MarketView for February 24

 

 

Summary 

 

The S&P 500 recovered from a morning decline that was triggered by deepening concerns that higher crude oil prices could stifle economic activity. Oil is up about 12 percent over the past three sessions. Stocks hit their worst levels when Brent crude neared $120 a barrel as a result of the fighting going on in Libya.

 

The S&P inversely tracked oil prices and a late-day drop in crude resulted in a corresponding recovery in equities. The index is down 2.7 percent for the week so far, but the outlook going forward appears bullish.

 

Trading volume has risen in the past few sessions, following a period of anemic action that saw stocks hit 30-month highs. The S&P is up 24 percent since the start of September. About 8.90 billion shares traded on the major exchanges, well above last year's daily average of 8.47 billion shares.

 

Meanwhile, the S&P broke through a trend line dating back to August that connected lows in late August with lows reached in late November. Selling accelerated after this line was broken, and the Dow momentarily dropped below 12,000 for the first time since February 3, though both rebounded. At the same time, the day's options activity suggested that some investors were still cautiously bullish in the long term. Investors have been selling high-flying stocks, but then using long-term call options (which profit if the stock rises).

 

Boeing rose 3.4 percent to $73.20 after the bell on word that the Pentagon had announced that Boeing won a contract to build new refueling planes for the U.S. Air Force. Salesforce.com rose 7.8 percent to $144.79 in extended trading after the company reported a stronger-than-expected profit.

 

Priceline.com closed up 8.5 percent to $462.34 and kept the Nasdaq in positive territory after a number of brokerages raised their price targets on the stock. The online travel agency reported a larger-than-expected profit late Wednesday.

 

General Motors earnings exceeded estimates, but its shares fell 4.5 percent to $33.02 on concerns regarding crude prices.

 

In economic news, new claims for jobless aid fell last week, pointing towards an improvement in the labor market. However, declines in new home sales and durable goods orders in January indicated that the economy remains anemic.

 

Latest Economic Data Encouraging

 

New claims for unemployment benefits fell last week, indicating healing in the labor market, but declines in new home sales and durable goods orders in January indicated that the recovery remains uneven and slow by historical standards and the unemployment rate remains at a painfully high 9 percent.

 

According to a report released prior to the opening bell by the Labor Department, initial claims for state unemployment insurance benefits fell by 22,000 claims to a seasonally adjusted 391,000 claims. Jobless claims are now beneath the 400,000 threshold that economists normally associate with strong nonfarm payrolls growth, and several said it was likely employment would expand by at least 150,000 jobs in February, after January's paltry 36,000 gain.

 

Separate reports from the Commerce Department showed orders for long-lasting manufactured goods excluding transportation items suffered the biggest drop in two years in January, while new home sales tumbled 12.6 percent as a homebuyer tax credit in California ended.

 

As economists cheered the jobless claims data, which pulled a closely watched four-week moving average to a more than 2-1/2-year low, they shrugged off the other reports. They noted that durable goods orders are extremely volatile and argued that harsh winter weather might have weighed on home sales.

 

St. Louis Federal Reserve Bank President James Bullard said the improving prospects raised the question of whether the Fed should complete its planned purchase of $600 billion of government debt to support the economy.

 

Fed officials have set a high bar for tweaking the program and financial markets will look to congressional testimony by Fed Chairman Ben Bernanke next week to try to discern the current state of debate within the Fed.

 

Durable goods orders, excluding transportation, fell 3.6 percent last month, the largest decline since January 2009, after rising 3.0 percent in December. Overall durable goods orders rose 2.7 percent, the largest increase since September, after falling 0.4 percent the prior month.

 

Manufacturing is the key driver of the economy's recovery and economists saw no change to the status quo, citing several surveys which have pointed to strong factory activity.

 

The sting from the report was blunted by big upward revisions to December's data. The revisions, coupled with modest improvements in the trade balance and rising inventories suggest that the government could raise its measure of fourth-quarter growth to a 3.4 percent annual rate from the 3.2 percent increase reported late last month. The government will publish its second estimate for fourth-quarter growth on Friday.

 

The rise in overall durable goods orders last month was driven by a 4,900 percent surge in aircraft bookings, which reflected December orders from Boeing that had not been fully captured in the report for that month. Outside transportation, there were big declines in orders for machinery, computers and communications equipment.

 

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, dropped 6.9 percent last month, the biggest decline in two years. That followed a 4.3 percent increase in December.

 

Core capital goods shipments, which go into the calculation of gross domestic product, fell 2.0 percent after rising 2.5 percent in December. Unfilled orders for manufactured durable goods rebounded in January, while inventories rose for the 13th straight month.

 

New home sales in January were pulled down by a 36.5 percent plunge in the West after spiking 62.5 percent the prior month.

 

GM Shares Below IPO Price

 

General Motors posted fourth-quarter results that exceeded Street expectations, but its shares fell below their IPO price over concerns regarding the pressure from rising oil prices and higher costs of launching and selling new cars. GM posted a profit of $4.7 billion for all of 2010, its first full year after a landmark bankruptcy that scoured costs and debt from its balance sheet. That marked the automaker's first full-year profit since 2004 and its largest profit since 1999, when it earned $6 billion on booming sales of trucks and SUVs.

 

GM closed down 4.5 percent at $33.02, just above the $33 level at which they went public last November. At one point, the stock was down as much as 7.3 percent to hit a new, post-IPO low of $32.05. The shares have lost 15 percent since late January, pushing the remaining U.S. Treasury investment in the automaker into a deeper loss. Over the same period, the shares of Ford have lost nearly 22 percent.

 

For GM to keep the Treasury Department from taking a loss on its $52 billion bailout, the remaining 33 percent U.S. government stake in GM would have to be sold at about $53 a share.

 

GM's fourth-quarter net income of $510 million represented a slowdown from the previous three quarters, but topped analyst expectations after adjusting a one-time charge to buy back preferred shares held by the Treasury. Revenue rose nearly 15 percent from a year earlier to $37 billion.

 

The most bullish forecasts for a recovery in the cyclical auto sector had been under scrutiny since late January when Ford's quarterly earnings fell far short of expectations. Ford's results touched off a slide in shares of both GM and Ford as investors worried that higher costs for everything from steel to plastic to the engineering teams behind new vehicles would erode profitability in future quarters.

 

The surge in oil prices to 2 1/2 year highs near $120 a barrel on Thursday added to the pressure on GM and other auto-related shares. Shares of major auto suppliers including BorgWarner, TRW Automotive and Lear closed lower on Thursday.

 

GM Chief Executive Daniel Akerson said the automaker would keep a hard line on cost increases even as it ramps up spending on engineering and marketing. "As we expand production with growing industry demand, it will be critical for us to stay very focused on managing fixed costs," he told analysts.

 

Akerson said the automaker was better-positioned than it had been in 2008 when gasoline prices last spiked and GM was caught without competitive small cars.

 

"We were concerned about this well before it was on the front page of any paper in the United States or around the world," said Akerson, when asked about higher oil prices. "In fact, we've been contingency planning going back prior to the IPO. What we would do? How we would react?"

 

He added: "Energy is going to be more expensive, so we've got to prepare for that and it's come a little bit earlier maybe than the industry or the economy ... expected or wanted, so we're going to have to react."

 

GM is counting on new small cars to buffer the impact of higher gasoline prices. Those include the Buick Verano compact and an upcoming subcompact, the Chevy Sonic, that will compete against the likes of the Hyundai Elantra and the Ford Fiesta.

 

In addition to higher commodity costs, there are questions regarding GM's higher spending on incentives since the start of 2011, with some rivals saying the automaker was at risk of slipping back into its old ways of pushing volume by sacrificing profit per car. GM said it had pushed its spending on incentives up by almost 13 percent in January, but executives said that was a temporary move that would be reversed.

 

GM ended 2010 with nearly $28 billion in cash and about $5 billion on an undrawn credit facility. Its pension plans were underfunded by about $12 billion.

 

The Detroit-based automaker suspended some of its vehicle development efforts as it tried to conserve cash in the run-up to bankruptcy. It faces higher costs now to revive those programs, including efforts to broaden its offering of electric cars beyond the just-released Chevy Volt.

 

Separately, GM said it would pay more than $200 million in bonuses to hourly workers, including payouts of about $4,300 for each of its roughly 45,000 factory workers represented by the United Auto Workers union.