MarketView for January 6

 

Summary  

 

Stock prices moved a bit higher on Tuesday due to the increased likelihood of a government stimulus package. At the same time, the minutes of the latest Federal Reserve meeting indicated a somewhat dismal picture of the economy. The Federal Reserve, in minutes from its December 15-16 meeting, warned of uncomfortably low levels of inflation and said the economic outlook will be weak for some time.

 

Nonetheless, the Street was willing to be that technology stocks would benefit from President-elect Barack Obama's proposed economic plan that would include the largest domestic infrastructure investment since the 1950s.

 

IBM and Hewlett-Packard pushed the Dow higher, rising 2.8 percent and 8.2 percent respectively. However, after initially rising and helping to lift the NASDAQ in the wake of an Oppenheimer & Co upgrade, shares of Apple retreated as its performance at the Macworld expo in San Francisco disappointed investors with its lack of big news. Shares of Apple ended the day down 1.7 percent at $93.02.

 

Meanwhile, Microsoft rose 1.2 percent to $20.76 after the software maker said it sold 28 million units worldwide of its Xbox 360 video game console through the end of 2008, extending the Xbox's lead over rival Sony's PlayStation 3.

 

The Dow Jones industrial average, which has ended the day on a positive note for six of the last eight trading sessions, is still down 28 percent from a year ago.

 

After a dismal holiday shopping season, the data showed that retail sales rose 1.4 percent last week over the prior period and fell less than the same week a year earlier.

 

Materials and mining companies were among the top advancers on Tuesday as a global commodities benchmark settled at its highest level since November 28, helped in part by a rally in precious and base metals, soft commodities and some energy futures.

 

However, in after-the-bell trading, the shares of Alcoa sank after the aluminum producer said it will cut production and reduce about 13,500 jobs, or about 13 percent of its global workforce, in an effort to save cash and reduce costs in response to the economic downturn. Shares of Alcoa, a Dow component, were down 4.3 percent in after-market trading..

 

Earlier in the session, weaker-than-expected new orders received by U.S. factories in November and a seven-year low in pending home sales for that month spurred concerns about mounting job losses and the deepening U.S. recession.

 

Technology shares, which are seen as better prepared to weather the economic downturn due to large cash reserves, were a particular bright spot

 

Pending Home Sales Down Dramatically

 

Pending homes sales hit a seven-year low in November, as rising job losses and a deepening economic recession kept potential house buyers on the sidelines. The National Association of Realtors (NAR) pending home sales index, based on contracts signed in November, dropped 4.0 percent to 82.3, the lowest level since the series started in 2001. That was worse than economists' expectations for a 0.1 percent drop. November's reading was 5.3 percent lower than a year-ago and October's pending home sales index was revised down to 85.7.

 

"Mounting job losses and very weak consumer confidence deterred home buyers from signing contracts in November," said Lawrence Yun, NAR chief economist. "December's housing market activity could be comparably lower due to ongoing problems in the economy."

The economic downturn, triggered by the collapse of the housing market, has been marked by massive job losses and a record decline in consumer confidence. However, there is some cautious optimism that that president-elect Barack Obama's proposed massive spending plan, together with steps by the Treasury and Federal Reserve to lower mortgage rates will support the housing sector later this year.

 

The NAR said November's pending home sales data did not capture the impact of mortgage interest rates declining to near 50-year lows in December. It expects the 30-year fixed-rate mortgage to hold steady through the first half of 2009 year and rise slightly in the second half.

 

NAR said its housing affordability index, which looks at the relationship between home prices, mortgage interest rates and family income, was on track to match a record high set in 1972.

 

November's pending home sales index was dragged down by worsening market conditions in key regions. In the Northeast, the pending home sales index dropped 7.2 percent to 63.2 in November, while the index fell 6.7 percent to 74.2 in the Midwest. In the South the index declined 2.2 percent to 85.3 and in the West it was down 2.4 percent to 101.2.

 

Factory Orders Drop

 

The Commerce Department reported on Tuesday that new factory orders were down 4.6 percent in November, the fourth straight monthly decline and a sign the sharp drop in manufacturing is deepening the recession. It was the first time factory orders had fallen for four consecutive months since the government began assembling the data in its current form in 1992, the Commerce Department said.

 

An indicator of business confidence rose, however, as non-defense capital goods orders excluding aircraft rose 3.9 percent, the biggest rise since December 2007. The total value of shipments fell 5.3 percent, the sharpest drop since the government began assembling the data. November durable goods orders fell by 1.5 percent, a steeper drop than the 1 percent originally reported.

 

Crude Futures Below $49 per Barrel

 

The price of crude oil for February delivery fell below $49 per barrel on Tuesday as weak economic data triggered a bout of profit-taking, outweighing rising geopolitical tensions and OPEC production cuts that threaten to tighten supplies. Crude for February delivery settled down 23 cents per barrel at $48.58, after reaching a high of $50.47 earlier in the day. London Brent settled up 91 cents per barrel at $50.53.

 

Fuel inventories are rising as demand slows. A report from the Energy Information Administration due on Wednesday is forecast to show that supplies of crude, distillates and gasoline increased last week.

 

Israel's recent incursion into Gaza, however, was seen as supportive. While the conflict does not directly threaten any oil supplies, unrest in the Middle East can bolster prices because countries in the region pump about a third of the world's oil.

 

Oil prices are up from about $35 a barrel since Israel launched its Gaza offensive on December 27.

 

Also adding support Tuesday, Russia's row with Ukraine over natural gas supplies triggered supply disruptions to parts of Europe, echoing a similar dispute three years ago that raised questions about Russia's reliability as an energy exporter.

 

Crude gains were also encouraged by news that Kuwait plans to cut oil supplies to U.S. and European buyers by 10 percent later this month, bringing the producer in line with OPEC targets. The nation also will cut supplies to Asian customers.

 

The Organization of the Petroleum Exporting Countries has cut output three times since September in a bid to halt the price decline.

 

Fed Outlook Not Optimistic

 

Despite reducing their key interest rate to a record low and pledging to use other unconventional tools to fight the worst financial crisis since the 1930s, the Fed is still concerned that the economy will be bogged down in a seemingly painful rut for some time.

 

In the minutes of its last meeting released on Tuesday were insights as to the Fed’s thinking as it lowered interest rates  to near zero from 1 percent at its Dec. 15-16 meeting. In the first action of its kind in the Fed's 95-year history, Fed Chairman Ben Bernanke and his colleagues created a target range for its rate, putting it at zero to 0.25 percent.

 

Despite its aggressive action, the Fed believes that, "The economic outlook will remain weak for a time and the downside risks to economic activity will be substantial," the Fed minutes indicated. In fact, Fed officials expected the economy would "contract sharply" in the final three months of 2008 and in "early 2009," the document said.

 

Some participants suggested "the distinct possibility of a prolonged contraction, although that was not judged to be the most likely outcome." Against that backdrop, Fed officials last month signaled rates would stay at record low levels for a while in an effort to cushion the blows from a recession that started in December 2007.

 

The housing, credit and financial debacles have badly hurt the economy. Problems have fed on each other, a vicious cycle that Bernanke and other policymakers have been desperately working to break.

 

Unemployment bolted to a 15-year high of 6.7 percent in November and is expected to hit 7 percent in December when the government releases that report on Friday. The economy has lost nearly 2 million jobs since the recession started. And, the Dow Jones industrial plunged nearly 34 percent in 2008, the worst showing since 1931. Vanishing jobs and shrinking nest eggs have forced consumers to cut back sharply, jolting the economy into reverse. Many believe the economy fell backward at a rate of 5 to 6 percent in the final quarter of last year and is still shrinking.

 

Apparently most Fed officials believe that the benefits of keeping rates "close to, but slightly above zero probably outweighed the adverse effects." The Fed didn't discuss those adverse effects but they would include the potential for spurring inflation down the road.

 

Fed officials thought it was important to let investors know that rates "were likely to stay exceptionally low for some time" because it could lead to a much-desired drop in longer-term interest rates. To that end, shortly after the Fed's December decision, mortgage rates started dropping sharply. Rates on 30-year mortgages fell to 5.1 percent, the lowest on records dating back to 1971, Freddie Mac reported last week.

 

In discussing the best strategy on rates at the December meeting, some members wondered whether the Fed should not set a target for its key rate, which would focus attention on the Fed's other efforts to turn around the ailing economy. But other members thought that not announcing a targeted interest rate might confuse investors.

 

In the end, the Fed officials agreed to create the new range, from zero to 0.25 percent. Fed officials decided it would be preferable to "communicate explicitly that it wanted federal funds to trade at very low rates."