MarketView for January 12

Summary 

Wall Street came under a broad but relatively mild selloff on Tuesday as the financials were hit over concerns that a potential government levy on banks will hurt profits. At the same time, Alcoa disappointing earnings numbers released after the close of regular trading on Monday, tempered the Street’s optimistic attitude regarding the speed of the economic recovery.

The benchmark S&P 500 broke a six-day winning streak as banks led the financial sector lower. Shares of Bank of America closed out the day down 3.4 percent, while Citigroup fell 3 percent and the shares of JPMorgan closed down 2.3 percent.

The Administration is considering asking Congress for a levy on financial services firms to recoup losses from the Troubled Asset Relief Program as part of the fiscal 2011 budget. The potential fee could raise as much as $120 billion to cover taxpayer losses stemming from government bailouts. Wall Street’s concern is that such a levy would reduce bank profits at a time when the sector was trying to recover from the financial crisis.

The banking industry is also facing the prospect that the Federal Deposit Insurance Corp will try to impose a new rule that banks whose compensation plans encourage risk-taking will have to pay more for deposit insurance.

Bank of America, which on Tuesday was sued by the SEC for a second time over its takeover of Merrill Lynch & Co, saw its share price end the day at $16.36, while Citigroup dropped to $3.52 and JPMorgan fell to $43.49.

Shares of Alcoa, a Dow component, fell 11.1 percent to $15.52, their biggest one-day percentage slide since March after the aluminum company's weaker-than-expected results. It had been hoped and expected that Alcoa would kick off the latest quarterly earnings season on a positive note after their bets on a more upbeat economic recovery sent Wall Street to 15-month highs.

News that China's central bank was tightening monetary conditions in response to increasing concerns about the economy overheating added to the negative tone. Any potential pullback in Chinese demand will be a major setback for exporters, which include commodity companies like

Technology, which along with financials led the market's run-up from the March 2009 lows, was not spared. Apple fell 1.1 percent to $207.72. Electronic Arts cut its fiscal 2010 forecast. The video game publisher’s shares ended the day down 7.8 percent, closing at $16.85.

Chevron announced that its fourth-quarter earnings results would be sharply lower than the previous quarter, sending its shares down 0.6 percent to $80.41.

Banks Feel the Pinch

Bank stocks felt a bit of pinch on Tuesday after reports that the Obama administration might charge banks more than $100 billion made investors worry about the sector's profits. The share prices of major banks felt the decline more than their regional counterparts. The Obama administration is considering charging the largest banks more than $100 billion to recoup losses from the Troubled Asset Relief Program.

The proposed fee represents a steep payment for large banks already struggling to generate earnings and paying higher Federal Deposit Insurance Corp premiums. It would also come after many have already repaid billions of dollars in government bailout aid.

The largest banks, such as Bank of America and JPMorgan Chase posted stock price declines greater than 3 percent. Citigroup’s shares fell 2.75 percent. Regional bank stocks posted smaller declines through mid-day. Regions Financial was down 1.42 percent to $6.23, and Fifth Third Bancorp traded at $11.05 per share, a 1.34 percent decline.

Trade Deficit Widens

The Commerce Department’s report on Tuesday on the trade deficit showed that America’s trade deficit widened in November, as the price of imported oil rose more than $5 per barrel, while at the same time rising consumer and manufacturer demand pushed imports to their highest in nearly a year. The gap grew 9.7 percent to $36.4 billion, the biggest deficit since January 2009, as trade continued bouncing back from a sharp fall caused by the global financial crisis, a showed.

However, the data also showed exports rising for a seventh straight month, as more evidence the United States is emerging from its deepest recession since the 1930s.

Macroeconomic Advisers nudged its estimate of U.S. fourth-quarter economic growth slightly higher to 5.6 percent but others said the report was neutral or slightly negative. Commerce Secretary Gary Locke, speaking for the Obama administration, hailed the trade figures as "a welcome sign of economic growth and increasing consumer demand."

Imports of goods and services jumped 2.6 percent to $174.6 billion, the highest since December 2008. The average price for a barrel of imported oil rose to $72.54, the highest since October 2008, but volume was the lowest in more than 10 years.

The overall import jump reflected gains in industrial supplies and materials, consumer goods and capital goods, which more than offset slight declines for food and auto imports.

Exports of goods and services rose by a less-robust 0.9 percent in November to $138.2 billion, the highest in a year. The weak U.S. dollar has given exports a boost, but they are still well below the peak of $164.4 billion set in July 2008 before the global financial crisis sent trade plummeting.

The November tally included a record $7.3 billion to China, beating the record set just one month before.

Soybeans were the major cause of the increase in exports to China in both October and November, as domestic suppliers stepped in to fill a shortage caused by drought in Argentina.

Semiconductor exports to China were down $1.5 billion in the first 11 months of 2009, as the U.S. trade deficit for advanced technology goods hit a record in November.

Further gains in exports to China might be difficult because of the significantly undervalued Chinese currency, which gives Chinese companies a big price advantage over foreign competitors. But following that country's robust trade figures for December, the People's Bank of China moved on Tuesday to tighten monetary policy by boosting reserve requirements for commercial lenders. That, plus a narrowing of the trade deficit with China in November, could take some of the immediate heat off Beijing to raise the value of its currency.