MarketView for May 6

Summary 

Stock prices were sharply higher again on Wednesday after a private-sector reading indicated that unemployment may be receding. The number of U.S. private sector job losses in April touched the lowest level since November, according to a report by ADP Employer Services, the latest data suggesting the worst of the recession may have passed.

Adding fuel to the fire were some leaked bank stress test results suggesting that most banks are healthier than previously thought. If three-fourths or even half of the banks pass the test, then the government can focus on the few remaining banks that need federal help. The test results will cover 19 major financial institutions.

The Wall Street Journal reported that JPMorgan, the No. 2 U.S. bank, does not need more capital under the U.S. government stress test. Other news reports suggested the capital shortfalls for Citigroup and others might be less than expected.

The government is due to release stress test results on Thursday. Several reports on the capital required for 10 of the 19 banks under the government's microscope have revealed how well the industry will cope with perhaps the most severe recession since World War II.

The rally in bank stocks was widespread, with Citigroup closing up more than 16 percent to $3.86, Bank of America up 17.07 percent to $12.69 and JPMorgan ending the day up 7 percent to close at $37.22. Concerns over the health of the banking sector were among the factors that pushed the market to 12-year lows in early March when many thought the government might be forced to nationalize several big banks.

The broader market also picked up some momentum from energy shares, which reacted to higher oil prices. Domestic sweet crude futures settled up $2.50 per barrel, or 4.64 percent,  at $56.34, the highest close since November 14, 2008. Among the energy shares, Exxon Mobil was up 1.4 percent to $68.58, while Chevron climbed 3.6 percent to $68.11.

On the Nasdaq, Research In Motion was the top gainer, rising 2.2 percent to $77.05, after JP Morgan upgraded the BlackBerry maker's stock to "neutral" from "underweight." After the bell, Cisco Systems, a tech bellwether, posted a smaller-than-expected drop in quarterly revenue its earnings exceeded Street expectations, sending the shares up 4 percent in after-hours trading. The stock had ended in the regular session at $19.61.

Disney gave the Dow Jones industrial average its biggest boost, closing up 11.8 percent to $25.87, a day after the company posted quarterly earnings above Wall Street forecasts. Disney's results also helped support the notion that the economy may be stabilizing and consumers may be regaining some confidence.

Economic Data Encourages Wall Street

The pace of private-sector job losses slowed dramatically last month, while future planned layoffs also declined, and the hard-hit housing sector showed signs of improvement last week. Those reports, released on Wednesday, are the latest indications that the economy is turning the corner and could begin a slow rise back to a healthier state.

In housing, the original epicenter of the economic crisis, mortgage applications rose last week, even as interest rates hit their highest levels since mid-March. The total number of private-sector job losses was much less than expected in April, hitting its lowest point since last November, according to a report by ADP Employer Services. ADP said private employers cut 491,000 jobs in April versus a revised 708,000 lost in March, originally reported as a loss of 742,000 jobs.

Meanwhile, planned layoffs fell for a third consecutive month in April, hitting its lowest level since last October, according to a report by Challenger, Gray & Christmas. Planned job cuts announced by U.S. employers totaled 132,590 in April, a 12 percent drop from 150,411 layoffs recorded the previous month, according to the Challenger report. This was the lowest monthly total since 112,884 cuts were announced last October, but still up 47 percent from the 90,015 job cuts announced in the same month of 2008.

Demand for home purchase loans, an indicator of home sales, far outweighed that for refinancing. The increase may help gauge how the hard-hit U.S. housing market is faring this spring, the peak home-buying season.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended May 1 increased 2.0 percent to 979.7.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.79 percent, up 0.17 percentage point from the previous week, when it nearly matched the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990. It was the highest since 4.89 percent in the week ended March 13, though well below year-ago levels of 5.91 percent.

Crude Hits $56 per Barrel

Crude oil futures hit five month highs above $56 a barrel on Wednesday as a surprise drop in gasoline inventories and a slowdown in private sector job losses in April added to the idea that we are about to see a turnaround in the economy. Sweet light domestic crude for June delivery settled up $2.50 per barrel at $56.34, the highest settlement price since November 14, 2008, when the front month ended at $57.04. London Brent crude settled up $2.03 per barrel at $56.15.

The data showed crude inventories rose again last week, up 600,000 barrels to a fresh 19-year high of 375.3 million barrels, yet a smaller build than analysts had expected. Meanwhile, gasoline stocks declined unexpectedly last week, falling 200,000 barrels to 212.4 million barrels, the Energy Information Administration said on Wednesday.

Oil prices have risen from lows around $33 this winter, driven higher by stronger equity markets and hopes the economy may begin to pull out of recession soon.

Around 100 million barrels of crude oil and 25 million barrels of products are estimated to be floating at sea on giant tankers as supply outstrips demand. The Organization of Petroleum Exporting Countries last year agreed to a series of output cuts to help soak up excess supply and support oil prices.

Venezuela’s oil minister said on Wednesday that OPEC is seeking a minimum oil price of $70 per barrel and that OPEC production cuts have helped increase oil prices. The head of Saudi Arabia's state oil company Saudi Aramco, Khalid al-Falih said on Wednesday the kingdom was currently pumping under 8 million barrels per day (bpd), below its OPEC target.

Cisco Exceeds Expectations

Cisco Systems posted stronger-than-expected quarterly results and Chief Executive John Chambers said some customers were seeing stabilization for the first time in many quarters. The news sent shares of the network equipment maker up 3 percent in after-hours trading.

"They are seeing some stabilization, a leveling out, or in other words, they are finally beginning to have something reasonably solid underneath their feet," Chambers said of how Cisco customers are describing their current business. However, he warned shareholders "to not get too far ahead of themselves in building on the positives of this quarter," as there was no way of knowing when the turnaround would be and the market could fall again.

Cisco posted a smaller-than-expected drop in profit thanks to cost cuts, which helped offset a 16.6 percent fall in revenue to $8.2 billion in the fiscal third quarter ended April 25. Net profit fell to $1.3 billion or 23 cents per share from $1.8 billion or 29 cents per share a year ago. Earnings, excluding items, fell to 30 cents from 38 cents.

Cisco is the largest manufacturer of routers and switches, which direct Internet traffic. It recently expanded into software, services, and consumer electronics. Its results are often seen as a benchmark for the overall technology sector.

Tighter credit and the recession have discouraged many of Cisco's customers from big technology investments. However, Cisco has been cutting costs to help protect its bottom line. Total operating expenses fell to $3.6 billion from $4.1 billion, the company said.

Cisco forecast a drop in current-quarter revenue of 17 percent to 20 percent year-on-year. The company said it would continue to maintain tight financial management, but that large-scale layoffs and salary reductions were avoidable for now. Cisco also said its long-term revenue growth target of 12 percent to 17 percent was still possible.