MarketView for March 26

 

 

 

Summary 

 

The Dow Jones industrial average and S&P were virtually unchanged on Friday, giving back earlier gains after the sinking of a South Korean naval ship, while tech shares' weakness kept the Nasdaq in slightly negative territory. News of the ship sinking hit sentiment, although it was also an excuse to sell stocks in what is being viewed by some as an overvalued market.

 

Stock prices were higher during the first part of the trading day after European Union leaders agreed on a standby aid package for Greece, and after better-than-expected March consumer sentiment data. Euro-zone leaders unveiled a deal late Thursday in which Athens would receive coordinated bilateral loans from other euro-zone countries and the International Monetary Fund if it faced severe difficulties. The euro-zone agreement relieved uncertainty about the European Union dealing with the problem, which has weighed on equities in recent weeks.

 

The Commerce Department reported on Friday that GDP expanded at an annual rate of 5.6 percent in the fourth quarter, instead of 5.9 percent, as it previously estimated. At the same time, the Nasdaq felt the influence of Oracle, whose share price declined from a nine-year high a day closing down 1.3 percent to $25.69. Separately, the Thomson Reuters/University of Michigan's Surveys of Consumers consumer sentiment index came in at a final March reading of 73.6, above expectations, but unchanged from February.

 

Chevron, up 0.9 percent at $74.43, supported the Dow. Apple rose 1.9 percent to $230.90 and limited the Nasdaq's loss after Credit Suisse raised its price target on the stock by $25 to $300, citing strength in the tech company's iPhone unit.

 

Another upside influence was RadioShack, which gained after a report that it was exploring alternatives including a share buyback or a possible sale of the U.S. electronics retailer that could net more than $3 billion. The shares were up 8.5 percent to close at $23.65.

 

AT&T To Take $1 Billion Charge for Health Care

 

AT&T stated on Friday that it planned to record a $1 billion non-cash charge for the current quarter related to the new care legislation, as lawmakers called on the company and three other large employers to testify about expected cost hikes. AT&T's charge appeared to be the largest in a series of charges announced by companies this week.

 

AT&T, whose annual revenue is expected to be $124.1 billion this year, said the charge is the result of a provision in the law related to the tax treatment of Medicare subsidies. As a result of the legislation, the company, which ended 2009 with 282,000 employees, said it will be evaluating prospective changes to the health care benefits it offers to employees and retirees.

 

Under the health care overhaul large ranks of retirees can no longer deduct from their taxes the subsidies paid by the federal government for retiree drug benefits.

 

According to reports, Verizon told employees that tax burdens under the new law would likely filter down to employees. Other companies that announced health care reform related charges include Deere, which sees a $150 million charge for its current quarter, and Caterpillar, which warned of a $100 million charge.

 

The congressional letters to the companies said the House Energy and Commerce Committee has made it a top priority to ensure the law is implemented effectively and does not have unintended consequences. They also said the companies' reports of cost burdens appear to conflict with independent analyses.

 

The Congressional Budget Office has reported that companies that insure more than 50 employees would see a decrease of up to 3 percent in average premium costs per person by 2016, the letters said.

 

Fed Is In Uncharted Territory

 

The Federal Reserve's unprecedented dose of stimulus to the economy during the recent financial crisis complicates the task of pulling back when the time is right, top central bank officials said on Friday. Fed Board Governor Kevin Warsh argued that tame inflation readings today should not make policy makers complacent about the risk of future price increases.

 

"Inflation expectations will be anchored until they are not," Warsh said in a speech in New York. "Central bankers would be prudent to keep a very open mind about shocks that could happen domestically and overseas."

 

Ben Bernanke, the Fed chairman, told Congress on Thursday that the central bank is aware of such risks and has the tools necessary to withdraw monetary stimulus in time. These include direct open market operations to drain reserves, raising the interest the Fed pays on excess bank reserves parked at the central bank, and outright sales of some of the nearly $1.5 trillion in mortgage-related assets the Fed committed to buying over the course of the crisis.

 

A small group within the Fed, mostly presidents of some regional Federal Reserve banks, has shown discomfort with this unorthodox policy, arguing it borders on fiscal policy and could make removing liquidity from the system difficult.

 

Charles Plosser, president of the Philadelphia Fed, said on Friday in an interview with The Wall Street Journal it might be prudent for the Fed to sell some of its mortgage assets before raising interest rates to make policy more effective.

 

In the past, Plosser has gone as far as suggesting the Fed should undertake a swap of mortgage assets with the Treasury Department so that its portfolio can return to being primarily composed of sovereign bonds rather than private debt.

 

"Given the market functioning, I don't anticipate that selling MBS at a reasonable pace is going to have a tremendous impact on mortgage rates," Plosser said.

 

But James Bullard, president of the St. Louis Fed who has also advocated asset sales as a potential early step in the Fed's exit, said recent weakness in housing data was giving him pause.

 

Sales of newly built U.S. homes fell for a fourth straight month in February to a record low annual rate of 308,000 units.

 

"It's making me nervous," he told Reuters on the sidelines of a conference sponsored by the Fed. "I will be interested in seeing the (upcoming) data, and if that begins to not look good, then I'll start to wonder."

 

Bullard said he does not foresee any sharp rebound in housing activity, adding that stabilization in prices and sales would be enough of a signal that selling assets would not be too disruptive. He said the economy is on track for a reasonable recovery.

 

Bullard asked Columbia Professor Michael Woodford, whether he believed the central bank would have to drain reserves even as it raises interest rates in order for rates to respond. Woodford argued that such operations were not strictly necessary. Those advocating them are being "excessively cautious.”

 

In separate remarks on Friday, Fed Board Governor Daniel Tarullo focused on regulation, his principal purview at the central bank.

 

He argued that public disclosure of bank stress test results last year helped rescue the global financial system, and regulators should weigh some level of transparency in future tests.

 

Congress is considering various versions of financial regulatory reform, some of which might reduce the Federal Reserve's role over policy. Many fault the Fed for loose oversight that allowed dubious practices in both banking and housing to thrive, leading to the financial crisis.

 

However, Tarullo argued the Fed has reformed its ways, fine-tuning the way it supervises banks to include possible risks to the system as a whole, looking beyond the individual conditions of specific institutions.