MarketView for February 9

 

 

Summary 

 

The projection that investors would look to take some profits off the table was very much in evidence on Wednesday, although a late-hour rally by Bank of America enabled the Dow Jones industrial average to end the day in positive territory and thereby chalk up its eighth straight day of gains. At the same time, many on the Street remain confident that a continuing increase in corporate earnings will inspire further advances. At the same time, the recent string of lightly traded sessions raises some doubts in that direction.

 

Cisco Systems, a component of the Dow, reported quarterly earnings after the markets closed for regular trading and while earnings and sales exceeded expectations, its margins disappointed were not as high as what the Street was looking for and the shares dropped 9.3 percent to $19.99 in after-hours trading. That move could pressure early trading on Thursday. Cisco is considered a prime bellwether for the technology sector due to the breadth of its consumer base.

 

Shares in the energy and materials sectors weighed on indexes on Wednesday, pressured by weakness in emerging markets, a source of heavy demand for raw goods. Chevron was the weakest stock on the Dow, chalking up a decline of 1.5 percent to close at $96.24, followed by Alcoa, down 1.4 percent to close at $17.16.

 

Dow components Disney Coca-Cola added to the Dow’s gain for the day after both companies reported strong quarterly sales. Disney was the best performer among the Dow 30 industrials, ending the day up 5.3 percent to close at $43.36, while Coke gained 0.4 percent to close at $63.15.

 

A rally by Bank of America in the final hour of trading was just enough to push the Dow into positive territory. Shares rose after WikiLeaks founder Julian Assange said privately he doesn't know if his cache of internal BofA data contains any big news or scandal. BofA ended the day up 0.2 percent to close at $14.64.

 

Trading volume continued to be weak, with only about 7.36 billion shares trading on the major exchanges, a number that was well below last year's daily average of 8.47 billion. However, both the Dow and the S&P 500 are at 2-1/2-year highs.

 

Whole Foods rose 8.1 percent to close at $58.11 in after-hours trading after company reported quarterly earnings that exceeded expectations, while at the same time increasing its full-year earnings guidance.

 

Federal Reserve Chairman Ben Bernanke told a congressional committee that the labor market remains sluggish and he continues to believe that inflation will remain subdued. Wall Street's reaction to Bernanke's comments was muted.

 

Shares of exchange operators rose on the surprising news that Deutsche Boerse was in advanced merger talks with NYSE. NYSE shares rose 14 percent to $38.10 while CBOE Holdings rose 4.3 percent at $25.51.

 

In the financial sector, shares of Wells Fargo & Co (WFC.N) dropped 2.8 percent to $33.13 after the bank said its chief financial officer will retire. The structure of the CFO's retirement raised questions, analysts said.

 

Deutche Boerse to Buy NYSE Euronext

 

Deutsche Boerse is in advanced talks to buy NYSE Euronext in a deal that would create the world's largest trading powerhouse and put a bastion of American capitalism into foreign hands. The discussions, announced on Wednesday, came only hours after the London Stock Exchange's said it had agreed to buy Canadian stock market operator TMX, marking a shake-up for an industry under intense cost pressure from upstart electronic rivals, but one that offers new opportunities after the financial crisis in on-exchange derivatives trading.

 

The deals sent shares in other exchanges soaring on speculation that further match-ups would follow. The LSE's purchase of the Toronto stock market operator would make it the world's fourth largest and a top center for growth sectors of mining and energy, with $4.1 trillion of stock changing hands each year. However, that deal would be dwarfed by a Deutsche Boerse-NYSE Euronext merger, which would give it annual trading volume exceeding $20 trillion.

 

The combined group would have headquarters in New York and Frankfurt, with Deutsche Boerse shareholders holding about 60 percent of the combined company and NYSE shareholders owning the rest.

 

The companies said NYSE Euronext Chief Duncan Niederauer would be chief executive of the merged company and Deutsche CEO Reto Francioni would be chairman. Deutsche Boerse and NYSE Euronext said they could cut costs by 300 million euros ($400 million) a year in a merger that European sources said should be finalized this month.

 

Aggressive, upstart trading venues have eaten deeply into the market shares of these traditional exchanges, forcing the Big Board, the LSE and others to invest heavily in trading technology and to look to higher-margin areas to grow. Nonetheless, the takeovers of such national capital markets, and indeed prominent symbols of a country's business prowess, require the approval of securities regulators.

 

In Canada, the pact met a lukewarm response and may run into political hurdles. Early signals out of Ottawa suggested the government will not quickly approve the takeover of the Toronto Stock Exchange's parent company.

 

The SEC declined to comment on the possibility of a German-based company acquiring the NYSE, which lies at the heart of Wall Street and long has been a proud symbol American finance where share trading first began under a buttonwood tree in 1792. The two takeovers -- along with Singapore Exchange's planned $7.8 billion purchase of Australia's ASX -- revive a wave of international exchange mergers last seen in 2006 and 2007.

 

Deutsche Boerse-NYSE Euronext would become a giant with a strong grip on profitable derivatives trading. It also would be well positioned to play a bigger role in the over-the-counter swaps market as regulators press for more transparent trading venues and clearinghouses in the wake of the financial crisis.

European regulators could take issue with the combined company's share of the derivatives market. For instance, it would dominate trading in stock and index derivative products, which had a trading value of 115 billion euros last month, according to Federation of European Securities Exchanges data. The two companies also are major interest rate and commodity exchanges.

 

Speculation that further mergers would follow sent CBOE shares up 4.6 percent to $25.60. Options exchanges of that ilk have been growing fast, while stock market trading has been moving away from traditional exchanges and toward electronic trading venues.

 

Bernanke Takes Heat from Congress

 

Wednesday saw Federal Reserve Chairman Ben Bernanke warning Congress against implementing sharp cuts in domestic spending at a time when the economic recovery is still fragile enough to require extraordinary support from the central bank.

 

Even as he warned about the need for a long-term plan to address "unsustainable" budget deficits, Bernanke said steep reductions in government outlays could compromise growth at a time when employment is just beginning to rebound.

 

"The cost to the recovery would outweigh the benefits in terms of fiscal discipline," Bernanke told the House of Representatives' Budget Committee. "I think we really need to take a long-term view."

 

Bernanke offered few clues into whether the Fed might extend its controversial policy of buying $600 billion in government bonds beyond its June deadline, but nor did he signal any inclination to cut the program short. The Fed launched the bond-buying plan in November in an attempt to keep long-term borrowing costs down and support a fragile economic rebound.

 

Acknowledging renewed momentum in the economy, Bernanke said a drop in the jobless rate to 9 percent in January from 9.8 percent in November, the largest two-month decline since 1958, was "grounds for optimism." However, he also said hiring is still anemic and noted that the economy has made up just over one million of the more than eight million jobs lost during the recession.

 

"This gain was ... not enough to significantly erode the wide margin of slack that remains in our labor market," he said. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

 

The Fed's aggressive bond-buying program drew ire from many policymakers in emerging markets, who accused the United States of unfairly driving down the value of the dollar to increase exports.

 

At the same time, Republicans attacked the policy as potentially inflationary, concerns on display again Wednesday as Bernanke made his first appearance before a House committee since Republicans assumed control of the chamber last month.

 

The panel's chairman, Republican Rep. Paul Ryan of Wisconsin, opened the hearing by criticizing the Fed for providing the fuel for future bubbles and inflation, suggesting the bond purchases has resulted in the Fed eroding the dollar's value.

 

"There is nothing more insidious that a country can do to its citizens than debase its currency," Ryan said.

 

Pressed by skeptical lawmakers, Bernanke said the Fed regularly reviews its bond buying, but also indicated he feels it is still needed. He repeated that it would take four to five years for unemployment to return to more "normal" levels closer to 5 percent.

 

Bernanke said inflation remains low, a tough message to deliver amid headlines of rising food and commodity costs across the globe. He also said expectations of future inflation had remained "stable," suggesting little worry that an inflationary psychology was building.

 

Both Democrats and Republicans tried to get Bernanke to back their views on how best to attack a budget deficit that is expected to hit a record $1.5 trillion this year. Republicans want to rein in outlays and ward off any tax increases; Democrats are wary of cutting spending too deeply now.

 

Bernanke offered a fig leaf to both sides, supporting lower taxes on the one hand while maintaining that short-term budget reductions should not be too radical.

 

"It's really a question of convincing the market that there's a long-term plan here," Bernanke said, adding that budget cuts should be done in a "growth-friendly" way.

 

He said Congress should consider closing corporate tax loopholes to broaden the tax base so that the corporate tax rate could be reduced. He also repeated a warning about the dire consequences of not lifting the country's debt ceiling.

 

Asked about the future of government-sponsored enterprises like Fannie Mae and Freddie Mac, Bernanke said government backing for the mortgage sector should be a last resort, not common practice.