MarketView for March 24

 

 

Summary

 

The major equity indexes moved higher on Thursday as optimism regarding upcoming earnings reports in combination with a buying spurt of the quarter's top performers lifted the S&P 500 index above a key technical level. The S&P 500 broke above its 50-day moving average at 1,305, meaning that from a technical perspective the market may have absorbed the worst of its recent pullback caused by Japan's earthquake and tumult in the Arab world, positioning stocks for another move higher.

 

The S&P 500 is up 24.8 percent since the start of September but fell briefly into negative territory as global concerns pushed commodity prices higher. It was the second consecutive day of gains for the market, with the S&P 500 up 2.4 percent so far for the week. With the market near the end of the quarter, portfolio managers will buy equities that have performed well as they execute window dressing, and hedge funds will cover short positions that are under pressure.

 

Semiconductor stocks were among the best performers with the result that the heavily technology weighted Nasdaq moved higher after Micron Technology posted a quarterly profit that exceeded forecasts. Micron ended the day up 8.4 percent to $11.50. The S&P technology index, up 3.1 percent so far for the quarter, was up 1.6 percent on Thursday. The rally on Thursday pushed Micron up more than 43 percent for the quarter, making it the sector's top gainer.

 

After the closing bell, Oracle rose 0.4 percent to $32.27 after posting quarterly results that exceeded Street estimates, while Research in Motion fell over 10 percent to $57.40 after giving a weaker-than-expected outlook.

 

Earnings growth is expected to help the market overcome worries about unrest in the Middle East and North Africa and Japan's crisis this year. The S&P 500 was forecast to end the year 11 percent higher, according to a Reuters poll released on Thursday.

 

Other data on Thursday showed the labor market's recovery was becoming well-established, with new claims for jobless benefits falling last week and the four-week moving average dropping to its lowest level in more than 2-1/2 years. According to Thursday’s report from the Labor Department, initial claims for state unemployment benefits fell by 5,000 claims to a seasonally adjusted 382,000.

 

The four-week moving average of new claims -- a better measure of underlying trends – fell by 1,500 claims to 385,250 claims, the lowest since mid-July 2008. It was the fourth straight week the closely watched average held below the 400,000 level that is associated with steady job growth.

 

Trading volume was light, with about 7.21 billion shares changing hands on the major exchanges, well below the daily average of 8.06 billion.

 

Fed Breaking Some Eggs

 

They say you have to break some eggs to make an omelet, well that is exactly what the Fed is dong as it breaks from about a 100 years of a tradition of secrecy and offers up four news conferences per year after policy meetings.

 

The historic shift will give Bernanke an opportunity to better inform the public and financial markets on how the Fed intends to maximize growth and keep inflation at bay. It also may help demystify the Fed at a time the central bank faces intense pressure to open up.

 

Bernanke, who has championed greater transparency since taking the reins at the Fed in 2006, will kick off on April 27 a program of four-times-a-year news conferences following a Fed meeting on monetary policy, the central bank said on Thursday. It will be the first regularly scheduled briefing by a Fed chairman in the central bank's history. The announcement brings the 97-year-old U.S. central bank into line with its peers from the other Group of Seven rich countries.

 

With reams of market commentary devoted to parsing the Fed's post-meeting statements, the central bank will now be able to convey a more-nuanced message on monetary policy than its brief statements can. However, the policy is not without risks. With the world hanging on every word, any misstep could roil financial markets.

 

Congressional and public outcry for greater Fed disclosure has grown louder in the wake of the financial crisis, when the Fed bailed out failing financial firms and set up an array of programs to pump money into frozen credit markets. While some credit the Fed with saving the economy, many of its measures were met with stiff criticism.

 

An effort by lawmakers to expose the Fed's policymaking deliberations to congressional audits won a surprisingly high level of bipartisan support last year. Some members of Congress have also sought to narrow the Fed's mandate to focus solely on inflation rather than also aiming to keep unemployment low.

 

The Fed said Bernanke would hold a briefing after each policy meeting at which officials provide their quarterly economic forecasts, which fall in June and November this year. "The introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy communication," the central bank said.

 

In a related move, the Fed said it would release its policy statement at 12:30 p.m. EDT  on those days, instead of the usual 2:15 p.m. EDT. The Fed's policy panel meets a total of eight times a year. The Fed, which did not begin announcing its policy moves until 1994, has slowly been coming into the light.

 

Among other steps, it decided in 2004 to move up the publication of minutes of its meetings to three weeks from about six; in late 2007, it moved to issue economic forecasts quarterly, rather than twice a year; and in 2009, it began providing a long-run inflation forecast that is viewed as a de facto target.

 

Nevertheless, the Fed has fought to keep some of details of its operations secret. This week, it lost a court battle to withhold the names of banks that had taken emergency loans.

 

Faced with fierce criticism over the Fed's crisis-fighting steps, Bernanke has stepped up efforts to explain the central bank's actions to the public. He has given two extensive television interviews -- a rarity for a sitting Fed chief -- and taken reporters’ questions after two speeches.

 

Durable Goods Orders Fall

 

Durable goods fell in February as companies scaled back investment plans for a second month in a row, suggesting a cooling off in business spending. Although the weak manufacturing report posed a risk to first-quarter growth, the durable goods report is both a statistical anomaly at this point as data on durable goods orders is also very volatile.

 

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.3 percent in February after a 6.0 percent drop the prior month, the Commerce Department said. The weakness in business demand and a big drop in defense aircraft orders helped pull down overall orders for so-called durable goods, items meant to last three years or more, by 0.9 percent. They had risen 3.6 percent in January.

 

Portugal’s Credit Rating Cut

 

Fitch cut Portugal's credit ratings by two notches, writing that risks to the country's financing rose after parliament failed to pass fiscal austerity measures and the prime minister resigned. The ratings agency warned further downgrades are likely in the next three to six months, especially in the absence of a "timely and credible" program of financial support from the International Monetary Fund and European Union.

 

So far Portugal has managed to finance itself in capital markets, but government borrowing costs spiked on Thursday -- with 10-year yields reaching an all-time high of 7.9 percent. That makes it challenging for the government to refinance upcoming bond redemptions of 4.3 billion euros and 4.9 billion euros in April and June, respectively. Chances Portugal will seek a bailout have increased, according to Fitch.

 

The agency cut Portugal's long-term foreign- and local-currency issuer ratings to A-minus from A-plus. Short-term issuer ratings were cut to F2 from F1. All the new notes were placed on "rating watch negative." Portugal's country ceiling was affirmed at AAA. The likelihood Portugal will require multilateral financial support in the short term has risen significantly, given "its impaired ability to retain affordable market access", Fitch said.

 

Among the big three rating agencies, Standard & Poor's currently assigns the highest rating to Portugal -- A-minus -- but the agency has already said it is considering downgrading the country if growth prospects weaken or if private creditors become subordinated to public creditors in a possible financial aid program.

 

Further rating downgrades from Moody's are also likely, as the agency said last week Portugal would need to meet the stricter fiscal targets set by the government for 2011 in order to keep its rating.