MarketView for June 25

 

 

Summary  

 

The markets turned in some nice numbers on Thursday after Fed Chairman Ben Bernanke held his own under intense questioning by members of Congress over the Bank of America-Merrill Lynch merger.

 

The U.S. House of Representatives Oversight and Government Reform Committee questioned Bernanke on the Fed's role in Bank of America's takeover of Merrill Lynch, and whether he pressured Bank of America's CEO Ken Lewis to go through with the deal after Lewis raised objections.

 

Despite the criticism by many members of Congress with regard to the Fed’s actions of late, the Fed chairman is well liked on Wall Street and the belief is that he will be reappointed, probably much to the chagrin of Larry Summers.

 

Also contributing to the positive tone on the Street was a surprising profit increase from retailer Bed Bath & Beyond. In the retail sector, Bed Bath & Beyond reported a surprising increase in quarterly profit as it cut costs to offset slumping demand, and its stock gained 9.5 percent to $31.08. Also in the retail arena, J.C. Penney closed up 6 percent at $28.20 after JPMorgan raised its rating on the stock to "overweight" from "neutral."

 

Energy companies' shares also rose as oil prices climbed above $70 a barrel. Exxon Mobil, ended the day up 2.1 percent to close at $69.88. Oil futures were up $1.56 to end at $70.23 per barrel.

 

With the second quarter ending early next week, some portfolio managers have already begun their end-of-quarter "window dressing" of selling some shares with big losses and buying some of the quarter's best-performing stocks to help improve their returns. This Wall Street ritual also is likely to have helped ignite Thursday's rally.

 

Another sign that encouraged investors was news the Federal Reserve was scaling back some emergency funding programs even while extending a number of others.

 

After the close, Palm rose 10.2 percent to $15.45 after the Smartphone manufacturer posted a narrower-than-expected loss despite a steep revenue decline. On Nasdaq, Palm added 0.6 percent to close at $14.02 ahead of the results.

 

Lennar posted a wider quarterly loss, but noted an increase in new home sales and orders. Its stock was up 17.5 percent to close at $9.19. Gains in home builders and retailers point to signs of strength in consumer spending, which could be a boon for stocks just as the second-quarter earnings reporting period gets under way.

 

Bernanke Stands His Ground

 

Federal Reserve Chairman Ben Bernanke, facing his toughest grilling yet by Congress, said he had never threatened to fire Bank of America's management if they cancelled the planned merger with Merrill Lynch.

 

During a tense three-hour hearing, lawmakers repeatedly pressed Bernanke on whether he had coerced Bank of America chief Kenneth Lewis in December to go forward with the deal despite Merrill's quickly deteriorating finances. Bernanke, holding his ground, told the members of the House of Representatives Oversight and Government Reform Committee the Fed never did anything "beyond the law or unethical."

 

"I did not tell Bank of America's management that the Federal Reserve would take action against the board or management," he said.

 

Bernanke also said neither he nor other Fed officials had "ever directed, instructed, or advised" the bank to withhold information about Merrill's mounting losses from the public, another charge lawmakers have leveled at the central bank. The Fed has faced intense scrutiny from both Democrats and Republicans on Capitol Hill for many of the extraordinary actions it has taken since the financial crisis erupted in the summer of 2007.

 

Under questioning, Bernanke said several times that he could not remember the details of the conversation Lacker had referred to in his e-mail, but said, whatever the substance, he never threatened Lewis. "I never did make a threat," the Fed chairman said. Bernanke also said he had not directed then-Treasury Secretary Henry Paulson to threaten to fire management.

 

However, the Fed chairman said that if Bank of America had invoked a merger-halting "material adverse change" clause and subsequently needed a government bailout, the company's leadership would likely have experienced a repercussion.

 

"If somebody makes a decision that results in their company failing and being rescued by the government, there should be consequences," he said.

 

After Bank of America's eventual decision to go through with its purchase of Merrill, the bank received a fresh injection of $20 billion in public funds and a government backstop on potential losses on a $118 billion pool of shaky assets.

 

During the hearing, lawmakers cited an e-mail written by Richmond Federal Reserve Bank President Jeffrey Lacker as possible evidence of undue Fed pressure on Lewis. In the e-mail, Lacker said Bernanke had told him he planned to make it clear that pulling back from the merger could result in managers losing their jobs if Bank of America ended up needing aid.

 

The probe into the merger comes as Congress debates an Obama administration plan for a regulatory overhaul that would expand the Fed's powers over the financial system. Some lawmakers said lingering questions over the Fed's role raised doubts about whether it should be given more power.

 

Essentially, Congress is looking for a scapegoat on which to blame the financial crisis and a possible erosion of political support for a Fed chairman who has earned high marks on Wall Street. The controversy over the Fed's role in the Bank of America-Merrill deal could also color President Barack Obama's looming decision on whether to reappoint Bernanke when his four-year term as chairman expires January 31. So far, Obama has only said Bernanke has done a good job.

 

Crude Sharply Higher

 

Crude oil futures rose above $70 per barrel on Thursday, the result of renewed rebel attacks against oil facilities in Nigeria and concerns over problems at the country’s largest oil refinery could run the risk reducing gasoline stockpiles during this summer’s driving season. The price of crude also received some upward momentum from the day’s rally on Wall Street that was fueled by optimism over the possibility that the economic recession was easing, a prospect that could spell a recovery in ailing world energy demand.

 

Sweet domestic crude futures for August delivery settled up $1.56 per barrel at $70.23. London Brent crude settled up $1.45 per barrel at $69.78.

 

In the latest in a string of attacks in Nigeria, Africa's largest oil producer, the Movement for the Emancipation of the Niger Delta (MEND), said it had sabotaged the Billie-Krakama pipeline in Rivers State, which supplies one of the country's main export terminals. Attacks by MEND have forced foreign oil companies, including Chevron and Italy's Agip, to shut at least 133,000 barrels per day of oil production in the last month.

 

Shell said it had shut one of its pipeline junction points on Thursday but declined to say whether any oil production had been affected.

 

Adding to the gains, Exxon told environmental regulators in Texas that its huge Baytown refinery suffered an operational glitch that triggered flaring. As a result, gasoline futures rose 5.58 cents to $1.8983 per gallon relatively thin stockpiles ahead of the July 4 holiday weekend, typically the busiest driving weekend of the year.

 

Oil's rally came alongside hefty gains on Wall Street. Oil has tracked equities markets closely in recent months as traders look for signs of economic optimism.

 

Economic Data Mixed

 

Weak job market numbers on Thursday were a strong indication of the strains being endured by a recession-struck economy that contracted slightly less in the first quarter than previously thought. According to Thursday’s report by the Labor Department, the number of workers filing new claims for unemployment benefits last week rose unexpectedly by 15,000 claims to a seasonally adjusted 627,000 claims. Extended claims, or those lasting more than a week, were also higher.

 

That outweighed a separate Commerce Department report showing that gross domestic product, which measures total output within the United States, contracted at a 5.5 percent annual rate in the first quarter instead of the previously reported 5.7 percent.

 

Although the worst of the downturn has likely run its course, employers will continue to downsize somewhat, while the economy stabilizes and that will mean a slow-paced recovery. Leading to that conclusion are indications in other data, like housing and factory orders, that the economy is, at a minimum, not skidding downward at the steep pace it was last year. 

 

The GDP figure was the final reading for the first quarter. The government initially said it shrank 6.1 percent, then revised that to 5.7 percent and finally to a 5.5 percent fall. The first estimate for the second-quarter U.S. economic performance will not be available for another month.

 

One of the longer-term issues is what will generate recovery. Continuing layoffs and problems in finding new jobs are shrinking incomes while weaker housing and equity markets sap wealth and make it unlikely that consumers will be able to provide much spending power. Consumer spending, which fuels two-thirds of U.S. economic activity, increased only at a 1.4 percent rate instead of the 1.5 percent previously estimated.

 

Reflecting the weak pace of global economic activity, exports fell at a 30.6 percent rate in the first quarter instead of the 28.7 percent estimated a month ago. That was the steepest drop in foreign sales in 40 years. Imports dropped at a 36.4 percent rate, the steepest since the summer of 1947.

 

Overall business investment plunged at a record 37.3 percent rate during the first quarter, while spending on home building fell 38.8 percent for its biggest quarterly tumble since early 1980.

 

Nonetheless, corporate profits grew at a 1.4 percent rate during the first quarter, slightly better than the 1.1 percent rise estimated a month ago, after falling 10.7 percent in the final three months of last year.