MarketView for January 11

Summary

It was another day of relatively light volume on Wall Street as the energy sector helped the Dow Jones industrial average and S&P 500 indexes end a three-day losing streak despite the recurring theme that higher fuel costs are not conducive to enhancing economic growth. The S&P Energy sector rose 1.2 percent on a 2 percent rally in the price of oil, but transportation and consumer stocks weakened on worries about higher energy costs.

Approximately 7.2 billion shares were traded on the three major exchanges, a number that was below last year's estimated daily average of 8.47 billion shares. Short-term technical resistance for the benchmark S&P is seen around 1,280 while the area between 1,265 and 1,260 provides support.

Meanwhile the earnings news from smaller companies, including Lennar and Sears Holdings, were also a contributing factor to the positive index gains. The difficulty, if there is one, is that volume was low for a second consecutive day, thereby questioning the sustainability of seeing an ongoing rally.

Sears Holdings closed up 6.3 percent at $75.02 after the company raised its earnings outlook above Wall Street estimates, citing strong sales as being the reason. At the same time, Lennar closed up 7.4 percent to $20.30 after reporting fourth-quarter results higher than expected.

Alcoa posted a quarterly earnings number that exceeded Wall Street's expectations but the aluminum maker's shares fell 1 percent to $16.33.

Verizon was down 1.6 percent to $35.36 after Verizon Wireless announced it will begin selling a version of Apple's iPhone. The news, which was expected, had been preceded by a rise of more than 11 percent in Verizon shares in the past six weeks.

Talbots fell 17.4 percent to $6.25 after it forecast a much larger-than-expected quarterly loss. MBIA as some positive activity as its shares rose 10.2 percent to close at $13.53 after a divided New York appeals court handed the bond insurer a crucial win in the legal battle over its restructuring plan.

Same Old Story at the Fed

Looking at the minutes of the last Federal Reserve Open Market Committee meeting, directors of Federal Reserve banks in Dallas and Kansas City again requested, unsuccessfully, a 0.25 percent rise in the rate charged to banks for emergency loans, minutes of Fed meetings in November and December showed on Tuesday.

The other 10 regional Fed banks wanted no change in the discount rate. The Fed’s board sided with them, keeping the discount rate steady at 0.75 percent in meetings ahead of its December 14 policy decision.

"Federal Reserve Bank directors noted positive developments that indicated the recovery was continuing, but given ongoing uncertainties, directors remained cautious about the outlook and expected growth to be modest going forward," the minutes said.

The directors noted somewhat stronger-than-anticipated consumer spending and expanding manufacturing activity, but also pointed to continued weakness in housing prices and the weak labor market.

The Fed said regional bank directors commented that uncertainty over U.S. fiscal and regulatory policies, the fiscal condition of state and local governments and financial developments abroad were weighing on hiring and capital spending decisions. They generally expected inflation to remain quite low, despite recent rises in food and metals prices.

Against this backdrop, most directors recommended that the current accommodative stance of monetary policy be maintained."

Those in favor of raising the discount rate described it as a "another step toward restoring a pre-crisis discount rate structure" that would result in a 75-basis-point-spread between the discount rate and the upper end of the Federal Open Market Committee's target rate for the federal funds rate, the main policy tool.

"These directors favored a move toward normalization of the primary credit rate in light of the monetary stimulus already in place," the minutes said.

At its December 14 meeting, the FOMC reaffirmed its commitment to buy an additional $600 billion in longer-term Treasury debt by mid-2011, offering only a cautious nod to the economy's improving prospects. It offered no policy shift, saying the recovery was still not strong enough to bring down unemployment significantly.

Surprises from the Holiday Shopping Season

The holiday shopping season still delivered a few surprises on Tuesday, as Talbots said its loss in its fiscal fourth quarter would exceed its previous worst-case forecast, as it had to slash prices in the last two weeks of December into January because women were avoiding its clothes.

Talbots said sales at stores open at least a year were down 6 percent so far in the fourth quarter, which ends on January 29. The retailer now expects a fourth-quarter adjusted loss per share from continuing operations of 15 cents to 19 cents, compared with its previous forecast of a range of a loss of 5 cents to a gain of 3 cents.

On the other hand, Sears Holdings indicated that it was expecting to post a fourth-quarter profit above Wall Street expectations, as sales of toys, home and sporting goods helped limit declines in overall comparable store sales fueled by weakness in appliances and clothing.

Sears is still struggling against competition from mass merchants like Wal-Mart, especially in areas like electronics. Sales at Sears domestic stores open at least a year were down 6 percent in December, while comparable store sales at Kmart discount stores were up 2.3 percent. But the company, which is led by hedge fund manager Edward Lampert, said it sees earnings of $3.39 to $4.12 a share for the fourth quarter, ending January 29.

Tiffany reported that its sales rose 11 percent in November and December sending its full-year forecast higher. Tiffany saw its share price fall slightly, while Sears' shares were up more than 9 percent. Talbots closed down 17.

Last week, retailers posted December sales that fell short of analyst expectations that had risen after a strong start to the holiday shopping season. Still, sales at stores open at least one year saw their best performance since the start of the recession.

On the down side, chain store sales fell 3.2 percent in the weekend that ended January 8, compared with an increase of 0.4 percent in the prior week, according to the International Council of Shopping Centers and Goldman Sachs. The sales numbers and forecasts were the latest evidence that only some retailers are positioned to grow in an economy that is struggling to create jobs.