MarketView for February 08

Summary

Wall Street’s worries certainly did not end on Monday as the Dow Jones industrial average ended the day below 10,000 for the first time since November bank shares took the brunt of the day’s selling activity due to heightened concerns over the fiscal stability of Greece, Portugal and Spain. Bank of America ended the day down more than 3 percent to close at $14.48, while JPMorgan fell 1.6 percent, closing at $37.70 and Citigroup was down 2.2 percent at $3.15.

Other financial sector casualties were Travelers, the largest publicly traded property-casualty insurer, off 2.5 percent at $49.05, and American Express, down 2.8 percent at $36.79. The sovereign concerns within the EU have rattled global markets over the last two weeks, curbing the appetite for riskier assets. The financial sector is also under pressure due to tougher rules the Obama administration proposed recently to curb banks' risk-taking. All but two of the 30 Dow components were lower on the day.

On the Nasdaq, shares of Apple were a major drag, ending the day down 0.7 percent at $194.12. Qualcomm also fell, closing down 1.4 percent at $37.51.

Meanwhile, an upgrade by Morgan Stanley helped Home Depot, sending its shares up 2.2 percent to close at $28.59. In its upgrade report to clients, Morgan Stanley said it was optimistic about the home improvement chain's prospects as the housing market begins to recover. Other gainers included Hasbro and CVS Caremark, both of which rallied after reporting stronger-than-expected fourth-quarter results. Hasbro, the second largest toy manufacturer after Mattel, also said it expects its revenue and profit to rise in 2010, sending its shares up 12.7 percent to $34.71. CVS rose 5.3 percent to $32.72.

Job Market Data Shows Continued Improvement

The outlook for employment going forward improved somewhat. For the fifth consecutive month, the Conference Board, a private research group, said its Employment Trends Index climbed to 93.2 in January from an upwardly revised 92.3 in December, which was originally reported as 91.8. It was the highest index level reading since January 2009, when it stood at 93.8. The index is still down 0.7 percent from one year ago, according to the Conference Board.

"The continued rise in the Employment Trends Index makes us more optimistic that job growth will resume in the first quarter of 2010," said Gad Levanon, associate director of macroeconomic research at The Conference Board.

The Fed May Sell Assets Later This Year

The Federal Reserve could sell off some assets later this year in an effort to whittle down its balance sheet and to avoid any potential outbreak of inflation, St. Louis Federal Reserve Bank President James Bullard said on Monday. The Fed's purchases last year of longer-term Treasuries and other debt, undertaken to help revive the economy, were financed by adding cash to the financial system. At the same time, leaving large amounts of cash sloshing around as the economy strengthens risks fueling inflation.

The Fed should try to get its balance sheet, which has added more than $1 trillion in assets, down to a more normal size before the next recession strikes to ensure it has the ammunition it needs to counter a downturn, Bullard said.

In late 2008, the Fed purchased large amounts of of longer-term Treasuries, mortgage-backed securities and debt issued by housing finance agencies to provide further support for the economy.

Bullard, who is a voting member on the Fed's policy-setting panel this year, said his preference would be to begin selling off some assets before raising interest rates, although he said not all Fed policy-makers were likely to see it his way.

He said the idea would be not only to get the balance sheet back to a pre-crisis size, but to return it to holdings of mostly Treasury securities.

The St. Louis Fed chief has long been an advocate of more actively managing the Fed's assets -- either by selling them or by leaving open the option of buying more if the economy stumbles anew. The consensus view at the Fed favors shuttering the purchase programs as planned and relying on rate hikes initially to tighten financial conditions.

However, with an economic recovery seemingly on track, Bullard made clear officials had begun to debate how best to normalize the Fed's balance sheet. Fed Chairman Ben Bernanke could shed more light on the central bank's plans in congressional testimony on Wednesday.

Bullard said markets would be disrupted if they came to believe the Fed was planning large-scale sales of mortgage-backed securities. However, he said the idea of gradual sales as a strategy is under discussion.

"Selling has more sympathy than you might think. It's more a question of timing and speed," Bullard said.

"You'd kind of want the situation to be back to normal in some kind of time frame before the next storm comes for the economy so that at that point you'd have a fresh set of tools and you can react at that point," he said. "There will be a lot more discussion going forward about how exactly to do this."

Bullard's emphasis on downsizing the Fed's balance sheet reflects a view that the recovery is gaining steam.

Unemployment may have already peaked, and the economy should grow at an annual rate above 3 percent in the first half of 2010, he said.

Boeing Tests New Version of 747

Boeing flew for the first time its twice-delayed 747-8 Freighter, a significant milestone and one the that could bolster the credibility of the world's second-largest plane maker. The takeoff on Monday started what was scheduled to be a three- to four-hour test flight near Boeing's factories around Seattle, Washington.

Boeing twice delayed the first flight of the 747-8 last year, most recently moving a planned fourth-quarter flight to early 2010 and first delivery to the fourth quarter of 2010.

The 747-8 Freighter, about 18 feet longer than the 747-400, had been launched in November 2005 and was originally scheduled to start delivering in the fourth-quarter of 2009. The 747 family has been in the air since 1969 and is Boeing's biggest and most recognizable commercial plane.

Boeing took a $1 billion charge related to the 747-8 in the third quarter of 2009 because of high production costs and tough market conditions.

The 747-8 uses new engine and wing designs, boasts greater fuel efficiency and lower operating costs than the Airbus A380, its closest rival, Boeing says. The Freighter model can carry 16 percent more cargo than the previous 747 model, while the Intercontinental can carry 51 more passengers.

Although it has 108 orders for 747-8s -- 76 for its freighter model and 32 for the passenger model -- on its books at list prices between $293 million and $308 million,  the company only gets paid by customers upon delivery.

The freighter's test flight comes on the heels of a successful test flight of the 787 Dreamliner in December. Though not nearly as innovative or fuel-efficient as the revolutionary carbon-composite 787 Dreamliner, the 747-8 does utilize some of the technology found in the higher-profile 787. However, Boeing's reputation has been bruised by two years of Dreamliner delays. That plane finally flew for the first time in December.