MarketView for March 2

 

Summary 

 

The major equity indexes eked out small gains on Wednesday despite another rise in oil prices as Wall Street appeared to reach the conclusion that the economy could absorb expected higher energy costs. Nonetheless, share prices were quite volatile as crude prices fluctuated throughout the day. Brent crude hit a 2 1/2-year high above $117 a barrel in the late morning but later slipped. Brent settled up 93 cents at $116.35.

 

The day's rally was broad with eight out of 10 S&P 500 sectors ending higher. Sectors that are sensitive to energy gained, including industrials. On the negative side of the slate, trading volume on the three major exchanges was at 7.69 billion shares, considerably lower than last year's daily average of 8.47 billion shares.

 

Economic data was positive, with the Federal Reserve's Beige Book suggesting economic activity picked up in 2011 and a private survey pointing to strong private-sector hiring. Nonetheless, share prices have taken their cue from oil since the start of turmoil in the Middle East and northern Africa in January. The fear was that rising oil prices could derail the recovery.

 

Private employers added more jobs than expected last month, the ADP Employer Services report said, before the closely watched and broader U.S. government report on non-farm payrolls due on Friday.

 

Texas Instruments closed up 3.3 percent at $36.14 after JPMorgan upgraded the semiconductor sector, including Texas Instruments, saying an inventory correction was nearing an end and demand appeared to be improving. This goes along with what I wrote a couple of months ago when I said that the Gartner Group had forecasted gains in the tech sector due to what appeared to be increasing sales on the horizon. Apple also helped out the Nasdaq after Chief Executive Steve Jobs surprised investors by personally presenting the new iPad at an event in San Francisco. The stock rose 0.8 percent to close at $352.12.

 

Shares of Yahoo closed 3.3 percent higher at $16.63 as the company advanced in talks to leave its Japanese joint venture and free up as much as $8 billion to compete with Google and Facebook.

 

Fed Praises 2011 Performance To Date

 

Economic activity kept slowly gaining strength as 2011 opened and manufacturers and retailers were having some success in pushing their prices up, the Federal Reserve said on Wednesday.

 

"Reports from the 12 Federal Reserve districts indicated that overall economic activity continued to expand at a modest to moderate pace in January and early February," the central bank's Beige Book summary said.

 

It was based on information collected in all the regional Fed districts on or before February 18 and was compiled by the Atlanta regional bank.

 

While the Beige Book indicates a strengthening economy, it was not growing evenly across the country. "Chicago reported that although there was an increase in activity, it was at a pace not quite as strong as during the previous reporting period," the Fed said.

 

Wage growth was weak but businesses were trying to boost prices to make up for higher costs of other items such as raw materials that they needed.

 

"Manufacturers in many districts conveyed that they were passing through higher input costs to customers or planned to do so in the near future," the Fed said. Retailers in some districts similarly were planning to hike prices or had already done so.

 

Job prospects "modestly improved across the country," the Fed said, though in some cases companies still wanted to hire only temporary workers instead of creating permanent jobs.

 

Real estate remained a soft spot. "Some districts reported a slight increase in the level of residential real estate activity, although all districts maintained that the overall level of home sales and construction remained low," the Fed said.

 

In some areas including Boston, Richmond, Kansas City, Dallas and San Francisco there was a pickup in commercial real estate sales and leasing activity, the Beige Book said.

 

Budget Cuts Will Increase Unemployment Says Fed

 

Federal Reserve Chairman Ben Bernanke said on Wednesday a Republican spending cut plan would not substantially reduce economic growth, but could cost around 200,000 jobs over two years. That estimate is at odds with losses of as much as 700,000 cited by Democrats but also clashes with forecasts of job gains Republicans have pointed to.

 

Bernanke said that a $60 billion cut along the lines being pursued by Republicans in the House of Representatives would likely trim growth by around two-tenths of a percentage point in the first year and one-tenth in the next year. "That would translate into a couple of hundred thousand jobs. So it's not trivial," he said in response to questions from members of the House Financial Services Committee.

 

Pressed on how such job losses would affect the recovery, Bernanke said that in spite of concerns about the longer-term budget deficit, the Fed's focus is on reducing unemployment. "I would like to see job creation," he said. "What I have been trying to focus on is, we have got to keep our eye on deficit reduction, but we need to think about it in a long-term framework."

 

In November, the Fed launched a controversial $600 billion bond-buying program to boost the recovery and spur job growth. Although the unemployment rate dropped to 9 percent in January, Fed officials say it remains too high. Bernanke on Wednesday said a failure to bring down unemployment could end up undercutting the recovery.

 

Bernanke's estimate that 200,000 fewer jobs would be created represents just a little more than 0.1 percent of the current labor force. Over the past 12 months, the economy has created 82,000 jobs per month, on average.

 

House Speaker John Boehner's office quoted an analysis by Stanford University economist John Taylor who stated that the estimates of job losses by the Fed were flawed. "A credible plan to reduce gradually the deficit will increase economic growth and reduce unemployment by removing uncertainty and lowering the chances of large tax increases in the future," Taylor wrote.

 

Bernanke told lawmakers said he did not know why the Fed's analysis was different than those of private forecasters.

 

Jobs Does Not Disappoint the Faithful

 

A thin but energetic Steve Jobs made a surprise return to the spotlight on Wednesday, taking the stage to unveil Apple's new iPad and drawing a standing ovation. Jobs has been out on medical leave since late January and his reappearance bolstered Apple shares and reassured investors and fans worried about his health.

 

Defying speculation in some tabloid reports that he was seriously ill; Jobs took swipes at rivals and mocked competing tablet computers. Striding back and forth across the stage at the Yerba Buena Center, Jobs spoke passionately about the iPad 2's features as heir apparent Tim Cook looked on.

 

The $499 device is thinner than the iPhone 4, twice as fast as the last tablet, camera-equipped, and ships March 11 in the United States and March 25 in 26 more countries. The surprisingly fast roll-out highlights the fierce competition in the tablet market.

 

"We've been working on this product for a while and I just didn't want to miss today," Jobs told a packed auditorium in San Francisco with his characteristic flair and energy. A relaxed-looking Jobs lingered near the theater stage for more than 20 minutes after the show wrapped up, chatting amiably with acquaintances and Apple employees.

 

In the run-up to the event, there had been almost as much speculation about whether Jobs would appear as there was about the device itself. Jobs has been treated for a rare form of pancreatic cancer and remains on medical leave for an undisclosed condition.

 

His appearance on Wednesday comes at a critical moment. Apple is launching the next generation of its ground-breaking tablet computer just as its main adversaries are releasing their first such devices.

 

The iPad 2 goes on sale at AT&T Inc and Verizon Wireless, and at $499 is about $100 cheaper than Motorola Mobility's Xoom. Motorola’s shares closed down 4 percent.

 

"The hardware is as good as anything on the market, the price is still very aggressive, and the software just buries the competition," said Gartner analyst Van Baker. "They're still the guys to beat by a large margin."

 

"This does serious damage to the competitors in the market. Xoom now looks like an extraordinarily expensive tablet, and the HP tablet looks under-featured."

 

Apple sold nearly 15 million iPads in nine months of 2010, two or three times as many as analysts had predicted. The company is expected to sell 30 million or more this year, which would generate close to $20 billion in sales. That is despite a growing cast of competitors like Motorola, Research in Motion and Hewlett-Packard Co.

 

Tablets are seen as a must-have device for consumers and many businesses over the next few years. Analysts expect the market to surge to more than 50 million units this year, and 200 million units by 2015. As in the smartphone market, Apple's chief rival is expected to be Google's Android platform, which is free to license and is being used on a number of tablets.

 

The iPad, along with the iPhone, is expected to fuel Apple's growth over the next several years. The two product lines already make up more than half the company's revenue.

 

Apple's products tend to be priced at a premium to its rivals, but the iPad has been priced aggressively low versus the competition, both to dominate the market and because the company can leverage its own retail network and pre-bought manufacturing capacity. That has pinched the company's margins, a problem Apple seems happy to live with if the tablet can deliver such startling growth.

 

A longer-term problem might be the question of who might replace Jobs were he to step down -- Cook is the favorite for the top job and has been running Apple in his boss's absence. However, for now concerns that Jobs might have to exit -- stirred by sensationalist and unsubstantiated tabloid reports -- appear to be allayed by Wednesday's proceedings.

 

Apple shares rose 0.8 percent to close at $352.12 and held steady in after-hours trading.