MarketView for May 14

 

 

Summary 

 

Stock prices moved higher on Thursday as financial and technology shares took the lead in the day’s rally with Apple among the leaders on the Nasdaq, rising 2.9 percent close at to $122.95. However, for those looking at the numbers, trading volume was light, a possible indication of a lack of broad conviction.

 

The gains in financials and technology were striking; coming shortly after some analysts said the very same sectors would likely lead the market lower, having underpinned its run-up since March.

 

Shares of semiconductor companies got a lift after Bank of America-Merrill Lynch raised its rating and price target on shares of Novellus Systems, citing cost cutting and attractive valuations. Novellus, which provides equipment to the semiconductor industry, rose 7.1 percent to $16.88.

 

Financial shares gained, including JPMorgan, up 4.4 percent to $35.54, and Bank of America, up 2.7 percent to $11.31. Bank stocks have been a large part of the recent rally on the idea that the sector had seen the worst of the credit crisis.

 

The surge in share prices over the past two months has made investors who missed the rally anxious to get back into stocks. Defensive stocks, such as consumer staples and healthcare, also gave a lift, underscoring some of the lingering worry about the economy following a report that showed a jump in weekly jobless claims. Coca-Cola was among the largest gainers on the Dow Jones industrial average, closing up 2.9 percent at $44.90.  Merck added 1.5 percent to close at $26.05.

 

Data showed the number of U.S. workers filing new claims for jobless benefits rose more than expected in the latest week, pushed up by plant shutdowns related to Chrysler's bankruptcy.

The report came on the heels of Wednesday's figures showing consumers were still reluctant to spend and reviving worries over the length of the recession after optimism that the downturn was showing signs of abating.

 

United Technologies was among the day’s top performers, up 1.8 percent at $51.51. The world's largest maker of elevators and air conditioners said order rates had stabilized and it was starting to see early signs of recovery in China.

 

Wal-Mart reported flat first-quarter earnings in line with Street estimates. Its chief executive said overall business at the world's largest retailer was stable, adding that until unemployment eased, it remained cautiously optimistic about a timetable for the economic recovery. Wal-Mart shares were off 1.9 percent to $49.10.

 

Producer Prices Rise

 

The producer price index, released on Thursday, indicated that producer prices rose faster than expected in April, driven by a surge in food costs. According to the report released by the Labor Department, the index was up 0.3 percent after declining 1.2 percent in March. Food prices rose 1.5 percent in April, the largest increase since January 2008. Food costs rose on a record jump in egg prices, along with soaring prices for vegetables and meat.

 

If you exclude food and energy prices, the so-called core index increased 0.1 percent. However, compared to the same period last year, prices received by producers tumbled 3.7 percent, the biggest decline since January 1950. The core PPI was unchanged in March. Compared to the same period a year ago, core producer prices were up 3.4 percent.

 

Energy prices fell 0.1 percent in April versus a 5.5 percent decline in March. Gasoline prices edged up 2.6 percent in April and residential natural gas fell 6.2 percent.

 

Crude Higher

 

The price of crude oil rose again on Thursday, tracking a rebound on Wall Street, though a gloomy demand forecast from the International Energy Agency (IEA) limited gains. Domestic sweet crude for June delivery rose 60 cents to settle at $58.62 a barrel while London Brent for June delivery, which expired at the close of trade, fell 65 cents to $56.69 per barrel.

 

Oil prices have been tracking equities markets in recent months as traders look to stocks for signs of an economic recovery that could lift ailing world fuel demand. Gains were limited by a report from Paris-based IEA, adviser to 28 industrialized nations on energy policy, forecasting the steepest decline in world oil demand this year since 1981.

 

It said the rise in oil prices to a six-month high above $60 this week was due to sentiment rather than fundamentals. The U.S. Energy Information Administration and OPEC also cut their forecasts for energy demand in recent days.

 

The Organization of the Petroleum Exporting Countries (OPEC), which has announced 4.2 million bpd of production cuts since September in a bid to tighten the market, also pumped more oil last month than in March, the IEA said.

 

OPEC members' compliance with production quotas fell to 78 percent in April from 83 percent a month earlier. The producer group next meets on May 28 and is unlikely to alter production limits if prices remain strong, Iraq's oil minister said Thursday.

 

Unrest in Nigeria, Africa's biggest oil producer, provided additional support for oil prices. Nigeria's main militant group on Wednesday ordered oil workers in Africa's biggest oil producer to leave the delta within 24 hours following heavy clashes between MEND and security forces.

 

The Movement for the Emancipation of the Niger Delta (MEND) on Thursday gave oil companies an additional 48 hours to evacuate their staff, but threatened to attack helicopters and planes after the deadline.

 

A security source working in the oil industry said it was taking the threat seriously, but there were no plans to evacuate staff.

 

Auto Layoffs Send Jobless Claims Higher

 

New jobless claims rose more than expected last week due partly to an increase in layoffs by the automobile industry, while the number of people continuing to receive unemployment benefits set a record for the 15th straight week.

 

The Labor Department said Thursday the number of new claims rose to a seasonally adjusted 637,000, from a revised 605,000 the previous week. The increase comes after initial claims dropped in four of the previous five weeks, which raised hopes that the wave of layoffs announced earlier this year has crested and that the recession was nearing a bottom.

 

A department analyst said most of the increase was due to auto layoffs. Economists estimate Chrysler LLC has laid off 27,000 workers in the wake of its April 30 bankruptcy filing. General Motors Corp. has said it will temporarily shut 13 factories beginning later this month through July, potentially affecting 25,000 workers.

 

Still, many economists expect the downward trend in jobless claims to return once the impact of the auto industry's job cuts has passed.

 

In another sign of labor market weakness, the tally of people continuing to receive benefits increased to 6.56 million from 6.36 million, setting a record for the 15th straight week and worse than analysts expected. The continuing claims data lags initial claims by one week. The large number of people on the jobless benefit rolls is a sign that unemployed workers are having difficulty finding new positions.

 

New applications for jobless benefits have declined since reaching 674,000 in late March, the highest level in the current recession. But claims remain elevated. Weekly initial claims were 375,000 a year ago.

 

The four-week average of claims, which smoothes out volatility, hit 630,500 claims after declining for four consecutive weeks. Nonetheless, the average remains nearly 30,000 below its high in early April.

 

There have been other signs the pace of job cuts is moderating, though still brutal. Employers eliminated 539,000 jobs in April, the fewest in six months and below the average of 700,000 in the first quarter of this year.

 

Still, more than 5.7 million jobs have been lost since the recession began in December 2007. The jobless rate rose to 8.9 percent in April, the Labor Department said last week. Many economists expect unemployment to hit 10 percent by year's end.

 

More job cuts have been announced recently. Steel giant ArcelorMittal said Wednesday it will eliminate nearly 1,000 positions at an Indiana steel plant in July, while DuPont said last week it will cut 2,000 jobs.

 

Among the states, Illinois reported the largest increase in initial claims, which it attributed to layoffs in the construction and manufacturing industries. The next biggest increases were in Kansas, Puerto Rico, Indiana and Ohio.

 

New York reported the largest drop in claims of 13,386, which it said was due to fewer layoffs in the transportation and service industries. The next largest drops were in Michigan, North Carolina, Massachusetts and Connecticut. The state data is for the week ending May 2, one week behind the initial claims data.

 

Paulson Gave Banks No Choice

 

Documents made public on Wednesday confirm former U.S. Treasury Secretary Henry Paulson gave nine major banks no choice but to allow the government to take equity stakes in them as the Bush administration moved to address turmoil in the financial industry.

 

The documents, obtained by the public interest group Judicial Watch under a Freedom of Information Act request, include "talking points" used by Paulson at the October 13, 2008, meeting with the banks' CEOs in Washington.

 

The details of the meeting had been widely reported at the time, but the documents offer a first-hand account of what transpired behind closed-doors.

 

"We don't believe it is tenable to opt out because doing so would leave you vulnerable and exposed. If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance," the document said, citing Paulson talking points.

 

Regulators recently completed stress tests of the U.S.'s 19 largest banks and have determined that 10 of them need to raise a combined $74.6 billion to provide a buffer against potential losses should the economy continue to weaken. The Treasury, however, has said it would welcome the return of taxpayers' funds from the strongest banks as long as it didn't weaken the sector as a whole.

 

According to the documents released by Judicial Watch, Treasury Secretary Tim Geithner, FDIC Chair Sheila Bair and Fed Chairman Ben Bernanke co-hosted the October meeting with Paulson.

 

Suggested edits of the "talking points" by Geithner, then-New York Fed president, were withheld by the Treasury Department, Judicial Watch said.

 

The CEOs wrote by hand the names of their institution and multibillion dollar amounts of "preferred shares" to be issued to the government, the documents show.

 

"These documents show our government exercising unrestrained power over the private sector," Judicial Watch president Tom Fitton said in a statement.

 

The CEOs present were Vikram Pandit of Citigroup, Dimon of JP Morgan, Richard Kovacevich of Wells Fargo, John Thain of Merrill Lynch, John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs, Robert Kelly of Bank of New York Mellon Corp, and Ronald Logue of State Street Bank.

 

The documents include an email showing a public relations effort, run in part out of the Bush White House, to tamp down public concerns about nationalizing the banks, Judicial Watch said. The Fed, the Treasury Department and the FDIC called the bank rescue "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

 

Change Is Coming...On Wall Street

 

The Obama administration's plan to reshape the opaque world of derivatives trading, unveiled on Wednesday, is only a preview of sweeping financial reform proposals that may be announced as soon as next week. The White House and Treasury, responding to the global financial crisis, have firm ideas about tightening oversight of hedge funds, streamlining bank regulation, shaking up executive pay standards and protecting consumers.

 

But two key components of the administration's approach -- policing "systemic risk" and winding down troubled financial firms -- are dividing senior officials and lawmakers, which will likely cause delays in getting broad reforms enacted.

 

Treasury Secretary Timothy Geithner, a chief architect, acknowledged on Wednesday the proposals might not sit well with everyone. "It's not going to be comfortable for everybody but it's important to do," he told a group of bankers.

 

The regulatory reform drive comes as economies around the globe continue to reel from a credit market paralysis triggered by a sudden plunge in the value of exotic securities created during the U.S. real estate boom. U.S. President Barack Obama has vowed to pursue changes to prevent another such crisis.

 

His administration's approach centers on a powerful, new "systemic risk" regulator, likely to be the U.S. Federal Reserve, backed by a council of regulators, including the Federal Deposit Insurance Corp, which will also get new powers, according to sources briefed on the plan.

 

That compromise has emerged after a debate between advocates of centralized financial supervision and skeptics who fear making the Fed too powerful, especially in view of its shaky record in handling troubled insurer AIG.

 

The administration looks poised to put the FDIC at the center of newly streamlined bank regulations. Other agencies' rulebooks will be rewritten to conform with FDIC standards, preventing banks from shopping around for a lax regulator. However, other bank overseers, such as the Comptroller of the Currency and the Office of Thrift Supervision, for now, will not be slated for shutdown, the sources said.

 

Democratic lawmakers and the White House want to enact reforms by the year-end, but the deadline looks less realistic as the proposal expands. In addition, many of the proposals involve sensitive structural changes that threaten existing bureaucracies and cross jurisdictional lines among congressional committees.

 

The U.S. House of Representatives Financial Services Committee is expected to hold hearings next month, with an eye toward passing legislation before an August recess, said congressional aides. Deliberations in the Senate will take longer. Democrats have much less control there, needing 60 votes to advance legislation, a challenge that will likely present the administration with its chief obstacle, aides said.

 

One key measure will be to empower the government to seize and resolve the problems of troubled non-bank financial firms so big that their collapse could threaten the overall economy. The FDIC can do this now only for banks.

 

Treasury has floated the idea of giving this "resolution authority" to the FDIC. But its chairman, Sheila Bair, has her own ideas. The FDIC has talked with lawmakers about speedy, separate legislation giving it power to wind down troubled bank holding companies, not a broader range of financial firms.

 

Comptroller of the Currency John Dugan has said he's not sure the FDIC is properly equipped to take on the task of dismantling complex financial conglomerates.

 

The administration is also likely to propose that hedge funds above a certain size must register with the government. The largest may face disclosure and oversight requirements, but likely not capital and leverage rules, the sources said.

 

Executive pay at financial firms is another issue that may be tackled by the administration's proposals, possibly in the context of discouraging excessive risk-taking. However,  the administration does not want to micromanage the development of financial products, possibly scuttling proposals for a Financial Products Safety Commission, the sources said.

 

Despite the sweeping nature of the plans, some initiatives, such as an overhaul of mortgage giants Fannie Mae and Freddie Mac will be tackled later. An overhaul of bank capital standards will also likely be kicked further down the road.