MarketView for December 13

 

 

Summary 

 

A late in the day sell-off by a few large tech stocks ended the winning spree of the Nasdaq on Monday as the Dow Jones industrial average managed a small gain, while the S&P 500 index was virtually unchanged in another day of low volume on the exchanges. The Nasdaq ended the day solidly lower as some tech names, including Apple and EMC, traded off highs reached earlier in the session. Apple rose more than 1 percent in afternoon trading, but at the close, it was up just 0.4 percent at $321.67. The stock is up 53 percent so far this year.

 

The S&P 500 reached another high for the year on Monday, advancing to an intraday peak at 1,246.73. The index's steady climb since breaking through 1,228 -- a key retracement of the 2007-2009 bear market losses -- has been judged a sign of further gains, even as the relative strength index suggests stocks are nearing an overbought condition.

 

Stocks showed some initial strength on the thought that China would not aggressively head off growth, which in turn add strength to both energy and materials stocks. The Street was concerned that China would raise interest rates to slow growth, but instead it merely increased the amount of extra capital top banks must hold, a considerably less severe move by the world's second-largest economy.

 

Companies that sell oil, like Chevron, and those that make mining equipment, like Caterpillar, sent the Dow higher. At the close, both Caterpillar and Chevron were up 1.5 percent or more.

Healthcare stocks were up briefly on news that a Virginia judge invalidated a key part of the March healthcare overhaul, but these shares quickly fell back. Nonetheless, the shares of health insurer Aetna still managed a 1 percent gain to $30.92.

 

Approximately 7.32 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq, well below the year's daily average of 8.62 billion.

 

On the mergers and acquisitions front, GE's ended the day down 0.6 percent to $17.62 after reaching a deal to buy Wellstream by raising its bid for the British oil drilling pipe maker by 6 percent to $1.3 billion. At the same time, Dell agreed to purchase data storage company Compellent Technologies. Dell fell 3.9 percent to $13.36 and was one of the largest percentage losers in both the S&P and Nasdaq 100 after it sweetened its cash offer for Compellent to $27.75 a share. Compellent fell 2.5 percent to $27.98 after trading above $34 last week.

 

Private equity firm Bain Capital agreed to buy IMCD, valuing the Dutch chemicals firm at around $857.5 million, while scientific instruments maker Thermo Fisher Scientific is set to acquire Dionex Corp for $2.1 billion. Thermo Fisher shares ended the day up 4.8 percent to $55.56, while Dionex rose 20 percent to close at $117.83.

 

Moody’s Not Happy with Tax Package

 

Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law. The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

 

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months. For the United States, a loss of the top Aaa rating, reduce the appeal of Treasury debt, which currently rank as among the world's safest investments.

 

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

 

If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.

 

On Monday, Congress moved toward grudging approval of President Obama's deal to extend expiring tax cuts, even for the wealthiest Americans. At the same time, Moody's and Fitch Ratings both expressed concerns about the U.S.'s rating longer term, with Moody's fearing the impact if the tax cuts become permanent.

 

In a market obsessed with the euro sovereign debt crisis, the Moody's note reminded foreign exchange investors about their worries of growing U.S. debt and was a factor pressuring the dollar on Monday.

 

The cost of insuring U.S. government debt in the credit default swap market was little changed on Monday at around 41 basis points, or $41,000 per year to insure $10 million in debt for five years,

A negative outlook would indicate that the rating may be more likely to be cut from the top Aaa rating over the following 12 to 18 months. The United States currently has a stable outlook, indicating a rating change is not anticipated over this time frame.

 

Moody's estimates the cost of the funding the proposed tax bill, along with unemployment benefits and other policy measures, may be between $700 and $900 billion, which will raise the ratio of government debt to GDP to 72 to 73 percent, depending on the effects on nominal economic growth.

 

This means that the government's debt relative to revenues will decline much more slowly over the coming two years, to just below 400 percent from 420 percent at the end of fiscal year 2010. "This is a very high ratio compared with both history and other highly rated sovereigns," Moody's said.

 

EU Central Bank May Need Additional Capital

 

The European Central Bank is considering requesting an increase in its capital to help cope with the rising costs of fighting the euro zone debt crisis. The ECB disclosed on Monday that it had increased its purchases of euro zone government bonds to 2.667 billion euros ($3.5 billion) last week from 1.965 billion euros a week earlier. It was the biggest weekly total since June but well below levels seen at the height of the euro zone crisis.

 

The best guess is that the ECB has purchased in the neighborhood of 72 billion euros in bonds -- exclusively Greek, Irish and Portuguese, since it began intervening in May to stabilize markets.

 

ECB policymakers have repeatedly signaled that the central bank cannot bear the brunt of fire-fighting against bond market attacks on highly indebted euro zone states, urging governments to increase reform efforts and boost EU contingency funds.

 

The Frankfurt-based central bank headed by Jean-Claude Trichet has greatly expanded its lending since the start of the global financial crisis in 2007. It has a subscribed capital of almost 5.8 billion euros compared to a balance sheet of 138 billion euros, according to its latest annual report.

 

All 27 of the European Union's national central banks contribute to the ECB's capital. The 16 countries already using the euro make up 70 percent with other EU members -- including Britain and Denmark which have opt-outs -- making up the rest.

 

EU leaders are due to discuss the relentless crisis at a summit on Thursday and Friday but are not expected to announce any new measures to ease concerns about the region's debt. Meanwhile, efforts are under way behind the scenes to find ways to shield Spain from market pressure expected to mount early next year.

 

Two major international financial institutions said EU paymaster Germany had aggravated the crisis with talk about making bond investors pay in future, but Berlin seems set to get its way on that issue at this week's European Union summit.

 

The Bank for International Settlements (BIS) and the head of the European Investment Bank (EIB) both said German Chancellor Angela Merkel's drive to make private bondholders share losses in any future euro sovereign default had intensified the crisis.

 

"The surge in sovereign credit spreads began on October 18, when the French and German governments agreed to take steps that would make it possible to impose haircuts on bonds should a government not be able to service its debt," the Basel-based BIS said in its quarterly review.

 

EIB president Philippe Maystadt said Merkel was absolutely right to demand a private sector contribution to financial rescues after an emergency safety net expires in 2013, "but the way it was presented created total confusion."

 

EU leaders are set to approve a two-sentence amendment to the 27-nation bloc's Lisbon treaty that would create a permanent European Stabilization Mechanism to lend to distressed member states on strict conditions.

 

They will also endorse a statement by euro zone finance ministers that private sector investors will be expected to contribute, on a case-by-case basis, in any sovereign debt restructuring after 2013. However, at the insistence of Berlin and Paris, they are unlikely to increase the existing rescue fund or to take any action on a proposal for common European bonds to help resolve the crisis.

 

Euro zone finance ministers are continuing to work on a more systemic response to the crisis, which has already forced Greece and Ireland to take EU/IMF bailouts and threatens to spread to Portugal, Spain and even Italy.

 

Euro zone bond markets have entered an end-of-year lull as investors close their books, with yield premiums on peripheral debt just a touch wider on Monday. Yet, it appears that EU officials fear another potential wave of selling early in the New Year.

 

A German government spokesman said indications were that the summit would not take up a proposal for common euro zone bonds made by Jean-Claude Juncker, chairman of the currency area's finance ministers, and Italian Economy Minister Giulio Tremonti.

 

The spokesman also told a news briefing he was not aware of any examination of an extension of the existing European Financial Stability Facility, as reported by the Financial Times.

 

The senior EU source said experts were working on ways to make European crisis management instruments more flexible and better able to help countries before they get shut out of credit markets. The crucial aim was to create a fence around Spain, the fourth largest euro zone economy. Madrid was taking energetic measures to avoid being sucked down with the crisis.

 

The EU source said experts were studying how to access the EFSF's full 440 billion euros ($580 billion) if necessary, despite pledges to maintain a cash buffer given to secure a top notch AAA credit rating for the rescue fund.

 

Luxembourg Foreign Minister Jean Asselborn said the 'E-bond' proposal, designed to reduce the borrowing costs of troubled euro zone states and prevent speculation against their debt, had been excluded from the EU summit agenda.