MarketView for March 16

Summary 

Wall Street suffered through another day that ended very much in the red on Wednesday as both the S&P 500 and Nasdaq indexes fell into negative territory for the year in a crush of trading on the perception Japan's nuclear crisis would continue to be a headwind for equities. The Dow Jones industrial average also neared its 2010 closing level in the year's most heavily traded session while the CBOE market volatility index surged, a sign the market would continue to gyrate and faced possible further losses in the near term.

The VIX jumped 21 percent, the biggest percentage gain since February 22. At 29.31, Wall Street's so-called fear index is up more than 46 percent this week. During Wednesday's session it briefly breached the psychologically important 30 level.

Stocks plummeted after the European Union's energy commissioner said, "In the coming hours, there could be further catastrophic events, which could pose a threat to the lives of people on the island."

That continuing uncertainty about Japan drove investors to seek safer assets like bonds. Trading volume on the three major exchanges was 11.1 billion shares, sharply above last year's daily average of 8.47 billion.

The iShares MSCI Japan Index Fund slid 3.8 percent to $9.65 and is down 11 percent this week in the aftermath of the earthquake that struck last Friday. Nikkei dollar-denominated futures were down 5.1 percent.

Nuclear-related stocks slid on bets the crisis would cripple the industry's growth worldwide. Cameco Corp closed down 9 percent at $29.64 and Shaw Group fell 3.8 percent to close at $32.83 on volumes many times their 10-day averages. The Global X Uranium ETF lost 6.6 percent. U.S.-listed shares of Toyota fell 1.2 percent to $80.41 after the automaker said it would continue to halt operations at its 12 main Japanese assembly plants.

Apple and IBM were down for the day after both received analyst downgrades. Apple lost 4.5 percent to $330.01 and IBM was off 3.8 percent to $155.

In a reminder of the headwinds facing the economy, the Commerce Department reported on Wednesday that groundbreaking for new homes posted the largest decline in 27 years in February and permits for future building reached a record low. The report painted a bleak picture for a market encumbered by a vast backlog of unsold inventory.

Housing starts fell 22.5 percent last month to an annual rate of 479,000 units, just shy of a record low set in April 2009. Permits for future building hit 517,000 units, the lowest on records dating to 1960. While the collapse in construction led some to trim their economic growth estimates for the first quarter, many saw the decline merely as a correction after a hefty January increase.

Producer Price Index Rises

The Labor Department reported on Wednesday that producer prices were higher in February, rising at their fastest pace in 1-1/2 years; a day after the Federal Reserve said it had a watchful eye on inflation pressures it expects to subside. The PPI, which measures prices received by farms, factories and refineries, rose 1.6 percent last month, the largest increase since June 2009, the Labor Department said, while the core rate, excluding food and energy, rose 0.2 percent. The core PPI saw a 1.0 percent increase in apparel, which was the largest rise since 1990. In the 12 months to February, the core producer price index rose 1.8 percent, the largest increase since August 2009.

Accounting for about twenty percent of the February increase was the index for passenger cars, which advanced 0.6 percent. In the 12 months to February, producer prices were up 5.6 percent, the largest increase since March 2010.

Energy prices rose 3.3 percent, the largest advance since January 2010 and an increase that built on January's 1.8 percent rise. Gasoline prices rose 3.7 percent to account for more than 40 percent of the overall gain in energy costs. Food prices increased 3.9 percent, the largest increase since 1974, with some blaming the increase on bad weather.

The unfortunate result is that the increase in food and energy costs that drove the producer price index higher could easily result in lower spending in other areas and thereby slow the nation’s economic growth. Nonetheless, the economy is likely to be able to withstand the shock from the oil price spike and any spillover effects from the devastation in Japan. Furthermore, given the current rate of unemployment and lack of wage-driven price pressures, it is unlikely that the rise in producer prices will be passed through to consumers on a large scale.

Apple Downgraded

A rare Wall Street downgrade of Apple brought on fears that the Company’s rapid growth is slowing and sent its shares sliding for the second straight day as Wall Street pondered the impact Japan's earthquake would have on the tech industry.

The world's largest technology company lost about $14 billion of value on Wednesday after JMP Securities' Alex Gauna downgraded the stock, pointing to a sharp pullback in sales growth at Apple's largest Asian contract manufacturer as a sign that business was also slowing at the iPhone and iPad maker.

Gauna downgraded Apple to "market perform" from "market outperform," based on signs of a severe slowdown in sales growth at Hon Hai Precision Industry Co Ltd, a contract manufacturer and subsidiary of Foxconn that is heavily reliant on Apple's business. JMP said year-over-year sales growth in Hon Hai slowed from 84 percent in December to 37 percent in January and 26 percent in February.

While it accounts for 6 percent of Apple's sales and is a major source of components for its screens, many analysts said Apple wielded sufficient clout and a good-enough track record to secure critical components -- for now.

"There's a risk of complacency. The sell-side has gotten itself into a game of one-upmanship," Gauna said. Investors "should make sure that they're comfortable with the situation ... especially since there's just so much uncertainty right now." He added: "We know that Japan as a supplier matters."

The decline in Apple’s share price is the largest single-day loss in almost nine months. Apple shares ended down 4.5 percent at $330.01 in heavy volume, following a 2.3 percent slide on Tuesday. The company has lost close to $22 billion in value over two days.

In an apparent response to Gauna's report, Oppenheimer analyst Yair Reiner said Apple's contribution to Hon Hai's revenue -- about a fifth -- was "limited," and made light of attempts to correlate their performance.

Ticonderoga analyst Brian White said the shift toward the iPad 2 -- which hit store shelves March 11 -- meant a gradual ramp-down of original iPad output, which could in turn have taken the air out of Hon Hai's sails.

Before this week's sell-off, Apple's stock price had doubled over 18 months.

Some top hedge fund managers cut their stakes in both Apple and Google during the fourth quarter, according to a Thomson Reuters survey of filings of the "Smart Money 30," some of the largest stock-picking hedge funds.

But BTIG analyst Walter Piecyk said demand for the iPad 2 has proven strong enough -- so far -- to sustain the sort of rip-roaring growth Apple is known for. "The past weekend showed once again why Apple is putting up more than 50 percent growth. Lines for the iPad 2 extended longer than even for the iPhone 4," he said.

But with the sturdiness of the global tech supply chain uncertain, investors may be choosing to play it safe for now with Apple, analysts said. Japan is a major source of glass for displays used in smartphones and tablets and is home to around a fifth of the world's semiconductor production. Japanese factories producing everything from chips to car parts have closed following the earthquake and tsunami last week, threatening supplies to manufacturers across the globe.

The uncertainty over Japan comes as rivals from Google, with its Android smartphone software, to Motorola and its Xoom tablet, begin to vie for the attention of the same crowd that buys iPads and iPhones.