MarketView for November 13

Summary 

 

Oh, how sweet it was as stock prices rallied on Thursday sending all three major equity indexes up over 6 percent. Furthermore, the day’s gains took place after the S&P 500 and the Nasdaq had hit new multiyear lows earlier in the session. However, the decline was more than bargain hunters could resist and they rushed back into the market to scoop up beaten-down shares. It seems that the desire to buy stocks at cheap prices offset worries about a sharper economic downturn with lower consumer spending.

 

After three days of selling that wiped out about $1 trillion in shareholder value, many investors, though nervous about the economy, appeared convinced the market had priced in enough bad news. So when the Standard & Poor's 500 index managed to recover from multiyear trading lows, the temptation was too great and they came hurtling back into the market.

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There were some thoughts expressed on the Street that investors were positioning themselves ahead of a meeting of Group of 20 leaders in Washington. The meeting could bring decisions on mending the troubled global financial system.

 

Stocks sold off early in the day after the Labor Department said the number of newly laid-off individuals seeking unemployment benefits jumped last week to the highest level since right after the Sept. 11, 2001 terrorist attacks. There was also more evidence of a severe pullback in consumer spending when Wal-Mart trimmed expectations for full-year earnings, and Intel late Wednesday cut more than $1 billion from its sales forecast.

 

But then a Treasury auction of 30-year bonds saw some decent demand from both domestic and foreign buyers, which in turn alleviated some fears about the government having a hard time financing its costly bailout. To top it off, as stocks rallied, so did oil prices, sending shares of energy companies higher. The largest gainer among the Dow industrials was Chevron, which rose $8.43, or 12.5 percent, to  close at $75.71.

 

Do not become too comfortable because it is likely that the markets will retest the multiyear lows it reached last month. Furthermore, the volatility that has become an almost daily occurrence is likely to remain with us for some time to come as Wall Street tries to rebuild from October's devastating losses, while it tries at the same time to gauge the severity of the economy's downturn. During past recoveries from bear markets, a great deal of turbulence in the market became commonplace, so there is a high probability that Thursday's gains will get erased if more gloomy reports pour in.

 

Jobless Claims at 7 Year High

 

According to the latest report by the Labor Department, the number of newly laid-off individuals seeking unemployment benefits has jumped to a level not seen since just after the Sept. 11, 2001. According to the Department, jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That nearly matched the 517,000 claims reported seven years ago, and is only the second time since 1992 that claims have topped 500,000. Initial claims from two weeks ago were revised upward Thursday by 3,000 to 484,000.

 

The increase puts jobless claims at levels similar to the recession of the early 1990s. The four-week average of claims, which smoothes out fluctuations, increased to 491,000, the highest in more than 17 years. Jobless claims above 400,000 are considered a sign of recession. A year ago, claims stood at 338,000.

 

The number of individuals continuing to seek unemployment benefits rose to 3.9 million, above analysts' estimates of 3.85 million. That's the highest total since January 1983, though the labor market has grown by about half since then. The continuing claims tally is for the week ending Nov. 1, one week behind the initial claims report.

 

Recipients stop receiving benefits when they find another job or their benefits run out. The increase in continuing claims indicates that laid-off workers are taking longer to find a new job.

Economists consider jobless claims a timely, if volatile, indication of how rapidly companies are laying off workers. Employees who quit or are fired for cause are not eligible for benefits.

 

Initial claims have been driven higher in the past several months by a slowing economy hit by the financial crisis, and cutbacks in consumer and business spending. Claims also rose in late September due to the impact of Hurricanes Ike and Gustav, but the department said last week that the impact of the hurricanes has passed.

 

The rise in claims has been mirrored by an increase in the unemployment rate. Unemployment reached a 14-year high of 6.5 percent in October, the Labor Department said last week, as the ranks of the unemployed swelled to 10.1 million.

 

Several companies recently have announced mass layoffs, including Morgan Stanley, General Motors, Ford and Fidelity Investments.

 

Dollar Lower

 

The dollar fell against the euro on Thursday after a more stable performance on Wall Street helped ease extreme risk aversion and reduced demand for safety. At the same time, the yen was down against the dollar, the euro and higher-yielding currencies, reversing sharp gains in the previous session. Renewed speculation of intervention by Japanese authorities to stem the currency's rise added to pressure.

 

Risk aversion made the dollar briefly trim its losses after U.S. government data showed initial jobless claims rose last week to the highest level since the weeks following the September 11, 2001 attacks. Euro gains were also partly driven by its rise to a record high against sterling. Sterling was down 0.9 percent against the dollar at $1.4800, having earlier fallen to a 6-1/2 year low at $1.4767. The pound came under pressure after the Bank of England said on Wednesday that the British economy would shrink sharply next year, bolstering expectations of further rate cuts.

 

Despite Thursday's pullback, the dollar and the yen should remain strong as persistent wariness over the global economic outlook will likely continue to drive investors away from riskier assets and into the safety of the two currencies.

 

Recession became a reality in Germany, where gross domestic product contracted by 0.5 percent in the third quarter, tipping Europe's biggest economy into recession for the first time in five years.

 

The Organization for Economic Cooperation cut its economic forecasts for the United States, Japan and euro zone, and said the 30-nation OECD area appeared to have entered recession. The projections were released ahead of an emergency meeting in Washington this weekend of the Group of 20 developed and developing countries.

 

Risk aversion was heightened on Wednesday after the Treasury Department backed away from using its $700 billion financial bailout to buy bad mortgages, adding to fears about the U.S. and global economy.

 

Wal-Mart Continues To Do Well

 

Wal-Mart reported a slightly better-than-expected 10 percent increase in quarterly earnings on Thursday as its customers scoured its aisles for discounts on groceries and medicine in the face of deteriorating economic conditions.

 

However, the retail behemoth forecasted lower both fourth-quarter earnings and full-year numbers in the face of pressure from the stronger U.S. dollar, which lowers the value of its international sales.

 

Wal-Mart's rising profits stand in stark contrast to competitors, whose businesses have been upended by a sharp decline in consumer spending. This week, consumer electronics retailer Circuit City Stores Inc filed for bankruptcy, while Best Buy Co Inc slashed its profit forecast, citing "seismic changes in consumer behavior."

 

Wal-Mart's Chief Executive Officer Lee Scott said the retailer is gaining momentum and he is "optimistic" despite entering what some economists are forecasting will be the worst holiday sales season in nearly 20 years. "It is our time," he said on a recorded call.

 

Wal-Mart reported net income of $3.14 billion, or 80 cents per share, for the third quarter that ended October 31, up from $2.86 billion, or 70 cents per share, a year earlier. The company said earnings from continuing operations were 77 cents per share. It had previously forecast 73 cents to 76 cents.

 

Wal-Mart's sales have outpaced competitors this year as cautious consumers adopt a thrifty attitude and try to stretch their dollars by shopping in its stores, especially for necessities like groceries and toiletries.

 

Wal-Mart has also been lowering prices, sprucing up stores and improving its merchandise selection to win shoppers during the downturn.

 

Quarterly U.S. sales, which include the namesake stores and its Sam's Club warehouse division, rose more than 6 percent to $72.78 billion. International sales rose 11.2 percent to $24.86 billion.

 

Sales at U.S. stores open at least a year rose 3 percent overall, with increases of 2.7 percent at the company's namesake stores and 4.5 percent at the Sam's Club division. Eduardo Castro-Wright, head of Wal-Mart's U.S. operations, said consumers were being more cautious with discretionary purchases of electronics.

 

Wal-Mart forecast fourth-quarter earnings per share of $1.03 to $1.07 from continuing operations on domestic same-store sales growth of 1 to 3 percent.

 

"The rapid changes in currency exchange rates during the last few weeks are projected to negatively affect this year's fourth-quarter results by approximately 6 cents per share," Chief Financial Officer Tom Schoewe said in a statement.

 

Wal-Mart operates stores in foreign markets including Canada, China, Mexico, Japan and Britain. A weaker dollar boosts profits of U.S. multinational companies when their foreign revenue is converted into greenbacks. But the dollar has risen against an index of major currencies, eliminating some of that benefit.

 

For the full year, Wal-Mart now expects earnings per share of $3.42 to $3.46 from continuing operations, compared with a previous view of $3.43 to $3.50.

  

GE To Keep Dividend

 

General Electric confirmed on Thursday that it planned to pay a dividend through 2009. In a statement posted on GEReports.com, one of its websites, the company said that its plan to maintain the 31-cents-per-share dividend through the end of 2009 was "unchanged."

 

"GE expects industrial cash flow to be greater than the amount needed to fund the dividend in 2009," the company said, meaning that growth in that unit would offset what it expects to be continued weakness at its hefty finance arm.

 

The company’s shares have been beaten up lately on market rumors that the company was considering cutting its dividend. Actually, Wall Street’s analysts would have been surprised had the company cut its dividend.