MarketView for January 13

 

 

Summary

 

Stocks edged lower on Thursday, partially because of a downturn in Merck and a downturn in commodities prices that in turn hit shares of natural resource companies. Nonetheless, the S&P 500, managed to remain near its 28-month highs as belief that the best was yet to come for stock prices remained the mantra of the day, the result of high expectations for strong results this earnings season.

 

The S&P 500 is up 22.3 percent since the start of September, while earnings from S&P 500 companies are expected to increase 32 percent during the fourth quarter when compared to the same period a year ago. About 7.57 billion shares traded on the major exchanges, a number that was less than last year's estimated daily average of 8.47 billion shares.

 

Intel added to those expectations as it posted better-than-expected quarterly earnings and forecast strong revenue for the coming quarter after the closing bell. Its shares rose 2.7 percent to $21.87 following a 0.06 percent decline during regular trading hours.

 

Copper prices retreated from recent highs on concerns of slowing demand from China. As a result, Freeport McMoRan Copper & Gold fell 3.1 percent to $118.07.

 

Merck closed down 6.6 percent to $34.69, accounting for more than half the losses by the Dow Jones industrial average, after it stopped testing a blood clot preventer, one of its most important experimental drugs.

 

Weekly initial jobless claims posted their highest number since last October, while food and energy costs pushed the producer price index upward in December, pointing to headwinds for an economy that has shown fresh vigor.

 

Exports hit their highest level in two years and in turn helped to reduce our trade deficit for the month of November, an encouraging sign for positive surprises in the current earnings season.

 

Marathon Oil rose 6 percent to $42.98 after it said it would spin off its refinery and pipeline operations into a stand-alone company.

 

Easing recent worries about the credit crisis in Europe, Spain and Italy followed Portugal with successful debt sales on Thursday. The euro rose 1.7 percent against the dollar, making it the best day for that currency in six months.

 

Economic Data Surprises

 

In the latest report from the Labor Department released on Thursday, jobless claims hit their highest level since October, while food and energy costs lifted producer prices in December, although in neither case was the data any cause for alarm. At the same time, an increase in exports to their highest level in two years helped narrow our trade deficit in November, an encouraging sign for fourth-quarter economic growth.

 

Despite a string of recent data that had signaled a pickup in the economy's momentum, the figures on Thursday did imply that for many people the recession is far from over. The number of people filing for first-time unemployment benefits rose unexpectedly to 445,000 from 410,000 in the prior week, a Labor Department report showed. It was the biggest one-week jump in about six months and confounded analyst forecasts for a small drop to 405,000.

 

The rebound in benefit claims came in the wake of the holidays, which may have hindered new applications and created a backlog. Claims, which hit around 650,000 in April of 2009, had been on a downward trajectory, dipping below 400,000 for the first time in two years during the week of Christmas. The four-week moving average of new claims, which removes short-term volatility to provide a better sense of underlying trends, rose by 5,500 claims last week, reaching a total of 416,500 claims.

 

The number claims for continued benefits after an initial week of aid did retreat sharply to 3.88 million from 4.13 million, offering some hope for continued improvement. Still, the total number receiving benefits, including those receiving extended benefits under emergency government programs, hit 9.19 million, up from 8.77 million.

 

As last year drew to a close, food and energy costs were rising briskly at the wholesale level despite a tame underlying inflation trend. The producer price index rose 1.1 percent in December after a 0.8 percent increase during November, according to a Labor Department report. The Street had been expecting a repeat of that 0.8 percent advance in December.

 

Inflation excluding food and energy, however, rose just 0.2 percent, in line with forecasts. That left the year-on-year gain in core producer prices at 1.3 percent, just below analyst estimates, helping tame inflation fears.

 

The rising prices producers receive ultimately could put upward pressure on retail prices, acting like a tax on consumers that could slow growth. Up to now, companies have not been able to pass increasing costs onto consumers because of weak demand, but that too has consequences.

 

A recent spike in global food costs has raised fears of a crisis in the poorer corners of the developing world. World food prices hit a record high last month, outstripping the levels that sparked riots in several countries in 2008, and key grains could rise further, the United Nations' food agency said recently.

 

On a more positive note, a report by the Commerce Department indicated that the trade gap narrowed to $38.3 billion in November from $38.4 billion in October. November's deficit was the slimmest since January 2010. Exports totaled $159.6 billion, the highest since August 2008 -- just weeks before the bankruptcy of Lehman Brothers touched off a trade-crushing global panic. Exports to China in November totaled a record $9.5 billion. Still, they were swamped by rising imports that pushed the shortfall with China to $25.63 billion.

 

The split between weak underlying inflation and high food and energy prices makes it harder for Federal Reserve officials to argue publicly that inflation is not a threat. A fear of inflation being too low has underpinned the Fed's efforts to support the economy by purchasing government bonds.

 

Bernanke Says 3 to 4 percent growth in 2011

 

Federal Reserve Chairman Ben Bernanke indicated on Thursday that economy should grow around 3 percent to 4 percent this year, a healthier clip than in 2010, but not enough to bring down unemployment as much as policymakers would like.

 

"We see the economy strengthening. It has looked better in the last few months. We think a 3 to 4 percent-type of growth number for 2011 seems reasonable," Bernanke said at an event sponsored by the Federal Deposit Insurance Corp.

 

"Now that's not going to reduce unemployment at the pace we'd like it to, but certainly it would be good to see the economy growing and that means more sales, more business," he added.

 

Bernanke's forecast still shows how much the outlook has brightened in policymakers' eyes since November, when the Fed anticipated growth next year in a range of 3 percent to 3.6 percent.

 

At the time, the Fed launched its controversial $600 billion bond buying program aimed at keeping interest rates low to spur more robust growth and bring down the lofty unemployment rate.

 

Bernanke said that it looks less likely that the recovery could stall. "We're seeing some improvement in the labor market, I think deflation risk has receded considerably and so we're moving in the right direction," he said.

 

Crude Prices Fall

 

Oil prices fell in see-saw trading on Thursday as disappointing U.S. jobs data weighed on demand prospects and a possibility that OPEC may raise output should prices break above $100 a barrel. In London, ICE Brent crude for February fell 28 cents to $97.84 per barrel. Domestic crude settled down 85 cents per barrel at $91.01.

 

Trading was volatile, after settlements hit 27-month highs on both sides of the Atlantic on Wednesday, with February Brent expiring on Friday and a plethora of economic indicators scheduled for release on Friday.

 

Brent's premium over U.S. crude remained wide, at around $6.40, after ending at $6.36 on Wednesday. The premium had pushed above $7 on Tuesday, the widest since February 2009.

 

A delegate from a Gulf OPEC member state said OPEC will only hold an emergency meeting if oil climbs above $100 and stays there, although the group's Gulf members could informally add supply if needed.

 

Recent supply concerns that helped ignite oil's most recent rally have eased after the restart of production at two North Sea oil fields and a provisional restart of the Trans-Alaska Pipeline, after it was shut by a small leak on Saturday.

 

By Wednesday, the pipeline, which carries about 12 percent of U.S. oil production, was pumping at a rate of 400,000 barrels per day, almost two-thirds of its normal levels. The pipeline will be temporarily shut again this weekend for about 36 hours to install a bypass system and analysts said potential problems may still be encountered.