MarketView for May 18

Summary 

Wall Street snapped its three-day losing streak on Wednesday thanks to a rebound in commodity prices and Dell's strong earnings, but Wall Street still faces its share of headwinds. Nonetheless, Wednesday's bounce gave some respite to selling that has driven the S&P 500 down nearly 2 percent this month as soft economic data has put investors on the defensive. About 6.5 billion shares were traded on the major exchanges, as compared with an average of about 8.4 billion last year.

The stock market has slipped in tandem with sharp declines in commodities that have prompted investors to pare their riskiest bets. Some believe it points to a sustained correction, but Wednesday's action shows fund managers are keen to buy on dips. Crude oil futures rose more than 3 percent to settle back above $100 a barrel as crude inventories unexpectedly fell. Chevron ended the day up 2.4 percent to close at $102.86, giving the Dow one of its biggest lifts. Exxon was up 1.7 percent to close at $81.74. Freeport-McMoRan Copper & Gold ended the day up 3.8 percent at $48.62.

Dell's shares were up 5.4 percent to $16.75 after company reported profits late on Tuesday that exceeded expectations. The company also raised its fiscal 2012 outlook for operating income. Analog Devices posted quarterly earnings that exceeded market expectations, sending its shares up 5.9 percent to $42.60. The Philadelphia semiconductor index .SOX rose 1.9 percent.

Helping transportation stocks, CSX said it is targeting double-digit growth in earnings per share and operating income through 2015, expecting growth that outpaces the economy. The transportation company’s shares ended the day up 2.2 percent to close at $75.44.

Most Federal Reserve officials prefer to raise benchmark interest rates before selling assets when the time comes to tighten policy, minutes of their April meeting showed on Wednesday.

Staples shares fell 15.4 percent to $16.63 and ranked as the S&P 500's biggest percentage loser after the office supply retailer slashed its full-year outlook on weak demand and higher costs.

Minutes of Fed Meeting Say Raise Rates First

Most Federal Reserve officials prefer to raise interest rates before selling assets when the time comes to tighten policy, restoring their main tool for managing the economy, according to minutes of the last Fed meeting in April.

The minutes, released on Wednesday, also showed worries about inflation rising among Fed officials last month before a big surge in oil prices subsided. During an extensive discussion of how the central bank might pull back its massive support for the world's largest economy, officials indicated unloading the mortgage debt the Fed piled on during the financial crisis would be a priority in eventually shrinking the Fed's $2.7 trillion balance sheet.

"A majority of participants preferred that sales of (mortgage) agency securities come after the first increase in the (Fed's) target for short-term interest rates," the Fed said. "Many of those participants also expressed a preference that the sales proceed relatively gradually, returning (Fed holdings) to all Treasury securities over perhaps five years," the minutes said.

Policymakers felt that holding off on asset sales would allow them to get their target for overnight rates up from its current level near zero sooner than otherwise, the minutes showed. Fed officials have long felt discomfort that their main policy tool was essentially exhausted.

The Fed will eventually have to face an unwinding of its unprecedented stimulus and the minutes underscored that there would have to be a big threat to the recovery to spur a fresh round of asset purchases. At the same time, however, the minutes stressed that the April discussion did not indicate the Fed was ready to start tightening policy any time soon.

While policymakers generally believed a recent rise in inflation would be transitory, many had become more concerned about upside price risks. A few felt the Fed should stand ready to tighten policy sooner than had been expected. The suggestion the day of the Fed's first tightening move could come sooner than thought caused long-term bond prices to slip and strengthened the dollar against the euro and the yen.

Policymakers worried that if oil prices continued to rise it could spill over into a wider range of prices. They also worried a self-fulfilling inflationary mind-set could take hold. Oil prices have dropped sharply since the meeting.

When the Fed concluded its two-day meeting on April 27, it signaled it was in no hurry to reduce its economic supports. "It is a relatively slow recovery," Fed Chairman Ben Bernanke told reporters just hours after the meeting ended. "The combination of high unemployment, high gas prices and high foreclosure rates is a terrible combination. A lot of people are having a tough time," he said.

Some officials since the meeting have called for the Fed to quickly reverse course from its ultra-easy money policies. Others have made clear depressed jobs and housing markets continue to justify loose monetary policy.

Policymakers have said that with core inflation measures not far from historical lows, there is plenty of room to boost growth without igniting a broader pick-up in prices. However, the Fed says it is watching closely to make sure higher gasoline and food prices do not spur a troubling rise in inflation expectations.

Linkedln Prices at $45

LinkedIn sold 7.84 million shares for $45 each, a higher price than the company was expecting even earlier this week. The strong investor demand for the offering bodes well for other social networking companies expected to go public in the coming months, including Facebook, Groupon, Twitter and Zynga. While the companies have significantly different business models, they each tap social networks and the valuations for each are rising sharply.

LinkedIn is a nine-year-old company that as of Wednesday is worth $4.25 billion. Facebook, which is expected to go public in April 2012, was valued at $70 billion in recent sales of the company's private shares, up from $50 billion at the beginning of the year.

To proponents of the value of connecting people online, the high market values of these companies may make sense. LinkedIn, for example, is an excellent way for companies to reach prospective customers, one venture capitalist said.

Groupon, which brings people together for deals, has had talks with bankers about an IPO that could value it at $15 billion to $20 billion.

Yet, even with all of the hype, there has not really been a test of how hungry public investors are for these stocks. LinkedIn is that test, and evidently demand is strong. Investors were willing to buy LinkedIn shares despite that fact that they come with fewer voting rights than the shares held by LinkedIn founders, managers and staff.

The company's shares were sold at about 17.5 times the company's 2010 sales, compared with Google's valuation of about six times.

One of LinkedIn's biggest risks may be its bet on its future growth -- combined with an admission that it does not expect to be profitable in 2011 on a (GAAP) basis. After two years of losses, LinkedIn made money for its common stockholders in 2010 -- but then it was back to breaking even in the first quarter of 2011.

In the risk factors section of its prospectus, LinkedIn said the rest of the year could be the same, or worse. "Our philosophy is to continue to invest for future growth, and as a result we do not expect to be profitable on a GAAP basis in 2011," the company said. LinkedIn added that it expects its revenue growth rate to decline over time and its costs to increase.

The risk factors section of any prospectus is designed to encapsulate worst-case scenarios. However, many investors would not likely be pleased with a profitable company flat lining or swinging to a loss in its first year as a publicly traded stock.

Another peculiar fact about LinkedIn is that it's not quite the Internet company that most consider it to be. Most of the biggest social networking sites mainly make their money through online advertising or Internet services.

LinkedIn is an online platform but actually makes more money through so-called field sales, or a sales force directly soliciting customers, agencies and resellers. In 2010, fifty-six percent of LinkedIn's net revenue came from field sales, while 44 percent came from online sales.

Underwriters on the IPO were led by Morgan Stanley, Bank of America Merrill Lynch and JPMorgan. The company's shares are expected to begin trading on the New York Stock Exchange on Thursday under the symbol "LNKD."