MarketView for January 19

 

 

Summary  

 

The major equity indexes were higher for the third straight day on Thursday, sparked by results from Bank of America and Morgan Stanley and as the latest jobless claims dropped to a near four-year low. The S&P 500 hit a fresh five-month high, with the industrials, consumer discretionary stocks and financials leading gains.

 

Tech shares advanced ahead of earnings from a number of bellwethers expected after the close. However, reports after the bell were mixed. Google fell short of Street expectations. As a result, its shares ended down 10 percent at $575.50.

 

In the regular session, Bank of America rose 2.4 percent to $6.96 after reporting it swung to a fourth-quarter profit from a year-ago loss. Morgan Stanley reported a loss that was narrower than expected, sparking a 5.4 percent jump in its stock to $18.28.

 

Financial shares have rallied since the start of the year. The S&P financial index .GSPF is up 8.1 percent so far for 2012, helping to push the S&P 500 up 4.5 percent for the year.

 

In one economic snapshot, the indication was that the number of Americans filing for new jobless benefits dropped to nearly a four-year low last week. It added to views that the economy is slowly moving forward.

 

Among the major tech companies reporting after the close, IBM said it sees 10 percent earnings growth in 2012, and its shares rose 2.5 percent to $184.94. Shares of Microsoft (MSFT.O) gained 1.9 percent to $28.64 in extended trading, and shares of Intel (INTC.O) added 0.5 percent to $25.75, both after reporting results.

 

American Express also posted results after the bell, and its shares slid 1.9 percent in extended trading to $49.98.

 

In a sign of optimism about Europe, both Spain and France drew strong demand at government debt auctions.

 

Volume totaled about 7.6 billion shares on the three major equity exchanges, a number that was above the daily average of 6.68 billion, and the highest since December 16.

 

Jobless Claims Hit Four-Year Low

 

New applications for unemployment benefits dropped to a near four-year low last week, a government report on Thursday showed, pointing to continued improvement in the labor market.

 

The Labor Department said initial claims for state unemployment benefits dropped 50,000 to 352,000, the lowest level since April 2008 and the biggest drop since September 2005. The prior claims data was revised up to 402,000 from the previously reported 399,000.

 

Last week's claims data covered the survey period for January nonfarm payrolls and claims dropped by 14,000 between the December and January survey periods. Payrolls increased 200,000 in December, with the unemployment rate dropping to 8.5 percent.

 

A Labor Department official said claims for six states, including California and Virginia, had been estimated owing to the Martin Luther King holiday on Monday. He said there was nothing unusual in the unadjusted data, which showed a sharp decline in claims.

 

The four-week moving average of claims, considered to be a better measure of labor market trends, dropped 3,500 to 379,000 last week. The number of unemployed workers still collecting benefits after an initial week aid fell 215,000 to 3.43 million - the lowest since September 2008.

 

CPI Unchanged

 

The seasonally adjusted consumer price index for all urban consumers remained unchanged in December, the Bureau of Labor Statistics said on Thursday. From twelve months earlier, the index edged up 3.0 percent compared to 3.4 percent in the previous month. The less volatile figures, excluding food and energy, rose 0.1 percent on a monthly basis and 2.2 percent on a yearly basis. A producer price index report released yesterday also revealed cooling inflationary pressure on the production line in the last month of year 2011.

 

The Consumer Price Index came in flat in December as decline in energy price offset increases in other goods and services costs. The gasoline index fell for the third consecutive month in December, as did household energy index. Specifically, gasoline price plunged 2.0 percent while fuel oil dropped 1.0 percent. In contrast, food prices moderately rose 0.2 percent in December after moving up 0.1 percent in November and October. Besides, the index for all items less food and energy increased 0.1 percent in the month on higher prices of medical care, shelter, recreation and tobacco.

 

The Consumer Price Index climbed 3.0 percent in 2011, following 1.5 percent advance in 2010. The energy index decelerated at the pace of 6.6 percent in 2011 compared to 7.7 percent in 2010. On the contrary, the index for food accelerated in 2011, soaring 4.7 percent compared to 1.5 percent gain in the previous year. Also, the index for all items less food and energy speeded up at 2.2 percent in comparison with its historical low 2010 increase of 0.8 percent.

 

Housing Starts Fall

 

Housing starts fell in December as groundbreaking on rental property posted a big decline, splashing some cold water on hopes the still-weak housing sector could boost economic growth this year.

 

The Commerce Department said on Thursday housing starts fell 4.1 percent to a seasonally adjusted annual rate of 657,000 units. Starts of buildings with five or more units dropped 27.8 percent to a 164,000-unit rate, the biggest drop since February. Tempering the overall decline, groundbreaking on single family buildings rose 4.5 percent to a 470,000-unit rate. Permits fell 0.1 percent to an annual rate of 679,000 units.

 

Bank of America Records Higher Earnings Number

 

Bank of America Corp reported a fourth-quarter profit, reversing a year-earlier loss, due in large part to one-time items and lower expenses for bad loans. Under pressure to shore up its balance sheet, Bank of America sold assets and completed a stock swap during the quarter that boosted its capital levels. And in 2012, the bank said it was considering issuing $1 billion in common stock to certain employees in lieu of a portion of their year-end cash bonuses.

 

The nation’s second-largest bank by assets reported that its net income applicable to common shareholders was $1.58 billion, or 15 cents per share, compared with a loss of $1.6 billion, or 16 cents per share, a year ago. Like other large banks, Bank of America reported a decline in investment banking and sales and trading revenue.

 

The bank benefited from pretax gains of $5.3 billion from the sale of China Construction Bank shares, and gains from the exchange of trust preferred securities and the sale of debt securities. Various accounting charges and litigation expenses reduced earnings by $3.7 billion. The bank set aside $2.9 billion in the fourth quarter for loan losses, down from $5.1 billion a year ago.

 

Bank of America, which is working to shed risky assets, said its total loans decreased to $926 billion from $932 billion in the third quarter. In its corporate bank, Bank of America said average loans and leases increased 29 percent from the year-ago quarter to $107.5 billion with growth in both U.S. and international commercial loans.

 

Sales and trading revenue in Bank of America's banking and markets unit increased to $1.9 billion, excluding an accounting charge, from $1.1 billion in the third quarter but was down from $2.4 billion a year ago. Investment banking fees were flat from the third quarter at $1 billion but down from $1.6 billion a year ago.

 

Moynihan, the bank’s CEO, is working to show Bank of America, saddled with losses tied to the 2008 purchase of Countrywide Financial, has enough capital to absorb mortgage-related losses and to meet new international capital standards. Over the past two years, he has been shedding noncore businesses in an effort to increase capital levels and streamline the company.

 

The bank's shares fell 58 percent in 2011, partly due to investor worries regarding capital. However, through Wednesday, the shares were up 22 percent this year at $6.80.

 

The Clock Ticks for Greece

 

Greece and its bondholders have made little progress since resuming stalled talks on a debt swap with time to strike a deal and avoid a messy default running out rapidly. Nearly a week after talks hit an impasse, the two sides remain bogged down over the coupon, or interest payment, that Greece must offer on its new bonds under the swap.

 

Athens and its foreign lenders offered a coupon of just over 3.5 percent during a two-hour meeting on Wednesday, but bondholders rejected that as too low. The bond holders were looking for something closer to a coupon of at least 4 percent. The stakes could not be higher. The two sides must thrash out a deal within days to pave the way for Greece to receive a new infusion of aid and avoid bankruptcy when 14.5 billion euros ($18.5 billion) of bond redemptions fall due in March. Even if a deal is struck rapidly, the paperwork will take weeks and Greece's official lenders -- the European Union and the International Monetary Fund -- say the work must be cleared before funds are doled out from a 130 billion euro rescue plan they drew up in October.

 

Turning up the pressure ahead of Thursday's talks, Finance Minister Evangelos Venizelos told lawmakers that a large chunk of the bond swap must be agreed by noon on Friday and formalized before Monday's meeting of euro zone finance ministers. Kept afloat by bailout loans, Greece faces the threat of having to leave the euro zone and slumping into further economic and social misery if it fails to come to grips with its debt, including securing a deal with the private bond holders.

 

"Now is the crucial moment in the final battle for the debt swap and the crucial moment in the final and definitive battle for the new bailout," Venizelos told parliament. "Now, now! Now is the time to negotiate for the sake of the country."

 

The swap is aimed at cutting 100 billion euros off Greece's over 350 billion euro debt load by getting the private holders of Greek bonds to accept a 50 percent write down on their notional value. However, terms of the swap -- including the interest rate and maturity date of new bonds Greece would sell to the private creditors in place of old debt -- have been up for negotiation.

 

The talks ran into trouble last week over Greek demands for an interest rate below the 4 percent that banks were willing to stomach and a plan to enforce losses on investors. A lower interest rate would push the actual loss investors take to well above the 50 percent level initially envisaged.

 

Horst Reichenbach, head of the European Commission's task force to help rebuild the Greek economy, appealed to Europe for patience with the Mediterranean country, saying reforms were moving slowly but no miracles should be expected.

 

In Washington, an IMF spokeswoman said staff at the Fund had sought executive board approval for talks with Greece that might lead to a deal requiring "exceptional access" to IMF loans. Greece already has exceptional access to IMF funding that allows it to draw more than 600 percent of its IMF quota and any further negotiations require fresh board approval.

 

Deficit Is Shrinking

 

For the first three months of fiscal 2012 — October, November, and December — Federal revenues were $555.4 billion, up 4.3 percent from $532 billion in the first three months of fiscal 2011.

 

Spending in the first three months of fiscal 2012 has come in at $877 billion, down from $901 billion in the first three months of fiscal 2011, down 3.3 percent.

 

Add it up, and the deficit so far this fiscal year is running at $321 billion, compared with $369 billion for the first three months of fiscal 2011. That's a decrease of 13 percent.

 

Business Activity Slips in Mid-Atlantic Region

 

The pace of factory activity in the U.S. Mid-Atlantic region ticked up in January, though it was not as strong as expected as new orders slipped, the Philadelphia Fed reported on Thursday. According to the Philly Fed, ts business activity index rose to 7.3 from a revised 6.8 in December. December was originally reported as 10.3.

 

Any reading above zero indicates expansion in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware and is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.

 

New orders slipped to 6.9 from 10.7, while inventories improved to minus 6.3 from minus 11.5. The employment components improved modestly, with the gauge of the number of employees edging up to 11.6 from 11.5 and the average work week index gaining to 5.0 from 2.8. Survey respondents' view on the coming months also strengthened with the gauge of business conditions for the next six months rising to its highest since March 2011 at 49.0 from 40.0.