MarketView for March 23

 

 

 

Summary 

 

Stock prices moved sharply higher on Tuesday, sending the Dow Jones industrial average to its 10th day of gains out of the past 11 sessions as tech, industrial and materials sectors sent both the Dow and the S&P 500 to 18-month highs. Improved demand in the semiconductor industry, along with some positive commentary on Caterpillar, added momentum to the day’s trading activity. Meanwhile, both Apple and Cisco knocked off 52-week highs. Kraft, a Dow component, also hit a 52-week high.

 

Caterpillar benefited from commentary aimed at the customers of Wells Fargo indicating that a Wells Fargo analyst had raised the firm’s target price on Caterpillar's shares because of expectations for strong longer-term growth. The stock climbed 4.1 percent to $62.41.

 

Semiconductor stocks were also strong performers, lifting the Nasdaq. The Philadelphia semiconductor index .SOXX rose 2.3 percent, while Intel gained 1.9 percent to $22.67.

 

In after hours trading, Adobe Systems rose 5.1 percent to $37 after reporting an adjusted first-quarter earnings number that exceeded expectations. It also posted revenue above the consensus. On the downside, Jabil Circuit sank 5.5 percent to $17.34 after reporting its second-quarter results.

 

During the regular session, the U.S.-listed shares of Brazilian mining giant Vale rose 5.1 percent to $31.57 after the company on Tuesday implemented a more flexible pricing system for iron ore. Brazilian business daily Valor Economico reported that Vale was boosting iron prices by 114 percent in 2010. Among U.S. metal companies, U.S. Steel gained 4.9 percent to $63.32.

 

Existing home sales fell to an annual rate of 5.02 million units in February, the National Association of Realtors said. The decline was less than forecast, but highlighted the fragility of a housing recovery. KB fell 1.7 percent to $17.15 after posting a wider-than-expected loss for the quarter.

 

Healthcare stocks gave back some of Monday's gains after President Obama signed the landmark healthcare reform bill into law on Tuesday.

 

U.S.-listed shares of Baidu rose 2.6 percent to $594.88 after rival Google Inc (GOOG.O) shut down its mainland China portal and began rerouting searches to its Hong Kong operation. Google shares slid 1.5 percent to $549.

 

Home Sales Down

 

Sales of previously owned homes fell for a third straight month in February and the supply of unsold houses on the market surged upward, showing the housing market was struggling to find its feet.

 

Existing home sales fell 0.6 percent month-over-month to an annual rate of 5.02 million units, the National Association of Realtors said on Tuesday. The drop last month was a bit less than market expectations for a fall to 5.0 million units.

 

The data showed weakness at a crucial time for the housing market with the Federal Reserve due to wind up its program to buy mortgage-related securities. The program pushed home loan rates to record lows and helped the market slowly recover from a three-year slump.

 

Analysts were disturbed by the first rise in inventories in seven months and the jump in the months' worth of supply to its highest level since August.

 

Home sales surged from September to November on the back of an $8,000 tax credit for first-time buyers. Even though the tax credit was extended and expanded, sales have remained subdued, raising worries of a relapse in a sector that was the main trigger of the worst U.S. recession since the 1930s.

 

Analysts believe home purchases were pushed forward to take advantage of the tax credit that had been originally scheduled to end last November. Some doubted a last minute surge in sales would materialize as buyers try to beat the April deadline to sign contracts and close them by June.

 

Treasury Secretary Timothy Geithner said on Tuesday the government -- which has lent support to the housing market -- should continue to play a role in any new system of housing finance Congress develops.

 

Underscoring the fragility of the housing recovery, one of the country's top five homebuilders KB Home (KBH.N) posted a wider-than-expected loss in the first-quarter ended February 28 as prices and demand for its houses sagged.

 

With sales dropping again last month, the inventory of existing homes for sale jumped 9.5 percent to 3.59 million units. That represented 8.6 months' worth of supply -- the highest since August. The NAR blamed the surge in inventories to a wave of distressed properties flooding the market.

 

The rise in the supply of homes on the market pushed the national median home price down 1.8 percent from February last year to $165,100.

 

A separate report from the U.S. Federal Housing Finance Agency showed house prices fell 0.6 percent month-on-month in January. They fell 3.3 percent in the 12 months to January.

 

The end of the tax credit and the Fed's purchases of mortgaged-backed securities (MBS) meant housing would continue to struggle into the second half of this year, analysts said.

 

"This data points to a very rough second half of the year in the housing market that will feature another round of price declines for homeowners in many areas of the country," said Joseph Brusuelas, chief economist at Brusuelas Analytics in Stamford, Connecticut.

 

While the Fed is ending its MBS purchasing program, it remains committed to keeping benchmark interest rates ultra low for a while, a position that was reiterated on Tuesday by San Francisco Federal Reserve President Janet Yellen.

 

"Such an accommodative policy is currently appropriate, in my view, because the economy is operating well below its potential and inflation is subdued. I don't believe this is yet the time to be tightening monetary policy," Yellen said.

 

The decline in February sales was concentrated in single-family homes -- the biggest portion the market -- which fell 1.4 percent. Condominium and co-ops rose 4.8 percent.

 

Last month, distressed transactions accounted for 35 percent of sales and continued to weigh on house prices, the NAR said. First-time buyers made up 42 percent of sales, with cash purchases accounting for 26 percent.

 

Fed Executive Says Better Rules Needed

 

Better regulation is needed to dissuade financial market players from taking excessive risks after the "too big to fail problem" undermined discipline, Philadelphia Federal Reserve Bank President Charles Plosser said on Tuesday. According to Plosser there were ways to discipline the market -- some within the market itself -- to prevent excessive risk taking.

 

His comments followed statements from Federal Reserve Chairman Ben Bernanke, who said over the weekend that regulators should be significantly tougher on large and complex financial firms.

 

"The too big to fail problem has essentially removed much of that market discipline," Plosser said.

 

"We have to have ways of disciplining the actors in the marketplace so that they don't take excessive risks, and in many cases the market can do that and do that quite effectively. But when we protect creditors, when we protect people from failure, we encourage them to take risks."

 

Bernanke made clear at the weekend that large financial firms continued to play a crucial role in the global economy, and Plosser said different, but not necessarily more regulations were needed.

 

"I believe we do need better regulation. It is not obvious to me that we need more regulation, but we need to do it differently," said Plosser, a non-voting member on the Fed's policy setting committee this year.

 

The comments from both officials follow the unveiling of a regulatory reform proposal by Senate Banking Committee Chairman Christopher Dodd that would put the Fed in charge of overseeing banks and financial firms with assets of more than $50 billion.

 

The Fed already has authority over big banks but lacks power over non-bank financial firms like insurer AIG, one of the main focal points of the global financial crisis.

 

Plosser's comments were general, and not specifically directed at Dodd's proposal. He added that regulators would never be able to be out in front of market innovation.

 

"Government regulation and government oversight will never replace the marketplace officially ... markets, firms ... when there is regulation they will look for ways around that regulation in order to be successful," he said.

 

"We will always as regulators be behind that curve. The only way we can be effective in protecting financial stability is to have regulations and rules that complement and encourage more market discipline, not replace it."

 

Walgreen’s Shares Up In Spite of Lower Earnings

 

Walgreen posted better margins for its second quarter by carefully managing seasonal merchandise. Prescription and general merchandise sales were both pressured by the mild winter flu season, while consumers continued to hold off buying discretionary items.

 

"As much as the early flu season helped our first quarter results, it hurt our second quarter results," Chief Executive Greg Wasson said in a statement.

 

However, the Street seemed pleased with the overall results, which came after three disappointing months of sales.

 

The CEOs of Walgreen and CVS both said they should benefit from the healthcare reform bill approved in Washington that extends health insurance to 32 million more Americans. Generally, CVS's Ryan said, health reform is "positive for our company. You're going to get coverage. When people have coverage, it's a benefit for us." Wasson is also examining how the bill will impact Walgreen as an employer of 238,000 people, as well as its retirees.

 

Walgreen shares rose 1.1 percent to $35.71 Shares of CVS rose 9 percent to $35.83 and shares of No. 3 player Rite Aid rose 1.2 percent to $1.66.

 

Profit was up to $669 million, or 68 cents per share, in Walgreen's second quarter ended on February 28 from $640 million, or 65 cents per share, a year earlier. The latest quarter included 2 cents per share in restructuring and other costs. Sales rose 3.1 percent to $17 billion.

 

Sales at stores open at least a year fell 0.2 percent. Same-store sales of general merchandise fell 1.6 percent while same-store prescription sales rose 0.6 percent.

 

Margins improved as the company stocked fewer seasonal goods, such as Christmas decorations or Valentine's Day gifts, and was not forced to mark them down to the same extent as a year ago. Gross profit margins increased 0.5 percentage point to 28.8 as a percentage of sales.

 

Walgreen is updating its network of 7,180 stores and promoting services such as in-store and worksite clinics to drive growth. It plans to buy New York-based drugstore Duane Reade to take the top spot in New York City.

 

Walgreen has its new store format in nearly 700 locations and expects to have it in as many as 3,000 stores by the end of the fall. While Wasson is pleased with Walgreen's store overhaul there are still kinks to work out, he said during a call.

 

Walgreen shed $500 million worth of inventory, which cut costs but also meant that some consumers could not find goods such as tools. So Walgreen is adding back a few hundred items.

 

Wasson also hopes to see a sales lift from tweaks such as stocking razors near toothbrushes, as shoppers buying one item might pick up another to complement their morning routines. The chain also aims to bring the number of stores selling wine and beer up to 5,000 from more than 2,500 this year, he said.

 

If Walgreen could increase, even slightly, the amount that shoppers buy in its stores it would have a major impact on the bottom line. Getting each shopper to buy about one more item, bringing the average number of items purchased to four, would double Walgreen's profitability, Chief Financial Officer Wade Miquelon said back in January.