MarketView for January 31

 

 

Summary

 

Wall Street just closed out its best month since October on a flat note on Tuesday as weaker-than-expected economic reports were a surprise after a stream of positive data in recent months. Keep in mind that stocks have rallied sharply since late last year, partly on hopes that we would avoid the effects of a recession in Europe. However, that theory was tested somewhat on Tuesday as home prices were lower and business activity in the Midwest declined unexpectedly, along with consumer confidence.

 

However, the market reversed much of the loss that came after the publication of the data, continuing a pattern that has marked recent trading activity and is being viewed as a sign of resilience. The S&P 500 has fallen for four days, but the losses amount to little more than one percent.

 

Earnings reports continue to paint a muddled picture. Exxon Mobile’s earnings narrowly exceeded expectations as rising oil prices offset falling margins for chemicals and fuel, and production fell short of some estimates. Exxon closed out the day down 2 percent at $83.74 and was the largest drag on both the Dow and S&P 500.

 

Volume on the three major equity exchanges was light for most of the day but surged late as managers adjusted portfolios at the end of the month. About 7.07 billion shares changed hands, a number that compares favorably with the 200-day moving average of 7.76 billion shares.

 

According to Thomson Reuters’ data, of the 204 companies in the S&P 500 that have reported results so far, 59.8 percent exceeded estimates. That was below the rate of those exceeding expectations that we have seen at this stage of the earnings season in recent quarters. Meanwhile, the S&P 500 gained 4.4 percent in January, its best month since October. The Dow is up 3.4 percent as it marches to its fourth straight month of gains, and the Nasdaq is up 8 percent.

 

The most recent negotiations regarding the possibility that Greece would reach a deal with private creditors on a debt swap and receive a bailout, thereby avoiding bankruptcy, was an aid to the market’s performance early in the trading day. Furthermore, shortly after the opening bell, the S&P 500 triggered a bullish technical signal, known as a "golden cross," as its 50-day average ticked above its 200-day average. The signal indicates a shift in mid-term momentum and usually means gains in the index six months down the road.

 

Out of 26 golden crosses since 1962, the S&P 500 gained an average 4.1 percent over the next three months and was positive 73 percent of the time. Over the next six months it gained 6.6 percent and was positive 81 percent of the time. At the same time, the flat close with wide intraday moves in both directions describes a "longed-legged doji" pattern on a Japanese candle stick chart and is seen as a sign of uncertainty and indecision on the part of investors.

 

Results from Pfizer and Eli Lilly both exceeded expectations. However, Pfizer trimmed its 2012 outlook and Lilly repeated its forecast for a drop in 2012 earnings. Lilly edged up 1.2 percent $39.74 and Pfizer dipped 0.8 percent to $21.40.

 

McKesson gained nearly 3.9 percent to $81.72 after it reported higher-than-expected quarterly earnings, fueled by growth in its core drug distribution business.

 

Transportation stocks fell as United Parcel Service gave up early gains to fall 0.7 percent to close at $75.65. Housing stocks fell after the S&P/Case-Shiller report on U.S. home prices. Lennar closed down 3 percent to $21.47.

 

Home Prices Decline

 

Home prices fell for a third straight month in nearly all cities tracked by a major index. The declines show that most homeowners are not reaping the benefits from some signs of an improving housing market.

 

Prices dropped in November from October in 19 of the 20 cities tracked, according to the Standard & Poor's/Case-Shiller home-price index released Tuesday. The steepest declines were in Atlanta, Chicago and Detroit. Phoenix was the only city to show an increase. The declines partly reflect the typical fall slowdown after the peak buying season.

 

Still, prices fell in 18 of the 20 cities in November compared to the same month in 2010. Only Washington and Detroit posted year-over-year increases. Prices in Atlanta, Las Vegas, Seattle and Tampa fell to their lowest points since the housing crisis began. And prices have fallen 33 percent nationwide since the housing bust, to 2003 levels.

 

The Case-Shiller index covers half of all U.S. homes. It measures prices compared with those in January 2000 and creates a three-month moving average. The November data are the latest available.

 

Sales of previously occupied homes rose in the last three months. Homebuilders are more optimistic after seeing more people express interest in buying this year. And home construction picked up in the final quarter of last year, which helped housing contribute to broader economic growth.

 

Home prices tend to follow sales, which are still below healthy levels. And a large number of vacant homes are sitting idle on the market, which means prices will likely stay unchanged for several years, said Paul Dales, senior U.S. economist at Capital Economics.

 

Conditions are improving for those in position to buy a home. Job growth is up, prices are down, mortgage rates are at record lows and rental prices have risen sharply since the housing bust.

 

Still, many people can't afford to buy or are unable to qualify for mortgage. Some people in position to buy are holding off, worried that prices could fall even further.

 

It is possible that we could be experiencing what similarly occurred in Britain in the 1990s, when it took four years for home prices to rise again after falling prices left homeowners with little financial equity in their homes.

 

Consumer Confidence Falls

 

The Conference Board , a private research group, reported on Tuesday that consumer confidence retreated in January after two straight months of substantial gains. According to the Board, its Consumer Confidence Index now stands at 61.1, down from a revised 64.8 in December. The index had surged from 40.9 in October to 64.8 in December.

 

The Conference Board indicated that despite consumers being more upbeat about jobs, they were less optimistic about income prospects. Rising gas prices have also taken a toll on sentiment.

 

A reading of 90 indicates a healthy economy, a level the index hasn't approached since December 2007 when the recession began. Economists and investors alike watch the confidence numbers closely because consumers' spending accounts for about 70 percent of GDP.

 

Crude Prices Rise on Hopes for EU Settlement

 

Oil prices climbed on Tuesday on supply worries together with hopes that a Greek debt deal and European budget agreement would help support stronger global economic growth and lead to higher fuel demand.

 

One key concern is that oil supplies from OPEC's second-largest producer, Iran, will be reduced as the United States considers additional sanctions, on top of a European embargo on Iranian oil, to step up pressure on Tehran to halt its nuclear program.

 

South Sudan's decision to stop production in a transit fee row with former civil war foe Sudan added to the supply worries.

 

As a result, crude futures saw volatile trading with North Sea Brent crude for March at one point jumping as much as $3.15 to a high of $113.90 before easing back to trade around $112.20 by 1511 GMT, on course for a rise of more than 4 percent in January.

 

Texas sweet crude was up $1.91per barrel to a high of $101.29, before slipping back to trade around $100.44 per barrel.

 

Brokers said high volatility was caused by computer-driven trading. A surge in volume had occurred as the Brent market went through a key buying level identified by one automated system. However, the oil market also gained support from across-the-board rises in stock markets after Greek Prime Minister Lucas Papademos raised hopes a deal would be reached this week to avoid a potentially chaotic debt default.

 

The dollar fell 0.3 percent against a basket of major currencies, remaining under pressure after the Federal Reserve said last week it was likely to keep interest rates near zero at least until late 2014. Dollar-denominated oil becomes cheaper to holders of other currencies when the greenback weakens.

 

The Senate Banking Committee plans to vote on a new round of sanctions targeting Iran's energy sector. The package comes on the heels of new banking sanctions that the Obama administration is only beginning to implement as well as tough new embargos by European nations.

 

South Sudan kept oil production shut even as Sudan released four tankers loaded with South Sudanese oil to try to defuse a row over export transit fees.

 

The expectation is for a second straight weekly rise in U.S. crude oil inventories on more imports, a preliminary Reuters poll showed.

 

In other energy trading, natural gas is down about 6 percent on renewed concerns about bulging supplies and weak demand.

 

At the pump, AAA says the national average for a gallon of gasoline is $3.44, an increase of almost 17 cents from a month ago and 34 cents from a year ago.

 

United Parcel Service an Indicator?

 

UPS reported on Tuesday that its fourth-quarter net income slid because of an accounting charge, but its adjusted results topped Wall Street's expectations. Excluding the charge, profit rose 21 percent. UPS credited the increase to an improving domestic package business that is making up for slower sales growth overseas. UPS. also forecast Tuesday that its full-year results would mostly exceed forecasts.

 

In the fourth quarter, the company earned $725 million, or 74 cents per share, compared with $1.3 billion, or $1.02 per share a year earlier. Excluding a charge tied to how UPS accounts for pensions and retirement plans, it earned $1.28 per share in the latest quarter.

 

Revenue rose 6 percent to $14.17 billion. Revenue rose 7 percent in the U.S, more than double the rate of its international business. Its smallest unit, supply chain and freight, saw revenue improve by 2 percent.

 

For the full-year, the company earned $3.8 billion, or $3.84 per share, compared with $3.33 billion, or $3.33 per share, in 2010. The full year 2011 results also include the impact of the accounting change.

 

Excluding one-time charges, UPS made more money in 2011 than any year since before the recession. Adjusted full-year profit was $4.35 per share. It made $4.17 per share in 2007, excluding one-time items. The recession began in December of that year. For 2012, the company expects to earn between $4.75 and $5, an increase of 9 to 15 percent over adjusted 2011 results.