MarketView for May 8

 

 

Summary 

 

Stock prices moved sharply higher once again on Friday, with the Nasdaq turning in its longest stretch of weekly gains in a decade as stress test results and reassuring jobs data fueled hopes the worst is over for banks and the economy. Bank shares led a broad run-up again, a day after regulators said most banks were sound.

 

Shares of JPMorgan Chase climbed 10.5 percent to $38.94, making the stock the Dow's top gainer. A 3.4 percent gain in oil prices above $58 a barrel bolstered energy companies' shares, led by Chevron, which rose 3.5 percent to $70.38.

 

For the week, the Dow rose 4.4 percent, while the S&P 500 was up 5.9 percent and the Nasdaq up 1.2 percent. The Nasdaq registered its ninth straight weekly advance, the longest such streak for the index since an 11-week climb in December 1999. Since hitting a 12-year closing low in March, the S&P has surged 37.4 percent.

 

Shares of Wells Fargo closed up 13.8 percent to $28.18, while the shares of Bank of America ended the day up 4.9 percent to $14.17. Citigroup closed up 5.5 percent at $4.02.

 

The government told a number of key banks after the close on Thursday to raise $74.6 billion to build a capital cushion that officials hope will restore faith in financial companies and set a course out of the deepest recession in decades. Several of the large banks have announced equity and debt offerings in an attempt to raise capital.

 

Bank of America Chief Executive Kenneth Lewis said in an interview on CNBC he anticipates about $10 billion in asset sales and that he is "pretty confident" the bank will do better than the stress test results indicate. Regulators told his bank it needed $33.9 billion of fresh capital.

 

The 539,000 jobs cut by employers in April was the smallest reduction since October, and hinted at some improvement in the labor market, but the unemployment rate soared to 8.9 percent, the highest since September 1983.

 

Google ended the day up 2.7 percent at $407.33 and gave the Nasdaq its largest boost. Sanford C. Bernstein, a brokerage, raised its price target on Google's stock to $600.

 

Jobs Numbers Improve

 

Employers cut 539,000 jobs last month, the fewest since October, according to government data on Friday, a strong indicator that the economy's steep decline might be easing. However, the unemployment rate came in at 8.9 percent, making it the highest level for that statistic since September 1983. Job losses in March and February were a combined 66,000 steeper than previously estimated, the Labor Department said.

 

A 72,000 jump in government payrolls tempered the overall job-loss figure. Government employment was bolstered by the hiring of about 60,000 temporary workers in preparation for the 2010 Census and U.S. Labor Secretary Hilda Solis said this figure would fluctuate in the months ahead.

 

Private sector employment fell by 611,000 in April after a 693,000 decline in March, the department said, which curbed some of the optimism over the report. Still, the data was not as bleak as financial markets had expected and offered the freshest sign that the intensity of the recession, now in its 17th month, was starting to fade.

 

President Barack Obama said April's payrolls number was somewhat encouraging, but that the job losses were still a sobering toll. "It underscores the point we're still in the midst of a recession that was years in the making and that is going to be months or even years in the unmaking. We should expect further job losses in the months to come," Obama said.

 

Since the start of the recession in December 2007, the U.S. economy has lost 5.7 million jobs, the Labor Department said.

 

In a hopeful glimmer for the economy, the rise in the unemployment rate reflected a surge in people joining the labor force, as opposed to a collapse in employment. The report showed job losses across almost all sectors, although at a less steep pace than in previous months.

 

The manufacturing sector lost 149,000 jobs in April after shedding 167,000 in March. Economists were encouraged by a slight increase in hours worked in manufacturing, where the average work week inched up to 39.6 hours from 39.4 in March.

 

Government data last week showed a record $103.7 billion drawdown in inventories in the first quarter, a contributing factor to establishing a platform for a recovery in manufacturing.

 

Construction, among the sectors hit hardest by the housing-led recession, shed 110,000 jobs in April, the Labor Department said, after losing 135,000 the previous month.

 

The service industry eliminated 269,000 additional positions after eliminating 381,000 in March, while in education and health services they rose 15,000 after rising 10,000 in March.

 

Despite the slowdown in the pace of job losses, look for the unemployment rate to continue to climb until at least the first quarter of 2010, peaking at a reading between 9.5 and 10.5 percent.

 

The length of the average work week was unchanged at 33.2 hours in April. Average hourly earnings edged up to $18.51 from $18.50 in March, which analysts said was a reminder that incomes remained under pressure.

 

Price of Crude Approaching 6-Month High

 

The price of crude oil rose more than 3 percent on Friday as it closes in on a six-month high. Driving the price higher was the ebullient outlook for the economy that is beginning to emerge as a the result of the government’s stress test for big banks and the recent jobs data. Domestic sweet crude for May delivery settled up $1.92 per barrel at $58.63 a barrel, after touching $58.69, the highest level since November 17. Brent crude settled up $1.67 per barrel at $58.14.

 

Oil, battered as the economic crisis slowed demand and sent prices down from a record over $147 a barrel in July, has risen over the past two months as hopes the economic recession may be easing lifts stock markets.

 

Signs of a potential economic recovery have helped increase oil prices by around 70 percent from February lows below $34 per barrel; although oil's positive correlation to the equities markets could be cut if rising inventories weigh on crude's rally.

 

U.S. crude oil stocks rose to fresh 19-year highs, according to U.S. government data, while inventories at sea have surged as well this year. Iran's OPEC governor said rising stockpiles may force the oil producer group to reduce its output ceiling when it next meets on May 28, Iran's Mehr News Agency reported.

 

"The volume of crude stockpiling in the world has risen, in comparison to the past five years, from an average of 52 days to 61 days," Khatibi was quoted as saying.

 

OPEC has already agreed to reduce production since September by about 4.2 million barrels per day (bpd), or about 5 percent of world supply. It is estimated to have delivered about 80 percent of those cuts so far.

 

Banks Now Begin To Raise Capital

 

Morgan Stanley and Wells Fargo sold more than $15 billion of shares and bonds, as the two banks rushed to the head of the line of those banks looking to raise funds following government stress tests. Morgan Stanley sold $4.03 billion in stock Friday, including overallotment shares, while Wells Fargo & Co sold $8.6 billion. Both deals were larger than expected, but came at discounts of more than 11 percent to their Thursday closing prices.

 

Despite the extra stock entering the market, Morgan Stanley's shares rose 3.9 percent to close at $28.20. The stress test said Morgan Stanley needed to boost its common equity capital buffer by $1.8 billion. Wells Fargo shares rose 13.8 percent to $28.18. The U.S. stress test found that Wells Fargo needed another $13.7 billion.

 

Bank of America got in line too, stating that it plans to sell 1.25 billion shares to help meet what the government deemed a $33.9 billion capital shortfall for the lender. Banks are hoping to sell shares in current rising market environment. Meanwhile, Bank of America's Lewis was upbeat on the economy, saying on CNBC he still expects to see signs of a turnaround in the second half of the year.

 

In addition to offering shares, Bank of America plans to sell assets to satisfy regulators. The bank is better able to raise capital than the government estimated in its tests, Chief Executive Kenneth Lewis told CNBC television on Friday. Bank of America sold $3 billion of non-government guaranteed debt maturing in five years, a key condition for banks looking to pay back money they received under the Troubled Asset Relief Program.

 

Regulators late Thursday announced the results of its stress test of the 19 largest banks, and the relatively small size of the $75-billion capital shortfall heartened European and U.S. bank investors and emboldened issuers. Nonetheless, the results also evoked skepticism among those who contend the tests were not rigorous enough.

 

With the stress tests over, President Obama's administration plans to focus on reforming regulation of the financial sector, including setting up a systemic risk regulator, sources told Reuters.

 

The biggest gainer Friday was Cincinnati regional bank Fifth Third Bancorp, which soared 58.8 percent to $8.49 a share, its highest price in four months. The bank needs to boost common equity capital by $1.1 billion, according to the stress test.

 

Of the lenders that had to raise money, auto and home lender GMAC LLC was deemed to have an $11.5 billion shortfall, by far the largest deficiency relative to its size. Treasury Secretary Timothy Geithner indicated that the administration will provide substantial support to GMAC.

 

Banks are keen to get out from TARP, in part because of pay restrictions for banks in the program. The government plans to soon detail the specifics of how the pay restrictions work, However, leaving TARP may be more difficult than banks think, but the interest in returning government money reflects bank optimism that the worst may have passed in financial markets..

 

Well Fargo Raises $8.6 Billion

 

Wells Fargo announced on Friday that it raised about $8.6 billion through the offering of 392.15 million shares after underwriters fully exercised their option to purchase an additional 51.15 million shares. The offering, which priced Friday, will be settled on Wednesday.

 

"Our common stock offering was heavily oversubscribed, reflecting, in our view, confidence on the part of both institutional and retail investors in Wells Fargo's business model and financial strength. Our focus continues to be on keeping credit flowing in the economy, building our company profitably as we have always done, integrating Wachovia, which is proceeding on track, and continuing to build capital by earning it," Chief Financial Officer Howard Atkins said in a statement.