MarketView for March 5

 

 

 

Summary 

 

The Nasdaq hit an 18-month closing high on Friday after economic reports showed that employers cut fewer jobs than expected last month and consumers showed signs of shedding their penny-pinching ways. Apple rose to an all-time high after the company said its much hyped iPad computer would arrive in U.S. stores in April, easing concerns about delays. The broader market also received a lift from smaller-than-expected job losses, after data showed nonfarm payrolls shed 36,000 jobs in February. The Street had been concerned severe winter weather that affected swaths of the country would cause a larger drop in payrolls.

 

News that consumer credit rose $4.96 billion in January, its first increase in a year and the largest for any month since mid-2008, according to Federal Reserve data, helped financial stocks. American Express rose 3.4 percent to $40.20 and ranked among the Dow industrials' top advancers.

 

The Dow and the S&P 500 closed at their highest levels in six weeks. The S&P 500 is now off only 1 percent from a 15-month closing high set on Jan 19, having clawed back from a drop of more than 8 percent through February8. All three indexes are now positive for the year.

 

For the week the Dow rose 2.3 percent, the Nasdaq added 3.9 percent and the S&P 500 was up 3.1 percent. There was also broad participation across most market sectors, with cyclical stocks taking the lead as commodity prices rose along with investor optimism. But volume remained low in a sign of residual investor caution.

 

Crude oil futures prices ended at their highest level in almost eight weeks, at $81.50 per barrel. Dow components Chevron and Exxon Mobil rose, with Chevron closing up 1.7 percent at $74.30, while Exxon ended the day up 1.6 percent at $66.47.

 

3M gained 1.8 percent to $82.44, and ranked among the Dow's top gainers after the jobs data showed the manufacturing sector added 1,000 jobs in February. Declining shares included Solarfun Power Holdings, which fell 9.1 percent to $6.84 after the company warned of a steeper fall in average selling prices in its first quarter. Transatlantic Holdings fell 3.4 percent to $51.96 after AIG said it would sell its 13.8 percent stake in the company. AIG's ended the day up 5.1 percent to $28.08.

 

Payroll Data Looking Good

 

Employers cut fewer jobs than expected during snow-battered February and the unemployment rate held steady at 9.7 percent, bolstering views the economy was on the brink of creating jobs. Nonfarm payrolls fell 36,000, the Labor Department said on Friday, adding it was unclear how the severe snowstorms that hit much of the country last month had affected employment.

 

Nonetheless, President Obama said the figures showed measures his administration took to boost the economy were working but that unemployment was still too high. "I'm not going to rest, and my administration is not going to rest, in our efforts to help people who are looking to find a job," Obama said on Friday.

 

Nonetheless, February's job losses lighter than had been expected, layoffs in the prior two months were 35,000 less than previously reported. Since the economy fell into recession in December 2007, 8.36 million jobs have been lost. Job growth is crucial to sustain the economic recovery, which started in the second half of last year.

 

According to the Labor Department, bad weather kept about 1.03 million workers home at some point last month compared to only 259,000 in January. This was the highest since January 1996, when the country was also slammed by blizzards.

 

While the winter storms might have affected its employment count, it was difficult to quantify the impact, the Labor Department said. Not every business closure or temporary worker absence causes a drop in employment, because workers are counted as employed if they received any pay during the survey period for the department's job count, even if for just an hour.

 

Moreover, it was unclear how many workers may have been added to payrolls in February for snow removal or repairs related to the storms, it said.

 

The weather effects last month were likely felt in the construction sector, where employment fell by 64,000 jobs after declining by 77,000 in January. Manufacturing jobs increased 1,000, less than the 20,000 gained in January.

 

Temporary hiring, seen as a precursor to increases in payroll employment, increased 48,000 last month. Employers have added temporary help for five straight months after nearly two years of monthly declines.

 

Half of the job losses last month came from government workers, but that category is expected to see huge gains in the coming months as more workers are hired for the once-a-decade U.S. census. In February, 15,000 temporary census workers were hired.

 

While the labor market is gradually improving, obstacles still remain. A broad measure of unemployment that includes the number of workers marginally attached to the labor force and those working part time for economic reasons rose to 16.8 percent from January's 16.5 percent. About four in 10 unemployed workers in February had been out of a job for 27 weeks or more.

 

Upper Income households Doing Better Than the Rest of Us

 

Sentiment of U.S. households in the top fifth of the income distribution improved in early 2010 compared with 2009, but worries over personal finances persist, a survey showed on Friday. Sentiment rose to 82.8 for 2010 compared with 71.5 for 2009, according to the Thomson Reuters/University of Michigan's Surveys of Consumers. The survey assessed upper-income households.

 

Some 36 percent reported an improved financial situation in early 2010, up from 27 percent last year; however, 38 percent reported a worsening financial situation, down from 51 percent in 2009.

 

"While the evidence indicates that the financial situation of upper-income households improved considerably more than the finances of lower-income households, even among those in the top fifth of the income distribution, those initial gains have not completely ended the overall financial decline," said Richard Curtin, director of the surveys.

 

Last week, a separate Thomson Reuters/University of Michigan survey found that U.S. consumer sentiment was weaker in February compared with January, as Americans grew more impatient with the government's gridlock over efforts to stimulate jobs.

 

Strong Dollar Has Adverse Effect on Stocks with International Exposure

 

The dollar’s strength is creating problems for stocks with a heavy international exposure. The reason is that strength in the dollar means international companies, which make up a large chunk of the S&P 500, are getting less dollars for their repatriated foreign revenues than before.

 

Companies in sectors such as technology and industrials are sailing against the currency tide as the euro nears a nine-month low against the dollar. That trend stands as a sharp contrast to last year when a falling greenback helped buoy U.S. companies that rely on overseas markets for much their revenue.

 

Since the dollar index has rise, companies that get all of their revenues inside the United States have performed better. The average S&P 500 company generates about 45 percent of its revenue overseas, Bank of America-Merrill Lynch estimates, including direct and indirect exposure.

 

Approximately two thirds of the S&P 500's foreign exposure comes from cyclical sectors such as technology, energy, industrials and materials, making those companies more sensitive to global growth than U.S. growth.

 

For example, IBM receives just over 40 percent of its revenues from the Americas, so currency movements can have a big impact on results. In the fourth quarter IBM's revenues from Europe, the Middle East and Africa were $9.7 billion, for growth of 2 percent.

 

But if currency levels had been held constant year-over-year, revenue would have dropped 7 percent, Therefore, the falling dollar helped these results. Beginning in the first quarter, though, this is set to reverse.

 

The technology sector is the most heavily exposed to currency effects, with 60 percent of revenues coming from outside the United States, according to BofA-Merrill. Much of the international growth for those companies is in Asia, however, where the currency picture has been more stable.

 

Many dollar bulls view signs the Fed is reining in its easy policies, combined with weaker growth and high budget deficits in Europe, as perceived strengths for the dollar. And the dollar's turnaround has been sharp. Since December the euro has dropped almost 10 percent against the dollar. That fall has been worse due to concerns that some euro zone governments may have difficulty financing high budget deficits.

 

The stronger dollar will erase $2 worth of earnings power from the S&P 500 this year, according to BofA-Merrill. The firm's currency strategists expect the euro to trade at an average $1.35 in 2010, falling to $1.28 by the end of the year, down from an average $1.40 in 2009.

 

Merrill raised its 2010 S&P 500 earnings-per-share estimate by $2 to $75 and its 2011 forecast by the same amount to $85 due to a better earnings outlook for technology and consumer discretionary companies. But because of pressure from the dollar that view remains below consensus, says Merrill.