MarketView for January 25

 

 

 

Summary 

  

Equities managed to end a three-day slide on Monday as signs that Federal Reserve Chairman Ben Bernanke would win a confirmation vote in the Senate for a second term helped to ease concerns. After the closing bell, Apple reported sharp gains in quarterly revenue and earnings, sending its shares up 1.9 percent to $207.00 in after-hours trading. The company also said it moved to adopt new accounting standards for its iPhone.

 

Texas Instruments posted its fourth-quarter results and outlook for the first quarter after the close. Its stock shed 1.2 percent to $23.40. IBM ended the day up 0.5 percent to $126.12 while Hewlett-Packard Co closed up 1.6 percent at $50.06. Both companies were among the top performers on the Dow Jones industrial average.

 

Both the Dow and Nasdaq briefly turned negative after data from the National Association of Realtors showed sales of previously owned U.S. homes fell at a record pace in December, highlighting the housing market's reliance on government aid. Homebuilder Toll Brothers shed 0.7 percent to close at $18.15.

 

Shares of natural resource companies rebounded. AK Steel Holding closed out the day up 5.4 percent at $21.27, after the company posted fourth-quarter earnings and forecast higher prices as demand shows signs of growth.

 

Lower Sales of Previously Owned Homes

 

Sales of previously owned homes suffered a record drop last month as a government tax credit was set to expire, raising doubts the housing market recovery can be sustained without government support. The National Association of Realtors (NAR) said on Monday that existing home sales fell 16.7 percent in December to an annual rate of 5.45 million units.

 

It was the sharpest decline on records dating to 1968 and the slowest sales pace since August.

There were, however, some encouraging signs, with the median home price rising in December in the first year-over-year gain since August 2007 and a decline in the inventory of homes available for sale.

 

Housing has been recovering from a three-year slump, driven by a tax credit for first-time buyers and low mortgage rates. The tax credit, which had been scheduled to end in November, was expanded and extended until June.

 

Prospective home buyers rushed through sales to qualify for the credit before it expired, creating a surge in November. But there was a lull in December once buyers saw they had an extra seven months to take advantage of the benefit.

 

Data ranging from pending home sales to builders sentiment have raised concerns that the housing market might be slipping again. According to the NAR, first-time home buyers accounted for 43 percent of sales in December, down from 51 percent the previous month. Distressed transactions made up 32 percent of the sales. Sales of previously owned single-family homes, the largest segment of the housing market, tumbled 16.8 percent last month. Sales of existing condominiums and co-ops dropped 15.4 percent.

 

Mortgage rates have been depressed by the Federal Reserve's program to buy mortgage-related securities in the market. The central bank is scheduled to end the program in March. Existing home sales for all of 2009 rose 4.9 percent, NAR said. Prices fell 12.4 percent, which the trade group said was "probably the largest annual drop since the Great Depression."

 

However, for the month of December the median home price rose 1.5 percent from a year earlier to $178,300, the largest rise since May 2006. And in another bright spot, the inventory of homes available for sale last month fell to 3.29 million units, the lowest since March 2006. At December's sales pace, that represented 7.2 months' worth of supply. Reducing the supply of homes for sale on the market is critical for the sector's recovery. Sales fell last month in all four regions of the country.

 

Obama to Freeze Part of Budget

 

President Barack Obama will ask Congress to freeze spending for some domestic programs for three years beginning in 2011, administration officials said Monday. Separately, Obama unveiled plans to help a middle class "under assault" pay its bills, save for retirement and care for kids and aging parents.

 

The spending freeze would apply to a relatively small portion of the federal budget, affecting a $477 billion pot of money available for domestic agencies whose budgets are approved by Congress each year. Some of those agencies could get increases, others would have to face cuts; such programs got an almost 10 percent increase this year. The federal budget total was $3.5 trillion.

 

The three-year plan will be part of the budget Obama will submit Feb. 1. Obama was expected to propose the freeze Wednesday night in his State of the Union address. The Pentagon, veterans programs, foreign aid and the Homeland Security Department would be exempt from the freeze.

The savings would be small at first, perhaps $10 billion to $15 billion. However, over the coming decade, savings would add up to $250 billion. The White House is under considerable pressure to cut deficits, or at least keep them from growing.

 

Obama's separate public comments previewed other topics in the State of the Union address.

The proposals he described won't create jobs, but he said they could "re-establish some of the security that's slipped away." His remarks aimed to lift the nation's dour mood and show he is in touch with the daily struggles of millions of people as resentment runs high about lost jobs and the economy.

 

The initiatives amount to a package of tax credits, spending expansions and new mandates on employers to encourage retirement savings by workers. Most of them will be included in Obama's budget for the fiscal year starting Oct. 1, and they will require approval from Congress. Obama will release that budget Feb. 1.

 

The president's latest rollout of ideas served as a preview of his prime-time State of the Union address. The economic elements of that speech will also cover Obama's plans to boost job creation and reduce swelling budget deficits — areas of concern to the public.

 

Obama's address will outline his second-year agenda across a spectrum of issues, including tighter rules on Wall Street behavior and a push for financial discipline in Washington. He also is expected to touch on the controversial issue of gays in the military.

 

Among the president's economic ideas: 

• Doubling the tax credit that families making under $85,000 can receive for child care costs, with some help for families earning up to $115,000.

• Capping the size of periodic federal college loan repayments at 10 percent of borrowers' discretionary income to make payments more affordable.

• Increasing by $1.6 billion the money pumped into a federal fund to help working parents pay for child care, covering an estimated 235,000 additional children.

• Requiring employers who do not offer 401(k) plans to offer direct deposit IRAs with exemptions for the smallest firms.

• Spending more than $100 million to help people care for their elderly parents, while also receiving support for themselvers.

The White House maintained that it is imperative to create jobs. Unemployment remains in double digits, and the economy is the public's top concern. Yet, Obama said that squeezed families need help in other ways, too, such as paying for child care, helping out aging parents, saving for retirement, paying off college debt.

 

What matters ultimately to people, Obama said, is "whether they see some progress in their own lives. So we're going to keep fighting to rebuild our economy so that hard work is once again rewarded, wages and incomes are once again rising, the middle class is once again growing."

Less clear was how much the programs would cost or where the money would come from.

Officials deferred comment until the release of the budget.

 

Obama is trying to sharpen his economic message in a way that shows people he is on their side. White House officials say they know people have been turned off by the long, messy fight for health insurance reform. Plus, there's a perception that families have received far less help than the large banks.

 

The economy is growing, but not fast enough to bring down widespread joblessness. The unemployment rate is at 10 percent and most economists say it could take until at least 2015 for it to return to more normal levels.

 

The plans Obama set forth came from the yearlong work of a task force, led by Vice President Joe Biden, charged with helping the middle class.

 

"We're talking about dignity. We're talking about security," Biden said. "We're talking about knowing your pension is safe, your health insurance is reliable, your elderly parents and your children are going to be cared for and that your neighborhood is safe."

 

Obama's initiatives also include expanding and simplifying a tax credit that matches retirement savings, and making 401(k) rules easier to understand.

 

On the matter of gays in the military, Obama has promised to lift the ban on gays serving openly, and several lawmakers support a repeal of the law. But some senior military advisers and members of Congress have urged the president not to shake up the status quo at a time of two wars.

 

Growing Support for Bernanke Confirmation

 

The Senate appears likely to approve Ben Bernanke for a second term although grudgingly so. Helping out the confirmation battle were efforts over the weekend by the White House to defend Bernanke’s crisis-fighting record and rally votes. The current tally shows that some 36 senators committed to approving the nomination or leaning that way, while 17 were outright opposed or inclined that way. Senate leaders need to secure a super-majority of 60 votes in the 100-member chamber to overcome efforts by some senators to block the nomination.

 

Senator Richard Durbin, the assistant Democratic leader, said he thought that with some Republican support, there would be enough votes to consider and approve Bernanke's nomination. "He is battle-tested and I think that we need his steady hand and his good mind to bring us forward out of this recession to a growing economy," Durbin said after meeting with Bernanke on Monday. Durbin said Obama was making calls to muster political support for Bernanke, and the White House dispatched advisers to defend Bernanke's record on Sunday talk shows.

 

What had looked like a sure thing was thrown into doubt last week when it became clear a growing number of senators would not support Bernanke, citing his handling of Wall Street bailouts. While a number of senators said on Monday they would back the nomination, Durbin said votes were still being counted and some well-respected lawmakers, including Republican Senator John McCain, said they would stand in opposition.

 

Bernanke's first four-year term as chairman expires on Sunday. If he is not confirmed, the Fed's Vice Chairman Donald Kohn is poised to take over on an acting basis. The Fed has become a prime target of public outrage as unemployment remains at the 10 percent level, while Wall Street profits and bonuses continue unabashed. Many voters saw that as evidence of an economic policy that favored Wall Street over Main Street.

 

That anger was on full display in the recent special Senate election in Massachusetts, which had been a Democratic stronghold for decades. That left Democrats one vote short of the 60 needed to clear Republican legislative roadblocks. It also prompted some senators, mindful of their own November elections, to think twice about backing Bernanke.

 

President Barack Obama has responded by taking a tougher tone with Wall Street and stepping up his commitment to create jobs. On Monday, he proposed new initiatives aimed at helping middle-class families.

 

That the vote was even in doubt was surprising, and the uncertainty sent stock markets down sharply on Friday, although they recovered somewhat on Monday as Bernanke's approval appeared more certain.

 

Bernanke, a Republican who was appointed by former President George W. Bush to succeed Alan Greenspan as Fed chairman in 2006, has received widespread praise for his response to the financial upheaval, which began with subprime mortgages but rapidly expanded into a global crisis. Bernanke, in turn, improvised special lending programs that many economists think helped prevent the recession from becoming a depression.

 

Nonetheless, Bernanke is blamed for missing the warning signs of a dangerous bubble forming in the housing market and underestimating its power to wreak havoc on the economy. Nonetheless, many investors see Bernanke as a known entity who is committed to keeping short-term interest rates low until the economy strengthens. They see the reappointment fight as a worrisome sign of politics interfering with monetary policy.

 

At the same time, the backlash over the financial crisis and ensuing government bailouts has put the U.S. central bank under intense political scrutiny. The House of Representatives last month approved a measure that would give Congress authority to audit the Fed's interest rate decisions, the very heart of the central bank's monetary policy, and the Senate is considering whether to strip the Fed of its bank regulatory authority.