MarketView for February 03

 

 

 

Summary   

 

Wall Street gave up its winning streak on Wednesday as Pfizer's disappointing outlook weighed on the health sector, and President Obama's pledge to complete banking and healthcare reform revived fears of increased regulation. President Barack Obama reiterated his commitment to overhaul the healthcare system and impose stricter regulatory reforms on Wall Street, underscoring the political risk that has Wall Street heading for the exits every time those commitments hit the headlines.

 

Expectations of more government scrutiny sparked fears that corporate profits would be crimped, driving the S&P 500 down nearly 7 percent in the second half of January. But markets had recovered with a two-day rally that began this week.

 

Meanwhile, Pfizer fell 2.3 percent to close at $18.62, leading a broad decline in several health-related sectors after the pharmaceutical giant posted quarterly earnings that missed estimates and the company forecast profits below expectations.

 

Trucking companies' shares were hit after Ryder System and C.H. Robinson Worldwide reported weaker-than-expected profits. Ryder closed down 7.7 percent to end at $34.45, while  C.H. Robinson closed down 6.8 percent at $53.54.

 

The Nasdaq ended flat, but outperformed other indexes, helped by major tech companies, including Apple and Google. Shares of Apple rose 1.7 percent to close at $199.23 and Google was up 1.8 percent for the day to close at $540.82.

 

After the close of regular trading, Cisco saw its share price rise 3.6 percent to $23.90. The company reported higher-than-expected revenue growth, and forecast a jump of 23 percent to 26 percent in revenue for the third quarter.

 

Visa posted higher quarterly earnings after the close, helped by rising debt card processing volume. The stock rose 1.8 percent to $85.06 in extended-hours trading.

 

During the regular session, economic data also renewed concerns about lackluster growth. The Institute for Supply Management's index showed the services sector grew less than expected in January, overshadowing an ADP Employer Services report that said job losses in the private sector slowed in January.

 

The Institute for Supply Management said its index of the vast U.S. services sector rose to 50.5 last month from a reading of 49.8 in December. That was a touch below economists' expectation, but slightly above the 50 level that indicates expansion. Yet, job growth in the services sector, which accounts for the majority of employment, remained negative.

 

 

Banking stocks fell as concerns resurfaced about the administration's intent to limit trading activities at some big banks. Morgan Stanley, which has a large trading arm, fell 0.6 percent to $27.89. Health insurers' stocks also fell, with Cigna Corp down 1.4 percent at $34.76, and UnitedHealth off 2.1 percent at $33.32.

 

MetLife slid 4.3 percent to $34.80 as the life insurer faced a possible credit downgrade, a day after the company confirmed it was in talks but it had not reached a deal to buy a unit of AIG.

 

Toyota slid 6 percent to close at $73.49 after the Obama administration stepped up the pressure to address a range of safety issues, deepening the crisis for the world's largest automaker following its massive January recall of cars and trucks due to faulty accelerator pedals.

 

Job Loss Slows Dramatically

 

Private employers reported the smallest payroll decline in nearly two years. Signs that the pace of job losses is slowing could ease pressure on the Obama administration as it seeks to regain momentum ahead of Friday's more comprehensive nonfarm payrolls report, expected to show the economy added jobs last month.

 

A report Wednesday by ADP Employer Services showed the United States lost 22,000 private sector jobs last month, smaller than the 61,000 jobs lost in December and below economists' forecasts of 30,000 jobs lost in January. January's tally was the lowest since February 2008, according to the ADP report, developed jointly with Macroeconomic Advisers. Macroeconomic Advisers Chairman Joel Prakken said the ADP report's February edition, due next month, is likely to show employers added jobs.

 

"The climate has really improved quite dramatically," he said. "I actually do expect that when we meet next month to discuss the (ADP) report for February's data that we'll be talking about an overall number that actually is positive."

 

According to the 20 most accurate forecasts, the median estimate is for a gain of 8,000 jobs, which would mark only the second monthly payroll gain since the recession began in 2007.

 

A report from consultancy Challenger, Gray & Christmas showed planned layoffs rose to a five-month high in January. Cuts were concentrated in retail, which the firm said tends to struggle in January, one of the slowest months of the year. However, John Challenger, chief executive of Challenger, Gray & Christmas, said the news "is not necessarily a sign of a recession relapse," adding: "it is not uncommon to see a surge in job-cut announcements to begin the year."

 

Fed Must Be Open But Guard Independence

 

Federal Reserve Chairman Ben Bernanke said on Wednesday that the Fed must be more transparent to the public but also guard its independence, which serves a vital public interest.

 

"In the interest of maintaining public confidence and promoting economic and financial stability, we must continue to protect our independence," he said in remarks at a ceremonial swearing in marking the start of his second four-year term as Fed chairman.

Bernanke faced the stiffest opposition of any nominee in the more than 30 years the Senate has been voting on heads of the central bank. While widely credited for steering the economy through its worst upheaval since the Great Depression, Bernanke endured scathing criticism from lawmakers for his role in easy money and hands-off regulatory policies that many believe set the stage for the crisis.

 

Bernanke acknowledged the turmoil revealed regulatory gaps at the Fed and elsewhere. The Fed faces "enormous challenges," and must persuade the public of the integrity of all of its operations, he said.

 

"The Federal Reserve is already one of the most transparent and accountable central banks in the world," he said. "We should be prepared to do even more, to become even more transparent."

 

However, Bernanke said the Fed would stop short of agreeing to anything compromising its ability to conduct policy independently.

 

Lawmakers are considering opening the Fed's monetary policy decision-making to congressional reviews. Bernanke and the Fed have strenuously resisted that change, saying such audits would result in political pressure on Fed interest rates decisions. The Fed says politicians are likely to pressure central banks to keep interest rates low, which could lead to inflation, a view that is widely held among central bankers.

 

Bernanke said independence gives the Fed freedom to make regulatory decisions on their merits rather than be subjected to political influence.

 

Anger directed at Bernanke and the Fed also reflects public frustration over high unemployment and lost wealth. Bernanke said the Fed will try to guide the economy toward recovery without stirring inflation.

 

Geithner Lobbies for Fees on Financial Firms

 

Treasury Secretary Geithner said on Wednesday that AIG's contracts to pay hundreds of millions of dollars in bonuses were "outrageous" and appealed to Congress to help recoup the payments. Geithner said Congress could help recover the "deeply irresponsible" bonuses by passing an Obama administration proposal to levy fees on large financial firms. "Those contracts were outrageous. They should never have been permitted," Geithner said in testimony to the U.S. House of Representatives Ways and Means Committee.

 

Obama has proposed a fee on the largest financial companies to collect around $90 billion over 10 years to recoup taxpayer losses resulting from financial bailouts. The White House has shifted to a more aggressive stance on Wall Street since the Democrats lost a Senate seat in a special election in Massachusetts in January. The election highlighted voter resentment against big banks and big bonuses in the wake of massive bailouts during the financial crisis.

 

AIG is readying another round of payments to employees of its Financial Products unit -- largely blamed for making bad bets on credit default swaps that brought the firm to the brink of collapse -- that are expected to reach about $100 million.

 

AIG said late on Tuesday that these employees had agreed to reduce their bonuses by about $20 million, short of a $26 million target. The payments were part of a second round of $195 million in bonuses paid by AIG after $165 million in payments sparked outrage in March 2009.

 

"Now, if you join with us in passing this proposed fee on our largest financial institutions, then you'll be able to say, as we do, that the American taxpayer will not pay a penny for what happened at AIG," Geithner said.

 

Cisco Dramatically Exceeds Expectations

 

Cisco Systems  results and outlook soared past expectations and Chief Executive John Chambers said business has improved dramatically in nearly all areas.

 

The company, whose shares rose 4 percent, expects to hire 2,000 to 3,000 people in the next several quarters, Chambers said in another sign of his confidence in the economic recovery.

 

Cisco forecast revenue growth accelerating to a range of 23 percent to 26 percent in the current quarter, against the average Wall Street forecast for an increase of 16.5 percent year on year.

 

"During the quarter we saw dramatic across-the-board acceleration and sequential improvement in our business in almost all areas," Chambers said in a statement.

 

As the economy improved, Cisco's customers have resumed upgrading their networks to handle growing Web traffic, boosting sales of the company's routers, switches and other equipment that support wireless and Internet use. Chambers said results for the fiscal second quarter ended January 23 were "remarkably well-balanced" between products and geographies, indicating a solid recovery was underway.

 

Revenue for the quarter rose 8 percent to $9.8 billion, marking the first year-on-year growth that Cisco has reported since the quarter ended October 2008. Analysts, on average, had expected $9.4 billion, according to Thomson Reuters I/B/E/S.

 

Earnings increased to $1.9 billion or 32 cents a share, from $1.5 billion, or 26 cents a share, in the year-ago quarter. Earnings excluding special items rose to 40 cents from 32 cents, beating Wall Street's average forecast of 35 cents.

 

Chambers said on a conference call that "based upon our business momentum and prior economic recoveries, this would indicate that the recovery from a capital spending perspective is very strong, and moving into the second phase of reasonably balanced, across-the-board growth."

 

Cisco shares rose to $24.03 in extended trading, after ending 0.2 percent higher at $23.07.