MarketView for June 16

 

 

Summary  

 

It was sort of your typical summer day on Wall Street only summer will not be with us officially until next Monday. In other words, stock prices and their respective indexes moved up and they moved down and at the closing bell they were virtually unchanged as cautious comments from FedEx and a round of weak housing market data overshadowed a surge in industrial production. Shares of 3M rose 1.4 percent to $80.88 and largest positive influences on the Dow Jones industrial average.

 

FedEx, an economic bellwether for the economy because it serves a wide range of industries, indicated that increased costs would constrain its 2011 earnings. FedEx fell 6 percent to close at $78.07 as a result of its earnings prognostication.

 

The Commerce Department released a report indicating that housing starts fell more than expected in May, underscoring the uneven nature of the economic recovery and casting a shadow over better-than-expected industrial production data for the same month.

 

Nonetheless, the S&P 500 managed to remain above its 200-day moving average a day after the index exceeded that level for the first time in a month. Many on the Street consider that in and of itself to be a positive signal because they view the 200-day average as an important momentum indicator. Meanwhile, Wednesday's session left the Dow and the S&P 500 just below the break-even point for the year, while the Nasdaq is up 1.6 percent for 2010.

 

Stocks have fallen sharply since a recent closing high on April 23, due primarily to fears of slower economic growth and unsustainable public debt in the euro zone. The S&P 500 is still down 8.4 percent since that date after falling nearly 14 percent to an intraday closing low on June 7.

 

On the closely watched energy front, BP agreed to President Barack Obama's demand to place about $20 billion in escrow with the funds being used to pay damage claims from the Gulf of Mexico oil spill. BP also announced that it was suspending dividends to its shareholders for the remaining portion of this year. BP also said it plans to reduce its investment program and sell $10 billion of assets for a planned fund to cover the costs related to its Gulf of Mexico oil spill. BP's shares rose 1.5 percent to close at$31.85, after earlier climbing as much as 5.1 percent to an intraday high at $33.

 

Shares of some oil and gas drillers and other energy companies also advanced, with Halliburton up 3.1 percent at $26.25. Strong sales from Apple, which said it sold 600,000 of its iPhone 4 smartphones in a single day of pre-orders, helped cushion the Nasdaq. Apple's stock was up 2.9 percent at $267.25.

 

Before the opening bell, the Federal Reserve Board reported that industrial output surged 1.2 percent in May, partly due to a spike in utility production, and a solid gain of 0.9 percent in factory

 

Reflecting the housing sector's struggles, the Commerce Department government said housing starts fell more than expected in May, hitting a five-month low, after a federal homebuyer tax credit expired.

 

Latest Economic Data Shows Mixed Results

 

Housing starts fell to a five-month low in May but industrial output rose, evidence of an uneven recovery that has kept inflation at a minimum. As the government's tax incentives for home buyers expired, new home building dropped 10 percent to a seasonally adjusted annual rate of 593,000 units, the lowest level since December, the Commerce Department reported on Wednesday.

 

Meanwhile, industrial production rose 1.2 percent. Some of the rise was due to a spike in utilities as rising temperatures prompted many Americans to turn on their air conditioners. Nonetheless, manufacturing output was firm, climbing 0.9 percent, according to a report by the Federal Reserve.

 

Despite that performance, prices at the wholesale level retreated in May, with the Labor Department's Producer Price Index falling 0.3 percent as gasoline costs dropped sharply. Core producer prices, which exclude food and energy, rose just 1.3 percent in the year to May, slightly above forecasts but still near the bottom of the Fed's presumed comfort range.

 

The grim housing picture is a concern for economists. Real estate was at the epicenter of the credit crisis, and many believe construction must play a role in any robust recovery. The percentage decline in home construction was the largest in 14 months and April's housing starts were revised down to show a 3.9 percent increase from a previously reported 5.8 percent rise.

 

New building permits, which give a sense of future home construction, fell 5.9 percent to a 574,000-unit pace in May, the lowest in a year. That followed a 10.9 percent drop in April.

 

The recovery appeared to have lost some momentum in May, with private hiring slowing sharply and retail sales falling. However, employers increased working hours and core retail sales were higher.

 

The combination of low inflation and low levels of resource utilization should allow the Federal Reserve to renew its commitment to low interest rates at next week's meeting, which would help to nurture the recovery.

 

Fed data indicated a 1 percentage point rise in capacity use to 74.7 percent for May. That was the highest since October 2008, but still 5.9 points below its average from 1972 to 2009.

 

Fed Lucks Out

 

After heavy criticism of its handling of the financial crisis, the Federal Reserve on Wednesday appeared likely to escape the most aggressive congressional scrutiny of its interest rate deliberations.

 

Those finalizing a sweeping overhaul of financial regulations have indicated they may back away from a measure that would subject the Fed's monetary policy to scrutiny. They could also abandon a plan to make one of its top officials a political appointee.

 

Fed officials had opposed both measures as intrusions on the central bank's political independence -- something that has been a hallmark of the Fed's operations in recent times. On the defensive early in the reform process, the Fed has already scored several victories in recent weeks and looks set to emerge as the most powerful financial regulator when reforms are complete.

 

Democrats in charge of negotiating a final Wall Street reform bill say there are relatively few differences they need to resolve between the competing bills passed by the House of Representatives and the Senate. They aim to finish by June 24 so Obama can sign a final package into law by early July.

 

On their second full day of work, negotiators directed regulators to find a way to reduce the conflicts of interest that critics say led credit-rating agencies like Moody's Corp and Standard & Poor's to issue the highest ratings on toxic securities ahead of the financial crisis.

 

The SEC would set up a government clearinghouse to prevent agencies from soliciting business from the credit issuers whose products they are supposed to impartially assess unless the agency determines a better way to resolve the conflict of interest.

 

The agreement, which concludes negotiations started on Tuesday, is a big win for credit rating agencies, which otherwise would have definitely seen the clearinghouse take effect.

 

The negotiating committee also considered measures that would strengthen the SEC's powers and toughen the client-care standard for brokers who offer financial advice. House negotiators agreed to give shareholders the ability to sue banks and other third parties that are not directly involved in securities fraud cases. The senators on the committee had yet to weigh in.

 

House Democrats also said they will press their Senate counterparts to accept a $150 billion fund to pay for liquidating financial firms that get into trouble and empower regulators to break up unstable large firms.

 

The Fed has admitted it was too complacent about oversight before the financial crisis, which prompted the worst recession in generations. While Fed officials have endured tongue-lashings from lawmakers who say it is too close to the banks it regulates, much of that anger may have dissipated since Fed Chairman Ben Bernanke survived a tense Senate confirmation vote in January.

 

The committee next week is scheduled to tackle disputes about how to limit banks' risky trading activities, how to protect consumers and whether to limit fees on debit-card transactions.

 

Banks are pressing to soften a proposal that would limit their ability to trade on their own accounts and invest in private equity and hedge funds. But their prospects appear to be dimming.

 

They also look likely to face limits on their lucrative swaps-trading operations as Democrats near consensus on a proposal that would require banks to spin off their operations to a separately capitalized affiliate.

 

The overall bill is likely to crimp financial firms' profits. Those whose profits appear most at risk are Goldman Sachs, Morgan Stanley, J.P. Morgan Chase and Bank of America.