MarketView for December 11

 

 

Summary

 

It was a positive day on Wall Street on Tuesday, with the major equity indexes ending the day in positive territory, led by gains in technology companies. The end result was that the  S&P 500 index ended the day at its highest level since Election Day.

 

A 2.2 percent gain to $541.39 by Apple was a great aid to the Nasdaq, as Apple rebounded from a week in which investors took profits before a possible tax rise next year. Prior to Tuesday's trading, Apple shares had lost 25 percent from an all-time intraday high hit in September.

 

Stocks pared some gains by late afternoon as more news on the "fiscal cliff" negotiations emerged. Senate Majority Leader Harry Reid said it will be difficult to reach agreement resolving the cliff tax hikes and spending cuts before Christmas.

 

The S&P 500 had lost 5.3 percent in the seven sessions following Election Day as investors refocused on the threat posed to the economy by the fiscal cliff, a series of automatic spending cuts and tax increases. Markets have mostly recovered those losses, but volume has been thin, suggesting investors are not betting aggressively due to the uncertainty.

 

Other major tech stocks also rose. Texas Instruments gained 4 percent to end the day at $31.01 after raising the guidance on its profit target late Monday. Microsoft ended the day up 1.4 percent to close at $27.32. Both of which helped other chipmakers rally, sending the PHLX Semiconductor index up 1.9 percent.

 

The lack of demonstrable progress in the fiscal cliff negotiations has kept investors from making aggressive bets in recent weeks.

 

Retailers like luggage maker Tumi Holding and Michael Kors Holding gained on Tuesday after a positive report from Goldman Sachs Equity Research. Tumi was up 4.7 percent to $21.92 and Michael Kors gained 2.4 percent, reaching $50.92. 

 

By contrast, discount retailers Dollar General and Family Dollar declined. Dollar General, whose shares fell 7.8 percent to $42.94, said it sees margins under pressure in 2013. Family Dollar shares dropped 8.4 percent to $64.68.

 

SPX Corp fell 9.1 percent to $62.07 after rumors that the company is in exclusive talks to buy rival Gardner Denver in a merger that could create an industrial machinery conglomerate with a market value over $7 billion.

 

The Treasury is selling its remaining stake in insurer American International Group. AIG's shares were up 5.7 percent at $35.26.

 

The Fed began a two-day policy-setting meeting on Tuesday. The central bank is expected to announce a new round of Treasury bond purchases when the meeting ends on Wednesday to replace its "Operation Twist" stimulus, which expires at the end of the year.

 

Approximately 6.43 billion shares changed hands on the three major equity indexes, as compared with the year-to-date average daily closing volume of roughly 6.5 billion shares.

 

Fed Likely to Increase Balance Sheet

 

The Federal Reserve will amplify record accommodation tomorrow by announcing $45 billion in monthly Treasury buying that will push its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists.

 

Forty-eight of 49 economists predict the Federal Open Market Committee will purchase Treasuries to bolster an existing program to buy $40 billion in mortgage bonds each month. The panel pledged in October to continue that plan until the labor market improves "substantially."

 

The FOMC is meeting for  two days and plans to release a statement on policy tomorrow at around 12:30 p.m. That will be followed by forecasts for growth, unemployment and inflation. Bernanke is scheduled to hold a press conference at 2:15 p.m., after release of the forecasts.

 

The central bank this month is scheduled to end Operation Twist, in which it swaps $45 billion of short-term Treasuries each month for longer-term government debt. That program kept the total size of the balance sheet unchanged, while new Treasury purchases would expand it.

 

The Fed's latest round of quantitative easing is expected to total $1.1 trillion, with about $620 billion in mortgage-backed securities and $500 billion in Treasuries. By adding Treasury purchases, policy makers would continue to lower mortgage rates and create conditions that would be favorable for a continued recovery in the housing market. Fed purchases of mortgage bonds have helped revive the housing market by pushing down the rate on a 30-year, fixed-rate mortgage last month to a record 3.31 percent.

 

New-home sales rose 17 percent in October compared with the prior year, while existing-home sales increased 11 percent. Home prices gained 3 percent from a year earlier in September, according to the S&P/Case-Shiller 20-city home-price index.

 

Homebuilder stocks have risen after a six-year slump. The Standard & Poor's Supercomposite Homebuilding Index of 11 homebuilders has surged 72 percent this year, compared with a 13 percent gain for the broader S&P 500.

 

Even with the recent improvement, home prices remain 29 percent below their July 2006 peak and the Fed does not want mortgage rates to climb much higher and they will do their utmost to keep long-term borrowing costs on the low side."

 

Treasury purchases would also constitute "insurance that if there's a failure to agree between Congress and the president.

 

The FOMC will probably wait until its March 19-20 meeting before adopting thresholds on unemployment and inflation to indicate when it will consider raising the federal funds rate, according to the median estimate of surveyed economists.

 

The Fed hasn't spelled out limits on the duration or size of its current accommodation, which was announced in September. In the first round of quantitative easing starting in 2008, the central bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

 

Forget a Special Dividend from Apple

 

Apple’s ability to pay a special dividend, viewed by investors as unlikely, is limited because almost 70 percent of its cash is outside the U.S.

 

While dozens of companies are paying special one-time dividends ahead of a potential jump in taxes, Apple probably won't join in partly because so much of its $121.3 billion in cash is held overseas, according to analysts.

 

Oracle, Wal-Mart, Costco and at least three dozen other companies have announced special dividends this quarter, according to data compiled by Bloomberg. The payouts come ahead of a potential rise in the top federal tax rate on dividends to 43.4 percent from 15 percent next year as part of the so-called fiscal cliff, a blend of tax increases and spending cuts that will take effect if lawmakers don't forge a budget deal.

 

Apple does not share the same concerns as other companies over the tax increase, it is to try to game taxes or game the market. Instead of the special dividend, look for Apple to increase its current dividend by at least 10 percent.

 

Wholesale Inventories Rise

 

Wholesale inventories rose more than expected in October as sales fell for the first time in three months, according to a report by the Commerce Department that was released on Tuesday.

The Commerce Department said wholesale inventories increased 0.6 percent to a record $497.1 billion after an unrevised 1.1 percent rise in September.

 

The Commerce Department said superstorm Sandy, which struck the East Coast in late October, had both a positive and negative impact on the wholesale data.

 

Inventories are a key component of gross domestic product changes and accounted for more than a quarter of the economy's annual 2.7 percent growth pace in the third quarter.

 

That led to forecasts of a draw down on inventories this quarter and weigh on growth. Data scheduled on Thursday on overall business inventories for October and November retail sales could shed more light on fourth-quarter GDP estimates. So far, GDP growth estimates for the quarter range from 0.5 percent to 2.3 percent.

 

The value of petroleum stocks fell 3.1 percent in October after rising 5.8 percent in September. Automobile inventories rose 0.4 percent in October after falling 0.8 percent the prior month.

 

Sales at wholesalers dropped 1.2 percent after increasing 1.9 percent the prior month. Economists had expected sales to nudge up 0.1 percent.

 

Sales at wholesalers in October were mixed, with auto sales tumbling 3.1 percent, extending the prior month's 0.8 percent decline. Petroleum sales fell 5.7 percent after rising 8.2 percent in September. However, farm products and metals sales rose.

 

At October's weak sales pace it will take 1.22 months to clear shelves, the highest ratio since October 2009. The inventories/sales ratio was at 1.20 months in September.

 

ISM Predicting Rise in Revenue

 

Economic growth is expected to continue next year with revenue in the manufacturing and services sectors seen rising more than four percent, according to a report released on Tuesday by the Institute for Supply Management (ISM).

 

Manufacturing revenue is expected to increase 4.6 percent in 2013 from the year before, the semi-annual forecast from The Institute for Supply Management (ISM) said.

 

Revenue in the non-manufacturing sector, which is made up mostly of service sector businesses, is expected to gain 4.3 percent.

 

Capital investment among manufacturing firms is seen rising 7.6 percent next year, and climbing 7.0 percent in the service sector.

 

Jobless to Job Openings Ratio Falls

 

Job openings edged higher in October, while the ratio of unemployed Americans to every opening fell to the lowest level in four years, signs the slow recovery in the labor market remains on track. More specifically, job openings - a measure of labor demand - climbed to 3.675 million during the month from 3.547 million in September, the Labor Department said on Tuesday in its Job Openings and Labor Turnover survey.

 

That meant 3.33 workers sought each open job, marking a good deal of progress from the dark days of 2009, when the ratio was nearly seven workers per one job.

 

While at its lowest since October 2008, the ratio is still far from normal. Before the 2007recession, which was the deepest since the Great Depression, there were fewer than two workers per job opening.

 

In another positive sign, more workers quit their jobs in October, the department said. Economists usually see an increase in quits as a sign of confidence in the labor market.

 

About 2.0 million workers purposely left their jobs in October, up from 1.9 million during the prior month. The hiring rate in October also rose, to 3.2 percent from 3.1 percent, the Labor Department said.