MarketView for February 28

 

 

Summary 

 

Comments from Warren Buffett and William Dudley, the President of the New York Fed, while not  glowing, they were comments that expressed solid confidence in the way the economy was moving forward. The end result was that the major equity indexes ended the month of February on a high note. Nonetheless, do not lose sight of the possibility that the price of crude oil, which was down on Monday, could reassert itself and thereby put a collar around future market gains.

 

For example, one sign that share prices could stagnate was evident in the lackluster volume, in contrast with last week's selloff which occurred on heavy volume. Just 7.49 billion shares traded on the major exchanges on Monday, well below last year's daily average of 8.47 billion.

 

Brent crude oil prices, which were moving towards the $120 per barrel mark last week, eased to $112. Nonetheless, there are still concerns that the global economic recovery may be threatened if oil prices remain elevated.

 

Buffett, chairman of Berkshire Hathaway, wrote in his widely read annual letter to shareholders of the need for "major acquisitions," a sign stocks may be cheap.

 

The latest acquisition news came from Ventas, which plans to buy Nationwide Health Properties in a $5.8 billion deal that strengthens Ventas' position as the largest domestic owner of senior housing. NHP shares nded the day up 9.7 percent to close at $42.74.

 

The Nasdaq's gains were the smallest as Amazon.com fell 2.2 percent to $173.29 after UBS downgraded the online retailer, citing increased costs.

 

For the month, the Dow Jones industrial average was up 2.8 percent, the S&P rose 3.2 percent and the Nasdaq chalked up a gain of 3 percent.

 

Comments from Federal Reserve officials hinting they were ready to support the economy if necessary helped ease concern over the scheduled end of the Fed's $600 billion bond-buying program later this year.

 

New York Fed Bank President William Dudley said policymakers should be wary about withdrawing liquidity too quickly, while St. Louis Fed Bank President James Bullard would not rule out further use of the Fed's unorthodox tool for stimulus.

 

Data on Monday showed Midwest business activity rose more than forecast in February. In addition, incomes posted the largest increase since May 2009 last month. The jump partly reflected a payroll tax cut enacted last year.

 

Mixed Economic Data…Again

 

Consumer spending barely edged up in January as households took advantage of tax cuts to rebuild their savings, suggesting spending would offer only a modest lift to the recovery in the first quarter. At the same time, other data indicated that the manufacturing sector was doing well, with a gauge of factory activity in the country's Midwest hitting a 22-1/2 year high this month, which should help the economy weather rising oil prices and maintain its steady growth momentum.

 

The Commerce Department reported on Monday that spending rose 0.2 percent, the smallest increase in seven straight months of gains, after an upwardly revised 0.5 percent increase in December.

 

New York Federal Reserve Bank President William Dudley, speaking in New York, cautioned against withdrawing support for the economy too soon.

 

Fed Chairman Ben Bernanke testifies before Congress on Tuesday and Wednesday and is likely to echo Dudley's comments. Some Fed officials have said the central bank should consider paring its $600 billion bond buying program aimed at keeping interest rates low and bolstering the economy.

 

Consumer spending -- which accounts for 70 percent of all economic activity -- rose at a robust 4.1 percent rate in the fourth quarter, making up the bulk of the economy's 2.8 percent annualized growth pace. At the same time, the rising cost of gasoline and food has begun to eat into household budgets. The spending report showed consumer inflation rose at a relatively brisk 0.3 percent last month.

 

Taking the higher prices into account, spending actually fell 0.1 percent, the first decline in a year. That prompted some to downgrade their spending growth forecasts for the first quarter to as low as a 2 percent rate. The report, however, offered little evidence that food and energy costs were sparking a broader rise in inflation.

 

A core inflation gauge closely watched by the Fed edged up just 0.1 percent. In the 12 months through January, this index rose 0.8 percent, just off a record low.

 

Tax cuts helped lift incomes by 1.0 percent in January, the largest rise since May 2009, as the government began to withhold less for the Social Security retirement program. The lower tax withholding was part of an $858 billion tax cut package enacted last year. Economists expect the extra income to cushion consumers against high gasoline prices. With spending tepid and incomes strong, savings jumped to their highest level since August.

 

Separately, the Institute for Supply Management-Chicago's index of business activity in the Midwest rose to 71.2 -- the highest since July 1988 -- from 68.8 in January as new orders and deliveries and backlogs increased. A reading above 50 indicates expansion in the regional economy.

 

The data, combined with other upbeat regional factory surveys, suggested a national manufacturing report Tuesday could show more strength than had been expected.

 

Treasury prices rose modestly, while the dollar fell to a 3-1/2 month low against a basket of currencies.

 

A third report showed the recovery continues to elude the housing sector. The National Association of Realtors Pending Home Sales Index, based on contracts signed in January, fell 2.8 percent. Pending home sales lead existing home sales by a month or two.

 

Crude Prices Fall

 

The price of crude oil was down on Monday in volatile trading on the belief that increased production from Saudi Arabia can offset supply disruptions in Libya allowed investors to pause after Libya's turmoil sent prices to 2-1/2-year peaks last week.

 

Some of the lightest trading volume of the year indicated investor weariness, but also helped make for choppy trading and wide trading ranges.

 

Brent crude futures for April fell 34 cents to settle at $111.80 a barrel, well off its $114.50 intraday peak. However, Brent still finished 10.68 percent higher for the month, its largest percentage rise since May 2009 when prices jumped 29 percent.

 

Brent's premium to its U.S. counterpart remained nearly $15 a barrel, but has narrowed from last week's record spread of $16.91. Brent's price rise has been stronger because Europe is more vulnerable to supply disruptions from Libya and the region.

 

U.S. crude fell 91 cents to settle at $96.97 a barrel, slipping after reaching a high of $99.96 intraday. U.S. crude posted a 5 percent monthly gain, biggest since December 2010.

 

Total U.S. crude trading volume was above 512,400 lots, 45 percent below the 30-day average of 929,140 lots, according to Reuters data. Brent's volume just topped 396,300 lots, 22 percent below the 30-day average.

 

Saudi Aramco CEO Khalid al-Falih told reporters the demand caused by violent unrest in Libya had been met. Saudi Arabia is pumping around 9 million barrels per day and has spare capacity of around 3.5 million bpd.

 

Crude oil shipments from Libya were at a virtual standstill because of reduced output and bad weather, according to shipping sources. Also tempering the view that the Libya supply disruption would be short-lived was a Bank of America Merrill Lynch warning output could be reduced for months.