MarketView for January 13

 

 

 

Summary 

 

Share prices moved sharply higher on Wednesday ahead of earnings from bellwethers Intel and JPMorgan Chase, sending the Dow Jones industrial average to a new 15-month high. Add in a brokerage upgrade of Merck, along with an upbeat outlook from Kraft Foods and both the healthcare and consumer sectors received a boost.

 

After a rough start to earnings season with Alcoa's lethargic results, the Street is looking for companies to meet or beat expectations to fuel a stocks rally that has lifted the S&P 500 almost 70 percent from its March lows. Intel is scheduled to post its quarterly results on Thursday and JPMorgan on Friday. JPMorgan, up 1.8 percent to $44.25, led the banking sector, while Advance Micro Devices up 5.8 percent to $9.15 after falling nine of the last 11 sessions. Intel rose 1.7 percent to close at $20.96.

 

The Federal Reserve its Beige Book on Wednesday, which indicated that while economic activity was at a low level, "conditions have improved modestly further, and those improvements are broader geographically than in the last report.

 

Wall Street, which had its worst session so far this year on Tuesday, fell at the open weighed down by resource shares, but then the Dow received its greatest boost from Merck shares, up 3.7 percent to $38.93 after Credit Suisse upgraded the stock.

 

Kraft raised its 2009 earnings outlook and rose for most of the trading day but finished down at 0.2 percent to $29.23. Hershey was preparing a bid for Cadbury that could top Kraft's hostile $17 billion takeover offer, the Financial Times reported on Wednesday. Hershey shares fell 3 percent to $36.61.

 

Google’s shares fell 0.6 percent to $587.09 after the company said it may shut its China operations over censorship and hacking. As a result, shares of rival Chinese search engine Baidu rose 13.7 percent to $439.48 and led percentage gains on the Nasdaq 100.

 

Crude oil prices settled down 1.4 percent and Chevron was the largest drag on the Dow, falling 0.8 percent to $79.80. Meanwhile, the CEOs of Wall Street's largest banks defended the lucrative pay practices and size of their businesses before a commission investigating the 2008 financial crisis.

 

Beige Book Tells of a Mild Increase in Activity

 

Economic activity remained at a low level as 2010 began but was improving modestly and beginning to broaden out to include wider swaths of the country, the Federal Reserve said on Wednesday.

 

"Reports from the 12 Federal Reserve districts indicated that while economic activity remains at a low level, conditions have improved modestly further, and those improvements are broader geographically than in the last report," according to the periodic Beige Book report compiled this time by the Philadelphia regional Fed bank.

 

Ten districts said activity was picking up while the Philadelphia and Richmond Fed banks reported mixed conditions.

 

The Fed's findings were based on results of a survey taken on or before January 4. It said shoppers in the 2009 holiday season spent slightly more freely than in 2008 but at a rate still far below 2007 levels, when the economy was just on the verge of slipping into a serious financial crisis.

 

Job markets were still soft in most of the country, though the New York Fed reported "a modest pickup" in hiring and several service-sector firms in the St. Louis Fed region planned to take on more employees. Wage rises and price pressures were subdued.

 

The Beige Book report, so called because of the color of its cover, will be used by the Fed’s policymakers when the Federal Open Market Committee meets on January 26-27 to decide whether to adjust policy.

 

The Fed has slashed rates to near zero and pumped over $1 trillion into the financial system to prevent a banking failure and pull the economy out of the worst recession in decades. It has pledged to hold rates ultra-low to nurture what appears to be a fragile recovery and comments from a senior policymaker on Wednesday reinforced the view that policy will be in place for some time.

 

"I think that we are going to be waiting for the economy to improve in a strongly sustainable fashion and until that happens then it's unlikely that we would be changing policy," Chicago Fed bank President Charles Evans said.

 

Financial markets took the latest indication of modestly improving conditions positively, with stock prices adding to earlier gains after the report was issued in early afternoon. It said home sales began increasing in most parts of the country as 2009 ended, especially for lower-priced homes. The extension of a federal tax credit for first-time homebuyers helped spur sales, according to realtors.

 

However, there were still plenty of signs of economic trouble.The Fed said demand for loans continued to decline or weakened further in much of the country. As well, credit quality was still deteriorating and financial institutions in many districts including new York, Philadelphia and Cleveland said loan delinquencies were rising.

 

Commercial real estate conditions were still soft in most of the country. New York, Philadelphia, Kansas City and San Francisco all said that demand for commercial and industrial space was still losing momentum.

 

SEC Wants to Ban High-Frequency Trading

 

The SEC proposed rules on Wednesday that would require more supervision of unlicensed high-frequency traders who gain unfettered, or "naked," access to public markets. The SEC voted for a proposal that would require brokerages that rent out their access to the markets to have rules in place to protect against potential mishaps from unlicensed traders.

 

In the practice known as "sponsored" access, brokerages that have been approved to trade on an exchange rent their access to traders, who are then able to shave milliseconds from the time it takes to access the markets.

 

In "naked sponsored" access, also called "unfiltered" access, the brokers do not screen orders en route to markets, making electronic trading even faster.

 

"We are concerned that order entry errors in this setting could suddenly and significantly make a broker dealer or other market participants financially vulnerable within mere minutes or seconds," said SEC Chairman Mary Schapiro.

 

The SEC said that the proposed rule would "effectively prohibit" brokerages from providing their clients with naked access to an exchange. The proposal is open for a 60-day comment period and would require another commission vote for adoption.

 

Naked access is now monitored by a patchwork of rules maintained by the exchanges, brokers, and trading firms. Some 38 percent of all U.S. stock trading is estimated to be done through naked access, a portion of it by high-frequency traders. The proposal would require broker-dealers to implement risk controls and supervisory procedures to manage various risks, such as faulty orders.

 

Brokerages would have to, for example, implement controls to prevent the entry of orders that appear erroneous or exceed credit and capital thresholds. The controls would have to be applied on a "pre-trade" basis, or before orders are routed to an exchange, under the SEC's proposed rule. Brokerages would not be allowed to outsource their supervisory procedures to third parties and would have to document and regularly review their risk management controls and procedures.

 

Google Scares Wall Street

 

Google Inc's threat to withdraw from China over censorship and cyber attacks has suddenly jeopardized any plans it has for the world's biggest Internet market, stunning both investors and analysts.

 

Google's announcement that it may quit China -- a possibility that analysts said appeared realistic and increasingly likely -- carries with it broader implications for other U.S. technology and media companies that have placed big bets on business in the country. In the case of Google, China accounts for only a fraction of its current business, roughly $300 million to $600 million in annual revenue, or less than 5 percent of its total, analysts estimate.

 

The bigger concern is what a withdrawal would mean for Google's future prospects, given the size of China's market and the potential for advertising sales there. Such concerns pushed investors toward Chinese search engine Baidu, which leads Google in China's search market with more than 60 percent share. Shares of Baidu jumped 12 percent to $432 in early trading, while Google shares slipped 2 percent to $579.

 

China's policy of filtering and restricting access to Web sites has been a frequent source of tension with the United States and tech companies, such as Google and Yahoo Inc.

 

Google's announcement late Tuesday that it was considering a withdrawal from China came after what it said were attacks from China on human rights activists using its Gmail service and on dozens of companies. Google suggested the recent intrusions were more than isolated hacker attacks. Some 20 other companies also were attacked by unknown assailants based in China, said Google. China has said it does not sponsor hacking.

 

Google claims a healthy piece of the market in China today despite arriving relatively late to the country. It was a tiny player in China in 2003 with only a 2 percent market share and has steadily grown into Baidu's formidable foe.

 

However, like other large foreign corporations -- particularly media concerns -- the search titan faces tighter scrutiny from Beijing censors. For example, last year, they railed against Google for its "pornographic" content and asked the Mountain View, California firm to audit its searches.