MarketView for February 17

Summary

Ouch, what a miserable way to start a holiday shortened trading week as stock prices across the board hit the skids, sending the major equity indexes well into negative territory, to the point that they were within striking distance of the November bear-market low. One key reason was the grim manufacturing data that appeared to be a warning of worsening times ahead, foretelling of risks ahead for the European banks. As a result, financial stocks sank to 14-year lows aided and abetted in part by Moody's Investors Service, which reported that banks could be hit by the recession in Eastern Europe.

Data showing a sharp contraction in Japan's economy also set a negative tone early in the day and helped bring oil prices down nearly 7 percent to below $35 a barrel. Chevron and Exxon Mobil were the biggest drags on the Dow Jones industrial average, sliding more than 4 percent.

Already beaten down by the failure of government and the Federal Reserve to save the financial system, bank stocks were also among the day’s biggest losers. Typical were JPMorgan, down 12.3 percent at $21.65, and Wells Fargo, down 13.1 percent to $13.69.

Wall Street's slide pulled the S&P 500 and Dow to their lowest levels since November 20, when stocks hit 11-year lows. Just before the end of the session, the Dow briefly broke through its bear market closing low that was hit on November 20. The day's losses brought the Dow down 13.9 percent since the start of the year, while the S&P 500 is down 12.6 percent and the Nasdaq has fallen 6.7 percent.

A report showing that manufacturing production in New York State fell to a record low in February stirred worries about the deepening recession and added to fears that the recently signed economic stimulus package will not be a quick fix. President Barack Obama signed the $787 billion economic stimulus bill into law on Tuesday, but Wall Street is fearful that the plan will not blunt the impact of the recession soon enough. The White House hopes the package will save or create 3.5 million jobs.

Energy shares slid alongside oil, with Exxon Mobil down 4.4 percent at $71.28 and Chevron fell 5.1 percent to $66.18. The S&P energy index dropped 6.3 percent. General Motors Corp shares shed 12.8 percent to $2.18 as GM and Chrysler prepared to submit a survival plan under the terms of the $17.4 billion government bailout that has kept the automakers afloat this year.

Sentiment was further dampened by news that the Securities and Exchange Commission had charged Houston-based Stanford Financial Group with massive alleged fraud involving a multibillion-dollar investment scheme that stretched from Texas to Antigua and around the world.

Wal-Mart was the only positive stock among the 30 components of the Dow industrials after the discount retailer posted a quarterly profit that beat Wall Street's forecasts. Wal-Mart rose 3.7 percent to close at $48.24.

Economic Data Does Not Provide Much Hope

The severe factory slow down appeared to be getting even worse this month while sentiment among home builders shows few signs of recovering after the bursting of the housing bubble, data showed on Tuesday. In fact, homebuilder sentiment held near all-time lows in February, suggesting sales of new single-family homes would be meager as long as mortgage foreclosures flood the market, the National Association of Home Builders said.

Factory activity in New York State fell to a record low in February, the New York Federal Reserve said, with new orders and employment falling sharply as the U.S. recession deepened. The New York survey suggested that January's minor halt in the worsening of factory data was an aberration rather than a signal of recovery that would also bring about a rebound in the economy.

Stock prices fell and Treasury bonds, which generally benefit during tough economic times, rose sharply in price as investors moved into safer havens. The New York Federal Reserve's Empire State factory index fell to minus 34.65, the lowest in the history of the index, which dates back to July 2001. It was down from January's already reduced reading of minus 22.20. More to the point, economists had expected a reading of minus 24, according to the median of their 46 forecasts, which ranged from minus 36.5 to negative 17.50.

The NAHB/Wells Fargo Housing Market Index eked out a one-point gain to 9 from the record low set in January, the group said in a statement. Economists polled by Reuters had predicted the index would stay at 8, the lowest reading since this measure started in January 1985.

Readings below 50 mean more builders view market conditions as poor than favorable. It was the fourth straight month the builder sentiment gauge clung to single digits, and was less than half of the reading of 20 posted a year ago. The weakness of the day's reports highlighted the magnitude of the problems facing world leaders, who are desperately trying to stem a global economic slump.

The finance ministers and central bankers of the G7 industrial powers, fearing a 1930s-style resurgence of protectionism, ended crisis talks in Rome on Saturday with a pledge to do all they could to combat recession without distorting free trade.

With the United States already more than a year into what may yet be the worst recession since the Great Depression, clouds also appeared to be darkening over its trading partners in Europe and Asia by the day. Worries that weakening Eastern European economies will undermine Western banks weighed on global markets on Tuesday.

Japan's economy plunged deeper into recession with its worst quarterly decline in gross domestic product since the 1974 oil crisis as the global downturn slashed demand for its exports. The world's second-largest economy shrank 3.3 percent in the final quarter of 2008, as its heavy reliance on exports and chronically weak domestic consumption left it badly exposed to the worldwide slump.

Amid all the gloom, foreign investors still appear willing to lend Washington the money it will need to stimulate the moribund economy, at least which was the case before Congress passed its $787 billion package of spending and tax cuts. The Treasury Department said that net overall capital inflows into the United States rose in December, boosted by buying in U.S. Treasuries and corporate bonds.

Total net inflows rose to $74.0 billion from a revised inflow of $61.3 billion in November. The Treasury department originally reported inflows of $56.8 billion in November.

The government is likely to take heart from this report, which showed foreign investors bought a net $14.98 billion worth of Treasury notes and bonds in December, a reversal of outflows seen the previous month at $25.81 billion.

The government is expected to issue some $2 trillion worth of debt this year to fund its economic stimulus and rescue efforts -- and someone will need to buy the bonds to pay for it.

Wal-Mart Beats Expectations

Wal-Mart posted higher earnings than had been expected on Tuesday, and said it expects to outperform rivals as a global downturn forces shoppers to seek low prices. Shares in the world's largest retailer rose 3 percent on the results. According to the company, U.S. sales rose 6 percent in the quarter as it attracted more shoppers trying to save money. International sales slid 8.4 percent due to a stronger dollar, while sales at its Sam's Club warehouse clubs were flat.

Wal-Mart's sales have been outpacing direct competitors like Target Corp and Costco as well as lower-priced department stores like J.C. Penney in recent months as consumers stretch limited budgets by shopping in its stores for necessities like food and medicine.

"Our performance relative to competitors was exceptionally strong in the fourth quarter and throughout the year," Chief Executive Mike Duke said in a statement. "We expect this momentum to continue."

Earnings came in at $3.79 billion, or 96 cents per share, for its fiscal fourth quarter, ended January 31, from $4.096 billion, or $1.02 share, a year ago. If you exclude a 7 cent charge per share for the settlement of class-action lawsuits, earnings came to $1.03 per share. The chain’s

Chief Financial Officer, Tom Schoewe, said in an interview that strong U.S. sales in January and a lower tax rate contributed to the better-than-expected results.

To win business during the fourth quarter, which included the crucial holiday sales season, Wal-Mart said it spent more on advertising to tout its low prices. Meanwhile, quarterly net sales rose 1.7 percent to $108 billion. Sales at U.S. stores open at least a year rose 2.8 percent overall, with increases of 2.8 percent at the company's namesake stores and 2.5 percent at the Sam's Club division.

"The business model that Sam Walton created is perfectly positioned for the environment we live in now," Duke said, referring to the company's founder. "I do believe this is Wal-Mart's time." Duke said that after a strong performance in January, business in February was off to a good start.

Wal-Mart U.S. CEO Eduardo Castro-Wright said on the call that families are eating at home more often, spurring demand for groceries as well as items used for home cooking and entertaining. At its Sam's Club stores, sales of big ticket items, like furniture and jewelry, remain under pressure, the company said. Wal-Mart also said it will keep a close eye on expenses so it can continue to try to keep its prices lower than rivals.

Schoewe now expects capital expenditures for the current fiscal year in a range of $12.5 billion to $13.5 billion, down from an earlier view of $13 billion to $14.5 billion. The retailer also said that while it stopped buying back shares in the fourth quarter, it believes it is "appropriate" to resume those purchases.

Schoewe said it is "way more difficult" now than at any time he can remember to provide earnings forecasts, given the uncertain economic climate.

For the first quarter, Wal-Mart forecast earnings of 72 to 77 cents per share, with full-year earnings of $3.45 to $3.60. Analysts had forecast 77 cents per share for the first quarter and $3.57 for the year. Wal-Mart said its forecast assumes currency exchange rates will hurt full-year results by about 13 cents per share.