MarketView for March 29

 

 

 

Summary 

 

The major equity indexes turned in another positive set of readings by the closing bell on Monday as miners and energy companies advanced on dollar weakness and investors bought recent high fliers as the quarter's end approached. The dollar's decline helped commodity prices, including crude oil. Exxon Mobil was up 1.1 percent to close $67.30.

 

Major manufacturers and industrials, the quarter's top-performing sector, also fared well, with Boeing closing up 2.1 percent, while Caterpillar chalked up a gain of 1.7 percent. They were both the Dow's top performers.

 

Nonetheless, overall volume was light at the start of a holiday-shortened week that will close out the S&P 500's fourth straight positive quarter. Although the underlying tone was positive, slippage in financial shares, including a 3.3 percent drop by Citigroup held back a broader market advance.

 

Slippage in the dollar underpinned the advance in commodities as the euro strengthened on news of another successful bond sale by debt-laden Greece.

 

On the Nasdaq, Apple’s shares were a top performer, ending at a record $232.39 after the iPhone maker said shoppers can buy its newest portable iPad computer this weekend at Apple and Best Buy (BBY.N) stores. Best Buy is the largest U.S. electronics retailer.

 

After the bell there was more news on Apple as the Wall Street Journal reported that the company was developing a new iPhone for Verizon Wireless, sparking an after-hours run-up in the shares of Apple and Verizon Communications.

 

Apple’s shares rose more than 1 percent to $235.44 after the closing bell, while Verizon, a Dow component, jumped almost 4 percent to $31.62. Both could be active in Tuesday's session.

 

The Dow is up 4.5 percent for the quarter so far, down from gains of 7.4 percent in previous quarter, while the Nasdaq is on track for a 6 percent gain this quarter versus an increase of 6.9 percent in the fourth quarter.

 

Money managers typically scour the market for high fliers close to quarter-end to spruce up portfolios by selling laggards in a practice known as "window dressing."

 

Among decliners, Citigroup fell 3.02 percent to $4.18 after the U.S. Treasury announced a plan to sell the 7.7 billion shares of the bank it owns over the course of this year. That sparked some profit-taking after the stock's recent run-up.

 

In economic news, U.S. consumer spending rose as expected in February for a fifth straight month, while stagnant incomes pushed savings to their lowest level since October 2008, the government said.

 

The equity markets will be closed on Friday in observance of the Good Friday holiday.

 

Consumer Spending Rises

 

The Commerce Department reported on Monday morning that consumer spending during the month of February increased 0.3 percent after rising by a slightly downwardly revised 0.4 percent in January. At the same time incomes were unchanged sending the nation’s savings level to its lowest level since October 2008.

 

Payrolls of goods-producing industries fell $3.5 billion in February after increasing $5.2 billion, while manufacturing slipped $1.4 billion following a $5.0 billion gain. This probably reflected the winter storms that struck parts of the country and kept some hourly paid workers at home.

 

Real disposable income was flat last month after falling 0.4 percent in January. With no income growth, savings fell to an annual rate of $340 billion, the lowest level since October 2008. The saving rate slipped to 3.1 percent, also the smallest rate since October 2008, from 3.4 percent the prior month.

 

The data also showed the personal consumption expenditures price index, excluding food and energy, rising 1.3 percent in the 12 months to February. The index, a key inflation gauge monitored by the Federal Reserve, increased 1.5 percent in January. 

 

GDI a Better Predictor than GDP

 

A critical question facing the Federal Reserve is why, with all its stimulus programs, has its actions not had a greater effect in reducing unemployment. It's a question that even Federal Reserve Chairman Ben Bernanke does not have a strong hypothesis about.

 

Friday's hotly anticipated employment report for March may only add additional confusion to the problem. The consensus is for a gain of 190,000 jobs, which would mark only the second month of job growth since the recession started in December 2007, and the largest increase since March of that year.

 

Government jobs are expected to account for much of that growth, because of Census hiring, which requires taking on hundreds of thousands of temporary workers. The Fed is well aware that Census hiring will skew readings, and have cautioned that unemployment will likely remain near 10 percent all year.

 

The Fed and private economists are trying to answer the bigger question of why the labor market shed 8.4 million jobs during this recession, a number that was even more severe than most models that compare economic growth and employment had predicted.

 

Bernanke offered two possible explanations.

 

"One is that maybe the recession was deeper than we thought," he said in response to a question from a member of Congress last week. "The other is that the productivity gains were greater than we thought they would be when firms were able to cut their work forces and still maintain output."

 

The first theory gained support when one of Bernanke's staff economists wrote a research paper suggesting that the most commonly used measure of U.S. economic growth, gross domestic product, had understated the depth of the recession and overstated the recent recovery.

 

The economist, Jeremy Nalewaik, argued that a lesser known measure called gross domestic income may give a more accurate assessment of the business cycle. GDP looks at spending to measure the size of the economy, while GDI focuses on income.

 

Based on GDI, the economy began contracting in 2007, not 2008 as GDP data indicates. It also shows growth did not resume until the final quarter of 2009, while GDP showed the economy had expanded in the third quarter as well.

 

If GDI is indeed a more accurate gauge, there is reason to think employment will soon rise. Data released last Friday showed GDI jumped at a 6.2 percent annual rate in the fourth quarter, even faster than GDP's 5.6 percent pace.

 

That would also help explain why payrolls were still contracting eight months after GDP indicated economic growth resumed. Employment gains normally lags economic growth by a few months, so if the cycle turn came in October rather than June, it would make more sense to see job growth now.

 

Greece Offering a Bond Issue of 5 billion euros ($6.7 billion)

 

Greece is planning to sell 5 billion euros ($6.7 billion) in its first offering since a European-IMF debt support deal last week but demand was less than half that of an issue earlier this month. Order levels on the new bond stood at around 7 billion euros compared to the more than 16 billion euros in interest shown for a benchmark 10-year paper, which eased some of the nerves over Greece's financing in early March. About 175 institutions bid for a slice, sources at the lead managers said, compared to 400 investors for the 10-year issue.

 

Guidance on the bond was set around mid-swaps plus 310 basis points, sources at the lead underwriters said, still around levels which Greek officials have said are "unsustainable" for the state's finances in the long run.

 

Confidence in Greece as a borrower has been badly shaken by a 300 billion euro ($403 billion) debt pile that exceeds the country's 240 billion euro economic output and by revelations that the extent of its budget problems had not been reported.

 

Greece, rated A2 by Moody's and BBB+ by Fitch and Standard & Poor's, has about 23 billion euros worth of bonds -- equivalent to almost 10 percent of its gross domestic product -- maturing between now and the end of May.

 

Some obligations could be met from cash reserves of 7 billion euros, debt agency head Petros Christodoulou has said, leaving him at least 16 billion euros to raise in the coming weeks during a debt crisis that has shaken global markets. Christodoulou declined to say how big the bond offering would be. The underwriters have indicated that the government is looking to raise 5 billion euros.

 

Before the announcement, the 10-year Greek/German yield spread tightened 4 basis points to 311 basis points, according to Tradeweb data. That was better than 323 basis points ahead of Thursday's deal offering the prospect of a last-resort bailout and well below a January peak of 405 but means Greece is still paying interest rates on new issues about twice those of Germany.

 

The current Greek 7-year benchmark bond with a coupon of 4.3 percent is yielding 6.01 percent. The 10-year bond earlier this month was priced at 300 basis points over mid-swaps and was more than three times oversubscribed with demand reaching over 16 billion euros from more than 400 investors. So far this year it has raised about 18 billion euros out of a 53.2 billion euro projected need for 2010.