MarketView for March 23

 

 

Summary

 

The major equity indexes moved a bit higher on Wednesday as materials shares rose, but rising commodities prices due to turmoil in the Middle East and North Africa are pulling stocks in the opposite direction. Meanwhile, the market's favored indicator of anxiety, the Chicago Board Options Exchange Volatility Index or VIX is indicates that concerns over unsettled world conflicts and natural disasters has been tempered for the moment. However, a lack of trading suggests that the optimism is limited.

 

About 7.01 billion shares traded on the three major exchanges, a number that was well below the daily average of 8.07 billion seen in 2010. The market posted the worst trading volume of the year on Tuesday.

 

Brent crude settled at $115.55 per barrel while domestic sweet crude rose 78 cents to settle at $105.75 per barrel, making it the highest close since September 2008, as further unrest in Yemen added to risks of oil supply disruptions in the region. While higher oil prices would benefit energy companies, they would have a dampening effect on economic growth over a longer time horizon.

 

Freeport-McMoRan Copper & Gold rose 5 percent to $54.88 after CEO Richard Adkerson, speaking at a Reuter’s summit in New York, said the company has the balance sheet to handle a large acquisition.

 

Valero Energy rose 2.6 percent to $28.83. For the year, Valero's stock is up nearly 25 percent. Shares of Exxon Mobil were up 0.05 percent at $82.60 on Wednesday, have gained 13 percent since the start of the year.

 

New Home Sales Continue Downward Slide

 

According to a report released by the Commerce Department on Wednesday, sales of new homes hit a record low in February and prices were the weakest in just over seven years, underscoring the housing market's lingering malaise, which could slow the economic recovery.

The report indicated that sales of new single-family homes fell 16.9 percent to a seasonally adjusted 250,000 unit annual rate, the lowest since records began in 1963, after a 301,000-unit pace in January.

 

An oversupply of homes exacerbated by an increasing flood of properties falling into foreclosure is frustrating recovery in the housing market. The housing market has remained on the periphery of the broader economy's expansion. However, residential construction has declined to about 2.3 percent of gross domestic product from a peak of about 6 percent in 2005.

 

Despite the surprise drop in sales, it is unlikely that there will be another downturn in the housing market, derailing the economic recovery. New home sales last month plunged to all-time lows in three of the four regions and surprised economists who had expected them to edged up to a 290,000 unit rate.

 

The weak data weighed on homebuilder shares such Toll Brothers and D.R. Horton, but overall, stocks recouped losses to end higher. Prices of U.S. government debt were little changed, while the dollar gained against a basket of currencies.

 

Many of the Street’s analysts are optimistic believing that home sales will pick-up from their current depressed levels in the spring. The median sales price for a new home plunged 13.9 percent last month to $202,100, the lowest since December 2003. Compared with February last year, the median price fell 8.9 percent.

 

Foreclosed properties typically sell well below market value, giving builders stiff competition and forcing them to hold back on new construction. Housing starts recorded their biggest decline in 27 years in February. February's weak sales pace pushed the supply of new homes on the market up to 8.9 months' worth, the highest since August and up from a 7.4 month inventory level in January.

 

There were 186,000 new homes available for sale last month, the smallest supply of homes since 1967. Despite lean inventories, new home sales will likely continue to bounce along the bottom for a while until the glut of previously owned homes is whittled down. New home sales account for less than 10 percent of overall sales.

 

According to the National Association of Realtors, new home prices have been running 45 percent higher than existing home prices, a premium that is historically about 15 percent, indicating previously owned homes are selling well below the cost of construction. Separately, the Mortgage Bankers Association said applications for home loans rebounded 2.7 percent last week.

 

Fed Says Smaller Banks Get a Break

 

New financial regulatory reforms should help reduce the edge that large banks have over smaller ones because of their implicit support from government, Federal Reserve Chairman Ben Bernanke said on Wednesday.

 

Bernanke argued the Dodd-Frank reform legislation will address the issue of firms perceived as too big to fail by restricting their activities, raising their capital requirements and enhancing regulators' ability to wind them down.

 

"A financial system dominated by too-big-to-fail firms cannot be a healthy financial system," Bernanke told a group of community bankers in a speech that did not touch on the broader economic outlook. "One benefit of the reforms should be the creation of a more level playing field for financial institutions of all sizes," Bernanke said.

 

Some Fed officials, including Richard Fisher, president of the Dallas Fed and Thomas Hoenig, president of the Kansas City Fed, have argued the legislation does not go far enough. They have called for very large banks to be broken up.

Bernanke said part of the reason the new laws governing the financial sector would support community banks was that regulators are cognizant of their concerns and challenges. With that in mind, the Fed is aware that many community banks need time to recover from the financial crisis.

 

"We recognize the importance of striking the right balance between promoting safety and soundness throughout the banking system and keeping the compliance costs for smaller banking firms as small as possible," he said.

 

Bernanke went on to say that the recent banking crisis suggested that fancy computer models are no substitute for on-the-ground intelligence on lending, joking the IBM computer that had recently won the U.S. game show "Jeopardy!" was not well equipped to make credit decisions.

 

"This advantage for community banks is fundamental to their effectiveness and cannot be matched by models or algorithms," Bernanke said. "Watson may play a mean game of Jeopardy, but I would not trust it to judge the creditworthiness of a fledgling local business or to build longstanding personal relationships with customers and borrowers."

 

No Dividend Increases for Bank of America

 

The Federal Reserve told Bank of America to rein in its plans for a modest dividend increase, a sign that regulators still view the lender as being financially weaker than its rivals. Bank of America had hoped to be in a second wave of banks raising dividends in the second half of this year. Unlike some of its major competitors, Bank of America is still struggling to be consistently profitable and, by some measures, has less capital.

 

For the last two quarters, the bank has suffered from mortgage-related losses, and it could be on the hook to repurchase billions in toxic mortgages from investors.

 

The largest U.S. bank by assets did not disclose how much of a dividend increase it was looking for, and did not give a reason for the rejection. Bank of America said it intends to submit a revised proposal to the Fed and still hopes to increase its dividend in the second half of the year.

 

The announcement comes two days after Citigroup restored its dividend to 1 cent per sharean amount equal to Bank of America's current payout, after suspending it in 2009.

 

The Fed's move highlights the extent to which the banks that required the least government aid are recovering quickly, while those that required multiple bailouts, like Bank of America and Citigroup, face a longer road.

 

On Friday, the Fed approved dividend increases for a group of banks after conducting a second round of stress tests on the 19 largest domestic banks.