MarketView for November 3

Summary  

The S&P 500 and the Nasdaq rose slightly on Tuesday as news of Warren Buffett’s acquisition of a major railroad helped sentiment. Nonetheless, the Dow Jones industrial average edged lower on caution before a Federal Reserve statement on interest rates and the economy. Morgan Stanley's downgrade of semiconductor stocks also limited a broad advance.

The Dow Jones transportation average rose 5.3 percent as Warren Buffett's Berkshire Hathaway company agreed to buy Burlington Northern Santa Fe in a deal that values the railroad company at $34 billion, Berkshire's biggest deal ever. Burlington shares jumped 27.5 percent to $97.

The Federal Open Market Committee began a two-day meeting on Tuesday. While investors expect the Fed to leave rates close to zero, they are nervous to hear what the officials say about the economic outlook.

Semiconductors ranked among the major decliners after Morgan Stanley downgraded the sector to "cautious" from "attractive," and cut its view on Intel, writing that inventories were beginning to creep up in the sector. Shares of Intel ended the day down 2.7 percent at $18.50. Even so, the Nasdaq managed to eke out a gain as bottom feedeers searched for bargains among tech shares that have suffered losses recently. The Nasdaq has been down five of the past eight sessions.

In other deal news, Black & Decker rose 31 percent to $62, a day after Stanley Works said it struck a deal to buy the company. Stanley shares rose 10.1 percent to $49.69.

Oil futures settled up $1.47, or 1.88 percent per barrel at $79.60. ConocoPhillips' shares closed up 1.5 percent at $50.75.

Data showed new factory orders rose more than expected in September but had little impact on the broader market.

Factory Orders Add To Recovery aspiration

The Commerce Department reported on Tuesday that factory orders rose a stronger-than-expected 0.9 percent in September, and inventories continued to shrink, bolstering prospects for a sustained economic recovery. It was the fifth month out of the past six that manufacturers saw orders rise, the Department said.

Factories cut their stocks by 1 percent in September, the 13th straight month of declines in manufacturing inventories. It is the longest streak of falling inventories since a 15-month string that began in February 2001. The draw-down is good news because it makes it more likely that any future spending will drive new output.

The closely watched inventory-to-sales ratio moved down to 1.36 from 1.38 in August. It was the lowest inventory-to-sales ratio since October of last year. The factory orders report also showed an upwardly revised gain in orders for durable goods -- long-lasting items that account for nearly half of overall orders -- to 1.4 percent from the previously reported 1 percent increase. Orders for non-durable items rose 0.6 percent in September, building on the 0.9 percent rise seen in August.

The factory data followed a week after the government reported the U.S. economy grew at a 3.5 percent annual rate in the third quarter, snapping four straight quarters of contraction and signaling an end to the nation's deepest recession since the Great Depression.

Worries about the sustainability of the stimulus-led recovery remain, however, as concerns over rising unemployment continue to take a toll on consumer spending. Even Tuesday's data on factory orders and inventories raised questions regarding the strength of the recovery.

Because the factory orders report showed a sharper cut in inventories than the Commerce Department had reported last week, analysts said it implied third-quarter economic growth was weaker than the government's initial estimate.

Based on Tuesday's factory data, JPMorgan Securities Global Economic Research said it cut its estimate for third-quarter growth to 3.1 percent.

Concerns about a fragile recovery will likely inspire the Federal Reserve to move cautiously at its two-day policy meeting that began on Tuesday afternoon. The Fed is expected to maintain its commitment to hold benchmark interest rates exceptionally low.

Auto Sales Increase

October reports from the domestic automakers suggested another bright spot as sales hit an annualized rate of 10.46 million units, according to industry tracking firm Autodata, a level not seen in a year except for July and August when the U.S. government's "cash for clunkers" incentives program sparked a surge in sales.

General Motors posted its first monthly sales increase in nearly two years on Tuesday as a rebound in industry-wide U.S. auto sales in October pointed toward a gradual recovery for the battered sector. Ford Motor said its domestic sales rose 3.1 percent in October from a year earlier. It expected sales to come in about at about 10.6 million this year.

Chrysler was the weakest of the large automakers. Its sales plunged 30 percent in October, the day before Fiat SpA Chief Executive Sergio Marchionne releases a five-year turnaround plan for Chrysler.

Domestic auto sales hit an annualized rate of 10.46 million units in October, according to industry tracking firm Autodata. That is a level not seen in a year, except for July and August when the U.S. government's "cash for clunkers" incentives program sparked a surge in sales.

The October sales are a key indicator because they are the first month of U.S. sales not affected by the clunkers boom, which provided incentives of up to $4,500, or the backlash that followed in September.

The annualized rate of 10.46 million units was a jump from the 9.22 million rate in September after the incentives program had ended and inventories were decimated. It also marked a slight decline from October 2008, the first month after the financial markets collapsed.

Automakers said they were cautiously optimistic. GM said the U.S. economy and auto industry were starting to show signs of recovery and the results suggested the sector may be stabilizing after four years of declines.

GM posted a 4 percent sales gain; Ford a 3 percent increase and Toyota a fractional gain. All three results were better than Wall Street had expected. Korea's Hyundai Motor Co posted a 49 percent sales rise that blew past expectations and allowed the automaker to take more market share from rivals.

Nissan reported a gain of nearly 6 percent, while Honda Motor Co Ltd reported a sales decline of less than 1 percent.

With inventories still below normal levels, automakers were able to pull back on discounts and other sales incentives in October. Ford estimated industry wide incentives were down 10 percent from a year earlier while it cut its own spending on such discounts by 30 percent.

Industry tracking firm Edmunds.com estimated the average incentive in the United States was $2,468 per vehicle sold in October, down 7.8 percent from last year and 11.8 percent from the previous month.

Ford, which surprised analysts by posting a third-quarter profit of nearly $1 billion on Monday, said it gained market share due to strong demand for cars and crossover vehicles. Strong demand for the Fusion sedan, and versions of the Taurus car and F-150 pickup truck helped Ford raise its share of the U.S. market to more than 15 percent, the company said.

Vehicles from the 2010 model year accounted for 80 percent of Ford's sales. New vehicles tend to require lower levels of incentives to lure buyers, meaning they generate higher profits, analysts said.