MarketView for March 5

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MarketView for Monday, March 5
 

 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Monday, March 5, 2012

 

 

Dow Jones Industrial Average

12,962.81

q

-14.75

-0.11%

Dow Jones Transportation Average

5,125.74

q

-34.39

-0.67%

Dow Jones Utilities Average

454.51

p

+0.76

+0.17%

NASDAQ Composite

2,950.48

q

-25.71

-0.86%

S&P 500

1,364.33

q

-5.30

-0.39%

 

 

Summary

 

Stocks fell on Monday for the second straight session and the third in the last four trading days, led lower by basic materials shares after China trimmed its growth target for 2012. The S&P 500 index opened lower and data showing the U.S. services sector expanded in February at its fastest pace in a year did little to stem the decline.

 

The benchmark S&P 500 is up 8.5 percent so far this year on investor expectations for a recovery in the U.S. economy, a containment of the euro zone's debt crisis and the belief that China will avoid a hard landing in its current economic cycle.

 

China, the world's second-largest economy, lowered its 2012 growth target to an eight-year low of 7.5 percent and made expanding consumer demand its top priority, as Beijing looks to shrink the economy's reliance on external spending and foreign capital. Materials shares, sensitive to signs of slowing in China's commodity-hungry economy, dropped and were the biggest drag on Wall Street. Freeport McMoRan Copper & Gold was off 3.8 percent to close at $40.45.

 

During the session, the S&P 500 briefly dipped below its 14-day moving average - a line it has held for the last 50 sessions in an impressive run. The Nasdaq registered the largest decline among the three major equity indexes as Apple fell as much as 3.5 percent to a session low at $526 on heavy volume. By the close, Apple had retraced some of that loss, down 2.2 percent at $533.16. The company is expected to debut its new iPad this week.

 

Further weighing on investor sentiment in the early portion of trading, Greece warned it was ready to enforce losses on its private-sector creditors, although major Greek bondholders later voiced their support for the deal. The continued uncertainty around the Greek deal along with data showing a slowdown in business activity in various euro-zone countries heightened recession worries for the region and pushed European equities lower.

 

Alpha Natural Resources fell 6 percent to $16.35 and Arch Coal was down 5.4 percent to $12.20 as lower natural gas prices added to growth concern in China, pressuring coal miners' stocks. U.S. steelmakers' shares were also hit by the news China was lowering its economic growth outlook. AK Steel fell 6.1 percent to $7.29, U.S. Steel was down 4.7 percent to $$26.21 and Nucor slipped 2.4 percent to $42.52.

 

Volume was light with about 6.08 billion shares changing hands on the three major equity exchanges, a number that was well below the daily average of 6.9 billion shares.

 

Service Sector Expands Sharply

 

The services sector expanded at its fastest pace in a year in February helped by a gain in new orders and as the housing market shows signs of stabilizing.  According to the Institute for Supply Management its services index rose to 57.3 in February last month from 56.8 in January, in sharp contrast to economists' expectations for a drop to 56.1. It was the index's highest level since February 2011. The services sector accounts for about two-thirds of all domestic economic activity. A reading above 50 indicates expansion.

 

ISM's gauge of new orders improved to 61.2 from 59.4. Real estate, rental and leasing sectors led growth, ISM said, suggesting housing got a boost from the unseasonably warmer weather. Recent stronger data in the housing market has suggested the sector is starting to heal.

 

The employment index eased to 55.7 from 57.4, on the heels of the biggest jump on record in January. Economists said February's reading was still consistent with a good rise in jobs in the Labor Department's payrolls survey due Friday.

 

The ISM prices paid index jumped to 68.4 from 63.5, suggesting that companies could start to be squeezed by higher input costs.

 

"The question is how quickly those higher fuel costs can be passed on to customers. Right now, suppliers are trying not to pass the higher prices on right away because there's not a lot of pricing power right now," Anthony Nieves, chair of the ISM non-manufacturing business survey committee, said in a conference call.

 

The report was in contrast to data from the euro zone's private sector earlier on Monday that showed Italian and Spanish businesses dragged the currency bloc back into decline last month.

It also diverged from ISM's manufacturing data released last week that showed growth in that sector cooled last month.

 

Separate data showed a decline in new orders for factory goods was not as steep as expected in January, while December's gain was revised higher. The Commerce Department said orders for manufactured goods fell 1.0 percent, not as big as the 1.5 percent drop that economists were expecting. Still, it was the biggest decline since October 2010. December was revised up to 1.4 percent from 1.1 percent.

 

Nonetheless, Monday's data prompted investment bank Goldman Sachs to raise its outlook for first-quarter economic growth to 2.0 percent annualized from 1.9 percent. Growth in the first three months of the year is seen backing off from the 3 percent rate in the fourth quarter of 2011, though a string of recent positive data has suggested underlying resiliency. Expectations range from 1.9 percent to 2.5 percent.

 

Only In a Dire Situation Says Dallas Fed President

 

Only a dire situation would call for the Federal Reserve to buy more assets, and that is unlikely given the better-looking economic data, Dallas Fed President Richard Fisher said on Monday.

 

Fisher, an outspoken policy hawk, added that he was "perplexed" by Wall Street's continued preoccupation with the possibility that the Fed will engage in a third round of large-scale asset purchases, known as quantitative easing, or QE3.

 

"I believe adding to the accommodative doses we have applied rather than beginning to wean the patient might be the equivalent of medical malpractice," he said at a meeting of the Dallas Regional Chamber.

 

"It is my opinion that we should run that risk only in the most dire of circumstances, and I presently do not see those circumstances."

 

Fed policymakers hold a regular meeting March 13 to decide what more, if anything, to do about the recovery that has shown signs of gaining traction this year, including a drop in the jobless rate to 8.3 percent and improvements in measures of consumer spending and confidence.

 

At its January policy meeting the Fed gave a gloomy read on the world's largest economy, saying it expected to keep interest rates "exceptionally low" at least through late 2014 and setting off intense debate over the need for more steps to boost slow domestic economic  growth.

 

"On balance, the data indicate improving growth and prospects for job creation in 2012," said Fisher, who does not have a vote on the central bank's policy-setting committee this year. He added, however, that the Fed's mandate of stable prices is being "challenged" by higher gasoline prices.

 

If the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage," Fisher said, using a familiar metaphor.

 

Banks Upset Over Release of Stress Test Data

 

Some of the country’s largest banks are incensed  over the possibility that the Federal Reserve will reveal too much detail regarding individual bank performance that could put one or more of them at a competitive disadvantage the Fed releases the results of its latest stress test.

 

The 19 biggest U.S. banks in January submitted reams of data in response to regulators' questions, outlining how they would perform in a severe downturn. Now, citing competitive concerns, bankers are pressing the Fed to limit its release of information—expected as early as next week—to what was published after the first test of big banks in 2009.

 

Three years ago, as the financial crisis was abating, the Fed published potential loan losses and how much capital each institution would need to raise to absorb them. This time around, the Fed has pledged to release a wider array of information, including annual revenue and net income under a so-called stress scenario in which the economy would contract and unemployment would rise sharply.

 

The Clearing House Association, a lobbying group owned by units of companies such as J.P. Morgan Chase, Bank of America and Wells Fargo, warned in a letter this month to the Fed that making the additional information public "could have unanticipated and potentially unwarranted and negative consequences to covered companies and the financial markets."

 

The Fed is not backing down from its plan to publish detailed projections of how the biggest lenders would fare in a steep economic downturn lasting two years. Regulators view full disclosure as critical to assuaging investor concerns about banks' capacity to withstand a market shock or economic setback.

 

"The disclosure of stress-test results allows investors and other counterparties to better understand the profiles of each institution," Fed Governor Daniel Tarullo, the central bank's lead official on supervisory matters, said in a speech last November.

 

The dispute is the latest flashpoint between big banks and their overseers. In the financial crisis, U.S. regulators forced banks to slash their dividends and curtail stock buybacks in exchange for billions of dollars in government aid. More recently, the sides have butted heads over the rollout of new rules tied to the Dodd-Frank financial-overhaul law, such as the so-called Volcker Rule that aims to limit bank risk taking.

 

Fed officials are assuring banks they won't release data that rivals could mine for clues to future acquisitions or other moves. In one concession, the Fed told banks it doesn't intend to break out projected losses on a quarterly basis.

 

The haggling between the government and the banks could escalate in the coming days. Before releasing the final results, the Fed is likely to provide banks with preliminary figures and an opportunity to raise concerns with the central bank. When the Fed gave banks a sneak peek at results in 2009, some institutions were able to persuade regulators to scale back by billions of dollars the sums they were ordered to raise.

 

The largest domestic lenders have been raising capital over the past year, and most institutions are expected to receive approval for dividend increases or share buybacks. Bankers believe those moves will boost their appeal with investors at a time when many financial stocks are trading below book value, a measure of net worth.

 

Even so, regulators are walking a fine line with the latest test. If banks look ill-equipped, markets could be spooked, adding to the stress on firms already struggling with the low interest rates, soft growth and new rules that led banking-industry revenue to fall last year for just the second time in 74 years. Shares of the biggest banks fell as much as 58 percent in 2011 amid questions about the industry's profit outlook and the impact of the European debt crisis.

 

If regulators are viewed as too pliant, the tests will fall short of their basic confidence-building purpose, possibly undermining a market recovery. Similar tests administered by regulators in the European Union were denounced for giving passing grades to some lenders that later required taxpayer bailouts.

 

Soon after the Fed said last November that the results would be made public, the debate began about how much the Fed should disclose. More than a dozen bank holding companies subject to the stress tests—all with at least $50 billion in assets—met with Federal Reserve staff in late December to discuss what the Fed might say, according to disclosures on the Fed's website. The meetings were at the Fed's invitation, and Fed staff said they were still considering the timing, scope and level of detail of the data they will publish, according to a summary of the meetings posted by the Fed.

 

Officials from MetLife, Bank of America, J.P. Morgan Chase, Goldman Sachs Group and other financial institutions also discussed with Fed staff the implications, including competitive issues, of making the results public. Bankers say it is unfair for the Fed to release more information than it did during the initial 2009 stress tests.

 

The reason: The Fed is still in the middle of writing a rule establishing what information it will make public in future stress tests, as required by the Dodd-Frank financial law passed in 2010.

 

Last year the Fed didn't make any aspect of its stress test public, leaving disclosure to institutions, many of which then released some results. Some bankers warn they may put out their own figures if they disagree with the Fed's calculations.

 

"They could just publish something that has nothing to do with reality," said one top executive at a major bank.