MarketView for May 12

 

Summary 

  

Share prices turned in their best three-day performance record in 10 months on Wednesday, lifted by technology and industrial shares after Spain unveiled an austerity plan that reassured investors Europe was addressing its fiscal ills. However, keep in mind that the markets are still in a recovery mode. If we were working from a base of say 14,000 on the Dow Jones industrial average, I might be a bit more impressed.

 

Nonetheless, the fact that Spain said it will reduce civil service pay and cut public-sector jobs, just a few days after EU finance ministers approved a 750 billion euro ($1 trillion) bailout package to stem the debt crisis, does make it appear that both our domestic economy and that of the world are returning to a more normal pattern.

 

Technology shares posted the greatest gains as IBM forecast roughly doubling its profit by 2015 a day after Intel indicated that it expects annual earnings growth to double over the next few years. IBM ended the day up 4.6 percent to $132.68 and Intel rose 3.6 percent to $23.09. Another key Dow component, DuPont, was 4.2 percent to close at $39.26.

 

Baidu rose 9.6 percent to $78.30 as investors snapped up the Chinese Internet search giant's stock following a 10-for-1 share split.

 

On the earnings front, Macy's turned in a first-quarter profit and affirmed its outlook, while at the same time making the point that it was "premature" to raise the forecast again for now, "given the macro-economic uncertainty." Macy’s shares ended the day up 3.4 percent to close at $24.70.

 

On the downside, Walt Disney closed down 1.8 percent to $35.13, a day after second-quarter earnings exceeded expectations, but with disappointing results at its television network division. Morgan Stanley was also down, closing with a loss of 2 percent at $27.80 after the Wall Street Journal reported that the SEC is probing whether it misled investors about mortgage derivative products it helped create.

 

Apple rose 2.2 percent to $262.09, shrugging off a patent infringement case filed by HTC Corp, a manufacturer of phones based on Google's Android software, that will ask for relief by banning sales of the iPhone, iPad and iPod.

 

The materials sector did well on Wednesday as the price of gold surged to a second straight record high of $1,249.20 per ounce.

 

On the economic front, the trade deficit widened in March to its highest level in more than a year as both imports and exports rose in response to improved domestic and foreign demand.

 

It Was the 19^th Consecutive Monthly Deficit

 

According to the Treasury Department, the Government chalked up its 19^th consecutive monthly deficit, this time of $82.69 billion for the month of April, or nearly four times the $20.91 billion shortfall registered in April 2009. It was also the largest on record for that month, the Treasury Department said.

 

According to the Department officials, there was a surplus during April in 43 out of the past 56 years. For the first seven months of fiscal 2010, which ends September 30, the cumulative budget deficit totals $799.68 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

 

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009. It was a record level of outlays for an April. Department officials noted there were five Fridays in April this year, which helped account for higher outlays since most tax refunds are issued on that day.

 

However, for the first seven months of the fiscal year, outlays fell to $1.99 trillion from $2.06 trillion in the comparable period of fiscal 2009, partly because of repayments by banks of bailout funds they received during the financial crisis.

 

Receipts in April, mostly from income taxes, were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009. Receipts from individuals, who faced an April 15 filing deadline for paying 2009 taxes, fell to $107.31 billion from $137.67 billion in April 2009.

 

The U.S. full-year deficit this year is projected at $1.5 trillion on top of a $1.4 trillion shortfall last year.

 

Second Record High for Gold

 

For reasons that for many, myself included, are mystifying when it comes to understanding why from the viewpoint of hard core investment logic, gold once again climbed to a record high on Wednesday for the second consecutive day as investors bet that a proposed $1 trillion European rescue will either fail to prevent a worsening euro zone crisis or will stoke inflation.

 

Chalking up its largest two-day gain since November, gold prices rose 1 percent to near $1,250 an ounce despite an expansion by investors in their desire for increased risk that sent the stock market higher. At the same time, an increase in the price of platinum and palladium by more than 2 percent, suggested that other factors were extending gold's week-long rally initially triggered by a flight to safety.

 

Demand for gold was evident across the spectrum, with retail sales of coins and bullion surging, exchange-traded gold funds drawing a net flow of over $2.3 billion and open interest in gold futures nearing a record amid the European crisis and after last Thursday's tumult in stock markets.

 

For most traders, the focus remained squarely on Europe's efforts to stop the Greek debt crisis from spreading to other countries, although some also said that options-related buying and technical momentum had contributed to the gains.

 

Spot gold hit $1,248.15 an ounce, a gain of nearly 20 percent since early February. It was at $1,245.25 an ounce, up from $1,232.05 on Tuesday. Prices have risen 3.5 percent in two days. Gold futures settled up $22.80, or 1.9 percent, at $1,243.10 an ounce.

 

Barclays Capital said that the two key drivers of gold are concerns about the stability of the global financial system and the risk of currency debasement or inflation.

 

"While the first of these concerns may have been eased by the massive EU/IMF rescue plan, the second has arguably been heightened by it," Barclays said.

 

Gold priced in euros extended its record high to 988.31 euros an ounce on Wednesday, and has risen 28 percent since early February, outstripping dollar gold's climb.

 

Investors and traders alike think the scale of Greece's fiscal problems could make it tempting for the country to default, despite the package, which could start a run on the debt of countries such as Spain, Portugal and Italy.

 

A range of investors scrambled for gold exposure over the past week, with open interest in COMEX gold futures jumping nearly 6 percent in the past week to 583,504 lots on Tuesday, less than 10,000 contracts below the January 2008 record.

 

Smaller-scale investors piled into the world's largest gold-backed exchange-traded fund (ETF), the SPDR Gold Trust, which said its holdings remained at a record high of 1,192.150 tons as of May 11, having surged last week. Gold ETFs, including the popular GLD, have seen more than $2.3 billion in net inflows in the six trading days ended Monday.

 

Sales of smaller gold investment products like coins and bars also jumped. The Austrian Mint, which produces the popular Philharmonic gold coin, said it sold more gold in the two weeks from April 26 than in the entire first quarter, while the U.S. Mint is selling coins at twice its normal rate.

 

Spot silver rose to $19.68 an ounce, its highest since March 2008. It was last at $19.64 from $19.28 late on Tuesday. The world's largest silver-backed exchange-traded fund, the iShares Silver Trust, said its holdings rose to 9,115.15 tons as of May 11, up 27.43 tons from the previous business day. Platinum was at $1,740.50 an ounce from $1,702 and palladium at $543.50 from $532 on Tuesday.

 

Microsoft Launches New Version of Office

 

Microsoft launched an updated version of its Office software on Wednesday, aiming to keep its grip on the hugely profitable business application market while countering the challenge of free online alternatives from Google Inc.

 

The company is upgrading its popular Word, Excel, Outlook and PowerPoint applications and rolling out its own online versions to keep up with the new class of mobile, Web-connected users that has emerged since the last upgrade in 2006.

 

Microsoft announced several improvements, such as editing photos in Word, using video in PowerPoint, collaborating on documents and connecting email contacts to Facebook information. However, the largest change is Microsoft's move into the "cloud" -- allowing users to manipulate documents stored on remote servers from anywhere – a capability for which Google has been setting the pace.

 

Corporate buyers of Office will have immediate access to Microsoft Office Web Apps -- online versions of Word, PowerPoint and Excel programs for Internet-connected phones and PCs -- but will pay more to use them.

 

Ordinary consumers will be able to use online versions free from June via Microsoft's Windows Live service, which the company is hoping will entice customers to pay for the full software, which will cost between $100 and $500, depending on the level of features.

 

The online strategy marks a major shift for the Windows franchise -- with 500 million users according to Microsoft -- which has so far relied on software installed on PCs. At the same time, the move brings Microsoft into direct competition with Google Docs, stripped-down alternatives to Microsoft's core programs, which are available over the Internet with no need to download software. They are free for personal users and $50-per-user per year for companies. Google says it has picked up 25 million users since launching Docs almost four years ago.

 

Microsoft's business division, which gets 90 percent of its sales from Office, averages around $2.8 billion profit per quarter. That is 47 percent of Microsoft's total profit so far this fiscal year, second only to Microsoft's core Windows operating system franchise.

 

According to the latest data from tech research firm Forrester, 81 percent of companies are running Office 2007, compared with only 4 percent using Google's online equivalent. A Forrester poll indicates almost a third of existing Office users plan to upgrade to Office 2010 within 12 months.