MarketView for January 29

Summary

Stock prices were hit hard on Thursday, sending all three major equity indexes into negative territory as dismal corporate earnings added to the list of rapidly deteriorating economic data that reinforced concerns that the recession is getting worse rather than better. Government reports indicated that unemployment benefits hit a record in mid-January, while durable goods orders fell for the fifth consecutive month in December. In addition, new home sales were also at a record low.

On the corporate front there was little comfort emanating from the bellwether companies whose profits are sensitive to economic growth. One example is Boeing; down 5.9 percent to $40.71 and second only to Chevron in leading the parade of blue chip stocks lower. Allstate saw its share price fall 20.7 percent to $23.50 after posting a $1.1 billion quarterly loss.

Even as the Obama administration pushes ahead with plans to add a stimulus to the economy mounting layoffs, lower estimates of earnings and persistent uncertainty about the financial sector's health are conspiring to make his job all that more difficult. President Obama's $825 billion economic stimulus package could still face a bumpy road weighed heavily on the markets after the House passed its version late on Wednesday, although every Republican who voted opposed it. The Senate begins debate next week.

The inability of Wall Street to sustain a consistent rally is a major hurdle to a turn around as the S&P 500 index remains down more than 6 percent, the Dow Jones industrial average is under water by 7.2 percent, and the NASDAQ off more than 4 percent.

Of the Dow's 30 components, only three finished higher, 3M, which was up 2 percent at $56.55; Merck up 0.6 percent at $28.94 and Procter & Gamble, up 0.1 percent at $58.22. Both Merck and P&G are among stocks traditionally deemed as a defensive play in a downbeat economy.

In the last half hour of trading, bank stocks added losses after President Obama said large bonuses doled out to Wall Street executives last year were "shameful," and noted he would tell the executives to show restraint.

The energy sector was another big drag with Exxon Mobil down 3.1 percent to $76.80 after Goldman Sachs removed the company from its Americas Buy list, a day before the company reports earnings. Chevron was down 4.3 percent to $70.62 after the company said its 2009 capital spending program will be unchanged from 2008.

Among home builders, shares of Hovnanian Enterprises fell 10.5 percent to $1.71 and Toll Brothers was down 7.5 percent to $17.85. Sales of new homes fell in December to the lowest annual pace since the Commerce Department started keeping records in 1963.

Black & Decker posted a better-than-expected quarterly profit, but warned it sees a very weak 2009, and its stock slid almost 21 percent to $30.65. Qualcomm was the largest drag on NASDAQ after it cut its full-year revenue target on weak demand for cell- phone chips. Its shares fell 4.6 percent to $35.13.

Grim Economic News

Jobless benefits hit a record high in mid-January, while durable goods orders fell for a fifth consecutive month in December, according to data on Thursday that showed the economy in steep decline.

According to the Commerce Department, New durable goods orders fell 2.6 percent last month after dropping 3.7 percent in November. Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 2.8 percent in December, while November's figures were revised sharply lower.

Initial claims for unemployment insurance rose to 588,000 last week, up marginally from a week earlier. The number of people on state jobless benefits rolls after drawing an initial week of aid increased by 159,000 claims to 4.78 million claims in the week ended January 17, the most recent week for which data is available. It was the highest reading on records dating to 1967.

The harsh economic climate is forcing companies to lay off workers in huge numbers, further curbing demand by households already reeling from the fall in their net worth as a result of the housing and stock market crash.

Adding to the gloom for an economy mired in recession for more than a year, were new single-family home. The Commerce Department reported on Thursday that new home sales fell to a 331,000 unit annual pace, the lowest since it started keeping records in 1963. November's sales were revised down to a 388,000 rate from a previously reported 407,000. For 2008, sales totaled 482,000, the lowest since 1982 and down a record 37.9 percent from the prior year.

The data is in keeping with our forecast that the economy will not begin to turn upward until the first quarter of 2010, since stability in the housing market, the root of the worst financial crisis in more than 70 years, may be a prerequisite. That same date delineates the urgency in getting a stimulus plan through Congress.

A report on U.S. gross domestic product on Friday is expected to show the economy contracted by at least a 5.4 percent annual rate in the fourth quarter, the worst since the first quarter of 1982.

Amazon Exceeds Expectations

Amazon.com reported higher earnings and robust holiday sales, while at the same time forecasting fiscal first quarter sales above expectations. An 18 percent revenue jump in the holiday fourth quarter was at the high end of Amazon's own expectations, and Chief Executive Jeff Bezos cited "unusually strong demand" for its Kindle electronic reader."

Seattle-based Amazon was expected to gain the lion's share of online holiday spending, at a time when consumers dramatically cut back purchases. Its lowered prices and discount shipping program, Amazon Prime, have helped the company lure repeat customers to its site.

Amazon's net income in the fourth quarter rose 9 percent to $225 million, or 52 cents per share, from $207 million, or 48 cents per share, a year earlier. Revenue rose to $6.7 billion. Amazon, posted quarterly operating income of $272 million. Amazon said it expects fiscal first-quarter operating income to range between $125 million and $210 million on revenues ranging from $4.53 billion to $4.93 billion.

Amazon is valued at 35 times projected fiscal 2009 earnings, at a premium to competitor eBay Inc and Internet giants like Google Inc or Yahoo Inc at 8, 16 and 29 times forward-looking earnings, respectively. Shares rose 11.4 percent in after-hours trade to $55.70 after closing at $50.