakers feel the institution was derelict in
policing the financial firm risk-taking that set the stage for the
financial collapse. Others blame the Fed for fueling the housing bubble
by keeping interest rates too low for too long earlier this decade, when
Bernanke served as a Fed governor. Still, Bernanke has drawn support from some important
quarters, suggesting his nomination is still on track for approval. "The experience that Chairman Bernanke has had over
the last year and a half makes him by far ... the most well-equipped
person to lead the Fed over the next several years," said Republican
Senator Bob Corker, a member of the banking panel.
Concerns Over Excess Returns Unwarranted Concerns over the large increase in excess reserves
within the banking system and the potential thereof to result in a
breakout of inflation are "largely unwarranted," according to two New
York Federal Reserve economists. The increase in excess reserves, or the amount of
funds banks hold beyond what Fed requires, is largely the by-product of
the unprecedented lending the Fed has conducted to combat the credit
crisis and the ensuing recession, Todd Keister and James McAndrews wrote
in an article for the New York Fed's December bulletin released on
Thursday. Moreover, burgeoning excess reserves signal "little
or nothing about the programs' effects on bank lending or on the economy
more broadly," they said in the article, entitled: "Why Are Banks
Holding So Many Excess Reserves." Some Wall Street economists have cited the estimated
$1.1 trillion in excess reserves as a failure of the Fed's monetary
measures to stimulate lending. Instead of making loans, banks are
sitting on their cash. Other private economists have warned the Fed
needs to act quickly to remove the large quantities of excess reserves
once the economic recovery gains traction, or it will risk stoking
inflation. To combat inflation, the Fed has two monetary tools
to curb bank lending and overall economic activity, Keister and
McAndrews said. First, the central bank can sell securities --
primarily U.S. Treasuries -- to banks through reverse repurchase
agreements. It has begun conducting tests of so-called triparty reverse
repos this month. However, the scale of reverse repos is limited by the
amount of securities the Fed owns. The other tool is raising the interest rate the Fed
pays on reserves. The Fed began paying interest on reserves in October
2008, shortly after the collapse of Lehman Brothers roiled global
financial markets. By increasing the interest it pays on reserves, the
Fed can raise short-term market rates and slow bank lending and the
economy without changing the quantity of reserves, Keister and McAndrew
noted.
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MarketView for December 17
MarketView for Thursday, December 17