MarketView for March 15

 

 

 

Summary 

 

It was another relatively dull day on Wall Street as some relatively meaningless worries the Chinese government may tighten credit, a move that could possibly but not necessarily slow growth in the global economy, kept many investors on the sidelines. Shanghai's key stock index fell to its lowest close in five weeks on Monday for the same reason, credit tightening in China.  There is no argument that inflation in China is rising faster than expected.  The nervousness hit sectors such as energy, which fell 1 percent as the price of crude oil declined.

 

At the same time, as is generally the case, the Street waits around to see the results of next key Federal Reserve Open Market Committee meeting, which occurs this week. The interest-rate setting committee of the Federal Reserve holds a one-day meeting in which the central bank is widely expected to repeat its promise to keep borrowing costs exceptionally low for "an extended period."

 

Meanwhile, share prices of banks turned around near the closing bell after Senate Banking Committee Chairman Christopher Dodd released a proposed financial regulation overhaul bill that did not offer any surprises.

 

Also weighing on energy stocks was Consol Energy, which closed down 10.1 percent to $48.85 after the Pittsburgh-based company agreed to buy the Appalachian natural gas properties of Dominion Resources for $3.48 billion in cash.

 

Semiconductors were a drag on the Nasdaq as analysts lowered their ratings on several chip stocks, including downgrades of Lam Research and KLA- by Oppenheimer and a Barclays cut of Atheros Communications. Lam Research dropped 4.6 percent to $32.68, KLA-Tencor fell 4.6 percent to $28.09 and Atheros declined 4.1 percent to $35.69.

The PHLX Semiconductor index shed 1.4 percent.

 

Wal-Mart was the top performer for the Dow Jones industrial average, up 2.8 percent to $55.42 after Citigroup upgraded the world's largest retailer.

 

Google fell 2.8 percent to $563.18 after the company stated that it remained in talks with the Chinese government about censorship of its Chinese-language search portal despite signs the company could soon shut the site.

 

Industrial Output Declines

 

Industrial production fell sharply in February, held back by severe winter storms that slammed parts of the country, while manufacturing activity in New York State stalled this month.

 

 

Nonetheless, Monday's data did not change the Street’s perspective that the factory-led economic recovery remained on track, given weather disruptions and the fact that details of the reports showed underlying strength. Look for a rebound in industrial production in March.

 

While manufacturing output fell in February, it rose outside of the auto sector, and mining activity posted a strong gain. In addition, factory employment, shipments and unfilled orders in New York state all rose this month.

 

The Federal Reserve said industrial output edged up 0.1 percent last month after increasing 0.9 percent in January, in line with market expectations. They blamed the slowdown on inclement weather. The report also showed the amount of the nation's industrial capacity in use hit the highest level in more than a year.

 

Separately, the New York Fed said its March gauge of manufacturing activity in New York State slipped to 22.86 from 24.91 in February. Markets had expected the measure to fall to 22.00.

 

While manufacturing activity in New York State slowed, the report's employment index rose to its highest level since October 2007 and the inventories measure jumped above zero for the first time in more than a year. Even more heartening, new orders and shipments rose sharplyh from the prior month, while the average workweek lengthened markedly and the backlog of orders grew.

 

In addition to inclement weather, industrial production last month was curbed by a steep drop in motor vehicle output -- likely a reflection of the auto recalls by Toyota Motor Corp. Manufacturing dipped 0.2 percent after growing 0.9 percent in January. If you remove vehicle assembly, manufacturing rose 0.1 percent.

 

The minor setback in February is expected to be followed by strong makeup gains in March. Meanwhile, mining increased 2.0 percent, adding to the 1.1 percent rise in January, while utilities gained 0.5 percent after a 0.6 percent rise.

 

Capacity utilization, a measure of slack in the economy, inched up to 72.7 percent, the highest since December 2008, from 72.5 percent in January. That was still 7.9 percentage points below the average from 1972 to 2009, the Fed said.

 

A third report from the Treasury Department showed foreign investors sold a net $33.4 billion of all U.S. securities in January but remained net buyers of Treasury debt.

 

Dodd Unveils Financial Reform Bill

 

The Federal Reserve would gain new powers over non-bank financial firms and keep much of its authority over banks under a new bill to be unveiled on Monday by the Senate's architect of financial reform. In a turnaround for the central bank after months of public criticism, Senate Banking Committee Chairman Christopher Dodd released a bill that leans heavily on the Fed to fix the financial system.

 

Not only would a new government watchdog for financial consumers be housed within the Fed, it would also retain much of its present authority over large bank holding companies and gain new authority over selected non-bank financial firms.

 

The Fed would also continue supervising smaller, state-chartered banks now in the Fed system -- a change from an earlier proposal that would have transferred those banks to Federal Deposit Insurance Corp. supervision.

 

With Republicans and bank lobbyists working to That would hurt Democrats and weaken and block new rules, the push for reform could fail in the Senate. President Barack Obama as they head into November elections already short on achievements.

 

But the release on Monday of Dodd's bill will move the Senate closer to a decisive vote.

 

In an interview, Dodd threw down a challenge to Republican committee colleagues who wrote him a letter on Friday seeking more time to study the issue. He called their demands "terribly naive." After months of debate, Dodd told Reuters, the road to financial reform is still difficult, but navigable.

 

"If you want to work with me ... we can do it. If you don't, you can walk away or delay or say we shouldn't be meeting. But if you're interested in getting a bill, the door's open," Dodd said.

 

Tightening oversight of banks and capital markets is a top priority for Obama. But almost two years since the near collapse of former Wall Street giant Bear Stearns, followed by the fall of Lehman Brothers, regulation has changed little.

 

Obama proposed sweeping reforms in mid-2009. Most of them were approved in December by the House of Representatives.

 

The Senate has yet to act. Dodd released a draft bill in November that Republicans immediately rejected. He has been working to find compromises ever since.

 

He told Reuters his new bill will call for "orderly liquidation" of large financial firms that get into trouble and pose a risk to economic stability. The goal is to avoid on-the-fly bailouts like the ones the Bush administration undertook in 2008 for AIG and Citigroup.

 

Dodd said his bill would set up a council of regulators "that has power, authority and responsibility to look over the landscape, both at home and abroad, for emerging problems that could pose a systemic risk to our financial system."

 

He said the bill will contain the same proposals he made in November for policing the $450-trillion over-the-counter derivatives market, partly through more trading on exchanges. But he said he was open to ideas being discussed by committee members Democrat Jack Reed and Republican Judd Gregg.

 

He also said the bill will have provisions offering investors greater power in corporate governance.

 

The Dodd bill will give the Fed authority to supervise bank holding companies with more than $50 billion in assets, lower than an earlier proposed threshold of $100 billion. The bill will also preserve the Fed's power over state-chartered banks with less than $50 billion in assets that are already in the Federal Reserve system, sources said.

 

If the state-chartered banks stay under the Fed's umbrella, it would have power over hundreds of banks large and small, as well as branches of foreign banks, sources said.

 

In addition, the bill would empower the Fed to supervise non-bank firms designated as "systemically important" by the council of regulators. Before its bailout, former insurance giant American International Group (AIG) would likely have fit into that category, for instance.

 

Dodd sharply criticized the Fed last year, calling its track record as a bank supervisor and consumer protection regulator an "abysmal failure." In an early draft of his own reform plan, he proposed stripping the Fed of bank supervision and consumer protection duties, leaving it focused almost exclusively on its role as a monetary policy manager. However, Fed Chairman Ben Bernanke, other Fed insiders and some banking interests have pushed back hard in recent months to shield the institution, and it appears to have worked.

 

Dodd plans to put Obama's proposed financial consumer watchdog inside the Fed, rather than make it an independent agency. To win support among Democrats for this, he will give the watchdog considerable power and autonomy, sources said.

 

Dodd said: "I want a very authoritative, very independent consumer division, agency, bureau, however that emerges."

 

With a clear majority in the committee, Dodd probably can push his bill through, likely before the end of March. A bipartisan compromise might even be reached. In either case, committee approval would send the measure to the full Senate. There its fate is more precarious. The Democrats are one vote short of 60 votes needed to overcome procedural roadblocks sure to be thrown up by Republicans.

 

If Dodd can cobble together enough votes to get a bill through the Senate, it would then have to be merged with the measure approved in December by the House before unified legislation could be sent to Obama to be signed into law.