MarketView for November 10

 

 

Summary  

 

Stock prices closed mostly lower on Tuesday as differing views on whether the market can build on recent gains stalled the S&P 500's six-day winning streak. The Dow Jones industrial average eked out a small gain to set a fresh 13-month high as cautious statements on the economic outlook from several Fed officials underscored the belief that easy monetary policy will remain intact well into next year.

 

Shares of American Express rose 1.6 percent to $39.68 after the company said credit card spending increased in October from September in another sign that the worst of the financial crisis may be over for the largest U.S. credit-card company.

 

Data from the National Association of Realtors showed home prices fell in the third quarter from year-ago levels in about 80 percent of U.S. cities. DR Horton fell 3.6 percent to $11.69 and KB Home was down 3.3 percent at $14.68.

 

Among the financials, MBIA fell 26.7 percent to $3.52 a day after the bond insurer posted a third-quarter loss. Regional bank Zions Bancorp was down 7.6 percent to $13.26.

 

On the upside, Monsanto rose 5.2 percent to $73.66 after the company said it had raised expectations for accelerated launches of new products.

 

American International Group rose 3.9 percent to $37.59 after ratings agency Moody's Investors Service said the insurer probably will be able to repay the government's bailout and much of its preferred equity stake.

 

Shares of online travel agency Priceline.com was up 17.6 percent to close at $204.22 a day after the company reported earnings that beat forecasts.

 

Fed Officials Strike a Cautious Note

 

Three top Federal Reserve officials on Tuesday struck a cautious note on the U.S. economy, citing high unemployment, heavy reliance on government support and commercial real estate woes as hurdles to recovery.

 

Speaking less than a week after the Fed left interest rates unchanged at near zero, a trio of top officials -- San Francisco Federal Reserve Bank President Janet Yellen, Atlanta Fed chief Dennis Lockhart and Boston Fed President Eric Rosengren -- said the economy was still vulnerable.

 

"The strength and durability of the expansion is in question," Yellen said. "High unemployment, weak job growth and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery." She said it was not yet clear whether the private sector could carry the load once supportive policies fade.

 

A fourth official, Richmond Fed President Jeffrey Lacker, was more upbeat, stating that the broad contours of recovery would be the same even without government stimulus. However, Lacker -- an inflation "hawk" -- made clear he was not itching to push up borrowing costs yet.

 

Asked if the Fed would raise rates next year, he responded: "It is too soon to say ... it could take longer than that. What I'm going to look for is growth that is strong enough and well-enough established that we need higher real interest rates."

 

The Fed cut overnight interest rates to near zero in December and it has pumped more than $1 trillion into the economy to spur a recovery from the deepest downturn since the Great Depression. The White House and Congress also lent support with a $788 stimulus package of tax cuts and spending.

 

Last week, the Fed reaffirmed its commitment to keep borrowing costs ultra-low for "an extended period," and financial markets are listening to Fed officials closely to try to gauge when they may finally move to withdraw their economic support. The latest remarks eased investor's worries about higher interest rates, helping support prices for U.S. government debt.

 

Yellen, Lockhart and Lacker are among the voters this year on the Fed's policy panel, while Rosengren will move into a voting slot in 2010. While Yellen and Rosengren are seen as Fed "doves," Lockhart is considered more of a hawk.

 

"It's a question of timing," Rosengren told a seminar in London when asked how the Fed planned to exit from its extraordinarily supportive policies. "We're not there yet."

 

A fifth U.S. central bank official who spoke on Tuesday, Fed Governor Daniel Tarullo focused his remarks on regulatory reform.

 

Lockhart said U.S. economic growth would be "relatively subdued" in the medium term.

 

"The situation is much improved, but there are sobering aspects of the economic picture," he told a conference in Atlanta, adding that data on bank failures, foreclosures, unemployment and personal income "continue to disappoint."

 

The labor market conditions remain dismal. The unemployment rate surged to a 26-1/2-year high of 10.2 percent in October. High unemployment is one factor expected to keep the Fed on the sidelines. The central bank said last week that economic slack, subdued inflation trends and stable inflation expectations argued for a prolonged period of low rates.

 

"At this juncture, it's hard to be encouraged about a fast rebound in job growth," Lockhart said.

 

He said he could envision scenarios in which the Fed may have to tighten policy even with unemployment "frustratingly high." However, the overall objective of policy should be to bring about "a durable economic recovery and an environment that reduces unemployment as quickly as possible while containing inflationary pressures," Lockhart said. There will also have to be a "judicious removal" of government support, he said.

 

Yellen said a problematic drop in consumer prices was a greater risk than inflation, and she noted core inflation, which strips out food and energy costs, had been slowing. "With slack likely to persist for years and wages barely rising, it seems probable that core inflation will move even lower over the next few years," she said.

 

In contrast, Lacker said he thought the risk of deflation had "diminished substantially" since the beginning of the year.

 

"As the economy proceeds, maybe not next year, we could see a growing risk of significant increases in inflation," he said.

 

Crude Down In Price As Hurricane Threat Evaporates

 

Oil prices fell on Tuesday as the dollar firmed and energy companies began restoring offshore operations disrupted by Tropical Storm Ida. Crude for December delivery settled down 38 cents at $79.05 a barrel. London Brent crude settled down 27 cents per barrel at $77.50.

 

Oil and natural gas companies operating in the Gulf of Mexico began returning workers evacuated ahead of Tropical Storm Ida and restoring shuttered output and ports.

Ida, which churned up to a category 2 status earlier in the week, weakened into a topical depression on Tuesday after coming ashore in Alabama.

 

About 43 percent of U.S. production in the Gulf of Mexico and 28 percent of the region's natural gas output remained off line on Tuesday, according to government figures. Disruptions in the Gulf, home to about 25 percent of U.S. domestic oil production and 14 percent of gas output, helped push crude prices up more than 2 percent on Monday.

 

Traders have looked to wider macro-economic data and equities markets for signs of an economic recovery that could bolster crude demand. Pressure on crude prices also came as the dollar firmed off a 15-month low, as investors pulled money out of equities and crude and sought safer havens.

 

Gasoline demand rose 2.2 percent last week versus year-ago levels, although it was down 2.3 percent from the previous week. The U.S. Energy Information Administration revised its forecast for 2010 crude oil demand up by 160,000 barrels per day, but cut its estimate demand slightly for the United States, the world's largest energy consumer.

 

In its annual World Energy Outlook published on Tuesday, the International Energy Agency forecast a 1.5 percent rise in primary energy demand globally every year until 2030, and called for $26 trillion in investment to meet the expected demand.

 

Markets were also awaiting weekly U.S. oil inventory data from the American Petroleum

 

FDIC Wants Reserve Fund

 

A reserve fund must be established ahead of time to give the government the working capital it needs to dismantle large, troubled financial companies, Sheila Bair, chairman of the Federal Deposit Insurance Corp said on Tuesday. Bair said she opposes the proposal by the Obama administration and a leading senator to collect fees from financial companies after another firm is seized and dismantled.

 

"This would not be a bail-out fund. This would not be an insurance fund," Bair said in prepared remarks to the Institute of International Bankers. "It would provide short-term liquidity to maintain essential operations of the institution as it is broken up and sold off."

 

Senate Banking Committee Chairman Christopher Dodd earlier on Tuesday released draft legislation that calls for any government expenses to be recouped after a financial company fails and is liquidated. The FDIC would be in charge of dismantling the company.

 

Treasury Secretary Timothy Geithner has been adamant that creating a standing fund would enhance moral hazard and be viewed by the financial industry as an insurance fund that would insulate it from risky bets.

 

Bair, however, has been successful in convincing Representative Barney Frank to reverse his opinion on the topic. He recently said he now supports pre-funding the so-called resolution authority.

 

The resolution authority is just one piece of sweeping legislation moving through Congress to overhaul financial regulation. Other pieces include creating a new consumer agency to police financial products, consolidating bank regulators and creating a new council to oversee risks to the financial system.

 

The House has made considerably more progress through public bill-writing sessions and hopes to have a full House vote by early December. The Senate Banking Committee will start drafting formal language and consider amendments in early December, Dodd said on Tuesday. He did not estimate when the full Senate might vote.

 

Bair said during her remarks on Tuesday that Frank, chairman of the House Financial Services Committee, is going to take other measures to strengthen his version of financial reform.

 

She said he will eliminate the government's ability to assist open but troubled financial companies, will ban the government from investing capital in those institutions, and will create a higher standard for the FDIC and Federal Reserve to provide support to healthy companies in the event of a systemic meltdown.

 

"We've had too many years of unfettered risk-taking, and too many years of government-subsidized risk," Bair said. "It's time we closed the book on the doctrine of too big to fail."

 

Bair also said regulators can restrain risk in the system by ensuring that large financial companies hold high amounts of capital. She said recent improvements in market conditions cannot deter the effort to follow through on tough new capital standards.

 

"There is little doubt that there will be eye-popping reductions in required capital when the good times return to banking," she said.