MarketView for July 12

 

 

Summary  

 

Watching and waiting continued was the mantra of the day on Wall Street on Monday, with indexes edging just a little bit higher as investors and traders alike kept bets to a minimum in front of the upcoming earnings season. Volume was among the lightest of the year with everyone waiting to see if corporate results and projections in this earnings season, which is just getting underway, will warrant a continuation of last week’s rally. Last week was the strongest in terms of gains of Wall Street that we have seen in the past 12 months.  Alcoa, a component of the Dow Jones industrial average, is traditionally the first firm to announce quarterly earnings.

 

After the close of regular trading, the aluminum producer reported second-quarter profit as sales rose 22 percent. Alcoa slipped 0.6 percent to $10.87 during the session, but jumped 3.9 percent after the bell. In addition to Alcoa, other Dow components set to report earnings this week include Intel, JPMorgan Chase and General Electric.

 

Resource companies' shares were the biggest drag on the day’s trading activity after Chinese data released over the weekend indicated that China’s copper demand fell. As a result, Freeport McMoRan Copper & Gold ended the day down 4.2 percent at $63.22.

 

BP saw its share price increase 8 percent to $36.76 with the British company in talks with Apache and others with regard to the possibility of BP selling off some off assets in an amount rumored to be in the $10 billion range.

 

For the second quarter, the consensus earnings growth is in the neighborhood of 27 percent for companies making up the S&P 500, up from a previous estimate of 22 percent. This would also exceed the 22.4 percent estimated at the beginning of the year.

 

The market also received some support from M&A activity after Aon Corp said it would acquire Hewitt Associates for $4.9 billion, thereby creating the world's largest human resource services company. Hewitt ended the day up 32.2 percent to $46.79, while Aon closed down 7.1 percent at $35.62.

 

Qualcomm close up 3.5 percent at $35.10 after Goldman Sachs added the company to its conviction buy list, writing to clients that the cell phone chip manufacturer is a key beneficiary of accelerating smartphone growth.

 

Alcoa Says What Wall Street Wants To Hear

 

Alcoa kicked off the current earnings season with words that warmed the cockles of Wall Street’s little heart. The company, the largest domestic aluminum producer, posted a stronger-than-expected second-quarter profit on Monday and raised its estimate for global aluminum consumption, sending its shares up 3 percent. Alcoa’s results, which are often viewed as a bellwether of the economy, cited strength in several industrial sectors and raised its estimate for aluminum consumption this year, even as metal prices have been falling recently.

 

Alcoa shares rose to $11.24 in extended trade after closing at $10.87 in the regular session on the New York Stock Exchange.

 

Net earnings were $136 million, or 13 cents per share, compared with a loss of $454 million, or 47 cents per share in the same quarter last year, the Pittsburgh-based company said. Earnings from continuing operations were $137 million, 13 cents per share. Revenues increased 22 percent to $5.2 billion.

 

During the quarter, Alcoa said there was a 1-percent increase in third-party prices for alumina -- the raw material for aluminum. However, that was offset by a 1-percent decrease in realized prices for the metal. It also indicated that it was seeing strong revenue growth over the first quarter in several markets, in particular in packaging, commercial transportation and building and construction.

 

In the past three months, the price of aluminum in London has dropped sharply, from over $2,400 per ton in April to around $2,000 as weak demand for cars, planes and construction and uncertainty over the strength of the global recovery have weighed on the metal.

 

Lending to Small Businesses Is Critical to the Economic Recovery Says Bernanke

 

Making credit available to small businesses is critical to keeping the economic recovery on track but wary banks cannot be forced to lend from their bountiful reserves, was the theme from the Federal Reserve on Monday. Specifically, Fed Chairman Ben Bernanke underlined the necessity for companies -- many still working their way back to health from the deep recession -- to be able to get loans when they need them to expand and to hire.

 

"To support the recovery, we need to find ways to ensure that credit-worthy borrowers have access to needed loans," he said.

 

Meanwhile, Fed Governor Elizabeth Duke drew attention to another harsh reality: the difficulty of persuading lenders that a slow-paced recovery warrants putting their money at risk by lending it.

 

"I don't know of any way we can actually force the banks to lend the reserves," she said. "There are a lot of reserves out there and I think it's going to take general economic improvement once the business prospects are better."

 

A scarcity of credit for small- and medium-sized businesses, traditionally the driving-force behind job creation, has been blamed for woes ranging from a 9 percent-plus unemployment rate to a perceived risk of double-dip recession.

 

With recent economic reports indicating a possible slowdown of the recovery,  the Fed faces a quandary. It has already lowered interest rates to near zero and pumped up bank reserves by flooding the financial system with more than $1 trillion.

 

Although the Fed could add additional liquidity into the economy through a variety of so-called "quantitative easing" methods, such as purchasing assets from banks or buying mortgage securities in hope of spurring more lending.

 

Richmond Federal Reserve Bank President Jeffrey Lacker argued on Monday that double-dip fears were overdone, saying the string of softer-than-expected data, from anemic private hiring to battered consumer confidence, was not "inconsistent with a moderately paced recovery."

 

"Market participants seem to be overreacting to a couple of reports that have been a little bit below what people expected," he told reporters who attended an event at the Richmond Fed's headquarters.

 

Lacker, a "hawk" on inflation who is not a voter this year on the Fed's policy-setting Federal Open Market Committee, was the only Fed speaker to directly address the policy outlook. "For me, consideration of further easing steps now is very far away," Lacker said. "It would take a very substantial, unanticipated adverse shock."

 

Like Lacker, Duke said she felt the economy was on track for continued growth. In response to a question, she said she didn't think a double-dip recession was a major worry.

 

"It's still a moderate recovery," Duke said, adding that she expects credit flow to "gradually loosen up" but in response to brightening business prospects rather than because it is forced upon bankers.

 

The economy has grown for three straight quarters beginning in the third quarter of 2009, but recent economic data implying softening housing markets and weak consumer confidence has led investors to fear the expansion could stumble again. However, credit availability has become a concern after the 2007-2009 crisis that hit financial firms exceptionally hard. Total loans held by commercial banks dropped 5 percent last year and lending has continued to shrink in 2010.

 

Bernanke said small businesses play a key role in job creation but they continue to report tough credit conditions. The Fed "takes very seriously" complaints from bankers that bank examiners often stop lenders from making good loans, he added.

 

At the same time, Bernanke also said that lower loan demand and many businesses' still-weak financial position were factors holding back lending.

 

The Obama administration backs legislation to create a $30 billion fund to boost capital at community banks to encourage small business lending, but that faces an uncertain fate in Congress where lawmakers seeking re-election in November are wary of anything that could be seen as a bailout.

 

FDIC Authority Seen Growing

 

The Federal Deposit Insurance Corp would have more power to examine the largest and riskiest institutions, under a new interagency memorandum approved on Monday. The agreement gives the FDIC a more prominent, on-site presence at the nation's largest banks, but seeks to ensure the agency does not add another burdensome set of eyes and ears at the firms.

 

More specifically, it seeks to remedy problems seen in 2008 when the FDIC was left scrambling for access to information about Washington Mutual, as the nation's then-largest thrift was failing. The Office of Thrift Supervision was Washington Mutual's primary regulator.

 

"The FDIC needs to have a more active on-site presence," FDIC Chairman Sheila Bair said at a meeting of the agency. The FDIC insures more than $7 trillion of deposits at the almost-8,000 U.S. banks and thrifts. However, it is only the direct supervisor at about 4,900 mostly smaller banks, meaning the FDIC has to safeguard deposits at thousands of banks for which it is not primary supervisor. The OTS, the Office of the Comptroller of the Currency and the Federal Reserve are the other federal bank supervisors.

 

The FDIC, under Bair, has taken a more assertive stance. Bair, throughout the 2007-2009 financial crises, took a critical view of taxpayer assistance for large financial firms, occasionally clashing with other regulators and policymakers. The memorandum approved on Monday would enhance the FDIC's role as back-up authority for any bank with federally insured deposits.

 

It would allow the chairman of the FDIC to order a special examination of troubled or large, risky banks, to ensure the agency can fully understand the threat to the FDIC's insurance fund and let it better prepare for any dismantling of an institution, if necessary. It would also give the FDIC a higher profile and presence at a larger universe of banks, and would not allow other regulators to freeze out the FDIC during examinations.

 

Watchdog reports have detailed the thorny relationship between the FDIC and the OTS as the OTS tried to maintain a high regulatory rating of Washington Mutual, the largest firm it supervised.

 

When the FDIC finally decided to go ahead and downgrade Washington Mutual's rating just weeks before its failure, then-OTS director John Reich was furious, according to documents released by a congressional committee. "I cannot believe the continuing audacity of this woman," he wrote in an e-mail message to a senior OTS official, referring to FDIC's Bair.

 

The disjointed regulatory system was criticized during the financial crisis for preventing the quick sharing of information about troubled firms.

 

The financial reform bill that is expected to soon become law would rework the bank regulatory structure, including folding the OTS into the OCC. The information-sharing memorandum approved on Monday seeks to tear down barriers between the regulators, before the law takes effect.

 

FDIC board members said the agreement was the result of a long period of negotiations, as regulators tried to strike the right balance between preserving their own powers, and ensuring transparency and cooperation.

 

Comptroller of the Currency John Dugan said he was leery of creating a de facto system of supervision by committee.

 

He said increasing the FDIC's access to these large and troubled banks should not undermine the powers of the primary regulator, and should not create duplicative supervision.

 

Dugan, who is leaving the post near the end of his five-year term on August 14, said he supports the negotiated memorandum, but wants to see how it works in practice. "This is of course only the beginning. What will matter most will be the implementation," he said.