MarketView for February 13

 

 

Summary 

 

The major equity indexes were higher on Monday, led by bank shares after Greece's parliament approved reforms needed to qualify for a cash disbursement and avoid an unruly default. Greek lawmakers backed drastic cuts in wages, pensions and jobs on Sunday as the price of a 130 billion euro ($170 billion) bailout by the European Union and International Monetary Fund.

 

The S&P 500 last week hit a 7-month high and is now up more than 25 percent from a low in early October, in part on bets the Greek reforms would pass. The benchmark index traded near the 1,355 level, seen as a resistance point and possible trigger for a pullback.

 

Financial stocks were among the day’s best performers on the S&P 500, and bank shares led gains in Europe. Bank of America ended the day up 2.7 percent to $8.29 and is up almost 50 percent this year. Bank shares continue to outperform after having posted deep losses in 2011.

 

Apple raised the stakes in an intensifying global patent battle with Samsung Electronics by targeting Samsung's latest model using Google’s Android software. Apple ended the day up 1.5 percent to close at $500.95 after reaching a record of $503.83, while Google rose 1.2 percent to close at $613.26.

 

Google is expected to win approval from European regulators, as well as from U.S. antitrust authorities, for its planned $12.5 billion purchase of Motorola Mobility.

 

Regeneron Pharmaceuticals ended the day up 13 percent to close at $115.37 after the company significantly raised its 2012 sales forecast for a key eye drug.

 

As earnings season moves into its final stages, 51 companies in the S&P 500 are scheduled to report results this week. According to Thomson Reuters data through Monday, of the 357 companies in the benchmark index that have released results, 64 percent have exceeded analyst expectations.

 

Greece Still Has a Ways to Go

 

Greece has until Wednesday to convince international creditors that it would stick to the punishing terms of a multi-billion-euro rescue package, endorsed by parliament as rioters torched downtown Athens. The Greek Parliament voted to agree to substantial reductions in wages, pensions and jobs on Sunday as the price of a 130 billion euro ($170 billion) bailout by the European Union and International Monetary Fund to avert a default that could send shockwaves through the entire euro zone.

 

Scenes of running battles between police and rioters and flames engulfing cinemas, shops and banks underscored a sense of deepening turmoil in the country after more than four years of recession and two years of punishing austerity. Nonetheless, the EU warned on Monday that the consequences of failure would be "devastating."

 

Nonetheless, the riots spread to Greece's second city of Thessaloniki, towns across the country and the islands of Crete and Corfu. Athens city authorities said some of the wrecked buildings were of particular cultural, historic and architectural value. The Attikon cinema, housed in a neo-classical building dating from 1870, was left a blackened shell.

 

The EU also gave the fragile ruling coalition of Prime Minister Lucas Papademos until Wednesday, when euro zone finance ministers are expected to meet, to specify how 325 million euros of the 3.3 billion euros demanded in budget savings will be achieved.

 

By the same deadline, Greek political leaders must give a written commitment to implement the terms of the deal, a Greek government spokesman said, reflecting fatigue among EU leaders who say they have heard enough broken promises. The spokesman said Greece would hold an election in April, when deep public anger over the second round of austerity could drive voters further to the left and right and test Greece's commitment to the program.

 

Germany said ahead of the vote that it was losing patience with throwing money into the "bottomless pit" of Greece's debt crisis. Official reaction from Berlin on Monday was muted.

 

Greece needs the international funds before March 20 to meet debt repayments of 14.5 billion euros. EU Economic and Monetary Affairs Commissioner Olli Rehn said a disorderly default would have devastating consequences for Greek society. The deal provides for a bond swap to ease Greece's debt burden by cutting the real value of private-sector investors' bond holdings by some 70 percent.

 

Papademos is likely this week to replace one minister and five deputies who quit over the rescue bill. He had warned of a "social explosion" if lawmakers rejected the deal and Greece defaulted.

However, the unrest in the streets, and a voting rebellion by 43 parliamentarians of the ruling coalition, suggested Athens might already be on the brink.

 

The cuts include a 22 percent reduction in the minimum wage and 150,000 jobs from the public sector workforce by 2015. Critics on Monday said more austerity would only condemn the economy to an ever-deepening downward spiral, but Greek political leaders have offered few alternatives. Conservative New Democracy leader Antonis Samaras says the country should focus more on stimulating growth with tax cuts and privatization.

 

Some ordinary Greeks say they have heard enough threats of economic Armageddon, and that a messy default can be no worse than the painful medicine they are currently being made to swallow.

 

The rioters were a minority, but spoke to the groundswell of anger among Greeks who say their living standards are already collapsing and more austerity will only deepen their misery. Unemployment in Greece reached 20.9 percent in November, and half of young Greeks are jobless.

 

Manufacturing Returning Home

 

Manufacturers seem to believe that they moved their production out of the country too quickly over the past decades and now see a competitive advantage in coming back home. In an attempt to move to locations with lower-paid workers corporations sent manufacturing employment down by 40 percent from its 1980 peak. But companies such as Boeing and General Electric are now concluding that the benefit of lower wages can be offset by higher logistics and materials costs.

 

"We, lemming-like, over the last 15 years extended our supply chains a little too far globally in the name of low cost," said Jim McNerney, CEO of Boeing. "We lost control in some cases over quality and service when we did that, we underestimated in some cases the value of our workers back here."

 

McNerney spoke at a Washington event organized by GE aimed at promoting the competitiveness of the U.S. economy. The nation has been slow to recover from a brutal 2007-2009 downturn and high unemployment -- 8.3 percent in January -- stands as one of the main barriers to a brisker recovery.

 

Boeing in particular ran into extensive delays in the launch of its 787 Dreamliner aircraft, handing off much of the manufacturing responsibility to outside suppliers, leaving the launch of the fuel-efficient aircraft some three years behind schedule.

 

"You are going to see more manufacturing jobs come back to the United States, and that's in part for business reasons and in part because we want to be good citizens," McNerney said.

 

GE CEO Jeff Immelt said the largest U.S. conglomerate's thinking evolved on the value of manufacturing inside the United States versus outside it.

 

"We're basically moving our appliance manufacturing back from Mexico and China to basically Louisville," Immelt said. "When we looked at it on a cost basis, our labor is still higher, but it's closer than it's been in the past. And both materials and distribution are less expensive in the United States than imported. So we see the opportunity to bring jobs -- certain jobs, not every job -- back. And we think this is going to take place in areas like software as well."

 

The nascent resurgence in domestic manufacturing -- which added 50,000 jobs in January -- has caught the attention of the White House. President Barack Obama, to whom Immelt is a top adviser on jobs and the economy, singled out the sector in last month's State of the Union address as an area where he would promote tax breaks in hopes of generating more jobs.

 

Noting that GE currently generates about 60 percent of its revenue outside the United States and that some 70 percent of the orders in its backlog are from abroad, Immelt said that multinational manufacturers need to add jobs both at home and overseas if they are to be competitive.

 

GE said it plans to hire some 5,000 military veterans over the next five years. Manufacturers say they like to hire veterans because their experience in figuring out how to solve problems quickly is useful in high-speed modern factories.

 

Approximately 600,000 manufacturing jobs are going unfilled because companies cannot find applicants with the skills needed to perform them, according to a study by the Manufacturing Institute and Deloitte. A renewed focus on educating students in science, technology, engineering and math could help fill those holes.