MarketView for July 19

 

 

Summary 

 

Stock prices were a bit higher on Monday, as optimism ahead of earnings from key technology companies continued to carry the day, reinforced by Boeing’s announcement of new orders. Boeing gained 2.1 percent to $63.18 during the regular session after it announced an order for 30 large airliners from Dubai-based Emirates and said it expects more orders this week, particularly from airplane leasing companies.

 

Halliburton kicked off a busy earnings week, posting a better-than-expected rise in profits, and shares of the oil field services company rallied 6 percent to $29.17.

 

The S&P 500 hit a session low of about 1,061, roughly at the index's 14-day moving average and the 23.6 percent retracement of the benchmark index's 2010 high-to-low decline, suggesting a level of resistance where pockets of buying would be expected. Volume was among the lightest so far in 2010, with about 7.1 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq.

 

Atheros Communications, which counts Apple and Nintendo among its customers, rose 4.1 percent to $30.46 after a brokerage upgrade. Entergy forecast second-quarter profit above market estimates and backed its full-year earnings outlook. The power company's shares rose 2.2 percent to $77.64.

 

But home builder Hovnanian Enterprises fell 4.7 percent to $3.84 after the National Association of Home Builders/Wells Fargo Housing Market index fell in July to its lowest level since April 2009.

 

Delta Air Lines posted a better-than-expected quarterly earnings number, but revenue missed expectations and its shares fell as much as 11.3 percent before paring losses. Delta closed down 2.9 percent to $11.38.

 

Second-quarter earnings for S&P 500 companies are expected to increase 30.2 percent from a year ago, up from an estimate of 27 percent a little more than a week ago.

 

Tough Decisions Ahead for Fed

 

Federal Reserve Chairman Ben Bernanke will be up against some hard line questioning mid-week as he delivers his semi-annual testimony on monetary policy to Congress on Wednesday and Thursday. What the Fed Chief says and presumably will implement in the not too distant future will most likely revolve around the issue of a stubbornly high unemployment rate.  

 

With Congress, wanting to appear in the best light ahead of elections in November will undoubtedly push for party agendas. The Republicans will want to show that they are continuing to press for a reduction in the budget deficit, while the Democrats are in favor of additional stimulus, both monetary from the Fed and fiscal by the Congress.

 

Wanting to be uncommitted and yet at the same time instill confidence that the Fed is very much in the picture and on top of the current economic situation, it is likely that Bernanke will pretty much rely on parroting the standard Fed line in which he speaks to the monetary policy options available to the Fed if the economy were to worsen appreciably.

 

There are reasons that the Fed does not want to show its hand as to what direction it might or might not go in. Additional easing of monetary policy would represent a big about-face for a central bank that recently was recounting the ways in which it planned to exit from extraordinary stimulus measures.

 

With regard to interest rates the Fed could, and still might, resume buying longer-term Treasury debt or mortgage-related assets, extending what continues to be a controversial program during which the Fed added more than $1.5 trillion of securities to its balance sheet.

 

Do not forget that the Fed can also reduce the amount it pays on excess reserves. It could even, at an extreme, target a specific yield level on Treasury notes, a possibility broached by Bernanke in a 2002 speech on battling deflation.

 

However, asset purchases and yield targets are unpalatable and it is unclear how much of an effect the programs would have short-term. Furthermore, with consumers and corporations in a deleveraging mode encouraging banks to lend more may not produce the desired results..

 

Some regional Fed officials have a natural dislike of buying mortgage debt, believing it comes too close to crossing the line into a fiscal policy that benefits one sector of the economy over others. Furthermore, there is a fear both within the Fed and in Congress that the Fed will be seen as monetizing the budget deficit. So if Congress does want the Fed to act, it better not push too hard.

 

Such concerns raise the bar for any Fed action to a high level. Fed Governor Kevin Warsh indicated as much last month when he argued further expansion of Fed credit to the banking system, already at a record $2.3 trillion, would need to be subject to "strict scrutiny."

 

Unemployment currently stands at 9.5 percent, while inflation remains quite tame, and does not appear to be a near-term threat. Bernanke will have to be careful not to incur any change in expectations as far as inflation is concerned.

 

Within the Fed's policy-setting Federal Open Market Committee, some of the members remain concerned that the economy could be facing a period of deflation and were keen to talk about what steps the Fed might take in the event of further economic deterioration. Others, in contrast, were still pushing to tighten financial conditions by beginning asset sales in the near term. Kansas City Fed President Thomas Hoenig continues to push for a near-term rate increase to thwart inflation threats.

 

Yet with so many Americans dealing with foreclosures, unemployment or both, lawmakers are likely to press hard on the issue of what more can be done to increase the level of economic growth.

 

Crude Prices Rise

 

Crude futures were higher on Monday, breaking a string of three losing sessions. Sweet domestic crude for August delivery settled up 53 cents per barrel, or 0.7 percent, at $76.54, trading as low as $75.50 and having rallied to an intraday peak of $77.69. The August crude contract expires on Tuesday. London ICE Brent crude for September delivery rose 25 cents to settle at $75.62.

 

Crude prices gave back some early gains after Wall Street gained ground on news from Halliburton and Boeing, but then pared back when the National Association of Home Builders said its home-builder sentiment index in July fell more than expected.

 

Traders appeared to be of the opinion that low trading volume contributed to the choppy price action on Monday. Crude oil trading volume was about 537,000 lots, 14.5 percent below the 30-day average.

 

Technical analysts keying off price charts eyed strong support for August U.S. crude futures from the 50-day moving average at $74.31 and solid overhead resistance at the 200-day moving average at $77.51 and the failure of prices to hold rallies above the 200-day moving average for four of the last five sessions.

 

Refined products and crude oil futures also received some support from news of a pipeline explosion and oil spill that shut China's port at Dalian, forcing refinery cuts.

 

PetroChina, which operates two refineries in Dalian, has started trimming refinery operations to cope with the port closure. As many as six Very Large Crude Carriers, or 12 million barrels of crude oil, are set to be diverted from the port.

 

In addition to the August contract expiring on Tuesday, all markets will be eyeing data on June housing starts, expected to be down 2.2 percent, and weekly oil inventory reports beginning with data from the American Petroleum Institute late on Tuesday.

 

IBM Disappoints

 

IBM's quarterly revenue did not meet Street expectations and a fall off in the number of new service contracts  damaged Street confidence, sending IBM’s shares down 3 percent. While firm growth in the company's higher-margin software unit and sales in emerging markets added to the bottom line, the results were not what the Street wanted to see.

 

IBM stated that second-quarter revenues increased 2 percent to $23.7 billion. IBM stated that much of the blame fell on unfavorable currency exchange rates that reduced revenue by about $500 million in the quarter, but there was also concern over lower signings of services deals, a key indicator of future revenue. According to IBM, services contracts fell 12 percent to $12.3 billion. Total outsourcing services signings decreased 19 percent to $6.5 billion, it said.

 

Net profit slightly exceeded expectations and rose to $3.4 billion, or $2.61 a share, from $3.1 billion, or $2.32 a share, a year earlier. Despite the solid showing in its bottom line, the company's shares fell 3 percent after-hours to $125.60 after closing at $129.79 on the New York Stock Exchange.

 

The company's guidance going forward of $11.25" per share, as compared to $11.20," helped a the share price a little. IBM shares have fallen about 2 percent over the past quarter as investors focused on technology companies such as Apple and VMware which are enjoying double-digit revenue growth.

 

Decline in Home Builder Confidence

 

The confidence level of home builders fell more-than-expected in July to the lowest level in more than a year after a popular home-buyer tax credit expired in April, the National Association of Home Builders said on Monday.

 

The NAHB/Wells Fargo Housing Market index fell two points to 14, the lowest level since April 2009, the group said in a prepared statement. It was the second straight decline in the index.

 

June was revised lower to 16. A reading below 50 indicates more builders view sales conditions as poor than good. The index has not been above 50 since April 2006.