MarketView for January 7

 

 

 

Summary 

 

Both the Dow Jones industrial average and the S&P 500 indexes managed small gains on Thursday after Bank of America and General Electric received positive broker comments. However, Thursday's small gains did manage to send both indexes to new 15-month highs, thereby continuing the equity market's slow upward trend of recent weeks. Nonetheless, the entire Street was ahead of Friday’s release of the monthly non-farm payrolls data.

 

The top performer among S&P sectors was the financials, which gained 2.1 percent after Credit Suisse upgraded Bank of America to "outperform." The stock, a Dow component, closed up 3.3 percent at $16.93.

 

It should be noted that the CBOE Volatility Index, or VIX, hit a new 16-month intraday low at 18.70, before moving back to 19.06 by the closing bell. The move down may suggest a lack of bearish hedging bets ahead of Friday's jobs report.

 

GE closed up 5.2 percent at $16.25 after J.P. Morgan raised its price target on the stock to $22 from $20, writing to clients that the shares do not sufficiently take into account a  potential earnings recovery at the GE Capital finance unit.

 

A majority of retailers reported better-than-expected December sales, according to Thomson Reuters’ data, sending the S&P retail index up 0.8 percent. Yet that did not help Abercrombie & Fitch, which closed down 9.8 percent at $32.67 after December sales fell 19 percent. American Eagle Outfitters Inc fell 3.1 percent to $17.02. Sears Holding Corp was a bright spot, rising 11.6 percent to $99.18 after forecasting strong fourth-quarter earnings.

 

The Nasdaq was pressured after Google Inc sweetened its bid for On2 Technologies with additional cash that increased the deal's price tag by 20 percent to $134 million, sending Google’s shares down 2.3 percent to close at $594.09.

 

Shares of home builders were higher after Lennar posted its first quarterly earnings number in almost three years, pushing its shares up 12.9 percent to $15.46.

 

Unemployment Claims Rise Ever So Slightly

 

The number of new jobless claims edged up by a minimal 1,000 claims last week and a gauge of underlying labor market trends fell to what is nearly a 16-month low. So what does it all point to? Clearly the evidence shows that the job market is beginning to awake from the dead. More specifically, the Labor Department reported on Thursday that initial claims for state unemployment benefits came in at 434,000 after declining for two consecutive weeks.

 

However the four-week moving average, considered a better measure of underlying labor market trends, dropped to the lowest level since mid-September 2008. The average fell for the 18th straight week to 450,250 -- around the level economists associate with labor market stability.

 

James Bullard, president of the St. Louis Federal Reserve Bank stated that the labor market was improving and the economy was close to the point where the unemployment rate would begin to decline.

 

The relatively bullish weekly claims report helped to lift the dollar against both the euro and the yen. Dollar strength and weak commodity prices sent prices for Treasury debt higher.

 

The pace of layoffs has slowed sharply in recent months as the economy resumed growth after its worst slump in 70 years. The state of the job market is among the key factors that will determine the timing of the Federal Reserve's first interest rate increase since cutting benchmark overnight borrowing costs to near zero in December 2008. The central bank has vowed to keep them low for an extended period.

 

Moderating job losses are helping consumers to keep up with their loan repayments. The American Bankers Association said consumer loan delinquencies dropped in seven categories in the third quarter. It was the first time since 2007 that so many loan categories experienced declines in late payments.

 

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, fell to 3.6 percent in the week ended December 26, the lowest since January last year, from 3.8 percent, the Labor Department said.

 

Despite the encouraging signs, some weakness persists. The number of workers still collecting benefits after an initial week of aid fell for a third straight week to 4.80 million in the week ended December 26. However, that likely reflected people exhausting their benefits after receiving the regular 26 weeks of aid provided by states.

 

The number of people receiving extended benefits under special programs rose to 5.44 million from 5.28 million in the week ended December 19, the department said.

 

A Hawk Speaks Out

 

The Federal Reserve should not wait too long to exit its extraordinary support for financial markets or risk sowing the seeds of the next crisis, Federal Reserve Bank of Kansas City President Thomas Hoenig said on Thursday.

 

The economy appears to be in the early stages of recovery, labor market conditions have begun to stabilize and the housing market shows signs of recovery Hoenig told a conference in Kansas City. Uncertainty remains, however, and short-term inflation risks are likely small, he said.

 

"Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation, and more unemployment -- not today, perhaps, but in the medium and longer run," Hoenig said.

 

"Maintaining short-term interest rates near zero could actually impede the recovery process in financial markets," he said.

 

"While there is considerable uncertainty about the outlook, the balance of evidence suggests that the recovery is gaining momentum. In these circumstances, I believe the process of returning policy to a more balanced weighing of short-run and longer-run economic and financial goals should occur sooner rather than later," Hoenig said.

 

Hoenig is one of the more hawkish or anti-inflationary policymakers at the Fed and is a voting member of the Fed's Fed funds rate-setting committee this year.

 

Retail Sales Gain at the Last Moment in December

 

A late bit of holiday shopping helped retailers exceed sales estimates for December. Retailers from Macy's to Aeropostale and Limited Brands Inc (LTD.N) raised their earnings outlooks for the holiday quarter, and the Standard & Poor's Retail Index .RLX rose 0.4 percent.

 

A total of 21 retailers out of 30 tracked by Thomson Reuters Data posted better-than-expected sales results for stores open at least a year in December, the most important month in the calendar for the sector. Retailers overall posted a 2.9 percent increase, exceeding the 2 percent rise analysts were expecting and marking the best performance since a 3.4 percent gain in April 2008, according to Thomson Reuters Data.

 

Retail watchers said the December performance showed consumers warmed up for the holidays, but cautioned that a full recovery requires a better job market. The International Council of Shopping Centers noted that same-store sales for all of 2009 were the worst on record, down 2 percent. It forecast sales would be flat to up 1 percent in January and only pick up steam later in 2010 for a full-year rise of 3 percent to 3.5 percent, marking the biggest yearly gain since 2006.

 

Some of December's upside could have come at the expense of January, as shoppers filled stores the day after Christmas to take advantage of the biggest bargains of the season. December 26 was the second-largest sales day after the day after Thanksgiving.

 

Macy's posted a 1 percent rise in same-store sales and raised its quarterly earnings view. Shares of the department store operator rose 2.3 percent. TJX and Zumiez were also among companies that raised quarterly earnings outlooks.

 

By sector, the strongest performance in December came from discount chains, which clocked a 3.9 percent sales increase. Costco posted a 9 percent increase. Sears Holdings reported a 0.4 percent increase in December same-store sales and forecast quarterly earnings well above expectations. Its shares surged 8.9 percent. Target posted a surprise 1.8 percent increase, helped by stronger-than-expected traffic.

 

Beyond discounters, the strongest growth came from apparel chains that cater to both adults and teenagers. Aeropostale said same-store sales in December rose 10.1 percent and as a result the chain raised its outlook for the current quarter.

 

High-end retailers like Nordstrom, Neiman Marcus Group and Saks also surprised Wall Street for the better with larger same-store sales increases. Retailers that fell short of expectations included Hot Topic and Abercrombie & Fitch.

 

GameStop, the largest videogame retailer, said holiday sales failed to improve from a year earlier and cut its quarterly profit forecast, sending its shares down 15.2 percent.