MarketView for May 5

 

 

Summary 

 

Stock prices were a bit lower on Tuesday as concerns over the results of the impending bank stress test had investors taking a few profits after the recent run-up in share prices. At the same time a drop in the price of crude oil pushed energy shares lower. The day’s decline meant a break in market gains that in turn propelled the S&P 500 into year-to-date positive territory. The S&P 500 index is up 34 percent after hitting a 12-year low back in early March.

 

Selling was seen across the board with big-cap technology companies, banks, home builders and big manufacturers dragging indexes lower. These sectors have all been among the market's bright spots during the rebound of the past couple of months. Specifically, Chevron closed down 1.4 percent at $65.75, while JPMorgan ended the day down 2.7 percent at $34.82.

 

Shares of Microsoft were off 2 percent at $19.79, making it the biggest drag on the Nasdaq, followed by Hologic, whose shares plunged 20.2 percent to $12.45, a day after the medical diagnostics maker delayed the launch of its Tomosynthesis mammography system and posted a quarterly loss.

 

On the plus side of the ledger, Boeing rose 2.37 percent to $43.15. However, Procter & Gamble fell 2.4 percent to $49.79 following news of problems at one of its manufacturing plants.

 

Increasingly less dire economic reports have increased investor optimism that the economic recession that began in December 2007 may be abating, while some renewed confidence about the banking sector underpinned sentiment.

 

Even so, there is concern on Wall Street over the upcoming release of government stress test results, which are expected to be out on Thursday and may show that about half of the 19 largest banks under review need to raise more capital.

 

Investors are optimistic that the largest banks do not need dramatic new government interventions. Among banks undergoing the tests, Citigroup, for example, has been told it will need to increase its common equity by about $10 billion.

 

Meanwhile, Tuesday's economic data showed that the vast services sector contracted less severely in April. Also on Tuesday, Federal Reserve Chairman Ben Bernanke said the three-year drop in housing may be drawing to a close and that he expected the recession to end this year, barring a relapse of the financial crisis. However, he also noted U.S. growth would remain subdued and unemployment high.

 

Domestic sweet crude for May delivery settled down 63 cents per barrel, or 1.16 percent, to settle at $53.84 a barrel.

 

Kraft Foods helped cushion losses on the Dow after the maker of household brands including Oreo cookies, reported a higher profit. Like many companies this earnings season, Kraft said its results were helped by raising prices and cutting costs, sending its shares up nearly 4 percent to $25.22.

 

Waffling But Nonetheless Optimistic

 

Federal Reserve Chairman Ben Bernanke said on Tuesday the three-year housing decline may be near a bottom and the recession should end this year, as long as there is no relapse of the credit squeeze that has strangled the economy. Bernanke said that even when recovery takes hold, it is likely to be tepid and unemployment may not peak until 2010, although it would likely not climb into double digits.

 

In March, Bernanke had pointed to "green shoots" of economic recovery, but in testimony to Congress on Tuesday he was more explicit in saying the pieces were in place for a rebound. Still, he acknowledged that growth would remain subdued and unemployment high even after the recession ends.

 

He also said "stress tests" to assess the capital needs of the 19 largest U.S. banks will provide an accurate reflection of the firms' financial positions, and he expected those which need a bigger buffer to raise the money from private sources.

 

"We continue to expect economic activity to bottom out, then to turn up later this year," Bernanke told the congressional Joint Economic Committee.

 

"An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall."

 

Excess economic slack should keep inflation low, he said, suggesting the Fed will keep interest rates low for some time as well. After a two-day meeting last week, the Fed repeated that it would likely hold borrowing costs at an unusually low level for "an extended period."

 

Economists think the United States is further along the road to economic recovery than Europe, thanks in part to the Fed's aggressive response. The International Monetary Fund last month said Europe's recession will drag into 2010.

 

Bernanke said estimates that banks may need hundreds of billions of dollars in additional capital overstated the "call" on government resources, pointing out that the Obama administration has said it does not expect to seek more bailout money from Congress.

 

"I've looked at many of the banks and I believe that many of them will be able to meet their capital needs without further government capital through either issuance of new capital, or through conversions and exchanges, or through sale of assets and other measures that would raise capital," he said.

 

Bernanke also said the Fed would soon release more details on the various lending programs it has launched to try to ease the credit crisis, including information on the number of borrowers and the collateral accepted.

 

While he stopped short of agreeing to name borrowers, as some lawmakers have requested, he acknowledged that the Fed had a responsibility to keep Congress and the public informed about its lending programs and balance sheet. That has become a contentious issue as the central bank has extended massive amounts of loans to banks as well as other firms that have not traditionally turned to the Fed in its role of lender of last resort.

 

Fed Rejects Credit Card Help

 

The Federal Reserve rejected a request to force credit card companies to immediately halt retroactive interest-rate increases on existing balances, Democratic Senator Charles Schumer said on Tuesday. Schumer and Christopher Dodd, who chairs the Senate Banking Committee, asked the Fed last month to use its emergency powers for rescuing banks to also help credit card consumers being slapped with unexpected rate increases.

 

"The Federal Reserve's failure to protect consumers from these outrageous rate increases is unconscionable," Schumer said. "The Fed has acted swiftly to use its emergency powers to steady teetering financial institutions. It is fair to ask why they won't use the same powers to aid American families who are at just as great a risk."

 

In a letter to Schumer, Fed Chairman Ben Bernanke, who has called credit card practices "unfair and deceptive," said credit card issuers have been "encouraged" to comply with the Fed's final rules as soon as possible. He also said shortening the implementation date of the Fed's rules could cause issuers to overreact by cutting the availability of credit and costing consumers more to use a credit card.

 

"We believe that issuers must be afforded sufficient time for implementation to allow for an orderly transition process that avoids unintended consequences, compliance difficulties and potential liabilities," Bernanke wrote in a May 4 letter.

 

Banks such as Bank of America, JPMorgan Chase, Citigroup and Capital One face a new set of Fed rules aimed at reining in abusive credit card practices. The rules are to be implemented by July 2010, a date some lawmakers and consumer groups complain is too far away to help struggling consumers.

 

Bernanke added that, while the new rules will fundamentally alter the way credit cards are underwritten and priced, consumers will benefit overall from more transparent and predictable credit card pricing.

 

Congress is trying to codify those rules in legislation. With support from President Barack Obama, the Senate could vote on a credit card measure within days if Dodd and Richard Shelby, the banking committee's top Republican, can agree on language for a final bill. Legislative efforts are aimed at stopping credit card companies from imposing certain late fees, restricting retroactive rate increases as well as other questionable billing practices and marketing to minors.

 

The House of Representatives overwhelmingly approved its own legislation last month. Lawmakers are trying to get a final bill to Obama to sign into law by the end of the month.

 

Service Sector Better Than Expected

 

A report by the Institute for Supply Management indicated that the services sector contracted less than expected in April and was back to its October 2008, thereby adding to the evidence that the economy was nearing bottom and moving closer to recovery. The ISM's non-manufacturing index rose to 43.7 from 40.8 in March. However, that reading was still below the level of 50 that separates contraction from expansion.

 

However, the ISM also released a grim 2009 outlook that was a reminder of the heavy toll the recession has taken on the economy. It severely downgraded its projections for economic activity and investment during 2009, in both the manufacturing and services sectors.

 

The services sector represents about 80 percent of U.S. economic activity, including businesses like banks, airlines, hotels and restaurants and despite being in the seventh consecutive month of contraction, there were signs of a positive trend. However, Anthony Nieves, chairman of the ISM non-manufacturing business survey committee, was cautious about the results of the report overall.

 

"We need to see how this trends out over the next month or two," Nieves said, "It's a slower rate of contraction but still contraction."

 

The details of the report showed substantial improvements in gauges measuring employment and new orders. Yet, the employment index remained mired in a slump, at 37.0 versus 32.3 in March.

 

The broader view in the ISM's semi-annual report also reflected the deep economic destruction caused by the current recession, which is on track to be the longest post-World War Two slump.

 

ISM said it expects a 22.7 percent plunge in capital investment for U.S. factories this year, more than three times worse than its previous projection issued in December of a 6.7 percent decline. It also said that non-manufacturing firms will see a 13.5 percent drop-off in new spending, far weaker than the 8.4 percent fall predicted in the last survey.

 

Disney Does Better Than Expected

 

After the close of regular trading, Disney reported better than expected earnings but still a lower quarterly profit due to sharply weaker performances at its theme parks, movie studio and media networks.

 

Net income fell to $613 million, or 33 cents per share, from $1.13 billion, or 58 cents per share, in the 2008 second quarter. Excluding restructuring and impairment charges of 10 cents per share, Disney's profit was 43 cents per share.

 

Revenue fell 8 percent to $8.09 billion, from $8.71 billion in the year-ago quarter, partly as the result of aggressive discounting at its domestic theme parks.

 

"We had a difficult second quarter due to the weak economy and other factors," said Disney President and CEO Robert A. Iger. "At the same time, we remain focused on our core business strategy and believe our creativity, brands and businesses will serve us well as the economy recovers."