MarketView for June 12

 

 

Summary 

 

Although the gains were nothing to write home about, what was psychologically important about Friday’s trading activity on Wall Street was that the Dow Jones industrial average moved into positive territory for the year for the first time since early January the result of positive movement in defensive sectors such as pharmaceuticals, while a disappointing outlook from National Semiconductor weighed on technology stocks.

 

The healthcare sector rose as money moved into defensive plays, which pushed the S&P 500 to a seven-month high. Defensive plays are stocks of companies that tend to weather a recession better than others because their products, such as food or toothpaste or drugs, -- are products that people require, even if they are forced to cut their overall budget. One of the beneficiaries was Procter & Gamble, which ended the day up 1 percent to close at $52.55. Other defensives such as utilities also gained ground on Friday.

 

At the same time, technology shares came under pressure after chipmaker National Semiconductor posted quarterly results provided guidance that fell short in comparison to an outlook earlier this week from Texas Instrument. National Semiconductor’s shares ended the day down 6.1 percent to close at $13.59.

 

For the week, the Dow was up 0.4 percent, the S&P 500 chalked up a gain of 0.7 percent and the Nasdaq posted a 0.5 percent gain. For the year, the blue-chip Dow average is up 0.26 percent.

 

Among the tech bellwethers, Apple closed down 2.1 percent at $136.97 and Research in Motion fell 2.8 percent to $83.02. They were the two of the worst performers on the Nasdaq.

 

The Reuters/University of Michigan Surveys of Consumers indicated that the mood of consumers for June stood at its highest in nine months, but worries about inflation and labor market uncertainty still persisted.

 

Crude Down on Rise in Dollar

 

The price of crude oil fell on Friday, dragged down from eight-month highs as the dollar firmed and speculators took profits from the past three-day rally. Sweet domestic crude futures for July delivery settled down 64 cents per barrel at $72.04. London Brent settled down 87 cents per barrel at $70.92.

 

The dollar rebounded from a sell-off earlier this week, while demand for the euro fell after data showed a plunge in euro zone industrial production. A stronger dollar can weaken commodity markets by cutting into the purchasing power of buyers using other currencies.

 

Meanwhile, OPEC further reduced its forecast for world oil consumption this year, but said the worst appeared to be over for the oil market. "As the world economy stabilizes, the world oil demand appears to be settling down," OPEC said in its Monthly Oil Market Report.

 

"There are no significant downward revisions to our previous oil demand forecasts."

 

Consumer Confidence Improves

 

According to the Reuters/University of Michigan Surveys of Consumers, consumer confidence rose to a nine-month high in June. According to the survey results, the preliminary index of confidence for June rose to 69.0 from May's 68.7. For the third straight month, the overall consumer sentiment reading was at its highest since last September's 70.3.

 

In a worrying development, inflation readings in the consumer sentiment data and a separate report on import prices revealed potential price pressures at a time when the economy appears to be on track for recovery from the worst recession in decades.

 

Gauges of inflation expectations in the Surveys of Consumers report rose to their highest in months, creating concern for the Federal Reserve, which has pumped vast amounts of money into the financial system to spur economic recovery.

 

Rising prices, particularly for necessities such as fuel, are unlikely to inspire spending by consumers, who were the key drivers of growth in recent decades but are now saddled with debt and facing the highest unemployment rate in nearly 26 years. Historically, expansive monetary policy is generally the opposite of an inflation-fighting strategy, while battling a surge in prices usually slows the economy.

 

Consumers' one-year inflation expectations rose to 3.1 percent in June -- the highest since October 2008 -- from May's 2.8 percent. The five-year inflation outlook rose to 3.1 percent in June from May's 2.9 percent. That was the highest in the long-term inflation expectations since February this year.

 

"Job and income uncertainty ... remained high and constitute a significant barrier for completing planned purchases," the Surveys of Consumers said in its report. "The economic recovery was thought to be weaker than originally anticipated, leading consumers to expect a longer period of time before the recovery gets underway."

 

Reflecting ongoing worries, consumers' assessment of the 12-month economic outlook fell. That gauge declined to 61 in June from 75 in May.

 

Give the Taxpayer a Fair Break

 

The Treasury Department is under pressure to ensure that taxpayers receive a fair return on banks' warrants, while at the same time being pressured by banks, who want to lower the warrants' multi-billion dollar price tag and avoid another big hit to their capital position.

 

The debate over the warrants is coming to a head as next week 10 of the biggest banks will begin to repay almost $70 billion in Troubled Asset Relief Program (TARP) funds, freeing the firms of a public stigma and restrictions on executive pay.

 

Repaying rescue funds will involve banks buying back the preferred shares that many sold to the government when financial markets were squeezed by a credit crunch last fall. But banks also wish to repurchase the warrants that give the government the right to buy common stock at a pre-set price for up to 10 years.

 

Some of the large banks, including JPMorgan, argue they should get a discount on the warrants because they did not want the money in the first place. Lawmakers say Treasury should give taxpayers their fair share of the gains in the banks' stock prices.

 

The Treasury Department is also facing increased scrutiny from the two primary TARP watchdogs that are currently estimating a reasonable range of values for the warrants.

 

In a letter dated Wednesday to leading lawmakers on the House and Senate financial committees, Neil Barofsky, the TARP special inspector general, and Elizabeth Warren, the chairwoman of the Congressional oversight panel for TARP, said they will work together to ensure taxpayers get a good return. The project will also include an audit of the warrant repurchase process, they said.

 

Treasury has said it will sell back the warrants at "fair market value" but experts say pricing can be difficult since the investments are unique in the marketplace. That means banks can negotiate on the buyback price.

 

"We are in the process of going through a judgment about what fair market value for those warrants is likely to be," Treasury Secretary Timothy Geithner told a Senate panel on Tuesday. "Some of the estimates now are in the several billion dollar range for those initial banks that are repaying."

 

Treasury is facing pressure from lawmakers who want to make sure taxpayers see the upside promised to them when the government made the investments last October.

 

On Tuesday, Jack Reed, a leading Democrat on the Senate Banking Committee, discussed the warrants issue with Geithner and urged him to make sure taxpayers are paid their due.

 

But the banks want a break, especially after paying billions of dollars in dividends to the government. The ten banks that have won the right to return their warrants have paid the Treasury about $1.8 billion over the past seven months, according to official data. In all, finance companies that have gotten government investments have paid about $4.5 billion to the Treasury.

 

The banks do have the option of exiting TARP by buying back the preferred shares, and letting Treasury liquidate the warrants. But the banks won't want to dilute their current shareholders and keep the fingerprints of government on their financial reports, said Wayne Abernathy, executive director for financial institutions policy at American Bankers Association.