MarketView for December 23

Summary 

Solid earnings from Micron Technology and Red Hat helped propel the major equity indexes over the line into the black, but any real gains in share prices were held back by a decline in new home sales. New home sales fell 11.3 percent, sinking to a seven-month low in November. Volume was light on the last full trading day before the Christmas holiday.

Better-than-expected results from Red Hat helped to send its shares higher closing up 5.2 percent at $31.43. Bellwether Oracle closed up 1.1 percent to $24.73 as Red Hat’s results aided other technology companies. Micron Technology closed up 6.2 percent at $9.99 after posting its first quarterly profit in nearly three years.

The housing figures were a disappointment because of the sector's crucial role in the economic recovery. Home improvement chain Home Depot fell 1 percent to $29.00 and ranked among the Dow's worst performers.

Though it achieved only a modest gain, the S&P 500 closed at the key technical level of 1,120. Market technicians have said a breakout above 1,120 could be a harbinger for more gains into year-end. The S&P 500 reached a fresh 14-month high, while the Nasdaq set a 15-month high.

The New York Stock Exchange will close at 1 p.m. on Thursday for Christmas Eve and will be closed on Friday for Christmas.

Energy stocks moved higher, as oil futures rose 3.1 percent, or $2.27, to settle at $76.67 per barrel on indications that crude oil inventories fell more than expected last week as imports declined. Meanwhile, Schlumberger closed up 2 percent to $65.23 after Barclays Capital raised its rating on shares of the oilfield services company to "overweight" from "equal-weight.

The dollar lost 0.5 percent against a basket of major currencies, lifting exporters like Caterpillar, which was up 0.7 percent at $58.32, and helped limit declines in the Dow and the S&P 500.

Rounding out the day's data, the final December reading on consumer sentiment from the Reuters/University of Michigan surveys and November personal spending both came in weaker than expected.

Economic News Mixed

Consumer spending rose in November as incomes recorded their biggest gain in six months, but a surprise drop in new home sales to a seven-month low was a reminder that the economic recovery would be bumpy.

The Commerce Department reported on Wednesday that consumer spending increased by 0.5 percent last month after a rise of 0.6 percent in October. A separate report from the Commerce Department indicated that sales of newly built single-family homes unexpectedly dropped 11.3 percent last month to a 355,000 unit annual rate. The decline was thought to be due to the expectation that the tax credit for first-time home buyers would expire at the end of November.

New home sales are counted after a contract is signed, but closing on a contract usually takes 30 to 60 days more. The credit has since been extended and expanded so sales should continue their upward climb in coming months.

There were some hopeful signs in the Commerce Department report, with the median sale price for a new home rising 3.8 percent from October to $217,400, the highest level since May. Compared to a year-ago, the median sale price fell 1.9 percent. The number of new homes on the market last month still fell to 235,000, the lowest since April 1971.

A third report showed consumer sentiment improved this month as incomes rose and the job market grew less gloomy. The Reuters/University of Michigan Surveys of Consumers' index of consumer sentiment was 72.5, the highest in three months, after 67.4 in November.

Improving confidence and rising incomes would support spending in general and the housing market. Personal income rose 0.4 percent last month, the largest increase since May, after gaining 0.3 percent in October, Commerce Department data showed. The rise in income saw savings increasing to an annual rate of $525.1 billion, but the savings rate was unchanged at 4.7 percent from the prior month.

In an interview with ABC's "Good Morning America" on Wednesday, Treasury Secretary Timothy Geithner said the economy was recovering, but it may be some months yet before jobs are being created instead of lost.

"The economy's growing, it's getting better, getting stronger and I think most people would say the economy is strengthening going into the end of the year...but the key thing is when do we get job growth back," Geithner said.

Treasury Has Uses for Surplus TARP Funds

The Treasury Department will ask Congress to ease restrictions on the use of bank bailout funds so it can use some of the money to encourage more lending to small businesses, a department official said on Wednesday. Treasury is considering using about $30 billion from the Troubled Asset Relief Program, or TARP, for programs to boost lending to small businesses, the official said.

The Treasury official said another $10 billion of TARP funds could go to the Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF, which is designed to revive consumer lending and to boost markets that package consumer loans into securities.

No final decisions have been taken on how much TARP money might be used or how it might be apportioned, the Treasury official. The Obama administration has been speaking with bankers, both large and small, about how to get credit flowing more freely to support a recovering economy.

The TARP fund was initially set up last year, with Congress' approval, for the purpose of buying toxic assets from struggling banks but was almost immediately converted into a program for injecting capital into banks.

Much of the bailout money now is being repaid, frequently with interest, but the administration is trying to find a formula for balancing a message of greater banking accountability with the need for small businesses to be able to get access to loans.

Treasury Secretary Timothy Geithner on Tuesday identified tight lending as one of the most severe risks a recovering economy faces. Small businesses create most jobs, so it is especially critical for them to be able to get credit.

"Right now, the real risk we face is that banks are not lending enough and not going to provide the capital businesses need to grow for the economy to strengthen going forward," Geithner said in an interview on National Public Radio.