MarketView for December 28

 

 

Summary 

 

There were some modest gains on Monday as share prices edged higher for a sixth straight trading day, the result of improved consumer spending numbers, evidenced by an unexpected increase in retail sales during the period from November 1 till Christmas. However, while the major equity indexes managed to chalk up some fresh closing highs for 2009, volume was light in what was expected to be a slow last week of trading.

 

Sales at U.S. retailers rose 3.6 percent for the period from November 1 to Christmas Eve, but gained only 1 percent when an extra shopping day this year was excluded, data from MasterCard Advisors unit SpendingPulse showed. Nonetheless, the even that low number was enough to the share prices of leading retailers higher. Amazon.com saw its share price rise 0.6 percent to close at $139.31 after the company announced that customers bought more e-books than physical books for the first time ever on Christmas Day.

 

On the negative side of the ledger, airline share prices fell as a result of tighter security after a passenger attempted to blow up an aircraft with explosives smuggled on board in his clothing. AMR, the parent of American Airlines, saw its share price fall 4.8 percent to close at $7.75, while Delta Air Lines closed down 4.1 percent at $11.29. On Monday afternoon, a branch of Al Qaeda said it was behind the failed Christmas Day attack, according to a Web statement.

 

U.S. oil futures rose 72 cents to settle at $78.77 a barrel, after hitting $79.12, a five-week high. Energy shares advanced, picking up their cue from climbing oil prices. Shares of Exxon Mobil Corp rose 0.6 percent to close at $69.08.

 

Retail Holiday Sales Exceed Expectations

 

The nation’s retailers had a better holiday period than many on Wall Street had been expecting, according to data released on Monday. Activity tracked by SpendingPulse, a unit of MasterCard Advisors, indicated that retail sales rose 3.6 percent in the period from November 1 through Christmas Eve on December 24. If you take out the extra shopping day this year between the November 26 Thanksgiving holiday and December 24, the increase was closer to 1 percent, SpendingPulse said. Nonetheless, it was an increase.

 

SpendingPulse figures reflect activity in the MasterCard Inc payment networks and estimates for other payments like cash and checks. They exclude gasoline and auto sales. This year, fewer consumers had credit cards after issuers tightened lending terms, while many others said they preferred to pay with harder-to-track cash in order to stay on budget.

 

In 2008, spending fell 2.3 percent as tracked by SpendingPulse and 2.8 percent as tracked by the National Retail Federation, as the financial crisis led consumers to cut back.

 

Looking at the holiday season as a whole, the consensus of opinion seems to be that retail sales did not really induce an optimism-inducing upside nor a deeply worrying downside. Meanwhile, the National Retail Federation continues to expect a 1 percent drop in sales for November and December, while other forecasts predict a rise of up to 1 percent. The NRF plans to issue its own holiday season tally, based on government data, on January 14.

 

Among stocks cited as holiday season winners this year, Gap Inc rose 1.4 percent. Wal-Mart, which offered early and deep discounts, rose 0.7 percent. Amazon.com Inc was helped by higher online shopping overall and its Kindle e-reader, and its shares rose 0.6 percent.

 

However, it will be weeks before investors find out what the final push meant to retailers' bottom lines. Several chains plan to report their December sales results on January 7. Full results will come after many retailers wrap up their holiday quarters on January 31.

 

The increase tracked by SpendingPulse was aided by a 15.5 percent surge in online purchases as consumers became more comfortable shopping online and shoppers stranded by snowstorms on the East Coast and in the Midwest bought from home. Online retail sales account for about 5 percent of overall sales.

 

Sales at specialty electronics chains such as Best Buy rose 5.9 percent after falling sharply in 2008. Luxury sales edged up 0.8 percent, while jewelry sales shot up 5.6 percent and gathered steam just before Christmas.

 

Men's apparel sales rose 3.9 percent, while women's clothing sales edged down 0.3 percent. Sales at specialty apparel retailers such as Gap and Abercrombie & Fitch edged down 0.4 percent, but showed signs of life after Black Friday this year, rising 2.3 percent between the last Friday in November and December 24.

 

Fed Has Tools It Needs

 

The Federal Reserve has the tools it needs to withdraw its extraordinary support for the financial system in a "timely and effective" way to avoid future inflation, Fed Chairman Ben Bernanke said on Monday. The Fed has pumped more than $1 trillion into the economy to combat the crisis and promote economic recovery.

 

An important tool when the time comes to tighten policy will be the Fed's ability to raise the interest paid on the balances banks hold at the central bank, Bernanke said. By raising the interest rate on reserves the Fed essentially creates a magnet for banks to keep those reserves with the Fed rather than lend them out into the financial system.

 

"Banks will be unwilling to make overnight loans to each other at a rate lower than the rate that they can earn risk-free from the Fed, and so the interest rate we pay on banks' balances will tend to set a floor below our target overnight loan rate and other short-term interest rates. Banks generally will not lend funds in the money market at a rate lower than they can earn risk-free at the Fed," Bernanke said in his December 7 speech.

 

The Fed could also arrange large-scale reverse repurchase agreements, or repos, with financial market participants, which would temporarily drain reserves from the banking system and reduce excess liquidity at other institutions. Reverse repos involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.

 

"Through the use of a short-term funding method known as reverse repurchase agreements, we can act directly to reduce the quantity of reserves held by the banking system," Bernanke said on December 7. The Fed has said it could conduct reverse repos with a number of institutions, not just primary dealers, its usual counterparties.

 

The Fed could also create a new "term deposit facility" for banks, similar to certificates of deposit offered by retail banks. Like the reverse repos, this would reduce the supply of funds banks have available to lend to each other, putting "additional upward pressure on short-term interest rates" Bernanke said on Dec 7.

 

"By paying a slightly higher rate of interest, we could induce banks to lock up their balances in longer-term accounts with us, making those balances unavailable for lending in the overnight market," Bernanke said on December 7.

 

The Fed could sell a portion of its securities holdings into the open market. "If necessary, we always have the option of reducing the size of our balance sheet by selling some of our securities holdings on the open market," Bernanke said on December 7.

 

Fed Considering Term Deposit Facility

 

The Federal Reserve on Monday pressed ahead toward the creation of a new mechanism it says could be used to withdraw money from the banking system once policymakers decide to tighten monetary policy. The program, called the term deposit facility, would allow financial institutions to earn interest on loans of longer maturities to the central bank. The Fed already pays interest on banks' overnight reserves.

 

"Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy," the Fed said in a statement that was the Fed's first detailed proposal for the new facility.

 

Rates on term loans, whose maturity would likely range between one and six months and would not exceed a year, could be determined via competitive bidding at auction, the Fed said. They would be available only to financial institutions eligible for federal deposit insurance, not the general public. Once lent to the central bank, the money cannot be withdrawn.

 

In its effort to battle the worst financial crisis since the Great Depression, the Fed has deployed an extraordinary array of emergency measures, leading to a surge in outstanding credit to the banking system to more than $2.2 trillion.

 

The amount of money sloshing around has fueled concern about the possibility of high inflation. Withdrawing the reserves at just the right time is seen as crucial to keep consumer prices under wraps.

 

The latest proposal, which the Fed stressed did not represent an immediate move toward a less accommodative monetary policy, was expected to serve as an additional tool in the tightening arsenal, which also includes reverse repurchase agreements and outright sales of assets.

 

"The proposal is one component of a process of prudent planning on the part of the Federal Reserve and has no implications for monetary policy decisions in the near term," the Fed said in a statement.

 

The central bank has requested feedback on its proposal from market participants, which should help inform the ultimate structure of term deposits.

 

At the height of last year's financial meltdown, the Fed had been discussing going to Congress to request the authority to issue its own bills. The term deposit facility achieves a similar purpose, but can be undertaken within the Fed's existing authority and does not require congressional approval.