MarketView for July 26

Summary

After being in negative territory for most of the major equity indexes revived and ended the day slightly higher on investors' optimism. At one point, the Dow was down as much as 150.45 points. Driving the optimism was increasingly evident likelihood that the Federal Reserve will keep its easy money policy for the foreseeable future. Meanwhile, with just three trading days left in the month, the S&P 500 is set to post its best month since October 2011. Five of the 10 S&P 500 industry sector indexes advanced, with the health sector leading the gains. The Nasdaq's advance makes July so far the best month in a year and a half.

Speculation over who Bernanke's successor could be has caused anxiety in the market, with investors wondering how different the next chair's policies would be. The timing of the announcement is also tricky as the Fed simultaneously considers when to begin pulling back its $85 billion a month in bond purchases.

The prospect that former Treasury Secretary Lawrence Summers might get the nod, and not current Fed Vice Chair Janet Yellen, has concerned investors. Yellen is seen as more likely to provide a smooth transition after Bernanke's term ends, while Summers is viewed as more critical of the effectiveness of the central bank's stimulus.

Investors will scrutinize the Federal Open Market Committee policy statement next Wednesday for any additional clues about the Fed's intended timeline for scaling back its quantitative easing.

For the week, the S&P 500 finished essentially flat - down just 0.03 percent - the first week in five that it did not manage a gain. But the benchmark index is up 5.3 percent so far in July - its best month since October 2011. The Dow rose 0.1 percent for the week, extending its string of weekly gains. For July, the Dow is up 4.4 percent. The Nasdaq is up 6.2 percent in July so far, its best monthly gain in a year and half. For the week, the Nasdaq is up about 0.7 percent.

Expedia ranked among the most active names traded on the Nasdaq. Shares of the online travel agency ended the day down 27.4 percent to close at $47.20 a day after it reported a quarterly profit far short of market estimates.

Starbucks gave the biggest push to the S&P 500 a day after the coffee giant reported a larger-than-expected increase in quarterly earnings. Starbucks' shares ended the day up 7.6 percent to close at $73.36.

Halfway through earnings season, 67.6 percent of S&P 500 companies have exceeded consensus expectations - in line with the 67 percent average of the last four quarters. About 56 percent of the companies have exceeded revenue expectations, more than the 48 percent of revenue beats in the past four earnings seasons, but below the historical average.

Amazon was up despite a forecast that disappointed on income and revenue. The stock rose 2.8 percent to end the day at $312.01, a rebound from a session low of $295.55. Earlier on Friday, Amazon's stock hit a 52-week high of $313.62.

Boeing fell after the FAA said it was proposing to fine the company's commercial airplane division $2.75 million for failing to take prompt action to fix a problem with fasteners on its model 777 airplanes. Shares of Boeing fell 1 percent to $105.60 and were the largest drag on the Dow.

Approximately 5.4 billion shares changed hands on the three major equity exchanges, a number that was below the daily average of 6.4 billion shares. Volume was relatively light for the week as a whole.

Detroit’s General Obligation Bond Disaster

The municipal bond market's self-regulator on Friday said the Detroit emergency manager's proposed treatment of general obligation bonds in the city's bankruptcy case risks changing how investors view what has long been considered the safest class of municipal debt.

Kevyn Orr, Detroit's state-appointed manager, has said that general obligation bondholders will remain unsecured creditors in the $18.5 billion bankruptcy filing.

"You have a long history of ... what everyone thought a GO bond was or what it meant to have a GO bond," said Jay Goldstone, chairman of the Municipal Securities Rulemaking Board. "That whole landscape could change."

The MSRB, which writes the rules for the market that the Securities and Exchange Commission enforces and operates a centralized system for posting bond information, said it discussed Detroit's filing for bankruptcy, including its public pension and debt, but decided not to take any action.

"At this point in time we are in an observation mode and as things evolve the board will revisit and decide what role - if any - there may be," said  Goldstone during a call with reporters on Friday, describing board members as, "the industry experts."

Detroit has an estimated $18.5 billion in debt and liabilities it is seeking to resolve under Chapter 9 bankruptcy protection. Last week, the city filed for the largest municipal bankruptcy in U.S. history.

Under the Dodd-Frank financial reform law, the MSRB became a much more powerful operation, with increased membership and a new mandate to protect public entities, including pension plans.

Still, it remains a "self-regulatory organization," led by representatives from financial firms, banks and municipalities instead of federal officials, and it is unclear if it could have much influence over the filing.

The board's most likely steps are releasing notices that explain how its rules apply to the situation, or working to draft new rules inspired by the outcomes of the case.