MarketView for February 11

 

 

 

Summary

 

Stocks were somewhat higher on Thursday, sending all three key equity indexes into positive territory for the day after a pledge by European leaders to support debt-laden Greece. European leaders are keen to prevent Greece's problems spreading to other highly-indebted or high-deficit members of the euro zone, a development that could plunge the 16-nation bloc into a deeper debt crisis.

 

At the same time, a round of upbeat data from China sent mining and material stocks higher. China, the world's top base metals consumer, reported a jump in lending and slower inflation, suggesting the economy is on track for growth.

 

Data pointing to stabilization in the labor market gave the market a further boost, along with a broker upgrade of 3M, whose shares closed out the day up 2.1 percent. Shares of 3M Co, a diversified manufacturer, rose 2.1 percent to $80.27 after Sanford C. Bernstein upgraded the company to "outperform" from "market-perform," citing better margins and a higher growth rate.

 

However, the greatest impetus towards the rising market on Thursday was the European Union pledge to support Greece. Wall Street saw an EU bid to avert fallout from fiscal troubles in Greece and other European single currency countries like Portugal and Spain as a major step forward towards preventing additional damage to the world economy.

 

Before the opening bell, a government report showed applications for jobless insurance fell more than expected in the latest week, a signal the labor market continues to mend.

 

Caterpillar closed out the day up 5.6 percent at $56.15. Among commodity related names, Alcoa rose 3.2 percent to $13.58, while U.S. Steel closed out the day up 6 percent at $47.01. Newmont Mining rose 3.2 percent to close at $46.76.

 

On the Nasdaq, shares of video game publisher Activision Blizzard were up 9.6 percent to $11.07 after the company posted better-than-expected results and said it would start paying an annual dividend.

 

Shares of Philip Morris International rose 4 percent to $48.67, after the company posted stronger-than-expected fourth-quarter earnings, while at the same time announcing a $12 billion share repurchase plan.

 

With the S&P 500 falling more than 7 percent from its 15-month closing peak of January 19 in recent days, the S&P 500 is now only up 59.4 percent since its March 2009 bottom after having pulled back from a run-up of 70 percent since that significant low.

 

A Drop in Unemployment Insurance Claims

 

The number of new claims for unemployment insurance fell more than expected last week, welcome news for the White House as it predicted more than a million jobs will be created this year. To that end, President Barack Obama has made job growth his top 2010 priority. In its annual economic report to Congress on Thursday, the White House predicted an average of 95,000 jobs per month will be created this year, yet the jobless rate may tick back up to 10 percent as discouraged workers come back into the market.

 

There were some positive signs from the Labor Department, which reported initial applications for state unemployment benefits dropped by 43,000 to a seasonally adjusted 440,000 last week, down from a revised 483,000 in the prior week.

 

The prior week's unexpectedly high reading was blamed in part on a backlog of claims that piled up over the holiday season and a Labor Department official said the report showed this backlog was largely "washed out."

 

Wall Street is watching jobless claims for evidence that the economy is on the verge of adding jobs again. With the exception of November 2009, payrolls have declined in every month since the recession began in December 2007. In its economic report, the White House said it expects the economy to create an average of 190,000 jobs a month in 2011, double what it expects for this year. That rate of job creation would add up to about 3.4 million jobs in two years, but less than half of the 8.4 million that have been lost since the start of the recession.

 

It would also leave the jobless rate well above its normal level of 5.0 percent. Economists estimate that about 100,000 jobs are needed each month just to meet labor force growth and keep the unemployment rate steady.

 

More than a million people gave up looking for work as the job market deteriorated, and are therefore not counted among the unemployed. As jobs reappear, many of these people are expected to return to the labor market, making it even harder to create enough jobs to cut the unemployment rate.

 

Christina Romer, chairman of the president's Council of Economic Advisers, reiterated several times that, "We are, as we've said many times, expecting positive job growth by spring." However, the White House has also acknowledged that the unemployment rate is likely to fall slowly, and the Administration remains concerned regarding the large number of people who have been unemployed for a prolonged period of time.

 

In an ominous sign for the job market, the latest semiannual survey of the Business Council, which includes as members the top executives of over 100 U.S. companies, has indicated that many CEOs continue to remain wary of hiring.

 

At the same time, politicians are worried that continuing high unemployment at election time will translate into voter anger. So it is no surprise that the Senate Democrats released a draft of legislation aimed at creating jobs via tax cuts and other incentives.

 

The weekly report on unemployment benefits also showed the number of people applying after an initial week of aid fell to 4.54 million in the week ended January 30, the lowest in 13 months. That figure is somewhat skewed by the fact that many people have dropped off the rolls because they have exhausted benefits, not because they have found new jobs.

 

The four-week moving average, which smoothes out week-to-week volatility, fell by 1,000 claims to 468,500 claims last week. Initial jobless claims had increased through January, giving rise to concerns the slow healing of the battered labor market had stalled. The latest report offered hope a longer-term improvement trend was still in place.

 

EU Pledge to Help Greece All Words and No Details

 

European leaders sought to prop up Greece with words of support at a summit on Thursday but failed to offer concrete proposals on how it plans to help the country tackle its debt crisis, and in what time frame. EU President Herman Van Rompuy told a news conference after the summit that Europe was sending Greece a "clear message of solidarity," a line echoed by Germany and France.

 

A deal to provide financial aid to Greece move to stave off a broader crisis in the 16-nation bloc would be unprecedented, riding roughshod through rules forbidding a bailout. However, the rhetorical promises of support were not enough to satisfy financial markets, which are looking for specifics on how Athens may be helped out of its debt and deficit spiral. As a result, Greek debt yields rose and the euro currency fell against the dollar.

 

Van Rompuy and German Chancellor Angela Merkel said it was not possible to offer specifics on how Greece might be helped as Greece had not specifically asked for assistance from the EU.

 

"Euro area member states will take determined and coordinated action if needed to safeguard stability in the euro area as a whole," the 27 EU heads of state said in a statement after their meeting.

 

European leaders are keen to prevent Greece's problems from spreading to other highly-indebted or high-deficit members of the euro zone -- such as Spain and Portugal -- plunging the currency area into a deeper crisis.

 

However, they also want to keep the pressure on Greece to implement a tough austerity program designed to cut hundreds of billions of euros in debt and a deficit that totaled 12.7 percent of gross domestic product last year, a number that is more than four times EU limits.

 

The leaders' statement said Greece had reaffirmed its commitment to reduce its budget deficit by four percentage points this year and that progress on that front would be monitored regularly.

 

"Greece is a part of the European Union and won't be left on its own, but there are rules and these rules need to be adhered to," Merkel said.

 

Greece needs to raise about 53 billion euros ($75 billion) this year to finance its budget and refinance its debts, which are expected to grow to 290 billion euros this year, nearly 120 percent of gross domestic product. Greek Prime Minister George Papandreou said the deficit cuts would be delivered.

 

"We are willing to take all the reforms that are necessary to change the way the public sector is working in Greece," he said. "We have made very serious efforts to convince our partners that we mean business."

 

Financial markets had hoped EU leaders would lay out specific plans to provide Greece with a credit life-line or a scheme in which state-owned European banks would buy Greek bonds in order to help the government finance its borrowing. Any detailed proposals are likely to be discussed by EU finance ministers at meetings in Brussels early next week. EU leaders seem to be hoping in the meantime that words of support will be sufficient to restore confidence in Greece's finances, making any bailout unnecessary.

 

"The question of pledges was not raised because the Greek government has not requested any financial support, which means the Greek government believes that they do not need this financial support," said European Commission President Jose Manuel Barroso. "That is why I think we should not now speculate about scenarios that are so far not present."

 

Even with EU support, the Greek government faces a daunting challenge to consolidate its budget and restore confidence in an economy whose imbalances were exacerbated by the economic and financial crisis and where social unrest remains a threat. Greek unemployment hit its highest level in nearly five years, data showed on Thursday, and civil servants said they would step up strike action to protest austerity measures that include freezes on public sector wages and an overhaul of the tax system.