MarketView for February 2

Summary

 

Blue chip stock prices were hit on Monday due in part to the rising uncertainty about the Obama administration's plan to stem bank losses, combined with some bad news released by Macy's did little to instill confidence that we are going to be exiting the current recession any time soon. Concerns over the delay in a plan to shore up beleaguered banks and unease over the wrangling in Congress over a stimulus measure, helped to undermine sentiment on Wall Street.

 

As a result, 3M closed down nearly 6 percent to $50.62, and Boeing ended the day off about 4 percent to close at $40.80. Among the financials, Bank of America was down about 9 percent to $6, while JPMorgan fell 1.3 percent to $25.19.

 

In an interview with NBC, President Barack Obama said it was likely that banks have not fully acknowledged all their losses and that "some banks won't make it" through the crisis. The Street is hoping that Obama's administration will unveil before long the details of a plan to relieve banks of money-losing assets to kick-start lending. Obama said he did not want to pre-empt an announcement next week.

 

Macy's fell 4 percent to $8.59 after the department store chain said it would cut 7,000 jobs and slashed its quarterly dividend. Rockwell Automation fell 11 percent to $23.16 after the company cut its 2009 profit outlook. Mattel reported disappointing profits, and its shares fell 16.1 percent to $11.90.

 

What Wall Street did bet on is that technology stocks might be among early beneficiaries from a likely economic stimulus. The result was that the NASDAQ ended the day In positive territory. Companies leading that index higher were Microsoft, up 4.3 percent to $17.83, and Intel up 5.7 percent to close at $13.63. Apple was up 1.5 percent to close at $91.51.

 

The surge in tech bellwethers following a sharp two-day technology sell-off, picked up speed at the end of a volatile session and helped temper some of the gloom about the economy and the fate of the bank aid plan.

 

After the closing bell, SanDisk posted a quarterly loss, but its revenue beat estimates handily. Initially SanDisk rose more than 3 percent in after hours trading from a NASDAQ close of $11.28. However, company comments that 2009 visibility continued to be poor, caused the stock to reverse course, falling 13 percent to $9.80.

 

On the economic front, the latest manufacturing index showed manufacturing contracting again in January, but at a far smaller-than-expected pace.

 

Crude Falls

 

The price of crude oil fell nearly 4 percent on Monday as disappointing economic data darkened projections for energy demand. At the same time, refinery workers averted a strike that would have slashed fuel production. Domestic sweet light crude for March delivery settled down $1.60 per barrel at $40.0. London Brent crude settled down $2.06 per barrel at $43.82. The drop came after a government report indicated that consumer spending fell for the sixth straight month in December, with 2008 as a whole showing the slimmest growth in spending since 1961.

 

Adding to oil's losses on Monday was news that union and oil industry negotiators averted a strike that would have cut fuel production, and that talks over a new contract were progressing well. Some 10 percent of our domestic refining capacity would be idled if the oil workers walked off the job.

 

Despite softening world energy demand, oil prices have held above the $40 level due mainly to aggressive output cuts by OPEC. The cartel already has agreed to reductions of about 4.2 million barrels per day since September and member nations have said deeper cuts could be required to stabilize the market.

 

Economic Data Not As Bad As Expected

 

Factory activity declined at a slower pace in January as credit markets improved, but overall it appears that the economy is sliding deeper into recession.  A report that the Institute for Supply Management's index of national factory activity rose to 35.6 from a nearly three-decade low of 32.9 in December gave some faint hope for the embattled economy. The improvement in the ISM index was its first since June, but it stayed well below the break-even figure of 50, showing the sector continues to contract sharply.

 

The weak data and uncertainty over the Obama administration's package of spending and tax-cut measures that could cost close to $900 billion weighed on the Dow Jones industrial average sending it once again to a close below 8,000.

 

Government bond prices rallied, while the dollar stumbled against the yen. The small rebound in manufacturing is being credited to an improvement in the credit markets following aggressive measures by the Federal Reserve.

 

A reading on employment held at 29.9 in January, indicating job losses in the sector continued unabated, the report showed. But slightly encouraging was a sub index measuring new orders that rose to 33.2 in January from 23.1 in December.

 

According to a closely watched quarterly survey of lending conditions by the Fed, a majority of domestic and foreign banks tightened lending standards to businesses and households over the last three months.

 

Separate data from the Commerce Department showed consumer spending, which accounts for two-thirds of economic activity, fll in December. Households facing diminishing job security opted to build their savings. As a result, consumer spending fell by 1 percent in December, the sixth straight monthly decline, after dropping by 0.8 percent in November. With companies cutting down on hours and reducing payrolls, incomes fell by 0.2 percent after November's 0.4 percent decline. On an inflation-adjusted basis, consumer spending fell 0.5 percent during the month.

 

For the whole of 2008, spending rose 3.6 percent, the smallest increase since 1961. Incomes increased 3.7 percent, the smallest advance since 2003. The spending data was incorporated in a report on Friday that showed the economy shrank at its fastest pace in nearly 27 years in the fourth quarter.

 

With the economy's collapse, inflation pressures have eased considerably. A price index tied to consumer spending rose just 0.6 percent on a year-over-year basis in December, down from 1.4 percent in the 12 months through November.

 

Excluding food and energy, the core inflation rate slowed to 1.7 percent from 1.9 percent in November. The core price index is in a range that the Fed welcomes, but the risk of a sharp slowing has caught their attention.

 

In a sign the recession was forcing households to change their behavior, the personal saving rate rose sharply in December to 3.6 percent of disposable income, the highest since May, from 2.8 percent in November, the Commerce Department said.

 

In a separate report, it said spending on construction projects dropped 1.4 percent last month, the biggest decline since July. For 2008, construction spending fell a record 5.1 percent.

 

Morningstar Sued for Espionage

 

Morningstar has been sued for allegedly gaining unauthorized access to a Web-based service that helps clients send the most up-to-date mutual fund prospectuses to investors, according to court documents filed on Monday.

 

The lawsuit, filed in Massachusetts state court by NewRiver, seeks to stop Morningstar from accessing its online warehouse of updated prospectuses, and asks for unspecified trebled damages. NewRiver is accusing Morningstar of using "screen-scraping" technology and copying thousands of documents.

 

Morningstar has acknowledged accessing NewRiver's data for "benchmarking" purposes to see if its own information was up to date. NewRiver's service, for which it obtained a patent in 1998, checks the SEC's online EDGAR site for updates to prospectuses and stores them on its electronic repository for use by brokerage houses. The company handles about 1,000 prospectus updates every nightand clients pay up to $500,000 per year for a subscription.

 

Although prospectuses are available from the SEC's website at no cost, they are updated often and difficult to send immediately to investors for compliance purposes. The lawsuit claims Morningstar gained access to NewRiver's data warehouse more than 130,000 times between May 1 and December 3 last year from Internet addresses in Chicago and China. NewRiver's service is not password-protected. Rather, subscribers are given a specific, proprietary website address for a prospectus, which they then share with clients.

 

Mattel Disappoints

 

Mattel posted a quarterly profit well below expectations, due to weak sales and a stronger dollar. The company forecasted additional pressure from the spreading economic gloom, sending its shares down sharply..

 

However, Mattel said it plans to take steps in 2009 to reverse its fortunes, Chief Executive Robert Eckert said, describing his outlook as more realistic than pessimistic.

 

"Our guiding principles for 2009 are to reduce spend in all areas of the business, work smarter and more effectively, and extract every efficiency we can out of this supply chain in order to deliver improved profitability, better execution and a stronger, well-positioned Mattel for 2010," Eckert said.

 

Mattel is feeling the effects of deep consumer cutbacks in spending during the fourth quarter, a period that included the holiday shopping season that was expected to bring more sales for toy sellers than many other companies. Yet, the recession, job losses and a credit crunch led consumers to pare spending even on their children.

 

This year, Mattel faces the added pressure of having no toys tied to movies. Hasbro, on the other hand, is expected to gain from toys related to the "Transformers - Revenge Of The Fallen" and "G.I. Joe - The Rise Of The Cobra" movies to be released later this year.

 

Mattel said it raised prices in the mid-single-digit range effective January 1 on its spring toy lines. According to the company, earnings fell to $176.4 million or 49 cents per share, from $328.5 million, or 89 cents per share a year ago. Sales were down 11 percent to $1.94 billion, suffering  a setback of 5 percentage points due to the stronger dollar, nearly half the percentage value of its sales decline.

 

While domestic gross sales fell 6 percent, international sales, which account for a significant portion of revenue, were down 20 percent, Mattel said.

 

Protectionism Is Economic Death

 

Dallas Federal Reserve President Richard Fisher warned on Monday against "Buy America" provisions in a proposed fiscal stimulus law and said it could lead to devastating trade protectionism.

 

"Let me just be blunt. Protectionism is the crack cocaine of economics. It may provide a high. It's addictive and it leads to economic death," Fisher said.

 

Congress is debating rules that will insist that public money is spent on U.S-made products, although the White House has already said it will review any Buy America provisions.

 

"We just cannot afford to go down that path and I hope our senators, Democrats and Republicans, will be very sensible on that front," said Fisher, who is not a voting member of the Fed's policy-setting committee this year.

 

Fisher also urged Congress to balance the immediate need to stimulate growth with the long-term consequences of piling on debt that could be a drag for years to come.

 

"Our job is to maintain price stability while we engender the growth and employment of the United States ... It is a very difficult balancing act, but it can only be done if it is buttressed by sensible fiscal policy," Fisher said.

 

The Fed has used unorthodox steps to thaw credit markets and encourage borrowing and consumption. It has cut interest rates almost to zero and has pumped hundreds of billions of dollars into the financial system, more than doubling its balance sheet in the process, to almost $2 trillion.

 

Fisher said he supported the Fed's aggressive action but stressed it was crucial that the U.S. central bank have an exit strategy to prevent this massive build-up in liquidity from fueling inflation once U.S. growth recovers.

 

"Right now the pressures are not on the inflationary side; they're on the other side. Longer term, we have to be aware of the fact that we could have, as a result of all these initiatives we've taken ... baked-in inflationary pressures.

 

"We're very mindful of that and our exit strategy has to work with the fact that we cannot allow inflationary pressures to also take root. This is our job," Fisher said.