MarketView for June 21

 

 

 

Summary 

 

The major equity indexes posted their worst day in three weeks on Thursday, the result of mounting evidence that slower manufacturing growth worldwide threatened corporate profits. Shares of energy and materials companies led declines as commodity prices fell. Crude futures slipped below $80 a barrel for the first time since October. One theory is that weak overseas demand was responsible for the decline in those industries.

 

At the same time, the slide in equities was accelerated by a bearish call from Goldman Sachs, which recommended clients build short positions in the broad S&P 500 index on expectations of more economic weakness.

 

"We are recommending a short position in the S&P 500 index with a target of 1,285," (roughly 5 percent below current levels), Goldman Sachs wrote in a research note. The investment bank cited the Philly Fed's mid-Atlantic factory index, which fell to minus 16.6 in June, an unexpected contraction in the region's factory activity.

 

Semiconductor stocks weighed on the Nasdaq after chipmaker Micron Technology posted a net loss for the fourth straight quarter. Micron lost 7.8 percent to $5.65.

 

Stocks had enjoyed a two-week run that brought the S&P up more than 7 percent on hopes for additional stimulus from the Federal Reserve. Business activity across the euro zone shrank for a fifth straight month in June and Chinese manufacturing contracted, while weaker overseas demand slowed growth by U.S. factories. The day's decline was the worst since June 1 when the S&P 500 fell 2.5 percent.

 

Softening data globally lifted hopes of central bank action to support the economy. The Fed announced on Wednesday it would extend one monetary stimulus program and said it was ready to do more to help economic growth if necessary.

 

Home re-sales fell in May and the four-week moving average for new unemployment insurance claims rose last week to the highest level since early December.

 

Celgene fell 11.5 percent to $59.45 after the company said it was withdrawing a European application for wider use of its big-selling Revlimid blood cancer drug.

 

Philip Morris International lost 3.3 percent to $85.62 after forecasting full-year earnings below Wall Street estimates, saying a strong dollar has hurt sales abroad.

 

After the bell, Moody's Investors Service cut the credit ratings of 15 of the world's biggest banks in a highly anticipated move that was part of a broad review of major financial institutions. Among the moves, Moody's cut JPMorgan Chase long-term senior debt to A2 from Aa3 and assigned it a negative outlook negative. It also cut Morgan Stanley's (MS.N) long-term senior unsecured debt to Baa1 from A2 and also assigned it a negative outlook.

 

Shares of JPMorgan added 1.4 percent to $36.00 and Morgan Stanley added 3.2 percent to $14.41 in extended trade.

 

About 7 billion shares changed hands on the major equity exchanges, a number that was below last year's daily average of 7.84 billion shares.

 

Economic Data Again Points to Slowing Economy

 

Manufacturing grew at its slowest pace in 11 months in June and the number of individuals filing new applications for unemployment aid fell only slightly last week, further evidence the economy was weakening. Other reports on Thursday underscored the difficulty the economy was having breaking out of a soft patch. Factory activity in the Mid-Atlantic region fell to a 10-month low in June and home re-sales were also down in May.

 

The economy is going through a repeat of 2011 when growth stumbled in summer, with Europe's debt crisis and uncertainty over the course of our domestic fiscal policy has resulted in reluctance on the part of businesses to hire.

 

The Labor Department said initial claims for state unemployment benefits fell by about 2,000 claims last week to a seasonally adjusted 387,000. However, a four-week moving average, considered a better measure of labor market trends, hit the highest level since early December.

 

The claims data covered the survey week for the government's nonfarm payrolls count for June and pointed to only a marginal improvement on the paltry 69,000 jobs added in May.

 

The Labor Department will release its June employment report on July 6. Much of the recent weakness in the labor market has been due to a decline in hiring rather than a pick-up in layoffs.

 

In a third report, the Philadelphia Federal Reserve Bank reported that factory activity in eastern Pennsylvania, southern New Jersey and Delaware contracted for a second month in June.

 

The dour reports handed stocks on Wall Street their worst day in three weeks. Prices for U.S. government bonds rose as investors sought a safe haven for their money, while the dollar notched its biggest one day gain in more than three months against a basket of currencies.

 

Manufacturing has been one of the strongest links in an otherwise frail economic recovery, but weaker overseas demand may be starting to take its toll. Labor market weakness was key in the Fed's decision on Wednesday to extend its so-called Operation Twist program through the end of the year. It was due to expire this month.

 

In a relative bright spot, a gauge of future economic activity rebounded in May. At the same time, sales of previously owned homes fell 1.5 percent last month, the drop followed April's hefty 3.4 percent increase and the median home price in May rose for a fourth straight month.

 

Investors Move Away

 

Investors continue to move away from equities, as concerns over Europe's debt problems and signs of a slowing global economy come to the forefront of everyone’s analysis. Stock mutual funds lost $620 million during the week ended June 13, according to the Investment Company Institute. Adding it up, that means investors have yanked money out the stock market for 16 of the last 17 weeks.

 

Interestingly, investors added money to U.S. stocks during the final week of May - a week that ended with the market's worst sell-off of the year. May wasn't much better -- it was the worst month in two years for stocks.

 

Stocks have had a pretty good June so far, excluding June 1. The S&P 500, Nasdaq and the Dow Jones Industrial Average indexes managed to log two straight weeks of gains.

 

However, worries about Europe's debt crisis, Spain's banks and Greece's efforts to renegotiate its bailout will keep investors on edge for some time. Toss in today's reports that signaled a slowdown in the global economy and you've got the perfect conditions for choppy trading to continue.

 

Since the beginning of the year, investors have pulled $56 billion from U.S. stock mutual funds. By comparison, the funds brought in $6.4 billion during the first five months of 2011 and lost just $18 billion during the first five months of 2010. Meanwhile, bond mutual funds took in $3.6 billion in assets, compared with the previous week's $1.5 billion inflow.

 

Hybrid funds, which invest in both stocks and bonds, gained $966 million during the second week of June, reversing the prior week's $1.2 billion outflow. Hybrid funds have enjoyed inflows for much of 2012.

 

An Apple TV for Christmas

 

Apple's manufacturing partner Hon Hai Precision expects to start receiving LCD TV panel orders from Sharp in the third-quarter of fiscal 2012 noted Topeka Capital Markets analyst Brian White wrote in a research report on Wednesday. White believes that Hon Hai's investment in Sharp earlier this year was an effort to support the production of a new Apple TV. He rates Apple shares "buy" with a $1,111 price target.

 

"Based on a recent interview by 21cbh.com with a Sharp executive and information from sources at the company, the online news source believes the order is for the new Apple TV and could be available for the holiday season," White wrote in his report.

 

If Apple enters the TV market during the upcoming Christmas and holiday season, it "would make for a very merry holiday season for Apple and consumers," White penned.

 

White predicts that the 1080p Apple TV released in March was just a precursor of Apple's full blown boob-tube, which will use a special type of motion detection technology and a unique remote control that looks similar to the iPad.

 

"We believe the pieces are in place for a launch soon, driving an entirely new $100 billion market opportunity or higher, while further strengthening the Company's digital grid and providing customers with a new TV experience," White said. He estimates that if Apple can gain 2% of the LCD TV market share, it can generate sales of $10 billion.

 

Gold Loses This Year’s Gains

 

The price of gold fell 2.5 percent on Thursday, nearly wiping out this year's gains as renewed fears of a global economic slowdown and disappointment over a lack of a new round of aggressive Fed stimulus dampened bullion's inflation-hedge appeal.

 

The metal posted its largest one-day drop since February 29. Its selloff started on Wednesday when the Fed ended a policy meeting without launching a new round of monetary easing but instead opted to lengthen its "Operation Twist" program aimed at lowering long-term interest rates.

 

Silver slid more than 4 percent, following steep losses on Wall Street and Brent oil's 3.5 percent drop to below $90 a barrel. Thursday's selloff in assets across the board lessened the need for buying gold to hedge against inflation.

 

Deflation worries pummeled precious metals after reports showed weak manufacturing activity, a shrinking Chinese factory sector and slowing business activity across the euro zone. The data added to fears that Europe's debt crisis and slower growth in the United States and Asia would cause downturns around the globe.

 

Spot gold fell 2.5 percent to $1,566 an ounce, having earlier hit a low of $1,563.88, within 10 cents to turning negative for the year compared with the 2011 close at $1,563.80 on December 30. The metal briefly broke below $1,530 in mid-May, and is a long way off the record high of $1,920.30 an ounce hit last year.

 

Gold futures for August delivery were down $50.20 an ounce at $1,565.60, with trading volume in line with the 30-day average. Silver fell 4.3 percent to $26.90 an ounce. Technical selling also pressured bullion prices once they broke below $1,580 an ounce, a level of decent support recently. Other analysts are more bullish in the longer term.

 

CitiFX, Citigroup's technical research unit, said in a note that gold's current price action resembled a pattern seen between March 2006 and August 2007 when the metal rallied sharply after consolidation. It said bullion could steadily rise to $1,795 an ounce. A the same time, despite recent weakness, some say gold should eventually benefit from economic uncertainty.