MarketView for March 18

 

 

 

Summary 

 

As far as the Dow Jones industrial average is concerned, it was another good day on Wall Street with that index chalking up its eighth consecutive trading day of higher numbers. Driving the index higher was Boeing's, while a mixed group of economic reports meant that the S&P 500 could not make the same claim.

 

The Dow managed Thursday’s gain despite the fact that more stocks declined than advanced on the Big Board and on a lower volume day in terms of trading, one day before the expiration of quarterly futures and options. The Dow's eight-session winning streak is the longest since an eight-day string of gains that ended August 27, 2009.

 

Boeing closed out the day with a gain of 2.2 percent, to close at $70.87, after Bernstein Research reported to clients that the 787 program "appears to be making substantial progress." Boeing, which marked its highest close since late June 2008, is the Dow's best-performing stock so far this year.

 

Economic data was mildly supportive. The Philadelphia Federal Reserve Bank's index showed factory activity expanded more than expected in March, although new orders fell.

 

After the bell, Palm forecasted sharply lower-than- expected revenue in the fiscal fourth quarter on dismal smartphone sales. Palm fell 13.5 percent to $4.89 in after-hours trading. In regular the shares closed up 5.2 percent at $5.65.

 

FedEx rose 3.2 percent to $92.67 after the world's largest package delivery company posted a sharply higher quarterly profit that beat Wall Street's estimate. UPS, a FedEx rival, climbed 2.5 percent to $64.42.

 

Oil service companies' shares dropped after UBS cut its price target on 11 drillers and oil service companies, while also removing its "short-term buy" rating on Nabors Industries. Nabors shares lost 4.8 percent to close at $20.63. The PHLX Oil Service Sector index .OSX fell 2.8 percent.

 

Both Nike and GameStop rallied after reporting results. Nike climbed 5.3 percent to $74.66, a day after the company reported third-quarter earnings that exceeded expectations. GameStop shares were up 6.6 percent to $21.16 after forecasting full-year sales growth of 4 percent to 6 percent.

 

Intel was down 0.2 percent to $22.20, as chip stocks limited the Nasdaq's gain. Macquarie Equities Research started coverage of the stock and the semiconductor sector with a "neutral" rating, expecting utilization rates for the chip arena to peak in the next one or two quarters.

 

Health insurers' shares gained on the day as the House appears to be on track to vote on the healthcare reform bill on Sunday, offering the prospect of removing some uncertainty for investors.

 

In other economic news, the Labor Department said consumer prices were flat in February, reinforcing the Federal Reserve's commitment to keep its benchmark interest rate low for a while. A separate report showed a dip in new claims for jobless benefits in the latest week.

 

Volume has been thin ahead of key options expirations on Thursday and Friday, when four different types of options and futures contracts expire in a convergence known as "quadruple witching."

 

Punk Remark Raises Tempers

 

The tension rose on Thursday as Democrats hit back at a Republican leader's comment about "punk staffers" and a pivotal vote neared in the Senate. White House economic adviser Larry Summers and other Democrats criticized remarks made by House Republican Leader John Boehner, who told hundreds of bankers at a conference to be tough when lobbying against reform on Capitol Hill.

 

"Don't let those little punk staffers take advantage of you and stand up for yourselves," Boehner said on Wednesday. He told the group that even if the Senate produces a bill to tighten bank regulation in the next few weeks, it could take a year to merge it with a bill approved in December. That measure passed without a single Republican vote in support.

 

In the latest sharp exchange between the White House and Republicans who are working to block reforms, Summers said, "I do not think that those who want to address these issues are 'little punk staffers' who need to be stood up to."

 

Summers said the banking industry has spent about $1 million per member on lobbying of Congress in recent months, and has as many as four lobbyists per member working the issue.

 

"We in the administration do not believe that the prominent issue is allowing bankers to stand up for themselves," Summers said. "Rather, we believe that the events of the last two years point something up that is profoundly problematic.

 

"The function of the financial system is to allocate capital. It is to diversify and distribute risk. It has in many respects performed that function very well. But all too often, a system that is designed to diversify and spread risk has instead been a source of risk."

 

President Barack Obama and congressional Democrats are trying to tighten bank and capital market oversight following the worst financial crisis in generations.

 

But regulation has barely changed almost two years since the near collapse of former Wall Street giant Bear Stearns and the downfall six months later of Lehman Brothers, which rocked markets worldwide and unleashed a global drive for reform.

 

The House of Representatives approved a sweeping bill in December that embraced most of many proposals made by Obama in mid-2009, but the slower-moving Senate has yet to act.

 

On Monday, the Senate Banking Committee will meet to debate, amend and move toward a vote on legislation that was unveiled earlier this week by its Chairman Christopher Dodd, the top Democrat in the Senate on financial regulation.

 

Republican Senator Bob Corker said he will not support the Dodd bill in committee and that he expects Democrats to approve it. Dodd has the votes to win passage for his measure at the committee level. Approval would send the bill to the full Senate, where senators from both parties are expected to file a flurry of amendments attempting both to weaken and to harden the bill.

 

However, Democrats control only 59 of the 60 votes that will be needed to overcome procedural hurdles sure to be thrown up by Republicans keen to block reforms.

 

House Democratic Leader Steny Hoyer, at the same industry conference where Boehner spoke, suggested bankers take a lobbying approach that is less confrontational than the one endorsed earlier by his Republican counterpart.

 

"Let me recommend to all of you who will be lobbying," Hoyer said. "Don't approach the staffer or member as if somehow they don't know what's going on and they are out to get you ... You want to figure out where their thinking is, and tell them how it is impacting your business," Hoyer said.

 

House Financial Services Committee Chairman Barney Frank, a Democrat and close ally of the White House on reform, said he wrote a letter to Boehner over his remarks.

 

"I am appalled that a leader of the House, who must know what good work is done by our staffs, would take such an inaccurate cheap shot at these people, for the purpose of ingratiating himself with bankers or any other group."

 

Also at the conference, attendees told Republican Senator Richard Shelby they view as unfair the Obama administration's proposal to set up a new government watchdog for financial consumers that would protect Americans from deceptive credit cards and abusive mortgage loans.

 

Asked what bankers could do to change the agenda, Shelby said, "What you can do is elect more Republicans to the U.S. Senate that would help immensely." He asked each of the attendees to send $10,000 to Roy Blunt, a former House leader who is now running for Senate as a Republican in Missouri.

 

Economic Data Continues To Improve

 

Labor market and consumer prices data on Thursday indicated once again that the economy is on a moderate growth path and inflation pressures are contained, backing up the Federal Reserve's vow to keep benchmark interest rates ultra-low for some time. Initial claims for state unemployment benefits fell 5,000 to 457,000 last week, the Labor Department said, suggesting the jobs market was improving.

 

In another report, the department said the Consumer Price Index was unchanged in February after rising 0.2 percent the prior month. Excluding volatile energy and food prices, the closely watched core measure of consumer inflation inched up 0.1 percent after falling the same amount in January.

 

"Even though we have growth in the economy, there is still spare capacity that is putting downward pressure on inflation. We think the Fed can be comfortably on hold," said Zach Pandl, U.S. economist at Nomura Securities International in New York.

 

Citing a moderate economic recovery and low rates of resource utilization, the Fed -- the U.S. central bank -- this week renewed a promise to keep its benchmark interest rate exceptionally low for an extended period.

 

The economy resumed growth in the second half of 2009, led by the manufacturing sector as factories ramped up production to rebuild inventories that had been reduced to record low levels because of weak demand.

 

Manufacturing continues to expand and the Philadelphia Federal Reserve Bank said its business activity index rose to a reading of 18.9 in March from 17.6 in February, but new orders fell. A reading above zero indicates expansion in manufacturing.

 

The drop in orders and the smaller-than-expected drop in new applications for jobless aid contributed to the S&P 500 index ending flat. Disappointment over a tiny rise in domestic volumes handled by major package deliverer FedEx Corp in the three months to February 28 also weighed on the index. FedEx is considered a bellwether of U.S. economic activity and the small gain in domestic volume suggested a slow recovery.

 

The claims data covered part of the survey period for the government's employment report for March, which will be released April 2. About 8.4 million jobs have been lost since the start of the recession in December 2007 and creating employment is critical to the economy's transition from a government-aided recovery to a self-sustained one.

 

President Barack Obama, who has made tackling unemployment a priority, signed into law a $17.6 billion jobs bill on Thursday and said jobs were in sight.

 

While weekly jobless claims have struggled to post huge declines after falling rapidly in the second half of 2009, other employment indicators suggest the labor market is stabilizing and support views of job growth in the near term. For example, the Philadelphia Fed's employment index in March rose to its highest reading since August 2007.

 

Labor market weakness, low industrial capacity utilization and high vacancy rates for residential and office space are keeping inflation pressures in check. While falling energy costs put a lid on consumer prices last month, inflation is trending lower on an annual basis.

 

Over the past year, core inflation has risen just 1.3 percent. That marks a slowdown from January's 1.6 percent reading and is the lowest since February 2004. Even though the economic recovery remains on course, there are signs of a slowdown in momentum.

 

The Conference Board's index of leading economic indicators, a gauge of the U.S. economy's prospects, edged up 0.1 percent in February after a 0.3 percent increase in January.