MarketView for January 14

 

 

 

Summary 

 

 

Technology shares sent Wall Street on another buying spree on Thursday as Intel's quarterly results had the Street of the opinion that business spending will bolster profits in the sector. Intel, a Dow component, reported a quarterly profit that beat expectations during after-hours trading. Its shares had risen 2.5 percent ahead of the results.

 

Software was also aided during the regular trading day on word that Morgan Stanley had placed Oracle on its "best ideas" list and raised its price target. Oracle closed up 2.5 percent to $25.37 and Microsoft ended the day up 2 percent at $30.96. The market rose despite an unexpected drop in December U.S. retail sales and an increase in new jobless claims last week that topped estimates.

 

After the bell, Intel shares gained 1.7 percent to $21.85 and stock futures ticked higher as trading resumed after 4:30 p.m. Shares of Advanced Micro Devices and Microsoft were also higher in after-hours trading.

 

Bank shares were in the spotlight after President Barack Obama on Thursday proposed a fee to make big banks repay taxpayers for bailouts. The sector had fallen earlier in the week on speculation about the fee.

 

Economic Data Surprises on the Downside

 

The Commerce Department reported on Thursday that retail sales fell 0.3 percent last month, the first decline since September, as consumers spent less on vehicles and an array of other goods during the holiday shopping month.

 

The consensus on the Street had been for an increase of 0.5 percent, but disappointment was tempered by upward revisions to prior months' data. November sales were revised to show a 1.8 percent gain from an initially reported 1.3 percent increase, and October sales were bumped up a touch as well.

 

Discounting appeared to be a factor weighing on the government's dollar measure of sales. Auto receipts dropped 0.8 percent, even though industry data had shown unit vehicle sales rose in December.

 

The report also conflicted with data from general merchandise retailers who reported strong December sales volumes. Some analysts blamed the surprise fall in sales on a snow storm that struck a week before Christmas.

 

The latest figures suggested that both consumer demand and the job market were still under considerable pressure.

 

A separate report from the Labor Department showed initial claims for state unemployment benefits rose 11,000 to 444,000 last week. However, the labor market is showing some signs of healing. The four-week moving average of jobless claims, which smoothes out weekly variations, dropped for a 19th straight week, to 440,750 -- the lowest level in nearly 1-1/2 years.

 

If you exclude motor vehicles and parts, retail sales fell 0.2 percent in December. It was also the largest decline since July. If you exclude autos, gasoline and building materials, then the so called core rate of retail sales fell 0.3 percent. This category closely reflects the consumer spending component of the government's GDP reports.

 

A second report from the Commerce Department showing inventories increased 0.4 percent in November bolstered views the economy picked up steam in the fourth quarter.

 

While the economy remains on a steady recovery path, the housing market -- the main trigger of the economic downturn -- continues to show signs of stress. The nation closed out 2009 with a record number of foreclosure actions and is poised to set a fresh record this year, real estate data company RealtyTrac said. According to the group, 2.8 million properties with a mortgage received a foreclosure notice last year, up 21 percent from 2008 and 120 percent from 2007.

 

Unemployment Rate to Remain Above 8 Percent

 

The unemployment rate, currently at 10 percent, is unlikely to drop below 8 percent before 2012 unless Congress takes further steps to boost the economy in the short term, the non-partisan Congressional Budget Office reported on Thursday.

 

That estimate will probably result in increased urgency by Congress in general and the Democrats specifically to create jobs before they face voters in November. The House of Representatives passed a $155 billion jobs bill in December and the Senate is expected to act in coming weeks.

 

CBO's estimate shows unemployment is likely to remain high for several years as the country gradually recovers from the worst downturn since the 1930s. The unemployment rate stood at 4.9 percent before the recession took hold in December 2007.

 

The 8 percent figure remains unchanged from the office's August 2009 estimate, when a $787 billion stimulus bill had just begun to affect the economy. The effects of that stimulus bill will peak in the first half of this year, CBO said, but further efforts could help hasten the recovery.

 

Increased spending on safety-net programs for the jobless will likely have the most immediate impact as the beneficiaries would spend that money quickly, CBO said. Each dollar spent on that approach would yield between 70 cents and $1.90 in economic activity, CBO estimated.

 

That element is included in the House jobs bill, along with increased infrastructure spending and aid to cash-strapped states. Those two approaches also could boost the economy but would have less of a short-term impact, CBO said.

 

House Democrats could yet pass more job-creation measures as they wait for the Senate to act. A payroll tax credit to encourage businesses to create jobs, which was not included in the House bill, would be among the most effective approaches, CBO said.

 

Tax cuts, especially for the affluent, would have less of an impact as households would be likely to save the money rather than spend it, CBO said.

 

Any stimulus efforts are unlikely to add to inflation but would worsen the budget deficit, which came in at a record $1.4 trillion in the fiscal year that ended September 30, 2009, CBO said.

 

A Fee on Major Banks Could Be In the Works

 

President Barack Obama on Thursday proposed Wall Street banks pay up to $117 billion to reimburse taxpayers for the financial bailout, as he slammed bankers for their "massive profits and obscene bonuses." Striking a populist tone, Obama called for a fee on the biggest U.S. banks to "recover every single dime" the government spent rescuing the financial sector from its worst crisis since the Great Depression.

 

"My determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people," Obama said.

 

Obama and his Democratic allies in Congress are seizing on the chance to cast Wall Street as its political foil in a congressional election year when their party is worried Republicans might weaken its majority status.

 

Obama, who has labeled financial executives "fat cats" for the huge bonuses they have received, is taking an increasingly tougher line against the industry. Democrats hope that will resonate with an American public furious at multimillion-dollar bonuses being handed out by banks as the middle-class struggles with double-digit unemployment. The fee is also aimed at helping to reduce the ballooning U.S. budget deficit.

 

Democrats in Congress signaled they would quickly take up the legislation. Senate Finance Committee Chairman Max Baucus praised Obama for "working to ensure taxpayers see a return on their investment." "I remain committed to working with the president, and my colleagues across the aisle, to make sure this proposal is right," he said.

 

But Republicans may try to block it. Some of them have criticized the bank fee as a tax that would be passed on to small businesses and Americans with savings accounts. Republican Representative Scott Garrett said the bank tax would "further cripple the economy" through its impact on consumers and small firms.

 

The aim of Obama's proposal is to recoup losses from the $700 billion rescue program of U.S. banks called the Troubled Asset Relief Program, or TARP. It calls for a levy of 0.15 of a percentage point on the balance sheets of companies with assets exceeding $50 billion.

 

The Obama administration expects to raise $90 billion over the first 10 years, and thinks this will ultimately cover all losses from TARP, although at the moment these losses are being projected at $117 billion.

 

Forged after the collapse of Lehman Brothers and multibillion-dollar rescue of insurance giant American International Group, TARP helped stem the crisis by injecting public capital into the biggest U.S. banks and convincing investors no others would be allowed to fail.

 

The administration said it was needed to avert a catastrophe in the broader economy, but it did not prevent the country from sliding into a deep recession that has pushed unemployment to a 26-year high of 10 percent.

 

Big financial firms consider the fee unfair because it will apply even to those companies that have already repaid the rescue funds they received as well as to firms that got no bailout money to start with. However, However, the White House argues that the industry as a whole benefited from the calm the rescue package brought to the markets. Obama also said the financial industry bears responsibility for the crisis because of what he said were its reckless actions that led to the subprime mortgage meltdown.

 

Full details of the fee proposal will not be laid out until Obama delivers his budget for fiscal 2011 in early February, and will then be subject to shaping by Congress. AIG will be subject to the fee, but mortgage lenders Fannie Mae and Freddie Mac, which are under government conservatorship, will be excluded, as will still-ailing U.S. automakers that got bailout money.

 

The bank fee proposal come as Congress is weighing sweeping financial regulatory reforms in the face of stiff industry opposition. Obama is pushing such an overhaul, but some liberal supporters of Obama have accused him of coddling Wall Street by not seek a more robust package of Wall Street reforms.

 

Wall Street chiefs were grilled on Wednesday at the opening hearing of a special inquiry into the 2008 financial crisis and the resulting taxpayer bailout to save their industry. The heads of Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America faced the first public hearing of the Financial Crisis Inquiry Commission. It will convene throughout the year and is expected to issue a report by December 15.

 

Obama said the goal of the bank fee is "not to punish Wall Street firms but rather to prevent the abuse and excess that nearly caused the collapse of many of these firms and the financial system itself." "We cannot go back to business as usual," he said.

 

Liabilities on Fed Balance at Record High

 

The Federal Reserve's balance sheet rose to a record level in the latest week, boosted by its ongoing efforts to support the mortgage market, Fed data released on Thursday showed. The Fed's balance sheet -- a broad gauge of its lending to the financial system -- rose to $2.274 trillion in the week ended January 13 from 2.216 trillion in the prior week. After declining early last year, the balance sheet generally has been accumulating mass amid the Fed's asset-buying, or quantitative easing, program.

 

Given that this program has led the central bank's holdings of agency debt and mortgage-backed securities to grow to more than $1 trillion, the balance sheet rise reported on Thursday came as little surprise.

 

The rise in the balance sheet came on the back of a jump in its holdings of agency mortgage-backed securities, which rose to $968.59 billion in the week ended January 13 from $908.74 billion in the previous week. The Fed's holdings of agency debt totaled $160.83 billion in the week ended January 13 versus $159.88 billion the previous week.

 

By the end of March, the Fed plans to have bought $1.25 trillion worth of mortgage-backed securities and about $175 billion worth of agency debt. At that point the balance sheet growth would be expected to taper off, though some say the Fed will find it difficult to end by that deadline if the economy hasn't improved markedly.

 

Supervision by Fed Is Key According to Fed Chairman

 

Federal Reserve Chairman Ben Bernanke argued on Thursday the Fed must retain its regulatory powers, telling lawmakers that supervising banks helps it set monetary policy and will help guide its pullback of extraordinary support for the battered economy.

 

"The Federal Reserve's participation in the oversight of the banking system significantly improves its ability to carry out its central banking functions," the Fed wrote in a report that Bernanke submitted to the top lawmakers on the Senate Banking Committee.

 

Congress is debating far-reaching overhaul of financial oversight after a devastating global crisis. Most observers agree that lax supervision of financial activities played a supporting role in bringing on the meltdown.

 

The Senate Banking Committee is considering stripping the Fed of its regulatory powers, arguing it should concentrate on its functions on calibrating borrowing costs to ensure stable growth and price stability.

 

In a report to Banking Committee Chairman Christopher Dodd and the panel's top Republican, Richard Shelby, Bernanke said the Fed's supervisory functions will help policymakers determine when and how to withdraw the unprecedented support it put in place to protect the financial system and pull it out of a deep recession.

 

"Information from the supervisory process will help policymakers to assess overall credit conditions and the stability of the financial sector, and so to time appropriately the shift to reduced policy accommodation," he said.

 

Bernanke acknowledged "significant shortcomings" by regulators, including by the Fed, in the period before the financial collapse. He said the Fed is trying to plug gaps and broaden its supervision to take into account risks across the financial system.

 

The Fed should not be the only agency responsible for the soundness of the broad system, but should play a central role in policing it, Bernanke said.

 

"The Federal Reserve is well suited to contribute significantly to an overall scheme of systemic regulation," he said.

 

CFTC Wimps Out

 

In an effort to prevent excessive concentration in energy trading, the Commodity Futures Trading Commission issued proposals to cap the number of contracts a company can hold across exchanges. The limits were less stringent than expected and offered limited exemptions for swaps dealers who hedge financial exposure, such as Goldman Sachs.

 

For instance, the limit on crude oil would equate to a 98 million barrel position -- equal to more than a day's global consumption, or near $8 billion at current prices. This is five times the New York Mercantile Exchange's own loosely enforced cap, which may assuage fears that tough limits would cause an exodus of liquidity to overseas or unregulated markets.

 

However, as part of the Obama administration's push to overhaul financial markets, the CFTC must explain its softer approach to lawmakers who have clamored for regulatory action since oil prices surged to a record $147 a barrel in 2008.

 

The limits will apply to futures and options contracts of light, sweet crude oil, RBOB gasoline, No. 2 heating oil and Henry Hub natural gas futures traded on both the NYMEX, owned by the CME, and the Intercontinental Exchange.

 

Oil and natural gas prices were little changed after the news, as were shares in CME and ICE.

 

Giving it the official go-ahead to launch the proposals for the required broader input period, the CFTC commissioners voted 4 to 1 to seek comment on the limits over the next 90 days. "We believe it's a measured and balanced approach but we want to hear from the public," CFTC Chairman Gary Gensler said.

 

Jill Sommers, the commissioner who voted against issuing the proposed rule, said she was concerned the CFTC's "piecemeal" action was "unwise," and said the proposal should have addressed passive long index traders.

 

In brief, the limit for the entire commodity would be set annually based on open interest at the sum of 10 percent of the first 25,000 contracts plus 2.5 percent of the remaining interest, allowing a regular annual adjustment to the limits rather than the fixed caps the CFTC applies to grain markets.

 

It said the limits, if implemented, would affect the 10 biggest position holders in all markets. Over the past two years, only 3 "unique owners" in the crude oil market and only one in the natural gas market would have been affected, according to Steve Sherrod, Acting Director of Surveillance at the CFTC.

 

The exchanges themselves will continue to allow exemptions for bone fide end-users, companies who need to hedge their physical positions, while the CFTC will be responsible for granting "risk management" exemptions to swap dealers at a maximum of two times the otherwise applicable position limit.

 

However, such players, the likes of Goldman and Morgan Stanley, would not be allowed to take on speculative positions that would exceed the exemptions, limiting their ability to make additional bets with their own money if they are already offsetting customers' positions. The limits should help prevent out-sized players from becoming a risk to the whole market.

 

For example, the CFTC said under the limits, the giant hedge fund Amaranth would not have been able to hold the large number of natural gas contracts it did in 2006, which led to the fund's collapse with ripples felt across markets. But they were far from strenuous compared to existing exchange-set "accountability limits", which for NYMEX crude is 20,000 contracts across all months -- one-fifth the CFTC's.

 

There are questions regarding how the CFTC might get a grip on the vast over-the-counter energy markets and what it would do about the influx of passive, long-term investors who buy and hold positions via index funds.

 

It appeared likely to be just the start, as the CFTC said it would seek public comments on how to address the passive long investors who typically buy and hold contracts via commodity indices, and whether metals, coffee, sugar and cocoa should also be subject to similar position limits. It will hold a meeting in March to focus on silver and gold markets.

 

The proposal is the first major regulatory reform for the CFTC since Gensler, a former Goldman Sachs executive, became chairman in May with promises to get tough on the volatile world of commodity trading. His actions are parallel to reforms pending in Congress and dovetails with the Obama administration's proposals to bring over-the-counter derivatives under federal regulation.

 

Efforts to tighten positions limits have drawn their fair share of critics. The ICE and the Chicago Mercantile Exchange, the world's largest exchange which owns the NYMEX, have urged the CFTC to be cautious. Opponents say limits could actually make markets more volatile, distort pricing functions and push traders to less-regulated offshore markets.

 

Commodity traders have been bracing for tougher trading limits since the CFTC announced in July it was going to review limits. Several large exchange-traded funds have been forced to suspend share issuance or adjust their strategies to appease regulators, while some major players are working out ways to shift toward trading of physical commodities.