MarketView for July 20

 

 

Summary 

 

If you looked at the key equity indexes shortly after the opening bell, consternation was certainly the name of the game with the Dow Jones industrial average down triple digits.  However, you cannot judge the markets by what happens in any given hour, or any given day for that matter, and by the closing bell life looked considerably better as share prices chalked up their second consecutive day of gains. Leading the parade were the shares of Goldman Sachs and several beaten-down homebuilders, along with several raw materials companies.

 

On a technical basis, despite some indicators signaling a possibly overbought condition, Goldman Sachs' technical momentum and its moving average convergence divergence point to a near-term rally. Goldman Sachs ended the day up 2.2 percent as buyers materialized after an early selloff on news the investment bank's quarterly earnings fell 82 percent.

 

And the good news may not end there. Wall Street could extend its gains for a third consecutive day as futures moved higher on news that Apple reported results that crushed Wall Street's estimates. Apple was up 3.2 percent to $260 in after-hours trading.

 

There were rumors on the Street that a portion of the late buying during the regular session was driven in part by speculation that the Federal Reserve would take steps to spur lending by eliminating interest paid on excess bank reserves held at the Fed.

 

Meanwhile, the Commerce Department reported that housing starts fell more than expected in June, but that applications for building permits, a measure of future activity were unexpectedly higher.

 

Weyerhaeuser Timber closed up 3.9 percent to $15.96. Crude oil settled up 1.2 percent at $77.44 per barrel. IBM fell 2.5 percent to $126.55 a day after reporting quarterly revenues missed estimates as new technology services contracts declined. IBM was the top drag on the Dow.

 

Texas Instruments also missed revenue expectations due to weaker-than-expected orders from one mobile phone customer, and its shares ended the day down 3 percent at $24.78.

 

In after-hours trading, Yahoo fell 6.3 percent to $14.25 after net revenue fell short of Street expectations.

 

Housing Starts Fall To Eight Month Low

 

According to a report released Tuesday morning by the Commerce Department, housing starts hit their lowest level in eight months during June, but a rise in permits offered hope that the future will see a rise in homebuilding. In the report, the Department indicated that housing starts fell 5.0 percent to a seasonally adjusted annual rate of 549,000 units, the lowest since October. It was the second straight month of declines in groundbreaking activity and was well below market expectations for a 580,000-unit rate.

 

Although housing starts fell last month, applications for building permits unexpectedly rose 2.1 percent to a 586,000-unit annual pace. The easily reached conclusion is that home construction activity will likely pick up in July. Building permits dropped 5.9 percent in May and markets had expected them to slip to a 570,000 rate in June.

 

The housing market was one of the key triggers of the economic downturn and its recovery continues to rely on either government or at times the promise of future government aid. Following the end of a tax credit for home buyers in April, home construction and sales have dropped sharply.

 

May's starts were revised down to show a 14.9 percent decline, previously reported as a 10.0 percent drop. Compared to June last year, starts were down 5.8 percent, the biggest decline since November.

 

Groundbreaking for single-family homes slipped 0.7 percent to an annual rate of 454,000 units, the lowest since May 2009. Starts for the volatile multifamily segment tumbled 21.5 percent to a 95,000-unit annual pace, erasing May's 4.3 percent rise.

 

Housing's share of economy has shrunk in recent years, with residential construction accounting for 2.4 percent of gross domestic product in the first quarter. Nonetheless, housing has a had an out-sized impact on the economy through consumer spending and bank lending. When the housing market is healthy households feel wealthier and are inclined to spend, while banks profit on mortgage loans.

 

Last month, home completions surged a record 26.2 percent to an 886,000-unit pace, the highest level since December 2008. The inventory of houses under construction dropped 5.5 percent to a record low 450,000 units in June while units authorized but not yet started rose 3.6 percent to 91,500.

 

Two at the Fed Want A Discount Rate Hike

 

It comes as no surprise to those of us who watch the Fed that two of the regional Fed banks, Kansas City and Dallas, continue to push for an increase in the rate the central bank charges banks for emergency loans, according to meeting minutes released on Tuesday.

 

The Fed has kept the discount rate unchanged at 0.75 percent since February, when it raised the rate by a quarter percentage point. Directors of the Kansas City and Dallas Fed boards requested an increase to 1 percent in June, while St. Louis Fed board members dropped earlier calls for an increase.

 

Minutes of meetings of the Fed's Washington board, which needs to approve any requests to change the discount rate, showed regional Fed directors remained cautious on the economic outlook, even though some wanted to bump the discount rate higher.

 

"Although the labor market showed signs of gradual improvement, directors generally expected hiring to remain subdued," the minutes said. "Directors also expressed concerns about downside risks posed by the fiscal condition of state and local governments and by financial developments abroad."

 

When the Fed's policy-setting Federal Open Market Committee met on June 22-23, it decided to hold the federal funds rate, the central bank's main policy tool, in a zero to 0.25 percent range. At the same time, the Fed's Washington board decided to make no change in the discount rate, which normally moves in tandem with the federal funds rate.

 

Before the credit crisis struck in 2007, the spread between the two rates was a full percentage point. There is internal disagreement at the Fed as to whether that gap should be returned to that level, a debate that has likely taken on new importance given a recent weakening in the economic data.

 

"As another step toward restoring a pre-crisis discount rate structure, some directors supported increasing the primary credit rate by 25 basis points (to 1 percent) at this time," the meeting minutes said.

 

Softer economic activity has driven analysts to push back the timing of any hike in the benchmark federal funds rate well into next year. There has even been growing speculation that the Fed would have to ease monetary policy further, perhaps by adding to a program of mortgage-linked and Treasury debt purchases that already totals more than $1.5 trillion.

 

Fed Chairman Ben Bernanke is expected to shed more light on the matter on Wednesday and Thursday as he goes to Capitol Hill to deliver testimony on the central bank's semi-annual monetary policy report.

 

And They Complain About Funding Unemployment Benefits

 

The U.S. Treasury loses in the neighborhood of $37 billion per year in tax revenues because multinational corporations stash money in overseas tax havens, Democratic Senator Carl Levin said on Tuesday.

 

Levin, who for years has pushed for a tough law to fight tax evasion among corporations, has enlisted some small businesses to back his so-far unsuccessful proposal to close loopholes letting companies legally avoid taxes by keeping income abroad.

 

"There are too many small businesses now paying more than their fair share," Levin told reporters on a conference call. "It creates a very unfair competitive situation."

 

Levin wants to attach some of his proposals to help fund a bill that sets up a $30 billion fund for small business. Levin has tried to attach his initiative to other bills in the past without success. The coalition of small companies favors banning the use of overseas tax havens, which are generally unavailable to smaller firms.

 

Policy changes sought include a ban on transferring intellectual property abroad to evade taxes, and repeal of a rule letting companies pay no taxes when 80 percent of their revenue is earned overseas.