MarketView for January 22

Summary

Stock prices were hit hard again on Thursday because of both the announced job layoffs at Microsoft and further deterioration in the labor and housing markets. Microsoft fell nearly 12 percent at one point in the session to its lowest level since 1998 and was among the top drags on both the Dow Jones industrial average and the NASDAQ. Microsoft announced that it planned to reduce its workforce by up to 5 percent over the next 18 months. The Dow is down 7.5 percent for the month and down 34.4 percent from 52 weeks ago.

The company also cautioned that it could no longer offer profit forecasts for the rest of the fiscal year after posting a quarterly profit that fell short of expectations. Microsoft also shook up Wall Street by releasing its earnings before the opening bell, instead of after the close as expected. It was the first ever layoff at the tech giant. Microsoft ended the day down 11.7 percent at $17.11.

The markets briefly pared losses late in the session after comments from the White House indicating that the new Administration is committed to moving as quickly as possible on a stimulus package and that President Obama will do everything possible to restore growth and normalize the markets.

In a positive sign for tech stocks, Google posted strong fourth-quarter earnings after the close on Thursday, exceeding expectations. Google's shares moved up 2.8 percent to $315.18 in after hours trading from a regular close of $306.50.

However, the strong earnings from Google were countered by results from Advanced Micro Devices, which reported a fourth-quarter loss after the closing bell and forecast decreased revenue in its first quarter. AMD also said that Intel had requested a meeting related to a patent cross-licensing agreement. Shares of AMD fell 5.9 percent to $1.90 in extended trade.

Apple rose 6.7 percent to $88.36, a day after the company reported stronger-than-expected earnings and gave a solid outlook for the current quarter, despite the weak economy.

The U.S. economy showed further signs of deterioration on Thursday as initial weekly claims for jobless benefits rose to a seasonally adjusted 589,000, and housing starts sank 15.5 percent to a seasonally adjusted annual rate of 550,000 units, the lowest on record.

Adding to concerns in the financial sector, former Merrill Lynch Chief Executive John Thain is leaving Bank of America. His departure, which is effective immediately, came less than a week after Bank of America took $20 billion of government capital to help absorb Merrill's losses. Bank of America ended the day down 14.5 percent at $5.71.

Investors were not appeased by the Senate Finance Committee's backing of Timothy Geithner, President Barack Obama's nominee for Treasury secretary. The panel's approval cleared the way for a full Senate confirmation vote. However, the process could be delayed until next week if Republicans object. The Treasury Department is essentially leaderless at this point.

Geithner is widely expected to be confirmed by the Senate as one of Obama's leading players on the team that will tackle the U.S. recession.

Shares of Aflac lost more than a third of their value after a Morgan Stanley analyst expressed concern about the company's holdings of hybrid securities issued by European financial institutions. Aflac ended the day down about 37 percent at $22.90. 

Price of Crude Oil Rises

The price of crude oil rose again on Thursday as the promise of a major economic stimulus package was outweighed by falling demand and rising inventories. Domestic sweet crude for March delivery settled up 12 cents per barrel at $43.67. London Brent settled up 37 cents per barrel at $45.39.

Oil fell in early trading after Energy Information Administration data indicated that crude oil inventories jumped 6.1 million barrels last week, well above expectations for a build of 1.4 million barrels. Gasoline stocks were to 6.5 million barrels, while distillate stocks rose unexpectedly by 800,000 barrels.

The price of crude oil has fallen from record highs as the economic crisis hits global demand. The demand for crude in China fell for a second month in December as refiners cut production by the steepest rate in seven and a half years on weaker consumption and stockpiles grew.

Economic Data Remains Grim

Unemployment rose sharply last week and home building slumped to a record low in December, as the economy's downward spiral accelerated. This was the first major set of grim economic data to greet President Barack Obama, who took office on Tuesday. The White House said Obama was working to implement a rescue plan quickly, but believed the economic climate could still worsen before getting better.

Adding to the ranks of unemployed, Microsoft announced the largest job cuts in its history on Thursday, laying off up to 5,000. Intel and Huntsman also announced thousands of job cuts this week. As a result, first-time applications for state jobless benefits rose to a seasonally adjusted 589,000 in the week ended January 17 from 527,000 the prior week, the Labor Department said.

It was the highest number since a matching reading in the week of December 20. The last time claims were higher was in 1982, when they notched a weekly rise of 612,000.

Underscoring the deterioration in the labor market, the number of people remaining on jobless rolls after drawing an initial week of aid jumped 97,000 to 4.61 million in the week ended January 10.

The Commerce Department reported that Housing starts fell 15.5 percent to a seasonally adjusted annual rate of 550,000 units, the lowest since records began in 1959, from 651,000 units in November. It was the largest percentage drop since January 2007, when housing starts fell 16.2 percent.

New building permits, which give a sense of future home construction, dropped 10.7 percent to 549,000 units, the lowest since tracking of the data began in 1960, from 615,000 units in November and sharply below analysts' estimates of 610,000. For all of 2008, housing starts declined 33.3 percent, the largest drop since 1974, while permits plummeted 36.2 percent, also the largest fall since 1974.

Mortgage applications were also lower last week as a rise in mortgage rates lowered demand for refinancing, the Mortgage Bankers Association said on Thursday. Average 30-year mortgage rates rose 0.35 percentage point in the week ended January 16 to 5.24 percent, after touching the lowest level in the history of the trade group's survey, which dates to 1990.

Google Surprises

Google's quarterly earnings exceeded expectations as strong advertising sales on its self-branded websites saved the day. The results, which sent Google shares up 2.6 percent in after-hours trading, spelled relief for the tech sector.

Google said fourth-quarter net income fell to $382 million, or $1.21 a share, from $1.21 billion, or $3.79 a share, a year earlier due to impairment charges on its investments in Clearwire and AOL. If you exclude one-time charges, the company earned $5.10 per share.

Revenues increased 18 percent to $5.7 billion, a major decline from the 50 percent growth levels that Google used to enjoy, but a robust performance given the weak economy and corporate cutbacks in advertising spending.

Google-owned sites generated 67 percent of revenue, or $3.81 billion, rising 22 percent from a year ago. Traffic acquisition costs, the portion of revenues shared with Google's partners, decreased to $1.48 billion.

However, Google CEO Eric Schmidt struck a cautious note, stating that the last quarter had benefited from the holiday season. "Now clearly we're in a worldwide recession as everybody knows, rising unemployment, foreclosures, that sort of thing," he said on a conference call. "But we don't know how long this period will last. We obviously hope it will be short."

Chief Financial Officer Patrick Pichette said Google's UK business showed "some softness" largely due to the weak British pound. UK revenue fell 1 percent to $685 million. However, the rest of Europe performed better, driven by strong performances in Germany, France and the Netherlands. Overall, international revenue, which accounted for 50 percent of total revenue, was relatively flat.

Paid clicks, a measure of how often Google gets paid for advertisements alongside its Web search results, rose 18 percent. Investors have worried that Google's paid search business would face keyword pricing deflationary pressures due to the worsening economy, but the company said search query growth was strong with revenues up in most verticals.

Google's stock has fallen by more than half in the last year due in part because the Street expected Google’s pay-per-click advertising format to be hit by the wider advertising market slump. The shares rose to $314.51 in after-hours trading from their NASDAQ close of $306.50.