MarketView for July 13

 

 

Summary  

 

Wall Street appears to be getting its MoJo back as share prices rallied and the major equity indexes all ended the day well into the black. Alcoa’s quarterly numbers that were posted after the close of business on Monday appeared to reinstate a bit of confidence that the economy may be on the track to recovery after all.

 

And it could be another strong day on Wall Street on Wednesday after Intel reported results after the close of regular trading that crushed expectations. The company also issued guidance going forward of a stronger-than-expected sales forecast. Intel rose more than 5 percent to $22.16 in afterhours trading.

 

Alcoa, a bellwether for the economy, rose 1.2 percent to $11.00 after it reported stronger-than-expected results and raised its estimate for global aluminum consumption.

 

The earnings optimism on Tuesday also lifted the share prices of other companies that will report earnings later this week, including major banks. JPMorgan Chase ended the day up 3.3 percent at $40.48, while Bank of America closed up 3 percent at $15.67.

 

U.S. Senate Democrats appeared to nail down the votes needed to pass a rewrite of financial regulation. If the bill is passed, it could be a short term negative for the banking sector, but for now it is a non-entity.

 

In the options market, heavy put buying was detected in an exchange-traded fund that tracks the S&P, indicating that a trader is combining the leverage of options and with that of an ETF to obtain a short-term insurance policy.

 

One investor picked up July $35 puts on the ProShares Ultra S&P 500, an exchange traded fund that delivers double the performance of the S&P 500. The heavy purchase drove premiums to jump from 32 cents to as high as 46 cents. Volume surged to 19,624 contracts, more than nine times open interest in the strike. The ETF rose 3.1 percent to $36.42, up more than 13 percent from a week ago.

 

On the downside, Apple saw its share price fall 2 percent after a poor Consumer Guide review for the iPhone 4 amid complaints about the device's reception. Apple closed down at $252.11.

 

Price of Crude Oil Up 3 Percent

 

The futures contract for August delivery rose $2.20, or 2.9 percent, to settle at $77.15 per barrel on Tuesday. Adding to the enthusiasm for crude futures was an International Energy Agency monthly oil market report that highlighted a marginal increase in its 2010 oil demand outlook. The projection stands at 86.5 million barrels per day, or 2.1% above 2009 levels. Nonetheless, demand projections are expected to ease in 2011, rising only 1.6%.

 

After the closing bell, the industry's American Petroleum Institute said crude oil supplies rose by 1.74 million barrels during the week ending July 9. The Energy Information Administration is scheduled to report its own stockpile levels on Wednesday at 10:30 a.m. EDT. In addition to a drop in crude stocks, an increase of 950,000 barrels to gasoline supplies and an additional 800,000 barrels of distillates is anticipated.

 

Also on the Nymex, the August natural gas contract settled down 3 cents, or 0.8%, at $4.35 per million British thermal units. August heating oil advanced by 6 cents, or 2.8%, to settle at $2.05 a gallon, and August gasoline futures gained 5 cents, or 2.7%, to settle at $2.08 a gallon.

 

Hedge funds and Private Equity Funds Find Capital Easier to Come By

 

Hedge funds and private equity firms had an easier time raising capital in the last three months, but the market for asset-backed securities remains crippled, according to a new Federal Reserve survey.

 

The Fed's first-ever Senior Credit Officer Opinion Survey, released on Tuesday, suggests financial markets are still fragile because banks are reluctant to lend. But it also shows conditions are improving, if slowly.

 

"Dealers provided somewhat more-favorable terms over the past three months" to hedge funds, private equity firms and other similar private pools of capital, the Fed said.

 

The U.S. banking sector is still recovering from its worst shock in modern history. Many avenues for corporate borrowing, including commercial paper and asset-backed bonds, were slammed shut for a long time.

 

With the help of steep interest rate cuts and an array of emergency programs from the U.S. central bank, markets have gradually begun functioning again.

 

But the Fed's survey, which also asked respondents to compare credit conditions to those in late 2006, indicated things are hardly back to normal.

 

"Responses to these special questions pointed to significantly tighter credit terms across counterparty and transaction types relative to the end of 2006," the report said.

 

Each quarter, the Fed publishes a Senior Loan Officer Survey that focuses on bank lending. The new poll, which was based on responses from 20 financial institutions that account nearly all dollar-based dealer financing, is meant to capture conditions at financial intermediaries.

 

Recovery on Track Says Fed

 

Federal Reserve Bank President Thomas Hoenig said on Tuesday that the economic recovery is on track despite some setbacks and the central bank should take no additional actions to encourage economic growth.

 

Hoenig, one of the Fed's most vigilant anti-inflation hawks, acknowledged that the economy was proving weaker than he had anticipated earlier this year. He said he has adjusted his forecast for 2010 growth down to the 2.5 percent to 3 percent range from above 3 percent.

 

Weak readings on consumer spending, private hiring and housing have spurred concerns in financial markets that the recovery could falter and have led traders to push back expectations for a firming of monetary policy until the middle of next year. To battle the deep recession, the Fed cut interest rates to near zero and pumped more than $1 trillion into the economy by buying mortgage-related assets and longer-term government debt.

 

After its most recent policy meeting on June 22-23, the Fed struck a cautious tone about the recovery, which it characterized lukewarmly as "proceeding." At that meeting, the central bank renewed its promise to hold interest rates exceptionally low for an extended period.

 

Some Fed officials in comments since then have left the door open to the possibility the Fed could buy more assets to provide an additional boost to the flagging economy. However, Hoenig, who votes on the Fed's interest-rate setting panel this year, said the central bank has already taken unprecedented steps and should do no more to bolster the shaky recovery.

 

"I've seen some of those who have advocated purchasing other assets -- which industry do you want to favor?" he asked. "Monetary policy can't solve every problem in the United States," he said.

 

Hoenig has dissented at all four Fed meetings this year, saying guaranteeing low rates ties the Fed's hands and risks causing financial imbalances that could turn into future problems. Uncertainty about what will happen when tax cuts expire, whether the government will cut spending or raise taxes to address the budget deficit, and what health care and financial regulatory laws mean has kept businesses on the sidelines, Hoenig said.

 

The Kansas City Fed chief renewed his call for the Fed to raise interest rates to 1 percent and then hold them there as the economy improves to avoid fueling another boom and bust cycle like the recent painful recession. "Zero was appropriate, perhaps, during the crisis," he said. "We are now finishing a year of positive economic growth and we have to think of the future."