MarketView for January 5

 

 

 

Summary 

 

The S&P 500 and the Nasdaq, managed to eke out small gains on Tuesday as better-than-expected factory orders and a surge in vehicle sales at Ford provided continuing evidence of an economic recovery. However, a decline in pending home sales, which fell in November for the first time in nine months, added to growing concerns by some as to the viability of the housing market. It was those concerns that pushed the Dow Jones industrial average, made up of large cap industrial issues, into negative territory by the closing bell.

 

The Dow's top performer was Kraft Foods, which gained 4.9 percent to $28.77 after Warren Buffett's Berkshire Hathaway voted "no" on the company's proposal to issue 370 million shares to help finance its proposed purchase of British chocolate candy maker Cadbury Plc.

 

For the past month, share prices have increased due to the continuing run of better-than-expected economic indicators. Much of that optimism appeared to remain intact on Tuesday as S&P indexes for the financial, materials and energy sectors ended the day higher. In fact, Tuesday marked a new 15-month closing high for the S&P 500 and a 16-month closing high for the Nasdaq.

 

Ford saw its share price rise 6.6 percent to $10.96, hitting a 4-1/2-year closing high following its report that its December sales increased 33 percent year-over-year. Early in the session, Ford's shares managed an intraday high of $11.23.

 

In economic news, the Commerce Department reported that factory orders increased more than expected in November. The report, which suggested the manufacturing sector will continue to support a recovery, was released one day after the Institute for Supply Management's index of manufacturing activity exceeded estimates.

 

The only real negative news of the day was a report by the National Association of Realtors indicating that pending home sales fell 16 percent in November. Nonetheless, the share prices of most home builders rose, sending the Dow Jones home construction index up 1.8 percent.

 

The dollar moved up by 0.15 percent against a basket of major currencies, curbing gains in the materials and energy sectors. The S&P materials index advanced 0.5 percent, while an S&P energy index rose 0.8 percent.

 

Oil futures rose 0.32 percent, or 26 cents per barrel, to settle at $81.77, the highest closing price since October 9, 2008. This marked the ninth day of gains for oil futures prices.

 

Economic News Remains Mixed

 

Pending sales of previously owned homes fell sharply in November, but a surge in new factory orders offered assurance the economic recovery remained on track. The National Association of Realtors reported on Tuesday that its pending home sales index, based on contracts signed in November, declined by 16 percent from October to 96.0. The index has been increasing for 9 consecutive months prior to November.

 

The consensus of opinion appears to be that the cause was what was thought to be the end of the tax credit. Home sales have benefitted from an $8,000 tax credit for first-time home buyers. The popular tax credit, which was originally scheduled to expire at the end of November, has been expanded and extended to mid-2010.

 

The difficulty is that the November decline, which leads actual sales by a month or two, could point to a faltering once government support is withdrawn. Nonetheless, with the index up 15.5 percent from its year-ago level it is evident that the housing market continues to improve.

 

A Federal Reserve program to buy $1.25 trillion of mortgage-backed securities that has helped keep 30-year mortgage rates near record lows is scheduled to end in March. However, it is not beyond the realm of possibility that the Fed will re-entering the MBS market later this year if its buying power is needed to hold down mortgage rates.

 

In a sign the economic recovery that started in the third quarter of 2009 continues to gain momentum, the Commerce Department report showed a closely watched proxy for business spending plans rose sharply in November. A separate report from the Commerce Department showed new factory orders were up 1.1 percent in November. It was their third straight monthly increase. The data came a day after a report showed factory activity in December rose to its highest level since April 2006.

 

Orders for non-defense capital goods, excluding aircraft, increased 3.6 percent after dropping 2.1 percent the prior month, the department said. Inventories at U.S. factories rose 0.2 percent month over month in November, following a 0.6 percent increase in October, the Commerce data showed. The inventories-to-shipment ratio, a measure of how long it would take to deplete current stocks, dropped to 1.32 months' worth from October's 1.34 months. It was the lowest level since September 2009.

 

Ford Leads the Pack

 

Ford Motor posted a 33 percent sales gain for December as sales of automobiles in the United States ended 2009 on an upswing after a year that saw GM and Chrysler collapse into bankruptcy and China overtake the United States as the biggest car market.

 

Ford’s sales numbers came in well above Street expectations sending the company's shares up over $11 to hit their highest level since August 2005. The stock has gained 55 percent in a rally since early November and has more than quadrupled in value over the past year on the belief that the company will not require federal bailouts that essentially wiped out the equity in its domestic rivals.

 

Ford's U.S. market share rose to 15 percent for all of 2009, up about a percentage point on the year to mark the first such gain for the automaker since 1995, when it controlled about a quarter of the market. Other automakers trailed Ford's gain. Sales for Nissan were up 18 percent in December. Chrysler's sales dropped 4 percent. General Motors was expected to post a sales decline near 9 percent.

 

After adjusting for population, auto sales suffered their worst decline this past year since World War II. Auto sales on average are expected to come in above an 11 million unit annualized sales rate in December. That would represent the best sales month of 2009 excluding July and August when U.S. government trade-in incentives gave sales a temporary boost through the "cash for clunkers" program. Full-year sales are expected to be just above 10.3 million vehicles, down 40 percent from where the industry began the decade in 2000.

 

In a historic reversal, vehicle sales in China surged to overtake the U.S. market as the world's largest in 2009. With a final sales tally due later this week, it is expect that China will post sales of 44 percent, translating to 13.5 million units in 2009. Slower growth is projected 2010.

 

Meanwhile, major automakers are betting that the domestic market is poised for a gradual but steady rebound this year and next and have set production plans higher for the current quarter to restock inventories.

 

U.S. auto dealers and analysts said December sales results were boosted by bargain-hunting shoppers taking advantage of holiday discounts and by two additional sales days in the month compared with a year earlier.

 

In the most aggressive incentive offers, GM gave its dealers up to $7,000 -- a discount of almost 50 percent in some cases -- to buy up remaining inventory of the discontinued Pontiac and Saturn brands still on their lots.

 

GM expects that move to have effectively cleared out old Pontiac and Saturn inventory, allowing it to start 2010 with a clean focus on its remaining four U.S. brands: Chevrolet, Cadillac, Buick and GMC. GM sales results are expected to have dropped near 9 percent on an overall basis, reflecting a sharp contraction in shipments to fleet operators led by car rental agencies.

 

Chrysler, now controlled by Fiat SpA, has also been battling to reduce a reliance on aggressive discounts and cut-rate fleet sales that have topped half of its overall sales in recent months.

 

The GM and Chrysler bankruptcies left GM held 60 percent by the U.S. Treasury and Chrysler under the management control of Fiat CEO Sergio Marchionne. GM and Chrysler took the brunt of the industry's collapse in 2009, but their stronger rivals were hit as well.

 

GMAC Expects To Post $5 Billion Loss

 

GMAC Financial Services indicataed on Tuesday that it expects to post a combined fourth-quarter loss of about $5 billion largely on charges related to the auto and home finance company's bid to write down or sell risky mortgage assets. GMAC is taking a $3.8 billion pre-tax charge against fourth-quarter earnings, partially so it can write down the value of mortgage assets to a level where they may tempt outside investors.

 

GMAC recently got a $3.8 billion cash injection from the U.S. government, the latest in a series of bailouts as the lender has struggled to recover from the housing crisis. Executives at the company told analysts in a conference call that they expected to now be able to sell some mortgages from Residential Capital, its struggling home loan arm, to third-party investors.

 

More Cars Are Scrapped Than Bought

 

More automobiles were scrapped than bought last year as a reduction in economic activity reduced demand and some major cities expanded mass transit service. According to a report to be released on Wednesday by nonprofit group the Earth Policy Institute (EPI), 14 million autos were scrapped, while only 10 million were sold last year, shrinking the country's car and light duty truck fleet to 246 million from a record high of 250 million.

 

“We are entering a new era, evolving from a car-dominated transport system to one that is much more diversified," said Lester Brown, the president of the EPI.

 

While many cities like New York have had to cut mass transit services and raise fares during the recession, Phoenix, Seattle, Houston, Nashville and other cities have expanded or improved mass transit systems.

 

Cities are taking a variety of steps, like adding rapid bus lanes and light duty rail, to fight traffic congestion and air pollution. Some are raising parking meter prices and cutting down the required parking spaces per building, the report said.

 

President Barack Obama's "cash for clunkers" program led to the scrapping of more than 700,000 vehicles. But since the incentive was only available to consumers who bought new fuel-sipping vehicles, it did not affect the ratio of scrapped vehicles to new sales.

 

Market saturation of autos, urbanization, high oil prices that reached a record $147 a barrel in 2008, and the uncertain economy have helped cut car sales, Brown said. Given those forces, sales may never reach the 17 million per year level they were between 1999 and 2007, he said.

 

Because more people live in cities than a few decades ago, young people, particularly those burdened with student loans, are foregoing car purchases, the report said. As more people live in cities, some teens are not even bothering to get driver's licenses. The number of teenagers with licenses peaked at 12 million in 1978 but is now under 10 million, the report said.

 

"When I was a kid socializing revolved around getting into a car and going for a drive," said Brown. "Today kids socialize over the Internet and on smart phones."

 

A continued drop in auto purchases could cut long-term oil demand and greenhouse gas emissions from transportation. he said. It could also lead to increases in steel supplies as big cars get recycled, Brown said. Brown used data from the U.S. Federal Highway Administration and R.L. Polk & Co to write the report.