MarketView for July 27

 

 

Summary 

 

After spending much of the day in negative territory, the three key equity indexes managed a last minute sprint to the finish line, ending the day in the black. Much of the day’s positive activity was attributable to a move into financial shares, which had lagged in the recent two-week run-up. A release of new home sales data by the Commerce Department helped to add strength to the sector.

 

New home sales posted their largest monthly gain in eight years in June, suggesting the housing market may be starting to recover from its worst slump since the Great Depression of the 1930s.Financials had lagged in the previous weeks, but Friday saw the beginning of a rotation into the sector and out of technology, which continued Monday.

 

Also helped out by the move into financial shares were several regional banks, which had been among the worst casualties brought on by credit losses resulting from poor real estate loans in combination with a weak housing market. Regions Financial rose 8.9 percent to $4.02, while Zions Bancorporation was up 13 percent to $12.65.

 

Stronger-than-expected earnings, coupled with upbeat economic data, have lifted the main equity indexes recently, giving stocks their best two-week run since just after the S&P 500 hit a 12-year closing low in the beginning of March. The three major indexes rose about 11 percent each over the past two weeks.

 

Shares of Verizon, a component of the Dow Jones industrial average fell 1.6 percent to $31 after the company reported second-quarter earnings that fell from a year ago. Aetna was down 2.7 percent to $25.72 after the company cut its full-year outlook, citing higher-than-projected medical costs.

 

Amgen rose 3.2 percent to $62.72 after the biotech company raised its full-year earnings forecast and reported better-than-expected quarterly earnings. Amgen attributed the good news in part to strong sales of its rheumatoid arthritis drug and a tax benefit. The shares ended the day  down 0.25 percent, or 15 cents per share at $60.77 in regular trading.

 

Commerce Department Reports Higher New Home Sales

 

Sales of new single-family homes rose more than expected in June, while the inventory of homes for sale hit an 11-year low, the Commerce Department reported on Monday. According to the report, sales rose to an annual rate of 384,000 units in June, the Commerce Department reported, up 11 percent from May, while the number of new homes still for sale fell to 281,000, its lowest point since February 1998.

 

Despite the encouraging data, the median sale price for a new home fell to $206,200, down 5.8 percent from the previous month, and down 12 percent from a year ago.

 

That was the good news supposedly.  The bad news is that the data could be extremely inaccurate, even by the government’s standard. The data is based on a 90% confidence interval, includes zero. Furthermore, the government does not have sufficient statistical evidence to conclude that the actual change is different from zero.

 

These statistics are estimated from sample surveys. They are subject to sampling variability as well as non-sampling error including bias and variance from response, non-reporting, and under coverage. Estimated average relative standard errors of the preliminary data are shown in the tables.

 

Whenever a statement such as “2.5 percent (±3.2%) above” appears in the text, this indicates the range (-0.7 to +5.7 percent) in which the actual percent change is likely to have occurred. All ranges given for percent changes are 90-percent confidence intervals and account only for sampling variability.

 

If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease.

 

In addition, changes in seasonally adjusted statistics often show irregular movement. It takes 4 months to establish a trend for new houses sold. Preliminary new home sales figures are subject to revision due to the survey methodology and definitions used.

 

The survey is primarily based on a sample of houses selected from building permits. Since a “sale” is defined as a deposit taken or sales agreement signed, this can occur prior to a permit being issued. An estimate of these prior sales is included in the sales figure.

 

On average, the preliminary seasonally adjusted estimate of total sales is revised about 3 percent. Changes in sales price data reflect changes in the distribution of houses by region, size, etc., as well as changes in the prices of houses with identical characteristics.

 

SEC Restricting Naked Selling

 

The SEC on Monday made permanent an emergency rule put in at the height of last fall's market turmoil that aims to reduce abusive short-selling, stating that that it took action on the rule targeting so-called "naked" short-selling that was due to expire Friday.

 

"Naked" short-selling occurs when sellers don't even borrow the shares before selling them, and then look to cover positions sometime after the sale. The SEC rule includes a requirement that brokers must promptly buy or borrow securities to deliver on a short sale.

 

Brokers acting for short sellers must find a party believed to be able to deliver the shares within three days after the short-sale trade. If the shares aren't delivered within that time, there is deemed to be a "failure to deliver." Brokers can be subject to penalties if the failure to deliver isn't resolved by the start of trading on the following day.

 

At the same time, the SEC has been considering several new approaches to reining in rushes of regular short-selling that also can cause dramatic plunges in stock prices. Investors and lawmakers have been clamoring for the SEC to put new brakes on trading moves they say worsened the market's downturn starting last fall. SEC Chairman Mary Schapiro has said she is making the issue a priority.

 

In addition to making the "naked" short-selling rule permanent, the SEC and its staff are working with major stock exchanges to make data on short-sale transactions and volumes publicly available through the exchanges' Web sites, the SEC announcement said. It will result in "a substantial increase" over the amount of information currently required, the agency said.

 

"Today's actions demonstrate the (SEC's) determination to address short-selling abuses while at the same time increasing public disclosure of short-selling activities that affect our markets," Schapiro said in a statement.

 

The SEC also said it will hold a public hearing on Sept. 30 to address stock lending for short-selling and possible new disclosures related to short-selling that could be required.

 

On another topic that has received attention by the SEC, flash trading, Sen. Charles Schumer said on Monday that he has asked Schapiro to ban the practice, which enables some big Wall Street banks and hedge funds to get an advance look at investors' stock orders before they hit the market.

 

The use of super-fast computers by those participants to spy on orders gives them an unfair advantage, Schumer wrote in a letter Schapiro. If the SEC fails to act, Schumer said he would consider proposing legislation to ban flash trading.

 

"This kind of unfair access seriously compromises the integrity of our markets and creates a two-tiered system where a privileged group of insiders receive preferential treatment, depriving others of a fair price for their transactions," Schumer told Schapiro.

 

Verizon’s Earnings Fall

 

Verizon posted lower quarterly earnings and said it would cut 8,000 jobs in its wire line business, as weakness in wholesale and corporate segments overshadowed wireless growth. According to the company, it plans to accelerate cost cuts in its land line business, with new layoffs amounting to 3.4 percent of its workforce of 235,000 employees. That number is in addition to the 8,000 job cuts in the last year.

 

Verizon's second-quarter profit fell to $3.16 billion, or 52 cents per share, from $3.4 billion, or 66 cents a share, in the same quarter a year earlier. Excluding items such as merger integration and pension charges, earnings came in at 63 cents per share.

 

"Clearly the broader economic issues are affecting the business," Chief Financial Officer John Killian told analysts on a conference call. In particular he cited delays to big telecom projects at corporate clients as well as job cuts, which reduce business telephone use.

 

In addition to the upcoming cutbacks Verizon also plans to "significantly reduce the wire line cost structure over the next 12 to 18 months," Killian told analysts.

 

Verizon's second quarter results were largely in line with expectations, with revenues increasing 0.2 percent in its mass-market segment, including home phones and small businesses; offset by declines in wholesale and enterprise. Operating revenue rose 11 percent to $26.86 billion in the second quarter.

 

Verizon Wireless said it saw competition pick up in June after the latest iPhone from Apple went on sale at AT&T, which has exclusive U.S. rights to iPhone. However, Verizon said it plans to improve its own line up with Palm's high-profile Pre in early 2010 and new upcoming phones from Motorola.

 

Strong mobile customer growth at AT&T and Verizon in the second quarter likely means customers defected from rivals such as Sprint Nextel and T-Mobile. Verizon, which owns Verizon Wireless with Vodafone Group Plc, said that before merger costs and other items, wireless margins on earnings before interest tax, depreciation and amortization rose 0.7 percentage points to 46.3 percent. AT&T margins were hurt by hefty costs from iPhone subsidies.

 

Verizon and AT&T both focus on postpaid customers who commit to pay set monthly bills for two years even if they talk less. But due to the weak economy interest has picked up in prepaid, where customers pay in advance and do not commit to contracts.

 

This led Verizon to recently forge an deal with Tracfone, the U.S. wireless arm of America Movil, under which Tracfone rents space on Verizon's network to offer unlimited calls to customers who pay in advance at cut price rates.