MarketView for December 21

 

 

Summary 

  

Technology shares moved lower on Wednesday and pushed the Nasdaq down 1 percent after Oracle reported results on Tuesday that were below both the Company’s and the Street’s expectations, even as broader markets closed mostly flat in a thinly traded day.

 

Outside the Nasdaq, the market recovered from early losses as some recent fears over Europe faded. Traders tried to build momentum for a year-end rally and possibly erase the S&P 500's 1.1 percent losses so far in 2011. For the year, the Dow Jones Industrial Average is up 4.6 percent while the Nasdaq is down 2.8 percent.

 

After Tuesday's close, Oracle reported earnings and sales that missed expectations for the first time in a decade. The software giant joins a growing list of companies, including some of technology's biggest and oldest names, whose results and outlooks have raised alarm bells about business conditions.

 

As a result, Oracle’s shares ended the day down 12 percent to close at $25.77 on heavy volume and were the biggest loser among the Nasdaq 100. Shares of other tech companies were also lower with IBM ending the day down 3.1 percent at $181.47. Cisco Systems fell 2.6 percent to close at $17.92. The Philadelphia semiconductor index was down 1.2 percent.

 

In Europe, investors worried that cut-rate loans from the European Central Bank's recent funding operation would not be used to buy Italian and Spanish debt, which would help lower elevated yields and reduce the pressure on refinancing for the debt-stricken countries.

 

European banks took nearly 490 billion euros in three-year cut-price loans from the European Central Bank on Wednesday. While a widening of the yield spread between German and Italian debt initially suggested that money was not flowing where it is most needed, those concerns faded toward the end of the day.

 

An Italian banking group said banks would not increase their exposure to sovereign debt even after the ECB offering because European Bank Authority rules discourage it. Moreover there are rumors floating around the EU that banks would use ECB loans to buy German bonds and not to support the debt of Spain and Italy.

 

Tuesday's rally had lifted the S&P 500 above its 50-day moving average. Many investors and traders are looking for a seasonal "Santa rally" through the end of the year and are keen to jump on any signs of momentum.

 

Research in Motion rose 10.1 percent to $13.78 and ranked as the Nasdaq 100's top gainer after Reuters reported that Amazon and other potential bidders had been looking at making an offer for the BlackBerry maker, although interest had cooled somewhat.

 

The latest economic data showed sales of previously owned U.S. homes rose sharply in November, but revisions to data for the last four years gave proof that the housing market's recession was deeper than previously thought.

 

Contract electronics manufacturer Jabil Circuit posted first-quarter revenue below estimates and said it sees lower revenue in the second quarter. The company’s shares ended the day down 2.8 percent to close at $19.40.

 

As is so often the case this time of the year, volume on the three major equity exchanges was light, with about 6.52 billion shares changing hands. That number was well below last year's daily average of 8.47 billion.

 

Previously Owned Sales Rebound

 

Homes sales surged in November, adding

 

The National Association of Realtors reported on Wednesday that sales of previously owned homes increased 4 percent from October to an annual rate of 4.42 million units. The news added to hints of recovery, but revisions to data for the last four years indicated that the housing recession was much deeper than previously thought.

 

At November's sales pace, the 2.58 million unsold homes on the market represented a 7.0 month's supply, the lowest since February 2007 and a sign a backlog of inventory that has been weighing on the market was slowly clearing.

 

The rise in sales and drop in inventory was the latest sign the housing sector, which triggered the 2007-09 recession, was on the cusp of a recovery. Data on Tuesday indicated that housing starts reached a 1-1/2 year high in November.

 

NAR also said it had overstated home sales from 2007 to 2010 by 14.3 percent. It said sales bottomed at a 3.30 million-unit pace in July 2010, rather than 3.86 million, underscoring the depth of the housing market downturn. The industry group said sales over that four-year period averaged 4.42 million units a year compared with the previous estimate was 5.16 million units. It blamed double-counting of properties and geographic population shifts, among other reasons, for the revisions.

 

"Some property listings on more than one multiple listing service, and issues related to flipping, also contributed to the downward revisions," said Lawrence Yun, NAR chief economist.

 

A housing recovery could help underpin what already appears to be a broader quickening of U.S. economic growth. During normal times, economists estimate that one out of every eight jobs in the economy is generated by housing-related activity.

 

While the inventory of unsold home fell in November, market conditions are still troubled. A supply of between six and seven months is generally considered ideal, with higher readings pointing to lower house prices.

 

The median sales price rose 2.1 percent from October, but was still down 3.5 percent from a year ago at $164,200. Given the glut of foreclosed properties hitting the market, analysts believe prices will remain under pressure for months to come.

 

A separate report showed applications for U.S. home mortgages slipped 2.6 percent last week, with both refinancing and home purchase demand falling. Mortgage demand had risen sharply earlier this month on a wave of refinancing activity.

 

Unexpected Demand for ECB Loans

 

An unexpected and unprecedented demand of about 490 billion euros in three-year cut-price loans from the European Central Bank on Wednesday, did temporarily ease the rising fears of a credit crunch but left unresolved how much will flow to needy euro zone economies.

 

Following a string of failed attempts by euro zone leaders to thwart market attacks on the bloc's weaker members, hopes of crisis relief before the year-end had been pinned on a massive uptake of the ECB's ultra-long and ultra-cheap loans.

 

The near half a trillion euro take-up of ECB funds represented the most the bank has ever pumped into the financial system and exceeded almost all forecasts. A total of 523 banks borrowed with demand way above the 310 billion euros expected by traders polled by Reuters,

 

The funding should strengthen banks' finances, ease the threat of a credit crunch and may tempt them to buy Italian and Spanish bonds, thereby easing the currency area's sovereign debt crisis.

 

However, it is unlikely that the cash will be  placed at the used to reduce the debt of euro zone weaklings and, while an interbank lending freeze may have been averted, the lack of trust between banks to lend to each other remains unresolved. So it was also not unexpected that the optimism hat the funding would ease Europe's two-year old debt crisis soon evaporated, sending the euro and stocks lower after an initial jump upward.

 

Banks have struggled to attract funding mainly because of worries about the underlying health of euro zone countries and their exposure to it, so becoming more reliant on the ECB and pledging more assets against those loans may add to the problem.

 

The debt problems of Greece, Portugal, Ireland and now Italy and Spain have taken the euro zone's troubles to new heights in recent months and raised serious questions about whether the euro, the currency shared by the 17 euro zone countries, can survive in its current form.

 

While a lending crunch may have been avoided thanks to the ECB's latest move, it is much less certain that banks will use the money to buy Italian and Spanish government debt, as French President Nicolas Sarkozy has urged, given the competing pressures on them to cut risk, rebuild capital and lend to business.

 

Banks will not increase their exposure to sovereign debt because European Bank Authority (EBA) rules discourage it, Italy's banking association (ABI) said. "The EBA rules are a deterrent for buying sovereign bonds, so not even the ECB's important liquidity injection ... can be used to support sovereign debt," ABI director general Giovanni Sabatini told reporters.

 

Given those doubts, most market experts say only more aggressive and direct buying of government bonds by the ECB will help ameliorate the crisis, something it is reluctant to do.

 

Italy alone faces about 150 billion euros of debt refinancing between April and March and data on Wednesday showed its economy - the euro zone's third largest - shrank in the third quarter, while the ABI forecast a recession next year.

 

Italian banks tapped the ECB for more than 110 billion euros, an Italian banking source told Reuters while a source from a Spanish bank said nearly all Spanish banks had participated in the 3-year ECB auction and taken up between 50 billion and 100 billion euros.

 

One of the key factors certain to have boosted demand is that banks are now more reliant than ever on central bank funds. The ECB said on Monday, in its semi-annual Financial Stability Review, that this dependency could be difficult to cure.

 

French banks have almost quadrupled their intake of ECB money since June to 150 billion euros, while banks in Italy and Spain are each taking more than 100 billion euros.

 

ECB President Mario Draghi had been pressing banks to take the money since announcing the plans earlier this month. He warned of a chance of a credit crunch on Monday and said that euro zone bond market pressure could rise to unprecedented levels early next year.

 

The 3-year funds were offered at an interest rate which will be the average of ECB's main interest rate over the next three years. That benchmark rate is, after a rate cut earlier this month, at a record low of 1.0 percent.

 

For some banks the new money could be more than 3 percentage points cheaper than they can get on the open market. As part of the deal, they were able to convert one-year loans they took from the ECB in October into the new three-year loans and also will be able to pay it back after just a year if they so wish.

 

The ECB was already lending banks 515 billion euros before Wednesday but the new loans will not simply stack on top.

 

Banks switched 45.7 billion euros out of the one-year loans they took in October. They also scaled down their three-month borrowing from the ECB to 30 billion euros from 140 billion and almost halved their intake of one-week loans this week.