MarketView for February 04

 

 

 

Summary 

 

It was a painful day on Wall Street on Thursday as share prices suffered through their worst losses in more than nine months. Escalating sovereign debt problems in Europe and an unexpected rise in jobless claims had Wall Street on the defensive all day. To add to the tension, the Street was anxiously awaited Friday's payroll report.

 

Spain and Portugal were the latest euro-zone countries to worry investors about mounting fiscal deficits after Greece had rattled markets earlier. Those worries fueled a flight from stocks to the safe-haven dollar, which hurt commodity prices denominated in dollars.

 

The Dow Jones industrial index is now off 6.7 percent from its 15-month closing high of January 19. The S&P 500 is off 7.6 percent from its 15-month closing high on the same date, while the Nasdaq is off 8.4 percent from its 16-month closing peak set on January 19. Reflecting investor anxiety, the CBOE Volatility Index, Wall Street's favorite measure of sentiment, spiked 20.7 percent to end at 26.08.

 

Bank of America was the Dow's largest percentage decliner, down 5 percent at $14.75. BoA was also pressured after New York's attorney general charged former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price with fraud for allegedly misleading shareholders about the bank's acquisition of Merrill Lynch. Also weighing on the financial sector, MasterCard fell 10.3 percent to end the day at $222.11 after it posted quarterly earnings that fell short of estimates.

 

A rare bright spot came from Cisco Systems, up 0.4 percent at $23.16, the Dow's only advancer, after the network equipment maker reported higher-than-expected revenue growth late on Wednesday.

 

Jobless Claims Increase

 

The number of individuals filing unemployment insurance claims rose unexpectedly last week. According to a report released by the Labor Department on Thursday, initial claims for state unemployment insurance rose by 8,000 claims to 480,000. Financial markets had expected claims to come in at 460,000. While claims are down sharply from their peak last spring, the improvement has stalled in recent weeks.

 

At the same time, worker productivity grew at a 6.2 percent rate in the fourth quarter as employers ramped up that quarter's output at the fastest pace in six years and kept a tight lid on hiring, another Labor Department report showed. Economists had expected productivity, which measures the hourly output per worker, to rise at a 6.0 percent rate after gaining 7.2 percent in the third quarter. In the second quarter, productivity had risen 6.9 percent. Despite the setback, analysts are optimistic hiring will pick up soon as firms run out of ways to boost output without new workers.

 

Job creation is seen as President Barack Obama's most pressing priority. Anxiety over a 10-percent unemployment rate may have cost Obama's Democrats a crucial Senate seat last month and threatens big losses for the party in the November congressional elections.

 

Obama lunched with top business executives on Thursday to discuss the economy and job creation and Democratic leaders in the Senate unveiled a proposal that they hope will help bring down the jobless rate.

 

High unemployment has curtailed consumer spending, but the worst of the retrenchment appears to be done. Major retail chains reported higher January sales compared with a year earlier, when the recession was at its deepest point, and monthly job losses soared to 741,000.

 

Productivity has grown for five straight quarters as employers slashed costs, mostly by cutting jobs, to cope with the worst economic downturn since the Great Depression. In 2009, productivity grew 2.9 percent, the biggest annual rise in six years.

 

The large productivity gains allowed companies to ramp up output in the second half of the year, even as they were letting employees go. In the fourth quarter, the economy grew at a 5.7 percent annual pace, also its fastest clip in six years. That recovery was underscored by a report on Thursday that showed an unexpected surge in orders received by factories and a drop in inventories in December. The productivity report showed non-farm output grew at a 7.2 percent rate in the final three months of 2009, the fastest pace since the third quarter of 2003.

 

Hours worked rose at a 1.0 percent rate, the first increase since the second quarter of 2007 and the fastest since the fourth quarter of 2006. Some economists said that was another sign businesses might need to start hiring soon. Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell a steeper than expected 4.4 percent after declining 1.5 percent in the third quarter, pointing to scant wage-related pressures.

 

Many Retailers Doing Better Than Expected

 

Some of the nation’s largest retail chains ended their fiscal year with better-than-expected January sales. January same-store sales rose 3.3 percent based on a tally of 29 retailers compiled by Thomson Reuters, led by positive surprises from department store operator Nordstrom and teen apparel chain American Eagle Outfitters. Sales rose in all categories except drugstores, which posted a 1.4 percent drop. The results mark a rebound from a year ago, when sales fell 5.6 percent, and follow a bigger-than-expected 2.9 percent increase in December.

 

January, the final month of the holiday quarter, accounts for the smallest portion of its sales. However, with retailers avoiding the drastic clearance discounts that hurt January sales a year ago and consumers cashing in on gift cards received in December, chains like Macy's) and American Eagle Outfitters were able to raise their earnings forecasts.

 

Target, the second largest discount retailer, posted disappointing sales and said it was prepared for tough business conditions in 2010.

 

Retailers have had more than a year to reposition their business for the "new normal," where shoppers buy less and focus on value. That is helping them protect profits, even if sales have not returned to levels seen before the recession. The question now is whether retailers can entice consumers to spend on full-priced spring merchandise after luring them in with discounts during the holiday season.

 

January sales at TJX Cos rose 12 percent, helped by lower levels of clearance merchandise, and the off-price retailer raised its fourth-quarter earnings outlook. It said store traffic was accelerating. TJX expects shoppers to remain focused on value and continue shopping at its chains even as the economy recovers.

 

Macy's January same-store sales rose 3.4 percent, beating estimates for a flat month as it raised its quarterly profit forecast. The retailer benefited from its strategy to tailor merchandise locally at its namesake stores and a strong performance at Bloomingdale's.

 

Warehouse club operators Costco Wholesale and BJ's Wholesale Club both posted sales that exceeded estimates. Shoppers have been heading to the clubs to get discounts on staple items, like food and cleaning supplies.

 

Crude Oil Futures Fall 5 Percent

 

The price of crude oil futures fell 5 percent on Thursday in the steepest daily decline since July and the fifth-largest trading volumes ever on the New York Mercantile Exchange as investors dumped commodities and other risky assets. The unemployment picture, and fear that debt-laden European economies may falter, exacerbated the selling.

 

There were rumors on the Street that the sell-off in crude was linked to a hedge fund quickly unloading a large position. More than 496 million barrels worth of front-month NYMEX crude futures changed hands -- representing enough oil to meet global demand for six days -- as volumes spiked in afternoon trading.

 

Sweet domestic crude for March delivery settled down $3.84 per barrel at $73.14, a drop of 5 percent for the day, the largest percentage decline since July 29. London Brent settled down $3.79 per barrel at $72.13.

 

The dollar firmed to a seven-month high against the euro as investors shunned risky assets amid fears over the fiscal health of European economies including Greece, Portugal and Spain. European Central Bank President Jean-Claude Trichet said Europe's economic recovery could be uneven and "subject to uncertainty." The economic concerns pushed gold to its single largest daily fall since 2008.

 

The price of crude oil has fallen more than $11 per barrel since closing at a 15-month high above $84 on January 11, fueled in part by weak demand and rising inventories in the United States and other developed economies.

 

 The Department of Energy said on Wednesday that U.S. crude stockpiles rose sharply last week.

 

Berkshire Loses Its AAA Rating

 

Standard & Poor's on Thursday stripped Berkshire Hathaway of its AAA rating, stating that Berkshire’s acquisition of Burlington Northern Santa Fe will hurt liquidity and capital adequacy. The rating agency cut Berkshire's long-term counterparty credit rating by one notch to AA-plus. The outlook is stable, which typically means that S&P does not expect another rating action over the next two years. S&P is the third major rating agency to cut Berkshire's top AAA rating.

 

Counterparty credit ratings reflect how well a company can meet its financial obligations with customers, trading partners or other parties.

 

S&P also cut its financial strength rating on the company's municipal bond insurance arm, Berkshire Hathaway Assurance Corp, to AA-plus with a stable outlook from AAA.

 

"We believe that the railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity, and that investment risk with sizable concentrations remains very high," S&P said in a statement.

 

The rating downgrade came on the same day that Berkshire launched an $8 billion bond sale to help pay for the Burlington acquisition. Berkshire is buying Burlington, the second-largest domestic railroad company, for roughly $26 billion in stock and cash.

 

"A key concern is that Berkshire's risk tolerances appear to have increased, yet we believe they remain ill-defined while the organization increases in complexity," S&P said. Earnings at Berkshire remain very strong and are likely to increase following the acquisition of Burlington, S&P said.

 

"It is our expectation that Berkshire likely will use these incremental earnings and cash flows to pay down the debt resulting from the acquisition rather than rebuild insurance company capitalization," S&P said. Uncertainty about management succession after Buffett, who is 79, eventually steps down is also an ongoing concern, the rating agency said.

 

Moody's Investors Service on April 8 cut Berkshire's rating to Aa2, its third-highest rating, citing the impacts of the recession and investment losses at Berkshire's insurance operations. Fitch cut Berkshire's senior unsecured rating four weeks earlier to AA, its third-highest rating.