MarketView for February 10

 

 

Summary 

 

Friday saw the S&P 500 index posted its largest percentage decline thus far in 2012 after an unexpected about-face on Greece's long-awaited debt deal ended a five-week streak of gains for equities. All but one of the 30 Dow components ended the day lower, while all 10 S&P sectors fell with cyclical sectors such as energy, financials and materials the biggest losers.

 

Shares of Bank of America fell 1.3 percent to $8.07 while Caterpillar lost 1 percent to $111.75. Alcoa was down 3.3 percent to end the day at $10.29. The CBOE Volatility index, often referred to as Wall Street's "fear index," rose 11.6 percent, its largest percentage increase in three months.

 

Wall Street’s patience is about up. The Street was continually looking for a bailout package for Greece so the country might avoid a messy default. An agreement finally came this week but almost immediately ran into problems as European leaders called for additional austerity measures and some Greek lawmakers said they would not support the deal. Greek Finance Minister Evangelos Venizelos said Greece needs to reach a decision within days on accepting the terms of a bailout.

 

For the week, the S&P was down 0.2 percent while the Dow fell 0.5 percent for the week and the Nasdaq lost a little less than 0.1 percent.

 

Consumer sentiment data also weighed on the market. The Thomson Reuters/University of Michigan overall index of consumer sentiment fell to 72.5 in early February from January's 75.0, which was the highest level since February 2011.

 

Expedia closed down 1.8 percent at $33.54, a day after delivering disappointing results. LinkedIn rose 18 percent to $89.96 a day after issuing an upbeat first-quarter outlook that prompted at least three brokerages to raise their price targets.

 

Volume was light with about 6.67 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.

 

For Greece It Is Bailout or Disaster

 

The Greek cabinet approved a draft bill spelling out reforms required by the EU and the IMF on Friday, taking Athens closer to getting a new 130 billion-euro bailout after the prime minister warned the alternative was "catastrophe." All eyes will now be on parliament, which is scheduled to vote on the bill on Sunday. Analysts expect the deeply unpopular package to be adopted but Greek politics remain highly unstable.

 

Even after this is done, the EU also wants a further 325 million euros of spending cuts and clear commitments by main party leaders that the reforms will be implemented before it agrees to release the aid.

 

Technocrat Prime Minister Lucas Papademos told his turbulent coalition government earlier on Friday to accept the harsh international bailout deal or condemn the nation to disaster.

 

"We cannot allow Greece to go bankrupt," he told a cabinet meeting. "Our priority is to do whatever it takes to approve the new economic program and proceed with the new loan agreement."

 

Papademos, the sole technocrat in a coalition of feuding politicians, tried to assert his authority after six cabinet members resigned over EU and IMF demands for yet more pay, pension and job cuts in return for the financial rescue.

 

The austerity plan includes lowering the minimum wage by 22 percent, axing 150,000 public sector jobs and reducing pensions.

 

"It goes without saying that whoever disagrees and does not vote for the new program cannot remain in the government," Papademos said in televised remarks. Greece faces bankruptcy unless it gets the funds from the IMF and European Union by March 20 when it has to repay 14.5 billion euros ($19 billion) in maturing bonds.

 

A former central banker, Papademos tried to raise Greeks' spirits as the nation enters its fifth year of recession, saying economic growth would return in 2013 despite accusations that the austerity is merely driving Greece into a downward spiral.

 

Any alternative to the rescue would be much worse, he said in opening remarks using the word "catastrophe" four times.

 

Earlier, far-right leader George Karatzaferis said he could not back the tough terms attached to the bailout and all four cabinet members of his LAOS party submitted their resignations, along with two from the socialist PASOK party.

 

Papademos was not expected to react immediately to the loss of his transport minister and five deputy ministers. "There will be no reshuffle today," said a government official.

 

Adding to the confusion, Greek media said that two of the LAOS cabinet members had resigned only under orders from Karatzaferis and would support the deeply unpopular package when parliament votes, possibly on Sunday or Monday.

 

The Socialist PASOK party, one of three in the "national unity" government, called on its lawmakers to vote for the bailout, and analysts said they still thought parliament would pass the deeply unpopular package.

 

The largest police trade union said it would issue arrest warrants for Greece's international lenders for subverting democracy, and refused to "fight against our brothers." A daily newspaper depicted German Chancellor Angela Merkel in a Nazi uniform with a swastika armband.

 

Finance Minister Evangelos Venizelos made clear Greece has little choice but to accept the harsh conditions attached to the bailout, and a plan to halve its huge debt to private bondholders, to avoid a chaotic default next month.

 

"It's time for us to make up our minds," he said after euro zone finance ministers refused to give immediate approval to the bailout plan. "Unfortunately, we have to choose between sacrifices and even bigger sacrifices."

 

LAOS leader Karatzaferis begged to differ. "Greeks cannot be hostages and serfs," he thundered. "We were robbed of our dignity, we were humiliated. I can't take this. I won't allow it, no matter how hungry I am.

 

He turned his anger on Germany, which will fund much of any bailout and has lectured Greeks on the need to tighten their belts.

 

"Germany decides for Europe because it has a fat wallet and with that fat wallet it rules over the lives of all the southern countries," he told a news conference.

 

His party has 15 deputies in the 300-seat parliament, dominated by the socialist PASOK and conservative New Democracy parties, which both support the Papademos government.

 

The EU and IMF have been exasperated by a series of broken promises and weeks of disagreement over the terms of the bailout, which would be Greece's second since 2010, with time running out to avoid a default.

 

The ministers gave Athens six days to prove its commitment by passing key legislation, finding an extra 325 million euros in savings, and providing assurances that the program will remain in force after any election.

 

Summing up their deep mistrust, Jean-Claude Juncker, chairman of euro zone finance ministers, said: "In short, no disbursement before implementation."

 

Meanwhile, the euro and European shares fell, reflecting concern that the Greek bailout and debt swap could fail.

 

With Greece probably at its lowest ebb since the junta was overthrown in 1974 and democracy restored, protesters denounced the "troika" of lenders - the European Commission, European Central Bank and International Monetary Fund.

 

"Do not bow your heads! Resist!" They chanted. "No to layoffs! No to salary cuts! No to pension cuts!

 

Budgeted Deficit Reduced

 

President Obama will project lower deficits and request billions of dollars for infrastructure and jobs in his 2013 budget, laying out a plan he will sell to voters in November. Obama's budget proposal, which he will submit to Congress on Monday, will project a $901 billion deficit for fiscal 2013, a sharp drop from the $1.33 trillion funding gap that is predicted for this year, a senior administration official said on Friday.

 

Obama is also expected to repeat a call for millionaires to pay a minimum tax rate of 30 percent, while taking aim at the foreign profits of big U.S. corporations.

 

Congress may ignore Obama's 2013 budget proposal, and with elections approaching in November, Republicans will likely declare it dead on arrival. Nonetheless, it still offers Obama a platform to lay out his vision of how he would govern if voters grant him a second White House term.

 

The deficit in 2013 would be equivalent to 5.5 percent of U.S. gross domestic product (GDP), down from 8.5 percent of GDP in 2012. However, the deficit in both years was higher than those forecast by the White House in September for a $956 billion funding gap in 2012 and a $648 billion gap in 2013.

 

On Monday, Obama is also expected to repeat proposals to raise $1.6 trillion over a decade through higher taxes, including $886 billion raised by allowing tax breaks for families earning more than $250,000 a year to expire at the end of 2012.

 

The budget will also earmark $476 billion for infrastructure spending and $350 billion to jump-start job creation, the White House official said. However, it must also spell out where the axe falls on domestic spending, with $360 billion expected to be saved by controlling growth in the costs of Medicare and Medicaid, federal healthcare programs for elderly and poor Americans.

 

Consumer Confidence Mixed

 

Americans felt worse about their personal finances in early February, while at the same time projecting increased confidence in the labor market's prospects, which in turn should help to support spending and the broader economy.

 

More specifically, the Thomson Reuters/University of Michigan overall index of consumer sentiment fell to 72.5 in early February, from January’s 75.0 reading. It was the first drop in six months and reflected households' anxiety over their finances.

 

The ebb in morale comes despite the recent run of relatively strong data, including solid job growth and manufacturing activity. The Conference Board's survey of consumer attitudes published last month also showed a fall in sentiment.

 

A key reason is that households continue to struggle under the weight of huge debt loads and a sustained decline in home prices is not helping. Yet, while consumers worried about incomes, they also reported a record level of optimism about job prospects.

 

"This pattern of responses - less favorable current assessments and more favorable prospects - is not surprising. It simply indicates that consumers find their current situation all the harder to bear when improvement is finally in sight," said sentiment survey director Richard Curtin.

 

Employers added 243,000 workers to their payrolls in January and the jobless rate fell to a three-year low of 8.3 percent.

 

However, the Michigan index is not seasonally adjusted and tends to be weak in February so the decrease in sentiment reported this year may partially be a reflection of this seasonal pattern.

 

Other data on Friday underscored the economy's firming tone. For example, the trade deficit widened to a six-month high of $48.8 billion in December as goods imports climbed to the highest level since July 2008, just before the financial crisis caused world trade to fall sharply.

 

U.S. exports grew slightly in December, with records set for petroleum, services and advanced technology goods. The trade gap, however, was not as big as the government had anticipated when it made its advance estimates for fourth-quarter gross domestic product.

 

That, together with sturdy construction spending in December and rising wholesale inventories, suggest the preliminary reading of 2.8 percent growth in the final quarter of last year could be raised to a an annual rate as high as 3.2 percent .

 

For the year, the U.S. trade gap swelled to $558.0 billion, the largest since 2008. The widening trade deficit is expected to slow growth in the first half of this year as a recession in the euro zone hampers exports to the region.

 

Meanwhile, the deficit with China last year soared to a record high $295.5 billion, a development certain to reinforce concerns in Congress about Beijing's currency and trade practices ahead of a meeting next week between U.S. President Barack Obama and the Asian giant's expected next leader, Vice President Xi Jinping.

 

U.S. exports to China rose 13.1 percent to $103.9 billion. However that was overwhelmed by a 9.4 percent increase in imports from China, which pushed the tally to a record $399.3 billion. Even as the U.S. trade shortfall with China grew, other data on Friday showed China's overall current account surplus shrank in 2011, offering Beijing fresh evidence to show critics of its currency policy that it is relying less on external demand.

 

The large import decline in January combined with a smaller export decline left China with the biggest trade surplus in six months, confounding expectations of a further narrowing. Last year, the Democratic-controlled Senate passed legislation to pressure China to raise the value of its currency, but that bill hit a dead end in the Republican-controlled House of Representatives.

 

Many lawmakers believe that China deliberately undervalues its currency to give its companies an unfair price advantage, contributing to the huge bilateral deficit. Yet, the U.S. trade deficits with the European Union and Canada also expanded in 2011.