MarketView for February 16

 

 

 

Summary 

 

The major equity indexes posted their largest daily percentage gain in three months on Tuesday after strong revenues from Merck, in combination with a regional manufacturing released by the Fed, once again renewed the Street’s confidence that the economic outlook was continuing to improve. Merck closed up 2 percent to $37.66 after it posted quarterly revenue that exceeded Street estimates. The New York Federal Reserve Bank's gauge of manufacturing in New York State rose more than expected in February as inventories increased.

 

Among the day’s largest gainers were resource related shares, the result of a weaker dollar that had both speculators and investors picking up oil futures, along with a number of other commodities. The upshot of it all was that the CRB commodities index chalked up its largest one-day percentage advance in three months, while Chevron was the largest gainer on the Dow Jones industrial average, closing up 2.8 percent at $72.99.

 

The S&P resumed weekly gains last Friday after four consecutive weeks of declines, which were triggered in part by fiscal weakness in Greece and other euro zone countries as well as uncertainty about China's moves to curb bank lending.

 

JPMorgan Chase will buy the non-U.S. assets of commodities joint venture RBS Sempra from Royal Bank of Scotland and Sempra Energy for $1.7 billion in cash, roughly doubling its commodities client base and making the Nation’s second-largest bank by assets even larger. JPMorgan closed up 2.9 percent at $40.07. Financial stocks were caught in an updraft as a result of an announcement by Barclays, indicating that it nearly doubled profits in 2009 to $18.2 billion.

 

Southern Company's shares rose 2.3 percent to $31.88 after U.S. President Barack Obama announced loan guarantees of $8.3 billion to build the first nuclear plant in nearly three decades. Obama said the United States will not achieve a boost in nuclear capacity without "incentives to make clean energy profitable. Southern subsidiary Georgia Power received the guarantees. The Market Vector Nuclear Energy ETF rose 3.2 percent to $21.80.

 

Simon Property Group made a $10 billion offer for General Growth Properties, increasing optimism in the battered commercial real estate market as a result of the combination of the two largest shopping mall owners. Simon shares rose 3.9 percent to close at $74.82.

 

On the Nasdaq, Intel rose 1.4 percent to $20.72 after a brokerage firm raised its rating on the shares.

 

Rise in Manufacturing in New York State

 

Manufacturing in New York State rose in February as inventories jumped, the New York Federal Reserve said in a report released Tuesday. The New York Fed's "Empire State" general business conditions index rose to 24.91 in February, the highest level since October and up from 15.92 in January.

 

On the surface, the main index appeared to reinforce the impression that industrial companies are continuing to bounce back after the long recession which ended last year. The inventories index was sharply, to zero from negative 17.33, its highest reading in more than a year. At the same time, the new orders index fell to 8.78 in February from 20.48 in the previous month -- a warning sign that activity could decelerate in future.

 

The report also offered some signs of improvement in the job market at factories. Employment indexes were positive for a second consecutive month, although at relatively low levels, the Fed said. The expectations index for six months ahead slipped to 52.78 in February from 56.

 

Treasury Purchases by China Fall

 

Although, overall, net capital inflows into the United States rose to $60.9 billion in December, from an inflow of $30.9 billion the prior month, foreigners cut purchases of long-term securities, the Treasury said on Tuesday.

 

The data also showed that China has now been a net seller of some $45 billion of U.S. Treasuries over the last five months. Much of China's selling has been in short-dated Treasury bills.

 

Homebuilders More Confident

 

The National Association of Home Builders reported on Tuesday that its housing market index rose two points in February, a sign that low interest rates and federal tax credits for buyers boosted confidence in consumer demand for new homes. The builders group reported that the index reached 17 in February, after falling for two consecutive months.

 

The increase shows builders are feeling better about their prospects as evidence emerges that the job market may be improving. But challenges still exist, such as a high number of foreclosures and a lack of financing for new projects.

 

The index reflects a survey of 528 residential developers across the U.S. Index readings below 50 indicate negative sentiment about the market. The last time it was above 50 was in April 2006.

 

Slow Recovery Says Fed’s Kocherlakota

 

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota was heard to say on Tuesday that the economy will likely grow at a pace of close to 3 percent over the next two years.

While a recovery from the worst downturn since the 1930s is underway, the outlook is clouded by regulatory uncertainty and a still-weak banking sector, Kocherlakota said in the prepared text of his first public speech since his appointment to the top job at the regional Fed bank last September.

 

"I do think that the economy is on the mend and should continue to recover over the next two years -- in terms of both GDP and unemployment -- but at slower rates than we would like," Kocherlakota told a group of bankers in St. Paul, Minnesota.

 

Unemployment is unlikely to fall below 9 percent this year or 8 percent next year, he said.

 

"To get a true expansion in employment and in the economy, the hiring rate has to pick up -- and we have yet to see evidence that it will do so in the immediate future," he said.

 

On a more positive note, he said, the Fed has kept inflation "at levels consistent with good long-run economic performance," he said.

 

"The news is mostly good on the inflation front, although the need for careful policy choices is even more critical than usual," Kocherlakota said.

 

The Fed lowered its target for overnight lending between banks to near zero in December 2008 to help stave off the worst U.S. economic downturn since the 1930s, and it has vowed to keep rates at rock bottom for an "extended period" to nurture a nascent recovery.

 

But at the last policy-setting meeting Kansas City Fed President Thomas Hoenig's dissented against the phrase "extended period", which has investors watching closely for any signs that the committee is inching closer to removing the phrase. The removal of that phrase would be a step toward tighter monetary policy.

 

Kocherlakota will rotate into a voting spot on the Fed's monetary policy-setting Federal Open Market Committee next year. Despite relatively tame inflation, the Fed must be watchful, Kocherlakota said.

 

Excess reserves at deposit institutions mean there is the potential for inflation should inflationary expectations increase, he said. However, he added, for that to happen, "we would need a combination of bad monetary policy and poor fiscal management." That combination, he said, is not likely.

 

"Nonetheless, good policy requires good choices, and policymakers at the Federal Reserve and in Congress need to keep this scenario in mind when making their decisions," he said.

 

Delinquency Declines Among Credit Card Holders

 

The percentage of Americans falling behind on credit card bills stabilized in January, according to data from the six major lenders, signaling that credit problems among consumers may be leveling off. Bank of America and American Express reported a decline in both credit card delinquency rates and in charge-offs..

 

The January data, while not uniform, follows a December that also showed signs fewer Americans were falling behind in payments. It continues a reversal from November, when most companies reported a rise in charge-offs, which reflect stress on consumers.

 

The delinquency rate at Bank of America, was 7.35 percent in January, down 0.09 percent from 7.44 percent in December. Its charge-offs dipped 0.28 percent in the same period.

 

While Bank of America had the highest numbers in the group, American Express posted the lowest. American Express said its delinquency and charge-off rates each fell by about 0.1 percent in January, compared with December. Capital One, JPMorgan Chase, and Citigroup wrote off a higher percentage of loans, while American Express, Bank of America and Discover wrote off a lower percentage.

 

Capital One shares climbed 4.5 percent to close at $36.74; JPMorgan shares added 2.9 percent to $40.07; Citigroup was up 4.1 percent at $3.31; and Discover was up 4 percent at $13.55.

 

For Capital One, borrowers with about 5.8 percent of U.S. credit card loans were more than 30 days behind on their bills in January, on an annualized basis. That is essentially unchanged from December's 5.78 percent. Capital One's charge-off rate rose 0.3 percent month-over-month.

 

JPMorgan Chase wrote off 10.91 percent of its loans, on an annualized basis, a big increase from December's 7.11 percent. The company said in January that write-offs could approach 11 percent, due to a payment holiday it allowed customers in May, which lowered defaults in late 2009 and are raising them now.

 

Discover reported a 0.06 percent rise in its delinquency rate in January, and a very slim drop in the charge-off rate. Citigroup, the last company to report on Tuesday, said its delinquency rate rose 0.13 percent -- the steepest rise of the six companies -- and its charge-off rate rose 0.24 percent.

 

Credit card charge-offs and delinquencies usually track unemployment, which fell to a five-month low of 9.7 percent in January. That surprised economists and hinted at a labor market recovery despite the loss of 20,000 jobs in the month.