MarketView for December 28

 

 

Summary 

 

It was another light day of trading so typical of this time of year with trading expected to remain thin over the week as the Eastern portion of the United States dug out from a snowstorm that stranded thousands of travelers at the end of the Christmas weekend. Nonetheless, both the Dow Jones industrial average and the S&P 500 indexes managed to put a few positive points up on the scoreboard on Tuesday, extending December's rally, as the cold weather sent oil prices and energy shares upward.

 

The current blizzard increased demand for heating oil, sending crude prices above $91 per barrel. Commodity companies had fallen on Monday after an interest rate hike by China sparked concerns about decreased demand. Chevron and Exxon Mobil edged upward to new 52-week highs, with Chevron adding 1.2 percent to close at $91.19, while Exxon rose 0.6 percent to close at $73.42. Both companies are components of Dow.

 

Newmont Mining gained 2.4 percent to close at $61.55 as gold staged its largest one-day gain since December 3 to settle at $1,404.90 per ounce.

 

General Motors saw its shares add about 2.1 percent to close at $35.32 after several banks initiated coverage on the automaker, including "overweight" ratings from Barclays Capital and Morgan Stanley.

 

However, the day’s somewhat disappointing economic data kept the market in check. Consumer confidence unexpectedly deteriorated in December, the result of increased concerns over the labor market.  At the same time, the price of single-family homes fell almost double the expected pace in October.

 

Although the confidence data was weak, new retail sales data confirmed that retailers are poised to show their best holiday season in three years, according to the International Council of Shopping Centers and Goldman Sachs.

 

MannKind rose 3.3 percent to $8.23 after the company reported that the FDS would require an additional four weeks to complete a review of its experimental diabetes treatment. The news lifted the hopes of those who invested in the company, many of whom had expected the drug to be rejected outright.

 

Economic News is Discouraging

 

Consumer confidence unexpectedly deteriorated in December, while prices of single-family homes fell almost double the expected pace in October, tempering growing optimism on the economy's recovery. The latest data was at odds with other signs suggesting the economic recovery is accelerating and a separate report last week showing consumer sentiment in December at its highest level since June.

 

Concerns over the unemployment issue sent an index of consumer sentiment to 52.5 in December from 54.3 in November, the Conference Board said on Tuesday. Consumers' assessment of the labor market worsened in December after data at the start of the month showed the unemployment rate jumped in November to a seven-month high of 9.8 percent.

 

The "jobs hard to get" index of the sentiment survey rose to 46.8 percent in December from 46.3 percent last month, while the "jobs plentiful" index dropped to 3.9 percent from 4.3 percent.

 

Financial markets showed a muted reaction to the consumer and housing data, with traders citing very thin post-Christmas liquidity.

 

Despite the overall drop in confidence, the tax compromise has helped fuel optimism about the recovery, with economists expecting it to lift growth next year by as much as 1 percentage point. The economy is also getting monetary support from the Federal Reserve's planned purchases of $600 billion in government debt.

 

Another report on Tuesday showed single-family home prices fell for a fourth straight month in October, pressured by a supply glut, home foreclosures and high unemployment.

 

The Standard & Poor's/Case-Shiller composite index of 20 metropolitan areas declined 1 percent in October from September on a seasonally adjusted basis, much steeper than the 0.6 percent decrease economists expected.

 

The housing market has been struggling since home-buyer tax credits expired earlier this year. With the number of foreclosures expected to top a million in 2010, many economists expect the index to drop further in the coming months.

 

Retail sales rose in the week before Christmas, putting holiday sales on track to hit the high end of estimates. Data released on Tuesday by the International Council of Shopping Centers and Goldman Sachs showed retail sales rose 4.8 percent for the week ended December 25 compared with the year-earlier period.

 

Optimism about the economy has grown after recent reports on jobless claims, durable goods and consumer spending suggested the economy perked up a bit in the fourth quarter and appears to be entering the New Year with a relatively decent amount of momentum.

 

China Sticks It to the World Once Again

 

China announced on Tuesday it will cut its export quotas for rare earth minerals by more than 11 percent in the first half of 2011, further shrinking supplies of metals needed to make a range of high-tech products. China produces about 97 percent of rare earth minerals; used worldwide in high-technology, clean energy and other products that exploit their special properties for magnetism, luminescence and strength.

 

The rare earth issue could further strain our ties, which have been battered this year by arguments over human rights, Tibet, Taiwan, the value of the Chinese currency and North Korean military attacks on South Korea. In an effort to rein in the discontent many have with China Chinese President Hu Jintao is due to visit the United States next month for talks with President Barack Obama that both sides hope can stabilize the vital relationship.

 

Beijing says its curbs are for environmental reasons and to guarantee supplies to Chinese clean energy firms it is trying to promote internationally. However, one of the key reasons is that China has dominance as a producer of 95 percent of the rare earths mined and as such should have control over global prices.

 

In a short statement on its website the Chinese Commerce Ministry said it had added more producer companies to the quota list but cut volumes allocated to trading companies. China's Commerce Ministry allotted 14,446 tons of quotas to 31 companies, which was 11.4 percent less than the 16,304 tons it allocated to 22 companies in the first half of 2010 quotas a year ago. China slashed the export quota by 40 percent in 2010. The export restraint has inflamed trade ties with the United States, European Union and Japan in particular.

 

In Washington, the U.S. Trade Representative's office expressed concern over the latest announcement. Last week, the trade representative's office said China had refused U.S. requests to end export restraints on rare earths, and the United States could complain to the World Trade Organization, which judges international trade disputes.

 

Wind turbines and hybrid cars are among the biggest users of rare earth minerals, which analysts say are facing a global supply crunch as demand swells. The minerals are also used in some weapons systems.

 

This little-known class of 17 related elements is also used for a vast array of electronic devices ranging from Apple's iPhone to flat-screen TVs, all of which are competing for the 120,000 tons of annual global supply.

 

While industrial users of rare earths in industrialized countries face tighter supplies and higher prices, China's export curbs have created opportunities to open mines or revive dormant production in Canada, Australia and the United States.

 

After China's announcement, shares of Molycorp, the Colorado-based company that owns a rare earth mine in California, rose as much as 11.6 percent. However, the headline-driven surge in a firm whose value has tripled since July proved only temporary, in part reflecting the fact that Molycorp's rare-earth mine in Mountain Pass, California, is due to come back online only late next year.

 

Canada alone has at least 26 publicly traded companies, including Great Western Minerals Group and Rare Element Resources that have rare earth projects in some stage of exploration.

 

Japan has been hard hit by the export curbs. Japanese imports of rare earths shrank further in November, reflecting the impact from China's de-facto ban on shipments of the minerals that was lifted late last month.

 

The European Union has also expressed concern over China's limiting of rare earth exports; though the bloc's trade commissioner said earlier this month China had reiterated that rare earth supplies would be sustained.

 

Beijing has been trying hard to impose discipline on its chaotic rare earth sector and is expected to establish a rare earth industry association by next May, said Wang Caifeng, an official with the Ministry of Industry and Information Technology, speaking at a conference on Tuesday. Tougher environmental regulations for the rare earth sector are also expected to be unveiled next year, the China Business News reported on Tuesday.