MarketView for June 17

 

 

Summary  

 

Wall Street ended the day mostly unchanged although technology shares did help the Nasdaq composite index close out trading in positive territory. On the tech side, Qualcomm was a winner, up 3.8 percent to close at $45.09 after Goldman Sachs added the wireless technology supplier's stock to its "conviction buy" list. Biotech companies also rose after Celgene reported that its experimental anti-inflammatory drug was effective in a mid-stage study. Celgene rose 4.2 percent to $44.94.

 

Cisco Systems also added support to tech shares after Chief Executive John Chambers told CNBC television he has seen business level out in the last few months. Cisco added 0.6 percent to $19.20.

 

On the Big Board losses among banking stocks held back gains by the Dow Jones industrial average and the S&P 500 indexes. Banks came under pressure from a broad debt ratings downgrade from Standard & Poor's. More than a dozen banks were downgraded. This added to the uncertainty over what the end result will be from the financial industry reform proposals submitted by the White House that include closing one bank regulator and creating new government watchdogs.

 

Although the Administration did not release any last minute surprises with its plans to reshape financial regulation, uncertainty still remained about the regulations' impact on the financial system and the wider economy. Dow component JPMorgan Chase fell 2.3 percent to $32.73.

 

Among decliners outside the banking sector, FedEx, whose delivery services make it a yardstick for economic activity, fell 1.4 percent to $50.70. The company reported a larger quarterly loss and gave an outlook well below Wall Street's estimates for the current period.

 

The S&P 500 briefly fell below its 200-day moving average for the first time since the beginning of June but rallied to close above that level, a crucial technical gauge of market strength.

 

Consumer Price Index Shows Little or No Inflation Pressure

 

Consumer prices rose slightly in May, but over the past 12 months prices registered the largest decline in nearly 60 years, allaying fears that inflation could threaten prospects for economic recovery.

 

According to a report by the Labor Department released prior to the opening bell, higher gasoline prices contributed to the smaller-than-expected 0.1 percent rise in May's Consumer Price Index from April when the CPI was unchanged from the previous month. Compared to the same period last year, the CPI fell 1.3 percent, the largest decline since April 1950. The pace of the price decline also accelerated, with the CPI down 0.7 percent year-on-year in April.

 

The Labor Department said core prices, excluding food and energy, also rose only 0.1 percent in May, slower than April's 0.3 percent monthly gain, as prices for tobacco and smoking products fell after surging the last two months on the back of a federal excise tax increase. It was the smallest monthly rise in the core CPI since December. The gain reflected a fifth straight monthly increase in new vehicle prices. Shelter and medical costs also rose.

 

Over the past 12 months, core prices have increased 1.8 percent, slower than the 1.9 percent rise in April. Gasoline prices rose 3.1 percent in May versus a 2.8 percent drop in April, but the increase was mitigated by a 0.2 percent fall in food prices.

 

The data soothed worries that massive spending by the government and the Federal Reserve to pull the economy out of an 18-month-long recession may end up fueling inflation. The Fed has been aggressive in its efforts to control the possibility of deflation and might not feel it is fully out of the woods yet.

 

Nonetheless, Wall Street has been pricing in rising inflation risks in the bond market since early this month when government data showed a sharp slowdown in the pace of job losses in May. Benchmark Treasury debt yields spiked to an eight-month high last week. The yield difference between Treasury Inflation-Protected Securities, or TIPS, and other Treasury bonds has grown, another sign of mounting concern on prices. TIPS spreads, however, narrowed about 5 basis points on Wednesday, suggesting a pullback in inflation expectations.

 

The sharp rise in Treasury debt yields has sent mortgage rates soaring. Applications for mortgages fell last week for a fourth consecutive week, with overall demand diving to a near seven-month low.

 

Oil Prices Rise Again

 

The price of crude oil was higher again on Wednesday, supported by government data indicating a drawdown in crude supplies, gains in the stock market and a weaker dollar. Further gains came after the oil minister from Qatar indicated that OPEC was unlikely to hike output soon.

 

Sweet domestic crude for July delivery settled up 56 cents per barrel at $71.03, having traded down to as low as $69.00. Brent crude settled up 61 cents per barrel at $70.85. At the same time, domestic crude inventories fell 3.9 million barrels for the week to June 12, according to data released by the U.S. Energy Information Administration.

 

Gasoline demand rose over the four-week period ending last week, adding further support for prices. A steep 3.4-million barrel rise in gasoline stocks in the midst of the summer driving season earlier dragged crude markets lower.

 

The dollar fell after tame inflation data dampened speculation the Federal Reserve would raise interest rates any time soon. The weaker dollar makes oil and other commodities cheaper for holders of other currencies.

 

FedEx Says Worst Behind It

 

FedEx said on Wednesday that the next two quarters will be "extremely difficult" as the recession and higher fuel prices bite into its bottom line, but said the pace of economic decline appears to be slowing.

 

"There are signs that the worst of the recession is behind us," Chief Executive Fred Smith said in a statement, "and we remain optimistic that we will see quarter-over-quarter economic improvement later this calendar year."

 

FedEx reported a larger quarterly loss on Wednesday, sending its shares down 2 percent. The company forecast earnings per share of 30 to 45 cents for the current quarter. The company said its loss had widened to $876 million, or $2.82 a share, in its fiscal fourth quarter ended May 31 from $241 million, or 78 cents a share, a year earlier. If you exclude the previously announced charges of $1.2 billion from two units, the company reported a profit of 64 cents a share.

 

The charges stem from a decline in the fair value of home office supply chain Kinko's Inc, which FedEx bought in 2004 and is now called FedEx Office, and Watkins Motor Lines, a trucking company acquired in 2006 and now known as FedEx National LTL. Both units have been hit by the recession.

 

FedEx said stringent cost-cutting had mitigated the impact of the recession on its results. Nonetheless, FedEx reported quarterly revenue of $7.85 billion, down more than 20 percent from $9.87 billion a year earlier.

 

"At this time we do not have enough visibility into the economic recovery and jet fuel prices to provide a meaningful annual earnings forecast," said Chief Financial Officer Alan Graf. "However, we believe that FedEx will be poised for growth in our fiscal second half, as our many cost-saving initiatives gain traction and the economy begins to improve."

 

When fuel prices go up, the extra expense hits FedEx's results in the short term. The company charges customers a fuel surcharge, which lags real-time prices by up to two months, so in the medium term it recoups those costs.

 

Graf said on a conference call with analysts that the company expected the U.S. economy to return to growth in the first quarter of calendar year 2010.

 

One Analyst Sees Good Times Ahead

 

The benchmark S&P 500 index should surge back to its October 2007 record above 1,500 by the end of 2012, provided the U.S. economy sees a V-shaped recovery, JPMorgan Chase Chief U.S. Equity Strategist Thomas Lee said on Wednesday.

 

"The global economy is in the midst of a synchronized recovery," Lee said at the Reuters Investment Outlook Summit. "If we end up with a V-shaped recovery, we could go back to our record high of 1,500 in 2011-2012," he added, referring to the S&P 500.

 

Lee also reiterated his year-end 2009 target of 1,100 for the S&P 500, saying the United States will likely come out of its recession sometime this summer, followed by the rest of the developed world.

 

In October 2007, the S&P 500 hit a record closing high of 1,565.15, before falling back. In March of this year, it slumped to a 12-year closing low, but has since rebounded by about 40 percent on hopes the recession that had begun in December 2007 was moderating.

 

Lee added that a market correction in the wake of the recent run-up would be "healthy," and could lure back investors who opted to sit out the recent rally.

 

"This rally has left many investors un-invested or under invested. The pullback is the entry point to really see more meaningful money put to work," said Lee, who has been named a top analyst in Institutional Investor magazine's annual all-star poll.

 

He favors the financials, industrials, technology and consumer discretionary sectors, in that order, saying the sectors would be the biggest beneficiaries of an economic recovery.

 

We are still favoring cyclical stocks over defensives," said Lee. Even so, he was mindful of potential risks to the recovery.

 

"The biggest risk is that we're implicitly assuming the consumer is stabilizing. There's a lot of potential shocks. If oil goes to $100 a barrel, you can't have a recovery," said Lee, adding the other risk would be if savings rates somehow overshoot.