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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Wednesday, February 24, 2010
Summary
Federal Reserve Chairman Ben Bernanke reassured
Congress that interest rates will remain low, driving stocks higher on
Wednesday as Wall Street welcomed the promise of more cheap money.
Banks, which have benefited from borrowing rates at historic lows, led
the market higher. Bank of America was the Dow's biggest percentage
gainer, rising 2.45 percent. JPMorgan Chase ended the day up 2.4 percent
at $40.85. Investors overlooked a 47-year-low in the pace of new
home sales and the generally somber tone taken by Bernanke on the
economy. Semiconductor shares recovered most of the previous
session's losses, with Micron Technology up 5.6 percent at $9.09, and
Intel up 1.5 percent to close at $20.70. and the KBW bank index .BKX
jumped 2.3 percent. Despite Wednesday's gains, the major indexes are
still negative for the week after Tuesday's decline, the largest in
nearly three weeks for the market. On the Nasdaq, Autodesk closed up 8.7 percent at
$27.89, a day after the software maker posted better-than-expected
quarterly profit. Monsanto fell 2.5 percent to $74.04 on reaction to a
weaker-than-expected second-quarter outlook and persistent struggles
with its glyphosate business. Home builders' stocks fell after government data
showed sales of newly built single-family homes hit a record low. Securities regulators adopted a new rule that
restricts short selling in stocks that have fallen more than 10 percent
on any given day, more than a year after the financial crisis provoked
cries to rein in investors who bet on a stock's decline.
Fed Chairman Nixes Talk of Rate Hike
Federal Reserve Chairman Ben Bernanke told Congress
on Wednesday a weak job market and tame inflation warrant low interest
rates for "an extended period," curbing speculation the central bank was
moving closer to raising borrowing costs. In his first appearance before Congress following a
testy confirmation vote in the Senate last month, Bernanke offered a
relatively somber assessment of the U.S. economy despite recent signs of
strong growth. The country has lost 8.4 million jobs in just over
two years in the most severe economic downturn since the Great
Depression. The Fed chief said job losses were abating, but acknowledged
the recession's toll on American workers. "Notwithstanding the positive signs, the job market
remains quite weak," Bernanke told the U.S. House of Representatives
Financial Services Committee. Delivering the Fed's semiannual report to Congress,
Bernanke said the U.S. central bank's policy-setting Federal Open Market
Committee was prepared to support the economy with extraordinary
stimulus for some time. "The FOMC continues to anticipate that economic
conditions -- including low rates of resource utilization, subdued
inflation trends, and stable inflation expectations -- are likely to
warrant exceptionally low levels of the federal funds rate for an
extended period," he said. The Fed last week surprised markets by raising the
discount rate it charges on direct emergency loans to banks. The move
spurred fears the central bank was about to embark on a broader push for
higher borrowing costs, even though the Fed made no change to the
federal funds rate, its main policy tool. But the central bank has said the discount rate hike
was simply an effort to pull back on the measures it had taken to
increase liquidity in financial markets. Bernanke repeated that message,
saying the step was taken to "discourage banks from relying on the
discount window rather than private funding markets for short-term
credit." Fed officials have held the benchmark overnight
interbank rate in a zero to 0.25 percent range since December 2008 and
suggested they would likely wait several months after removing the
"extended period" phrase from their policy statement before proceeding
to raise it. They have also committed to buy more than $1.4
trillion in mortgage-linked debt to keep mortgage rates low. Commercial
real estate, where defaults are supposed to spike this year, also
remains a key concern. Bernanke called it "the biggest credit issue we
still have." Bernanke said, however, the time would come for
tighter policy and argued the Fed possesses a broad array of tools to
remove such accommodation when the moment is right. Among the Fed's options, he said, are transactions
that would drain excess money from the financial system. One such
program, a "term deposit facility" that would give banks the incentive
to park their money at the central bank, could be operational shortly
after being tested this spring, the Fed said in its semiannual report. Most analysts do not expect the Fed to raise the
federal funds rate until sometime in the second half of the year, at the
earliest. Similarly, a Reuters poll released on Wednesday showed
economists expect the European Central Bank to keep euro zone interest
rates on hold until the fourth quarter. Legislators on both sides of the aisle used the
hearing to play out the ongoing tug-of-war in Congress over budget
deficits. Committee Chairman Barney Frank leaned on Bernanke to argue
that the fiscal stimulus measures enacted by Democrats have helped
alleviate some of the nation's employment losses. Republicans, for their part, wanted Bernanke's view
on the long-term implications of the government's funding gap, which he
said was not on a sustainable path. A credit rating downgrade is not likely, Bernanke
said, though he warned that bond market worries on growing debt could
send interest rates higher. If unattended, the budget woes even pose the
risk, however small, of a sharp drop in the U.S. dollar. "I think it would be helpful for the current
situation if the Congress and the administration ... could provide a
plan which shows how the deficit will fall," Bernanke said.
New Home Sales Hit Record Low A report released by the Commerce Department on
Wednesday indicated that sales of new homes fell to a record low in
January while demand for loans to buy homes hit a 13-year low last week,
fanning fears of renewed weakness in the housing market. According to
the Department, sales of newly built single-family homes fell 11.2
percent to an annual rate of 309,000 units, the lowest level since
records started in 1963, from 348,000 units in December. It was the third straight monthly drop and the
largest percentage decline in a year. Analysts, who had expected a
360,000 unit pace, said bad weather was partly to blame and warned of
more of the same for February. A separate report from the Mortgage Bankers
Association showed mortgage applications fell for a third straight week,
with demand for home purchase loans sinking to the lowest since 1997.
Mortgage demand also was hampered by inclement weather. Compared to January last year, new home sales fell
6.1 percent. Last month's drop came despite the extension of a popular
tax credit for first-time buyers, which was also expanded to include
repeat buyers. The $8,000 tax credit and purchases of
mortgage-related securities by the Fed have underpinned the housing
market's recovery from a three-year slump that had led the broad economy
into recession. Economists hope an expected turnaround in the labor
market will help fill the void left by the end of the incentives. The
Fed's program ends next month. Bernanke told a Congressional panel that evidence so
far suggested that even when the Fed ends its mortgage-backed securities
purchasing program, it could still help prevent mortgage rates from
rising. "It is true that we will stop buying new
mortgage-backed securities at the end of this quarter but we will
continue to hold one-and-quarter trillion dollars in agency
mortgage-backed securities and taking that off the market in itself will
keep mortgage rates below what they otherwise would be," he said. One of the nation's largest homebuilders, Toll
Brothers, sounded a cautious note of optimism on the housing market,
saying it saw the choppy conditions gradually calming. The drop in purchase loan demand combined with a
decline in refinancings to push the Mortgage Bankers Association's index
of mortgage applications down 8.5 percent last week. However, a
four-week moving average of loan applications, which smooths weekly
volatility, was up 1.6 percent. There were no bright spots in the Commerce Department
report, however. The median sales price for a new home fell 5.6 percent
last month from December to $203,500, the lowest since December 2003.
That monthly decline reversed December's gain. Compared to January 2009, the median sale price was
down 2.4 percent. The number of new homes on the market rose 0.4 percent
to 234,000 units last month, while the supply of homes available for
sale stood at 9.1 months' worth, up from 8.0 in December. That was the
highest in eight months.
Short Sellers Reined In A Bit The SEC
adopted a new rule to restrict short selling more
than a year after the financial crisis provoked cries to rein in
investors who bet on a stock's decline. The SEC voted 3-2 on Wednesday
for a rule designed in part to boost investor confidence by braking the
precipitous fall of a stock. It also did not exempt option and equity
market makers from the curb but said hedging could still occur. The new rule attempts to bridge the divide between
lawmakers and companies who argued a market-wide curb on all short
selling was needed, and traders who said that any restrictions would
hurt market liquidity. Under the SEC's rule, if a stock fell by more than 10
percent in a day, a curb would kick in, allowing short selling only
above the national best bid. "The commission was cognizant of the
benefits that short selling can provide to the markets," SEC Chairman
Mary Schapiro said at a public agency meeting. However, Schapiro said the SEC was also concerned
that excessive downward pressure, accompanied by fear of unconstrained
short selling, could destabilize markets and undermine investor
confidence. Under the new rule, the restriction would last for
the day the stock dropped and the day after. During the worst of the financial crisis, lawmakers
and companies begged the SEC to clamp down on the short sellers and said
the uptick rule should be reinstated. First adopted after the 1929 market crash, the uptick
rule allowed shorting only if the last sale price was higher than the
previous price. But the SEC abolished it in 2007 after concluding that
it was no longer effective in modern markets. Democratic SEC Commissioner Luis Aguilar said
investor trust in a fair and orderly market was essential to the
operation of capital markets. "It would be a mistake to undervalue this
trust because we cannot assign a dollar figure to it," he said. The two Republican commissioners, Kathleen Casey and
Troy Paredes, dissented and said there was no firm foundation for
adopting the new short sale rule. Paredes said there was no way to know
whether implementation of the rule would boost investor confidence.
"Human psychology is difficult to predict," he said. Casey suggested
that those who have been clamoring for the old uptick rule will not be
satisfied until the SEC reinstated the Depression-era rule. Casey and Paredes both raised concerns over potential
compliance costs that are estimated to be in the billions of dollars.
The SEC estimates that it will cost the average broker dealer or trading
center at least $70,000 to comply with the new rule and about $120,000
for annual upkeep. The new SEC rule goes into effect 60 days after it is
published in the government's official federal register. The market will
then have six months to comply with requirements.
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MarketView for February 23
MarketView for Tuesday, Feb 23