MarketView for February 02

 

 

 

Summary 

  

 

Wall Street continued its strong rebound for the second consecutive day on Tuesday, as better-than-expected earnings and encouraging data calmed investors after the market's recent sell-off. Rising sales of previously owned homes and solid earnings from bellwethers representing consumer and industrial businesses, including Whirlpool and Cummins, pointed to a steady rebound in demand.

 

The home builders received a double jolt of good news. In addition to a 1 percent gain in December pending sales of existing homes, D.R. Horton, one of the top five U.S. home builders, reported its first quarterly profit in almost three years. D.R. Horton's stock gained 10.9 percent to $13.21. The day's home sales data followed a string of encouraging economic news, including Monday's data on the manufacturing sector from the Institute for Supply Management, and Friday's report on the economy's fourth-quarter growth.

 

The S&P 500's gain was its largest two-day percentage jump since October 2009, after falling 6.2 percent in the last three weeks of January.

 

Shares of UPS added 0.4 percent to $58.62 after the company reported a drop in fourth-quarter profit, but forecast a sharp increase in 2010 earnings. Whirlpool Corp gained 8.1 percent to $82.23 after the appliance manufacturer reported a sharp increase in first-quarter earnings.

 

Exposure to emerging markets helped major industrial companies Cummins Inc and Emerson Electric both posted some excellent quarterly earnings. Cummins' stock rose 8.8 percent to $51.09, while Emerson's stock jumped 10.1 percent to $46.77.

 

Amazon.com slid for a second straight day, falling 0.6 percent to $118.12 and curbing the Nasdaq's advance. Traders continue to fear that a pricing battle that Amazon lost with book publisher Macmillan could hurt sales volume growth for its Kindle e-reader.

 

Shares of JP Morgan Chase & Co rose 2.3 percent to close at $40.55 and ranked among the stocks giving the Dow Jones industrial average its largest boost, while Goldman Sachs' stock advanced 2.5 percent to $156.94. Credit card companies' shares rose following a positive broker comment on the sector, with American Express up 2.1 percent at $39.02, and Capital One Financial up 1.8 percent at $37.43.

 

Volcker Wants Curbs on Trades

 

Paul Volcker, an economic advisor to the White House, told Congress on Tuesday to curb risky investing by big banks, warning his soul would haunt lawmakers when the next banking crisis hits if they did not heed him now. The former Federal Reserve chairman, whose star is rising in the Obama administration, faced tough questions from lawmakers about the White House's latest and far-reaching proposals for a crackdown on the banking industry.

 

Few details were forthcoming from the venerable central banker, or from Treasury Deputy Secretary Neal Wolin, who testified with Volcker to the Senate Banking Committee.

 

President Barack Obama stunned financial markets in late January by calling for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers. Volcker, considered a sage of monetary policy and a crusader for tighter regulation, conceded such a move would not have prevented the debacles at AIG and Lehman Brothers, which were at the heart of the 2008 financial crisis. However, he also said that not adopting new trading limits today would lead to another crisis tomorrow.

 

If proprietary trading is not curbed, Volcker told the committee, "I may not live long enough to see the crisis, but my soul is going to come back and haunt you."

 

Banking Committee Chairman Christopher Dodd, a Democrat, told the two witnesses he supports the new Obama proposals, but complained they were coming very late to a financial regulation debate that has been going on since 2008. As a result, Dodd said, the proposals seemed to many senators "to be transparently political and not substantive, and it's adding to the problems of trying to get a bill done."

 

He said the administration needs to clue him in early on anymore new proposals and be ready to answer questions. In this case, he said, "We're not getting good answers." He said piling on too many new ideas would be a mistake. "I don't want to be in a position where we end up doing nothing because we tried to do too much," Dodd said.

 

Since Obama unveiled "the Volcker rule," named for its chief proponent, analysts have speculated about exactly what sort of trading would be off-limits if Congress adds it to a sweeping package of reforms still being debated. Some see a blurred line between proprietary trading and market-making that helps customers. But Volcker disagreed.

 

"Bankers know what proprietary trading is and is not. Don't let them tell you any different ... I don't think it's so hard," Volcker told lawmakers pressing for a clearer idea of where the regulatory lines would be drawn.

 

Taken on early as an adviser after Obama's election, Volcker initially seemed to have little impact inside the administration. But that has changed since the Democrats lost a Senate seat in a special election in Massachusetts and Obama has shifted to a more aggressive stance on Wall Street.

 

Under the Obama proposals, banks could not establish or maintain a separate trading desk, capitalized with their own resources and unrelated to customer business. That could mean barring banks from using such trading desks to speculate on the prices of oil, gas or equity securities, he said, adding that the restrictions should apply to all banks, including operations of foreign banking firms.

 

Senator Richard Shelby, the panel's top Republican, said he was "quite disturbed" by Obama's proposals being "air dropped" into the financial regulation debate, which is more than a year old. But Shelby said he was willing to consider them.

 

Senator Bob Corker, also a Republican, questioned the need to crack down on proprietary trading at commercial banks, saying firewalls already exist within bank holding companies to protect deposit-based activities.

 

Despite the firewalls, banks that do proprietary trading enjoy a cheaper cost of capital because of the taxpayer backing of the deposit-funded sides of their business models, which he said is unfair and should end.

 

Volcker -- whose tight-money regime broke the back of inflation when he was Fed chairman in the early 1980s under Presidents Carter and Reagan -- also wants banks to sever ties to hedge funds and private equity ventures.

 

"What I want to get out of the system is taxpayer support for speculative activity," Volcker said.

 

A second hearing is set for Thursday to hear from executives of JPMorgan and Goldman Sachs.

 

Banking committee members are trying to negotiate a bipartisan regulatory reform to avoid a repeat of the financial crisis that caused the worst recession in decades. Nonetheless, deep divisions remain among committee members over issues such as managing systemic risk, bank supervision and consumer protection. Obama's latest proposals complicated the talks.

 

The House of Representatives approved a bill in December that called for the biggest regulatory changes since the Great Depression, but the "Volcker rule" was not included.

 

Obama also called for a new cap on banks' market share based not only on deposits, which are already capped, but also non-deposit funding.

 

Banks Must Pay for Bailout Says Geithner

 

The Obama administration is prepared to impose fees on financial firms for as long as necessary to ensure that every cent spent on bailing out banks is repaid, Treasury Secretary Timothy Geithner said on Tuesday.

 

A proposed Financial Crisis Responsibility fee that is projected to raise $90 billion over 10 years could be extended if the cost of the bailout exceeds that amount, Geithner said in testimony before the Senate Finance Committee.

 

"The fee can and will be extended until every penny of taxpayer assistance to the financial system has been repaid and the cost of the rescue to taxpayers is zero," Geithner said. He told the committee that soaring budget deficits must be wrestled down to protect the country's economic future, but warned that doing so too quickly would risk a return to recession.

 

"We must strike precisely the correct balance with the job- and growth-spurring measures required to assure recovery," Geithner said as he testified about the Obama administration's $3.8 trillion fiscal 2011 budget proposals. "If we fail to do so, we risk driving the economy back into recession...and making it even harder to fix our problems."

 

Geithner laid most of the blame for the country's woes, including this year's projected $1.56 trillion deficit, on the former Bush administration.

 

"On the day that President Obama took office, the budget deficit stood at $1.3 trillion -- 9.2 percent of GDP -- and the projected 10-year deficits for the following 10 years were $8 trillion," Geithner said.

 

"These huge deficits are the result of the prior administration's decision to enact large tax cuts and a prescription drug bill without paying for them," he said.

 

The current deficit trends, which will see the deficit hit 10.6 percent of gross domestic product this year, are not sustainable, Geithner said, while again stressing the need to deal with the deficit gradually.

 

At one point, Geithner was pushed to say whether he thought ever-rising totals of U.S. debt were harming the dollar's value and asked if he even believed in a strong dollar.

 

"Of course I (do)," he replied sharply. "In fact, that particular phrase and commitment of policy was first written in my office in 1995."

 

Geithner appealed for a bipartisan effort to help get economic growth onto a sounder track that would enable the private sector to create more jobs.

 

"We cannot afford an economic expansion like that of the past decade when...jobs grew more slowly than during any previous recovery...and much of our growth was built on the sands of a real estate and financial boom," he said. He went on to say that the Obama administration supports setting up a bipartisan fiscal commission to explore ways to tackle oversize deficits, an idea that Republicans already have spurned.

 

Pending Home Sales Higher

 

Pending sales of existing homes rose slightly in December, while home vacancies were also higher in the fourth quarter, pointing to a slow and painful recovery for the troubled housing market.

 

According to the National Association of Realtors, its Pending Home Sales index, based on contracts signed in December, rose 1.0 percent to 96.6 after a steep drop in November when a boost from an initial tax credit for first-time buyers ebbed. The gain in the index, which leads sales of previously owned homes by one to two months, was in line with market forecasts. Compared to December 2008, it was up 10.9 percent.

 

The monthly rise in the Pending Home Sales index was not as large as in the months prior to the November slide and suggested existing home sales were flat to slightly weaker in January, analysts said. Existing home sales fell to their slowest sales pace in four months in December.

 

Separately, the percentage of homes standing empty rose to 2.7 percent in the final three months of 2009 from 2.6 percent in the third quarter, the Commerce Department said. The rate has risen for the last two quarters.

 

Still, the Street was encouraged by the rise in pending homes sales after November's slump.

Monthly housing data has been distorted by the first tax credit, which saw prospective home owners pushing forward purchases to beat the initial November deadline.

 

Although the tax credit was subsequently expanded and extended until June, a lull in sales followed, causing economists to question the sustainability of the housing market's recovery without government support.

 

There are worries that the housing market, at the center of the worst economic downturn since the Great Depression, could take a step back and harm the broader economic recovery. The January sales rate was down from 11.2 million units in December. The extension and expansion of the tax credit for first-time buyers is expected to buoy sales in the months ahead. Analysts do not expect them to set the same pace as that achieved during the initial program.

 

A cautious note on the housing market was also sounded by D.R. Horton, one of the top five U.S. homebuilders. "Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment," said chairman Donald Horton.

 

Homeownership fell to 67.2 percent in the fourth quarter from 67.6 percent in the third quarter, the Commerce Department report showed. It was the lowest since a matching 67.2 percent in the second quarter of 2000. With foreclosures on the rise, buyers are snapping up homes on the cheap. Buyers paid 2.7 percent less, or a median of $5,618 below the listing price on homes bought in December, up from $5,538, or 2.6 percent in November, real estate website Zillow.com indicated.

 

The Federal Reserve said on Monday most banks stopped raising the bar for borrowers at the end of last year and even made it easier for consumers to get some loans. However, the Fed also noted that banks continued to tighten standards on residential real estate loans in the fourth quarter, a factor that could generate some bumps for the housing recovery.