MarketView for December 22

 

 

Summary

 

The S&P 500 hit its highest level since the collapse of Lehman Brothers, led by bank stocks. The banks -- epicenter of the credit crisis two years ago – led the major equity indexes higher as a December run helped keep the market's year-end rally going strong.

 

The S&P 500 index has gained ground for the past five sessions although the gains have been modest and on light volume. On Wednesday, the S&P 500 climbed above 1,255.08 where the index closed just days after Lehman filed for bankruptcy in September 2008. For the year, the index is up 12.9 percent, including a 6.6 percent December run.

 

Nonetheless, the benchmark's relative strength index does indicate that some degree of retrenchment could occur, most likely in the near term. Meanwhile, the CBOE Volatility Index .VIX, known as Wall Street's fear gauge, fell 6.3 percent to 15.45, its lowest closing level since July 2007.

 

Bank of America rose 3.1 percent to $13.38 and JPMorgan Chase ended the day up 2.8 percent to $42.16, giving the Dow Jones industrial average its largest boost of the day. At the same time, regional banks outpaced their larger counterparts after recent merger activity in the sector raised the possibility of more mergers and acquisitions to occur in the future. Meanwhile, Hancock Holding agreed to acquire Whitney Holding on the heels of last week's takeover of Marshall & Ilsley by the Bank of Montreal.

 

Whitney Holding ended the day up 28.8 percent to close at $14, while United Bankshares rose 4.6 percent to close at $29.80 after KBW raised its price target to $28 from $23.

 

Energy shares rose as crude oil futures settled 0.7 percent higher at $90.48 a barrel. Chevron Corp closed up 0.7 percent at $89.89.

 

Walgreen saw its share price end the day higher after the chain posted higher profit on increased prescription sales and a slower pace of store openings that helped control costs. Its shares ended the day up 5.5 percent, the second-best percentage gain on the S&P 500, to $38.85.

 

About 6.14 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's estimated daily average of 9.65 billion.

 

Economic Data Continues to Point to Slow but Steady Growth

 

Sales of previously owned homes increased in November, offering the latest sign the economy was ending the year on a more solid footing. According to the National Association of Realtors existing home sales rose 5.6 percent in November to a 4.68 million unit annual pace. Sales were the highest since June but were still at a depressed level and came in slightly weaker than expected.

 

In a separate report, the Commerce Department said on Wednesday that the economy grew at an annual rate of 2.6 percent in the third quarter, a touch above its earlier 2.5 percent estimate, but more of that output ended up in warehouses as increased inventories

 

The economy, which expanded at an anemic 1.7 percent rate in the second quarter, is expected to receive support next year from an $858 billion tax cut deal that led the Street to raise its 2011 growth estimates by as much as a percentage point. The tax plan is seen complementing the Federal Reserve's program to buy $600 billion worth of government bonds to keep borrowing costs low in an effort to add continued stimulus to the economy.

 

A key question hanging over the economy is whether the level of inventories held by businesses is appropriate given the pace of sales. Business inventories increased $121.4 billion in the third quarter, revised from the $111.5 billion estimated previously. Without the inventory buildup, the economy expanded at a 0.9 percent pace.

 

Although the stockpiling implies some softness in the pace of growth in the fourth quarter, some businesses may be happy to add further to inventories given signs of strong sales in October and November.

 

The government revised down the third-quarter increase in consumer spending to a 2.4 percent rate from 2.8 percent, but all indications are that spending has since picked up.

 

Retailer Bed Bath & Beyond reported quarterly results after the market close and gave a strong outlook for the period covering the holidays that underscored signs of strength in consumer spending. Sales rose 11.1 percent in the fiscal third quarter ended November 27 and earnings topped Wall Street expectations, sending the shares up 6 percent in after-hours trade.

 

Consumer spending accounts for more than two-thirds of U.S. economic activity and the third-quarter pace was the fastest since the first three months of 2007.

 

There were also slight downward revisions to government and business spending estimates, while the trade deficit was a bit smaller than previously estimated and the contraction in home building was little changed.

 

Housing remains the economy's main weak spot. The Mortgage Bankers Association reported that mortgage applications last week fell to their lowest level in nearly a year as interest rates ticked higher.

 

In the Commerce Department's GDP report, after-tax corporate profits were revised down to show a 0.2 percent rise, instead of a 1 percent rise. It was the weakest reading since the fourth quarter of 2008 and marked a sharp slowdown from the 3.9 percent gain in the April-June period.

 

The report also showed a lack of inflation pressure. The Fed's preferred inflation measure, the personal consumption expenditures price index, excluding food and energy, rose at a revised annual rate of 0.5 percent. That was the smallest increase since records began in 1959.

 

France Looking for Tighter EU Controls

 

France has indicted that it wants all 16 euro zone governments and any other interested European Union members to coordinate their economic policy more closely in the future, Economy Minister Christine Lagarde told a German newspaper.

 

"The crisis showed us that it is not sufficient to limit public debt as foreseen in the Maastricht Treaty. Ireland stuck to these criteria and finds itself nevertheless in difficulty," Lagarde said in an interview with the Sueddeutsche Zeitung.

 

"The EU must not look just at the budgets, it must monitor how the economies in the member states develop," she said.

 

Countries that set out to boost exports and increase investment in a certain sector, for example, would directly affect other EU countries.

 

"I don't think it is possible to take away sovereignty over budgets from national states, but we could coordinate with each other already when we are preparing tax legislation. Germany and France plan exactly that - more and more we want to coordinate already when we draft our budget plans for the coming years," she explained.

 

"Furthermore, I can also imagine creating an arbitration body (for closer economic policy coordination)," Lagarde said.

 

European countries' diverging tax rates have become a subject of tension. In negotiations on Ireland's EU/IMF bailout last month, France and Germany wanted Ireland's ultra-low corporation tax rate -- long seen by higher-tax European countries as unfair competition -- to be addressed but Dublin made clear the tax rate was non-negotiable.

 

Lagarde, in the interview, acknowledged that all 27 member EU states were unlikely to agree to such a wide-ranging move to coordinate economic policy, with the UK likely to vent fierce opposition, but she said some countries outside the euro zone would be interested.

 

"I doubt that a coordinated economic governance would be possible with all 27 states. Great Britain, for example, disagrees entirely on certain things. But that shouldn't hold up all the others," she said.

 

Lagarde rejected the idea of issuing common euro zone bonds -- which some European policymakers and analysts say would help ease market concerns about peripheral euro zone debt -- at least until member states have aligned themselves more closely.

 

"Definitely not at present," she said, when asked under what conditions France would support debt jointly issued by all 16 states.

 

"Before we introduce euro bonds, we first need a closer economic governance," she said.

 

She also told the newspaper that the French government was committed to lowering its debt and was currently planning to propose a tax reform prior to presidential elections in 2012.