MarketView for February 7

 

 

Summary

 

The major equity indexes rose slightly on Tuesday, but with the outcome of discussions on a bailout package for Greece uncertain, large positions in equities just are not going to happen. At the same time, the S&P 500 index has gained almost 7 percent in 2012 on better-than-expected economic data, sending the shares of bellwether companies such as Microsoft to yearly highs, while  Apple reaches a record high.

 

In a sign of underlying confidence, the 10-day moving average of stocks posting 52-week highs on the NYSE is at 203, the highest level since May 2010. The 10-day moving average of stocks hitting 52-week lows has dropped to just eight.

 

Nonetheless, Wall Street continues to watch the euro zone for any sign of a setback in resolving the sovereign debt crisis. Greece's government is preparing a document with a list of painful reforms needed to clinch a new, 130-billion-euro bailout financing package that is critical to the country avoiding a disorderly default. Political parties on Tuesday again delayed making a decision on accepting the reforms.

 

A disorderly Greek debt default would almost certainly lead to increased fiscal problems for weaker members of the euro zone and would risk wreaking havoc in credit markets. The impact could also dampen the U.S. recovery.

 

Stocks helping to send the Dow Jones Industrial Average higher on Tuesday included Coca-Cola up 0.8 percent to $68.55 after it reported better-than-expected quarterly results and announced a cost-savings program. Microsoft ended the day up 0.5 percent at $30.35, while Apple rose 1.1 percent to close at $468.83.

 

Technical analysts say that improved medium-term momentum indicators such as a recent move of the S&P 500's 50-day moving average above its 200-day moving average should mean more gains for stocks in the coming months.

 

Shares of money-market fund operators took a hit on Tuesday after The Wall Street Journal reported that the U.S. Securities and Exchange Commission was finalizing rules meant to stabilize the $2.7 trillion money-market mutual fund sector, including allowing the net asset value of funds to fluctuate.

 

Shares of Federated Investors, whose high percentage of money-market funds makes it vulnerable to changes in fund rules, fell 3.3 percent to $18.03. Shares in Charles Schwab fell 2.8 percent to $12.34 on heavy volume. Walt Disney was down 1.3 percent to $40.46 in extended trading after it reported weaker-than-expected revenue for its fiscal first quarter. Emerson Electric fell 2.7 percent to $51.92 after it reported lower quarterly sales and earnings as last year's floods in Thailand disrupted supply chains and weak European economies hurt demand.

 

According to Thomson Reuters data through Tuesday morning, 301 companies in the S&P 500 posting results so far saw 60 percent exceed expectations, tracking below recent quarters at this point of the reporting season.

 

UBS predicted more weakness in its investment banking division after a restructuring of the business failed to prevent an earnings hit from the euro-zone debt crisis, combined with combined with concerns regarding the global economy. UBS shares ended the day down 0.7 percent to close at $14.27.

 

Federal Reserve Chairman Ben Bernanke on Tuesday renewed a pledge to prevent Europe's financial crisis from damaging our domestic. economy in testimony before Congress that mirrored remarks he made last week.

 

Trading volume on Tuesday was light, with about 6.48 billion shares changing hands on the three major equity exchanges, a number that was below last year's daily average of 7.84 billion shares.

 

Job Availability Increases

 

The number of available jobs in the United States rose during December to nearly a three-year high, supporting other data that show a brighter outlook for hiring. According to a report released by the Labor Department on Tuesday, private industry and government agencies posted 3.38 million jobs in December. That is up from the 3.12 million advertised in the previous month and nearly matches the three-year high reached in September. In other words, job openings in the private sector reached the highest point in almost three and a half years.

 

Still, overall hiring slipped, and the number of people who quit their jobs also declined. That suggests the job market still is not as dynamic as it was before the recession. Manufacturers, retailers and professional and business services all posted gains. Professional and business services include temporary jobs. But they also include high-paying positions, such as architects, engineers and accountants.

 

December was also a big month for hiring, but there were still 13.1 million people unemployed that month. That means an average of 3.9 people competed for each open job in December, the first time in four years that ratio was below 4 to 1. In a healthy job market, the ratio is usually around 2 to 1.

 

It generally takes one to three months for employers to fill job openings. December's big jump in postings is likely one reason January's jobs report was healthy. But it also suggests job growth may continue in the coming months.

 

Job openings have rebounded since the recession ended in June 2009, rising 39 percent since then. But they are still far below the pre-recession levels of roughly 4.5 million. And hiring has not kept up with job openings. It is up only 11 percent since June 2009.

 

The slow recovery in hiring may be one reason the job market still seems sluggish to many people, particularly those out of work, even as the unemployment rate has fallen for five months straight.

 

The key issue is how the monthly net job change is calculated: It's additions to company payrolls minus subtractions. That net figure normally rises as hiring strengthens. But it can also rise even if hiring is weak— as long as layoffs and quits are relatively few.

 

Tuesday's report shows that most of the improvement in December's net gain of 203,000 jobs stems from lower layoffs and quits, rather than a pickup in hiring.

 

Layoffs fell to 1.6 million in December, below the pre-recession monthly average of about 1.9 million. Last year, layoffs fell to their lowest annual total in the 10 years that the government has tracked the data, Tuesday's data indicated.

 

At the same time, the number of people quitting their jobs, while rising, is also far below pre-recession levels. That's not such a good thing. Workers tend to quit when they find another job, usually with better pay.

 

A higher number of "quits" tends to signal a strong labor market, with lots more jobs and higher pay. With pay levels stagnant, not many jobs offer better opportunities. The result: a low-turnover labor market, with few being laid off, few quitting and moderate numbers of hires.

 

Any net job gains are still, of course, a good sign. They mean payrolls are growing, and consumer spending can grow. So can the economy. However, the low turnover helps explain why the job market may not feel much better to many people, especially those who are unemployed.

 

Bernanke Warns Job Market is Far From Normal

 

Federal Reserve Chairman Ben Bernanke repeated that the job market is still far from healthy after signs of economic improvement over the past year, and he called on lawmakers to reduce the long-term budget deficit.

 

"We still have a long way to go before the labor market can be said to be operating normally," Bernanke said in testimony prepared for the Senate Budget Committee that is identical to remarks he gave on Feb. 2 to the House Budget panel. "Particularly troubling is the unusually high level of long-term unemployment."

 

While the jobless rate has dropped for five consecutive months, it remains above the 5.2 percent to 6 percent that Fed officials say is consistent with maximum employment. The percentage of the unemployed who have remained without work for 27 weeks or more rose to 42.9 percent in January from 42.5 percent in December, the Labor Department said.

 

"Over the past two and a half years, the U.S. economy has been gradually recovering from the recent deep recession," Bernanke said. He went on to say, "While conditions have certainly improved over this period, the pace of the recovery has been frustratingly slow, particularly from the perspective of the millions of workers who remain unemployed or underemployed."

 

Bernanke also reiterated that the benchmark interest rate will probably stay near zero at least through late 2014, while saying the economy is vulnerable to shocks. He also repeated his call on lawmakers to reduce budget deficits.

 

"To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time," Bernanke said.

 

Congress should "take care not to unnecessarily impede the current economic recovery," Bernanke said. Replying on Feb. 2 to lawmakers' questions, he declined to voice his views on policies such as the payroll tax cut and unemployment benefits.

 

Private payrolls, which exclude government agencies, rose 257,000 in January after a revised gain of 220,000 the prior month, marking the biggest back-to-back gain since March-April. They were projected to climb by 160,000.

 

The unemployment rate, derived from a separate survey of households, was forecast to stay at 8.5 percent, according to the median of a Bloomberg survey. The drop in the jobless rate reflected a 381,000 decrease in unemployment at the same time 250,000 Americans entered the labor force.

 

St. Louis Fed President James Bullard said after the jobs report that economic news "has been surprising to the upside."

 

"I need to see significant deterioration in the economy and some threat of deflation or inflation moving significantly below our inflation target before" backing more bond buying by the Fed, Bullard was quoted as sayingCL-LCO1=R.

 

Fed policy makers see inflation declining in 2012 to below their 2 percent target, with most expecting prices to rise 1.4 percent to 1.8 percent this year, according to forecasts released Jan. 25. Bernanke said he expects inflation to "remain subdued."

 

The price gauge preferred by the Fed, the personal consumption expenditures index, increased 2.4 percent in December from a year earlier, down from 2.6 percent the previous month. The pace of so-called core inflation, which excludes food and energy, increased to 1.8 percent in December from 1.7 percent the month before.

 

January Deficit Declines by 50 Percent

 

The budget deficit fell by nearly half in January compared to a year earlier as tax collections from individuals rose and outlays fell, the Congressional Budget Office said on Tuesday.

 

The CBO said it expects the Treasury Department to report a $27 billion deficit for January, versus a $50 billion deficit in January 2011.

 

Crude Prices Rise on Improving Jobs Picture

                                        

Brent crude fell somewhat on Tuesday after rising above $117 per barrel to push its premium over U.S. crude above $20 per barrel; triggering profit taking and helping U.S. crude recover and rally.

 

Fears that Iran would stop exports to the European Union in advance of the EU's embargo set for July, along with Europe's severe cold snap, had lifted Brent despite concerns Greece's debt crisis would result in curbed economic growth. Meanwhile, U.S. crude had been weighed down by the rising stock market and tepid demand that was highlighted in recent government data. However, data has started painting an improving jobs picture that is more supportive to oil.

 

Brent's premium to U.S. crude oil widened to more than $20 per barrel on Tuesday, the highest level since October. However, a sharp reversal by Brent and a rally by domestic crude prices narrowed the spread back below $18.

 

Brent March crude rose 73 cents to $116.66 a barrel, trading from $115.60 to $117.10, its highest intraday price since early August. During its rally above $117, Brent's Relative Strength Index reached 70, an overbought indication for investors eyeing technical indicators. U.S. March crude rose $1.68 to $98.59 per barrel, having swung from $95.84 to $99.13.