MarketView for July 16

 

 

Summary 

 

Stock prices moved sharply higher for the fourth consecutive day on Thursday due in no small part to the announcement by JPMorgan of a profitable second quarter, which now has optimism building on the Street that this earnings season may end up as a pleasant surprise. After the close of regular trading, Google also posted better than expected earnings

 

Comments from economist Nouriel Roubini further boosted sentiment after he said the worst is past in terms of economic and financial conditions.

 

Shares of Qualcomm sent the Nasdaq higher after RBC Capital Markets started coverage of the cell phone chip supplier with an "outperform" rating. Qualcomm ended the day up 1.4 percent to close at $46.72.

 

On the economic front, government data showed the number of new claims for jobless benefits fell last week to their lowest level since January. However, the seasonally adjusted data was amplified by earlier auto industry plant shutdowns.

 

A separate report showed factory activity in the Mid-Atlantic region shrank for the 10th consecutive month in July, a worse-than-expected decline that raised questions about the speed of the economic recovery.

 

Mixed Economic News

 

The number of new jobless benefits claims fell to their lowest level since January last week, a decline that was due in no small part to the upheaval in the auto industry, while a key regional manufacturing index slipped more than expected in July, reports showed on Thursday.

 

Labor Department said initial claims for state unemployment insurance fell 47,000 to a seasonally adjusted 522,000 in the week ended July 11. The figure was much lower than expected, but was not seen as a sign of a sudden, sharp improvement in the labor market.

 

A Labor Department official said there had been far fewer seasonal layoffs than anticipated in early July in the automotive sector and elsewhere in manufacturing. Many of the jobs typically shed for just a few weeks for summer retooling were cut earlier, and in some cases permanently, as the industry slashed output in the spring to reflect extremely weak demand.

 

"The big drop is not necessarily a reflection of what is going on in the economy," the official said.

 

The jobs report, however, still managed to reinforce the idea that the worst of the labor market retrenchment is over, even if net job creation is months away. 

 

The effects of the weak labor market were seen on the rising rate of home foreclosures. Foreclosure filings jumped to a record 1.9 million on more than 1.5 million properties in the first half of 2009, RealtyTrac reported. James Saccacio, chief executive of RealtyTrac, said in a statement that unemployment-related foreclosures accounted for much of the increase.

 

Nonetheless, in a positive note for housing the National Association of Home Builders reported that home builder sentiment in July jumped to its highest level since September 2008. In the mortgage market, average interest rates fell to 5.14 percent for the popular 30-year fixed rate in the week ended July 16, a third straight weekly decline, said home funding company Freddie Mac.

 

The Philadelphia Federal Reserve said its index of factory conditions in the U.S. Mid-Atlantic region fell to minus 7.5 in July from June's minus 2.2. Any reading below zero shows contraction in the business sector in a region that spans eastern Pennsylvania, southern New Jersey and Delaware.

 

Among the components of the Philadelphia index, perhaps the most closely watched regional manufacturing measure, employment slipped but new orders were less weak. The report was termed consistent with views that the initial stages of a U.S. recovery will be far from robust.

 

JPMorgan warned on Thursday that rising unemployment will add to pressure on credit losses. Credit quality for both mortgages and credit cards is weakening faster than expected, said the bank, which reported a surge in consumer credit losses for the quarter, even as its profit jumped.

 

CIT said on Thursday that its bailout talks with the government had ended. The news fueled fears of a potential bankruptcy by CIT, a major lender to retailers and other small and mid-sized businesses.

 

Crude Prices Up Again

 

The price of crude oil futures for August delivery rose on Thursday, tracking a late-day rebound on Wall Street and bolstered by a report showing strong economic growth in China, the world's second largest consumer of energy.

 

The price of sweet domestic crude oil futures for August delivery settled up 48 cents per barrel at $62.0. London Brent settled down 34 cents per barrel at $62.75 per barrel ahead of the August contract's expiration.

 

The gains, which added to Wednesday's rally of more than $2 per barrel, was triggered by a report indicating a reduction in domestic crude inventories. Oil prices have also tracked equities closely in recent months as dealers look to stock markets for signs of optimism about the economy that could eventually spell a rebound in energy consumption.

 

The oil market also received support from news that China experienced surprisingly strong economic growth of 7.9 percent in the second quarter, fueled by state spending and bank lending.

 

Oil prices remain down nearly $10 since early July amid lingering concerns about global energy demand, which has been contracting for the first time in a quarter century under the weight of the economic recession. The global slowdown has cut world oil demand by as much as 2.5 million barrels per day, according to the International Energy Agency.

 

Encouraging News from the Home Building Sector

 

Home builder sentiment in July rose to its highest level since September as improved sales conditions bolstered confidence in the market for new single-family homes the National Association of Home Builders said. The NAHB indicated that its preliminary NAHB/Wells Fargo Housing Market Index was 17 in July, up from 15 in June.

 

Readings below 50 in the index, which was launched in January 1985, indicate more builders view market conditions as poor rather than favorable.

 

The rise in home builder sentiment is a positive for the housing market, which has been showing some signs of stabilization, with sales rising and home price declines moderating in many regions of the country.

 

"Builders are seeing slightly better sales conditions this month as consumers take advantage of the first-time buyer tax credit, low interest rates and attractive home prices," NAHB Chairman Joe Robson, a home builder from Tulsa, Oklahoma, said in a statement.

 

The government's $8,000 tax credit for first-time home buyers, part of the economic stimulus package, is helping boost sales. Nonetheless, there is concern about what lies ahead, Robson added.

 

"A true recovery in the housing market and overall economy cannot take place until the continuing foreclosure crisis is abated and a decent flow of credit is restored to housing production," Robson said. "Meanwhile, the stalled jobs market is a major concern to builders and potential home buyers alike," he said.

 

The gauge of current single-family homes sales rose to 17 from 14. The index of sales expected in the next six months, however, was unchanged at 26. But the measure of prospective-buyer traffic climbed, rising to 14 from 13, the group said.

 

The housing market is suffering the worst downturn since the Great Depression as a huge supply of unsold homes; tighter lending standards and record foreclosures push down home prices. Home builders are struggling under sinking demand and a credit crisis, while at the same time facing a flood of homes in foreclosure.

 

However, interest rates on mortgages have fallen in recent weeks, a key development that could help turn the hard-hit housing sector around. Home builders have curbed their new construction. They have also been reducing their inventories of unsold homes by slashing prices at the expense of profits to pay off debt and keep afloat.

 

"Although today's HMI is positive news that helps confirm the market is bouncing around a bottom, the gain was entirely contained in the component gauging current sales conditions, while the component gauging sales expectations for the next six months remained virtually flat for a fourth consecutive month," NAHB Chief Economist David Crowe said in a statement.

 

"Builders recognize the recovery is going to be a slow one and that we are facing a number of substantial negative forces," he said.

 

On a regional basis, the housing market index declined in only one of the four regions in July. The Midwest was unchanged at 14 and the South posted a five-point increase to 20. The Northeast posted a three-point decrease to 16. The West was unchanged at 15 this month.

 

IBM Surprises

 

IBM increased its full-year earnings forecast, much to the surprise of Wall Street, as its software and services businesses increased profit margins, lifting its shares in after-hours trade. The company's outlook and higher-than-expected quarterly earnings gave investors hope that the worst of the technology downturn may be over. IBM said it now expects 2009 earnings of at least $9.70 per share, up from its previous outlook of $9.20.

 

The upbeat results added to the market's optimism following leading chipmaker Intel Corp's stronger-than-expected earnings and outlook announcement this week. The higher than expected outlook took the sting out of its lower-than-expected second-quarter revenue, which fell 13 percent to $23.3 billion. Net earnings for the quarter rose to $3.1 billion from $2.8 billion in the year-ago quarter. Profit per share rose to $2.32 from $1.97.

 

IBM has fared better than many other technology companies amid the downturn, helped by its growing focus on profitable software and services like outsourcing and technology support, rather than increasingly commoditized hardware. Its gross profit margin rose to 45.5 percent from 43.2 percent a year earlier.

 

Chief Executive Samuel Palmisano said the results underscored how the company's transformation continued to reap benefits. "We are well ahead of pace for our 2010 roadmap of $10 to $11 per share," he said.

 

Chief Financial Officer Mark Loughridge said economic conditions remained tough and held off of sounding an all-clear, but said he saw further room for the company to improve its profitability. He also said he expects the government's stimulus plans to begin encouraging customers' discretionary spending, and forecast a weaker dollar to provide tailwind.

 

IBM rose to $112.40 in extended trading, after closing up $3.42, or 3.2 percent, at $110.64.