MarketView for March 31

 

 

Summary 

 

Wall Street chalked up its best month since 2002 in March as the first quarter of 2009 came to an end. Upbeat news from Europe set the tone for financials, helping them recover much of Monday's losses and continue a recent robust rally after Barclays declined to take part in a government asset-protection plan.

 

Technology shares added to a strong three-week rally after the Davenport brokerage house recommended investors buy Microsoft on the grounds of increased demand for personal computers in China and the United States, along with the potential or a restocking of inventories in Europe. Microsoft ended the day up 5.1 percent to $18.37 and contributed the most to the Nasdaq's advance.

 

However, even as the S&P 500 index rose 8.5 percent in March for its best one-month percentage gain since October 2002, uncertainty over the economy left the benchmark index down 11.7 percent for the first quarter.

 

As the final trading day of March ended, the S&P 500 marked its sixth consecutive quarterly decline, matching the longest streak of quarterly drops that stretched from the end of the fourth quarter of 1968 to the end of the second quarter of 1970. This time, the S&P's cumulative slide for the past six quarters was 47.7 percent, compared with a 30.6 percent drop 39 years ago.

 

After Monday's sharp sell-off in banking shares on concerns over the sectors health, JPMorgan Chase rose 7 percent to $26.58 and Bank of America gained 13.1 percent to $6.82.

 

Alcoa saw its share price move up 9.7 percent to $7.34 after Deutsche Bank upgraded the aluminum company's stock to "hold" from "sell" and raised its price target. On the Nasdaq, shares of Autodesk rose 10.4 percent to $16.81 after UBS upgraded the design software and services company's stock.

 

On the economic front, the picture remained bleak but investors appeared to pay less attention to the data, with damage limited to the homebuilding sector. In addition to January's record drop in home prices, March consumer confidence came in barely above the record monthly low.. At the same time, the Institute for Supply Management-Chicago index of business activity fell in March at a rate that was more severe than expected.

 

Consumer Confidence Steady In March

 

Consumer confidence showed a slight move upward in March, halting three months of declines as slivers of hopes about the economy buoyed consumer outlook. However, consumers are still leery about their future given the rising numbers of layoffs in combination with reduced earnings.

 

According to the Conference Board’s release on Tuesday, its Consumer Confidence Index came in with a reading of 26.0 for March, as compared to a revised 25.3 number in February, which was itself a big drop from 37.4 in January.

 

The slight rise followed three consecutive monthly drops. But the reading came in below the 28 expected and remains less than half of its level of 65.9 last March.

 

How people feel about their current economic circumstances, known as the Present Situation Index, slipped to 21.5 from 22.3 last month. Their assessment about the economy over the next six months, or the Expectations Index, rose to 28.9 from 27.3 in February.

 

Despite the slight improvement in that reading, many economists believe that a recovery is not near, and people continue to worry about what's ahead.

 

A few encouraging economic reports, including better-than expected figures on consumer spending and orders for durable goods, helped fuel a stock rally in recent weeks. The latest positive signs about spending came Tuesday from the International Council of Shopping Centers-Goldman Sachs index, which showed that sales perked up for the week ended Saturday.

 

A widely watched index released Tuesday shows American home prices dropped by the sharpest annual rate on record in January. The Standard & Poor's/Case-Shiller 20-city housing index tumbled by a record 19 percent from January 2008. The 10-city index dropped 19.4 percent.

 

Another key factor is job security, a major factor behind shoppers' ability and willingness to spend. The unemployment rate — now at 8.1 percent, the highest since late 1983 — is expected to rise to 8.5 percent in March, with projections of another 651,000 jobs lost.

 

The unemployment figures are slated to be released by the Labor Department on Friday. Many economists expect unemployment to tick up to about 10 percent by the end of the year.

 

Another concern for people is their incomes. A report released last week by the Commerce Department showed that Americans' incomes slipped 0.2 percent in February, the fourth drop in the past five months, as wages and salaries continued to suffer from massive layoffs.

 

"Apprehension about the outlook for the economy, the labor market and earnings continues to weight heavily on consumers' attitudes," Lynn Franco, director of The Conference Board Consumer Research Center, said in a statement.

 

Consumer confidence is important because consumer spending accounts for more than two-thirds of economic activity. The consumer confidence survey, which sampled 5,000 U.S. households through March 24, showed Americans remain gloomy about the job market.

 

The percentage of consumers saying jobs are "hard to get" increased to 48.7 percent from 46.9 percent in February, while those claiming jobs are "plentiful" was unchanged at 4.6 percent.

 

Their short-term outlook was moderately less negative. The percentage of consumers expecting fewer jobs in the months ahead decreased to 42.6 percent from 47.0 percent, while those expecting more jobs edged up to 7.1 percent from 6.8 percent. The proportion of consumers expecting an increase in their incomes declined to 7.5 percent from 7.9 percent.

 

GM Bankruptcy Quite Possible

 

A possible bankruptcy plan being discussed for General Motors includes quickly forming a new company of the automaker's most profitable parts, while a group of other units would remain under bankruptcy protection for a longer period. GM also would seek to have a new deal in place with the United Auto Workers union prior to any bankruptcy filing, the source said.

 

GM warned earlier on Tuesday that there is a rising chance it could file for bankruptcy by June, as the company has 60 days to reach deeper concessions with bondholders and unions after its previous restructuring plan was rejected by the U.S. government as insufficient.

 

While the automakers would still prefer to avoid bankruptcy, advisers to both GM and Chrysler LLC have been working to prepare for potential bankruptcy filings that would aim to preserve, or sell off, the best parts of the companies.

 

Under the plans being considered, GM would seek to quickly move its most profitable units into a new company separate from its other units in the early days of the bankruptcy filing. The aim being to show consumers, taxpayers, and the government that the new GM can survive and compete in the autos sector as a viable company, the source said.

 

Old components of the company not included in the new GM, such as Saturn and Hummer, would remain in bankruptcy over a longer period of time to be sold or wound down. During a transition period, the new GM would have to coordinate with the old GM for some time and share certain operational activities, like accounting and insurance.

 

GM has recently made progress on its negotiations with the United Auto Workers, winning deep concessions on healthcare and entry-level wages, but negotiations are ongoing over the fate of its obligations to 775,000 retirees.

 

As part of the negotiations to reduce or eliminate certain retiree benefits, the union is likely to seek some compensation, which could include a stake in the new GM, cash from a sale of the new GM. Meanwhile, bondholders, a key constituency in the GM restructuring have said they were braced for a reduced offer of "pennies on the dollar" for about $28 billion in GM debt.

 

Fed’s Plosser Optimistic

 

Philadelphia Federal Reserve President Charles Plosser said on Tuesday he is cautiously optimistic that the economy will start to grow again in the second half of 2009, breaking out of a lengthy recession. At the same time, Plosser, one of the Fed's most adamant inflation hawks, said the central bank needs to get out ahead of a potential inflation spike as the economy recovers, even if the jobless rate is still rising at the time.

 

"Unemployment is a lagging economic indicator. The economy is going to turn around long before unemployment rates peak," Plosser said. "There will come a time when we have to start raising rates and draining all this liquidity, and there are some parts of the marketplace ... that may not be fully recovered yet. We will need to do that."

 

In the past and in the 1970s in particular, the Fed has sometimes been too slow to start tightening its policy after an economic downturn, Plosser said.

 

"Once that process (of recovery) starts we need to get out in front of it, otherwise we could be faced with lots of inflation down the road."

 

The Fed will also need to brace for pushback from several directions when it starts to dismantle its alphabet soup of lending programs, Plosser said. Various interest groups are likely to cry foul, saying markets are too fragile or the economy still too weak, he cautioned.

 

"Such pressures could threaten the Fed's independence to control its balance sheet and monetary policy. We will need to have to fortitude to make some difficult decisions."

 

Plosser said he was surprised that the market seemed taken aback when the Federal Open Market Committee said in March it would buy longer-term Treasury debt, after foreshadowing such a move for a couple of months. Treasury purchases create more flexibility for the Fed's balance sheet and would be easier and less disruptive for the central bank to sell when the time arises than purchases in individual asset classes, Plosser.said.

 

Longer-dated issues also give more "bang for the buck" when short-term rates are near "zero bound," he said. The FOMC has set its target fed funds rate in a range of zero to 0.25 percent since December. Financial markets bet that rates will stay near zero for the rest of 2009.

 

While Plosser endorsed purchases of Treasuries, the Fed is also in the process of buying more than $1 trillion in mortgage-backed securities, many of which will not roll off its balance sheet for years. It is that program, and a separate plan to buy large amounts of asset-backed securities with maturities of three years or more, that underline the problems of the Fed's balance sheet drawdown, Plosser said.

 

Plosser and Minneapolis Fed President Gary Stern both urged a fresh focus on the issue of "too big to fail," in which certain banks or financial institutions are kept afloat because their demise is seen as a trigger for massive systemic risk. The policy-makers agreed, though, that a knee-jerk swing to over-regulation was not the answer.

 

"A truly draconian regulatory regime could conceivably succeed in diminishing risk-taking, but only at excessive cost to credit availability and economic performance," Stern said.

 

Years of inaction dramatically raised the economic costs of the U.S. financial crisis, said Stern, who has urged more attention to the TBTF issue for several years. "Policy-makers did not prepare for the 'too big to fail' flood; indeed, they situated themselves on the flood plain, ignored the flood warning, and hoped for the best," he said.

 

Looking ahead, Plosser said the policy goal should not be to try to prevent every failure, but to reduce the systemic risks to the financial system that a failure may create.

 

He also warned against suggestions that the Fed become the U.S. financial system's "uber-regulator," saying that an overly vague or sweeping mandate "puts the central bank's credibility at risk" and threatens core monetary policy objectives.