MarketView for March 10

Summary 

Banking and technology were the leading sectors on Wednesday, on hopes that a revival in business demand will increase corporate profits. Bank shares rallied to their highest point in 16 months, amid bets that an improving economy will stoke loan demand. As a result, Citigroup closed up 3.7 percent at $3.96, and Wells Fargo was up 2 percent at $29.57. At the same time, the Nasdaq rallied for a fifth straight day, after the Commerce Department reported that wholesale inventories fell unexpectedly in January and sales hit their highest in more than a year. Industrial shares ranked among the top gainers, with Boeing up 3.3 percent at $70.01. Intel gained 1.2 percent to $21.19.

The benchmark S&P 500 Index extended its year-long advance and is now up 69.3 percent from its 12-year closing low hit a year ago on March 9.

Abbott Laboratories announced that it had agreed to acquire Facet Biotech for $27 per share late Tuesday, moving ahead of a failed bid from Biogen Idec. Abbott's stock rose 0.4 percent to $55.03, while Facet rose 66.6 percent to $27.01. Travelers fell 1.3 percent to $52.89, capping the Dow industrials' advance.

Wholesale Inventories Fall

The Commerce Department reported on Wednesday that wholesale inventories fell by 0.2 percent in January following a 1 percent drop in December. Meanwhile, sales were up a solid 1.3 percent, the best showing since a 3.6 percent rise in November. The dip in inventories underscored the hypothesis that businesses remain cautious about restocking their depleted shelves. Nonetheless, the idea is that the gain in sales would add to a sustained rebound in inventory restocking. That would trigger increased factory production and provide support for the fledgling recovery.

The parameters for such a rebound are likely in place, given the lean inventory situation following the massive inventory liquidation that occurred during the recession. Inventories at the wholesale level have been down 15 of the past 17 months. The only gains in wholesale inventories occurred in October and November.

With the January drop in inventories, the ratio of inventories to sales fell to a record low of 1.10, meaning it would take 1.10 months to deplete inventories at the wholesale level given the January sales pace. That was the lowest point since the data series began in 1992.

The January drop in inventories was a disappointment. Economists had expected inventories would post a small increase of 0.2 percent. The government also revised the December report to show a bigger inventory drop of 1 percent rather than the 0.8 percent fall that was originally reported.

Most likely the recovery cannot be sustained until businesses begin consistently restocking their depleted shelves. That restocking would mean higher orders to factories and growing demand for manufacturing workers.

Wholesalers hold 25 percent of all inventories with factories holding about one-third and retailers the rest. Businesses slashed inventories by massive amounts during the recession as they struggled to control costs in the face of a deep recession and falling demand for their products. However, the economy received some momentum in the final three months of last year from a slowdown in the inventory liquidation process.

The swing from massive inventory reductions contributed two-thirds of the economy's overall growth of 5.9 percent in the October-December period. Economists are now hoping to see the beginning of sustained inventory rebuilding.

Growth Rate Increased for March and Trimmed for 2011

March saw an increase in forecasted economic growth in 2010, the third straight monthly increase, with the expectation now that growth during 2011 may come in lower than expected. Economists surveyed earlier this month in the Blue Chip Economic Indicators newsletter said the economy is expected to grow by 3.0 percent in 2011, which is 0.1 percentage point lower than estimates made a month ago. However, some economists raised their 2010 growth forecast for the third consecutive month to 3.1 percent, up 0.1 percentage point from February.

The consensus also expects inventories to continue adding to GDP over the next several quarters but see the size of those contributions become increasingly smaller. "By Q1 2011, the contribution to GDP from business inventories is expected to become trivial," the survey said.

The panelists said they also expect "a slower and less powerful than is typical improvement in labor market conditions that will cap gains in disposable personal income and personal consumption expenditures."

The panelists expressed concern that severe winter weather crimped economic activity in February and that upcoming monthly data on production, retail sales, housing starts and home sales could fall short of earlier consensus expectations. However, they also pointed out that any weather-induced softness will not be present in the March data.

Senate Passes Bill to Aid Those Who Are Unemployed

The Senate on Wednesday passed a $149 billion package of jobless aid and tax breaks, in a continued effort to lower the 9.7 percent unemployment rate. The measure, approved by a vote of 62 to 36, now heads to the House of Representatives, where many Democrats have pushed for more aggressive job-creation measures. Democrats say job creation is their top priority this year as they head into an election season that could possibly cost them control of Congress.

Both chambers have now passed two job-creation bills, but they have yet to resolve their differences and finish legislation that President Barack Obama can sign into law.

Democrats passed an $863 billion stimulus measure last year to battle the recession. That effort created up to 2.1 million jobs, according to the nonpartisan Congressional Budget Office. The bill passed on Thursday by the Senate largely continues existing government policies. Jobless workers would see their unemployment benefits and healthcare subsidies extended to the end of 2010, while businesses would once again benefit from $25 billion worth of tax breaks that expired at the end of 2009.

The bill's $149 billion in new spending is partly offset by $37 billion in revenue raised by closing tax loopholes. However, President Obama's planned to use the new revenue to help pay for his proposed healthcare overhaul.

Cash-strapped states would get $25 billion to help cover their portion of the Medicaid government-run healthcare program for the poor. More help could be on the way for states, which face yawning budget deficits and, unlike the federal government, must balance their budgets each year.

Representative George Miller, a senior House Democrat, introduced a bill on Wednesday that would give state and local governments an additional $98.5 billion to help avoid layoffs of teachers, police officers and other public employees. Other House Democrats say Congress should boost transportation spending to put more construction workers back to work.

Both the House and the Senate have approved a $13 billion payroll tax cut for businesses that hire unemployed workers, but the Senate needs to approve the measure again before Obama can sign it into law.

More than forty percent of unemployed Americans have been out of work for at least six months, the usual cutoff for jobless benefits. Congress extended the program to cover those out of work for nearly two years in some high-unemployment areas, but millions could still exhaust their benefits starting next month without additional extensions.

Unemployment aid does not directly create jobs, but it is one of the most cost-effective ways to stimulate the economy because recipients spend the money quickly. However, it is also not cheap. Extending benefits through the end of the year would cost $70 billion. Many Republicans voted against the measure, arguing that spending in other areas should be cut to cover all of its costs.