MarketView for February 6

 

 

Summary

 

Stocks edged lower on Monday as investors found little reason to extend a five-week rally on lingering uncertainty over whether Greece would accept the terms of a bailout. In fact, once again another deadline lapsed in Athens as political leaders failed to respond to bailout terms from the European Union and International Monetary Fund. Greece needs the funds by March in order to meet large debt repayments and avoid a messy default.

 

The S&P's recent rally had been helped by a run of better-than-expected domestic economic data, which was capped by Friday's solid employment report. Recent actions by central banks in Europe and the United States to maintain loose monetary policies have also helped reduce volatility in equity markets. Nonetheless, the S&P's rise of 7 percent so far this year, along with worries over Europe's ability to resolve its debt crisis and some weak corporate results, has kept many investors at bay.

 

Hasbro managed a gain of 2.2 percent to $36.66 after the toymaker reported a fourth-quarter profit just above analysts' lowered expectations although revenues came at a number that was lower than the Street was looking for.

 

Humana posted a large rise in fourth-quarter earnings, but again revenues came in below Street expectations, sending shares down 5.4 percent to $85.21.

 

Through Monday morning, of the 290 companies in the S&P 500 that have reported fourth quarter results, 60 percent exceeded earnings expectations, that is less than recent quarters at this point of the earnings season.

 

Technical analysts at Instinet in New York said a host of metrics, such as an upturn in the S&P 500's moving averages and a strong move up in January, boded well for equity prices in the medium term.

 

"The persistency of both price appreciation and breadth since the beginning of the year suggests the next pullback will be a precursor to another attack on the 2011 highs in the S&P 500 near 1,370," the firm wrote in a note.

 

Fidelity National Financial plans to acquire casual dining chain O'Charley's for $9.85 a share, valuing the company at $221 million. The title insurer already owned a 9.5 percent stake. Shares of O'Charley's closed up 41.8 percent to $9.81.

 

Semiconductor stocks lost ground, dragged down by Micron Technology whose chief executive died on Friday in the crash of a small plane he was piloting. Micron shares ended the day down 2.8 percent to close at $7.73.

 

Volume was light with about 5.82 billion shares changing hands on the three major equity exchanges, a number that was well below last year's daily average of 7.84 billion shares.

 

Fed Official Says Rates Should Rise in 2013

 

St. Louis Fed President James Bullard said he disagreed with the Fed's decision last month to keep interest rates exceptionally low through late 2014 and that the Fed should start raising interest rates next year. Bullard argued that many years of near-zero rates will do little to return economic output to pre-recession levels and risks causing "disaster."

 

Bullard, who does not have a vote on the Fed's policy-setting Federal Open Market Committee this year, is seen as a policy centrist.

 

"It's important to start to remove accommodation - even when you go up to 1 percent or 1-1/2 percent, that's still very easy monetary policy," Bullard told reporters. "It's a matter of getting to a normal level of interest rates at the right time. I don't think you want to wait until everything is exactly the way you'd expect it to be."

 

Because the recession was brought on by a collapse in housing that destroyed household wealth, unemployment is likely to stay high and labor markets will improve only slowly even if rates are kept low for years, Bullard said.

 

The belief that the economy is suffering from an "output gap" that can be bridged only if borrowing costs are kept low enough for long enough is wrong, he said. "If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates," Bullard said. "This could be a looming disaster for the United States."

 

Our domestic economy is on track to grow at a 3 percent rate this year and to strengthen further next year, Bullard said. That should help push the unemployment rate below 8 percent by the end of this year, he projected. It registered 8.3 percent in January, and most Fed officials last month saw the rate staying above 8 percent through this year.

Meanwhile, inflation, while falling, is running above the Fed's newly set target of 2 percent.

 

Bullard said keeping rates low for several quarters is very different from keeping them there for years, which punishes savers. Younger generations hurt by high unemployment are not increasing their consumption to make up for the decline in consumption among older generations, he said. "In this sense, the policy could be counterproductive," he went on to say.

 

Some lawmakers in Congress levied a similar criticism against Bernanke last week, saying the Fed's low-rate policy was hurting savers and, in Congressman Paul Ryan's words, "bailing out" debtors.

 

Bullard said he welcomed the Fed's adoption of an explicit inflation target because it may keep the central bank from allowing higher inflation in pursuit of bridging an illusionary output gap.

 

"This is an important development, as it may prevent the U.S. from repeating the mistakes of the 1970s, in which a misreading of the size of the output gap led the Fed to maintain easy monetary policies for far too long," he said.

 

Strong Dollar Dampening Interest in Gold 

 

Gold futures declined Monday, with prices pulling back by as much as $26 an ounce as a stronger dollar dampened interest in metals. Gold for April delivery was down $15.40 per ounce, or 0.9 percent, to settle at $1,724.90 an ounce on Comex division of the New York Mercantile Exchange. It had fallen by as much as $26.30 to touch a low of $1,714 an ounce earlier.

 

The better than expected employment data helped to send gold down by $19 an ounce on Friday, as its safe-haven appeal took a hit. A stronger dollar added further pressure to gold on Monday. The dollar index, which measures the greenback against a basket of six currencies, traded at 79.135, from 78.969 in late trading on Friday.

 

A rising dollar is a negative for gold and other dollar-priced commodities as it makes them more expensive to holders of other currencies.

 

A positive note for gold bugs is that the persistent uncertainty surrounding the euro-zone debt crisis has limited losses for gold. Meanwhile, across the wider metals complex, silver for March delivery fell by 6 cents, or 0.2 percent, to $33.69 an ounce. Copper for March delivery was down almost 4 cents, or 0.9 percent, to $3.87 per pound.

 

Platinum for April delivery was down $3.90, or 0.2 percent to $1,628 an ounce, while March palladium futures fell $4.05, or 0.6 percent to $704.80 an ounce.

 

Latest Round of Goldman Favorites

 

Goldman Sachs isn't taking a position on the stock market as illustrated by the move from a defensive position in equities to neutral with a late-cycle mix. The biggest concern remains Europe. While the LTRO (long-term refinancing operations) agreements and funding actions by the European Central Bank have helped to reduce some of the concern, Goldman Sachs Chief Strategist David Kostin says risks of a decline still "remains so significant that it impairs fundamental investment decisions."

 

A better-than-expected January jobs report, robust fourth-quarter GDP growth of 2.8 percent and positive signs from the manufacturing sector weren't enough to make the Goldman Sachs strategy team more positive in their market positioning. Risks related to the presidential election and concerns of a deceleration in GDP to 2 percent are prompting Goldman to tempter its bullishness. 

 

With that backdrop, Goldman is moving to an "overweight" recommendation in the energy sector from "neutral" and also recommends buying the technology industry. Current dynamics of the energy sector make it an attractive investment from a risk-reward perspective, according to Goldman. Demand should outweigh supply going forward and tension in the Middle East leave risk to the upside. Also, Goldman points out that energy stocks are pricing in an oil price below the current spot price.

 

Global information technology spending is expected to slow over the next few years, but will still grow at a low- to mid-single-digit rate. Goldman prefers investing in the software and services subsectors of the information-technology industry, which will benefit from the proliferation of smartphones, tables, cloud computing and increased e-commerce activity. The dividend-growth characteristic of the group is also attractive. Goldman anticipates dividends will rise 21% in 2012.

 

Below are the six energy and technology stocks Goldman recommends buying and are included in the America's Conviction List.

 

Exxon Mobil

 

Exxon has a $96 price target, representing 13% upside from where the stock closed Friday. Goldman likes the oil and gas company because of its commitment to returning cash to shareholders and its improved production outlook. The stock is trading at 9 times its earnings per share estimate of $9.10 in 2012, which Goldman sees as inexpensive.

 

Halliburton

 

Halliburton has a price target of $50, a 36% increase from its closing price Friday. Increasing margins in the international business, a bottoming in natural gas prices and the potential for North American margins to come in better than expected make the oilfield-services company an attractive opportunity, according to Goldman.

 

Apple

 

A price target of $600 implies stock upside of 31% for the iPhone and iPad maker. Likely catalysts such as a possible late-March iPad refresh with a lower price point on the iPad 2, a mid-year iPhone refresh, and the launch of the iOS-based television launch in late 2012 or early 2013 back up the positive rating for the company.

 

Oracle

 

Oracle has a price target of $35, representing a 20% increase from where the stock closed Friday. The company's disciplined approach to operating expenses helps protect margin downside in an uncertain economy. Goldman also expects the technology company to make up for deals that slipped out of the last quarter in the current quarter and views management's license growth as conservative.

 

Qualcomm

 

Qualcomm is expected to appreciate 18% to $72 based on Goldman's price target. The chipmarker is positioned to benefit from high demand for handsets from customers like Apple and share gains in the chipset market.

 

Visa

                                                                                                    

Visa has a price target of $114, a 6.5% increase from Friday's closing price. The payment processor will benefit from the continued secular shift to electronic payments, strong global growth and traction in emerging payments. Goldman also favors the company's positioning in the emerging payments market, including mobile, prepaid and e-commerce.