MarketView for November 18

Summary   

The streak of three consecutive days of by the major equity indexes came to an end on Wednesday, the result of f worrisome outlooks from two major software makers and last month’s unexpected decline in home construction The good news is that much of the day’s red ink evaporated just prior to the closing bell.

Software firm Autodesk was cautious regarding its outlook for the current quarter, while Salesforce.com reported a drop in new business. The news was a setback for a market that is continually looking for signs of a pickup in demand. Autodesk shares closed down 10.4 percent at $24.20 a day after the company warned that its recovery could be hindered by continuing job losses. Meanwhile, Salesforce.com fell 3.1 percent to $63.61

According to a report by the Commerce Department, housing starts fell to their lowest level in six months, weighed down by a sharp drop in construction activity for both single-family and multi-houses. While the decline in new construction raised concerns about the recovery, it could bode well for removing remaining inventory from the market. Meanwhile, a Citigroup upgrade of Pulte Homes to a "buy" from a "hold,” sent Pulte’s share up 4.6 percent to close at $10.04.

Losses in the overall market were kept in check by advances in the financial sector. Hedge fund billionaire John Paulson said Bank of America’s shares could double in two years. Paulson made his comments in an investor note that was reported by Bloomberg News. Bank of America's shares ended the day up 3.7 percent to close at $16.35.

Mining and energy shares declined, even as the dollar fell and gold hit a record high above $1,150 an ounce. The shares of Freeport McMoRan Copper & Gold fell 0.8 percent to close at $84.69, while ConocoPhillips was down 0.2 percent at $53.58. Oil rose 0.7 percent, while the dollar fell 0.4 percent when compared with a basket of currencies.

Housing Data Shows Decline While Inflation Rises

New home construction hit a six month low in October, providing more evidence of the economy's sluggish recovery, while an increase in the cost of new and used vehicles lifted consumer prices. The data came a day after a report indicating industrial output was virtually unchanged last month, suggesting the recovery stalled somewhat after a growth spurt in the third quarter.

Groundbreaking for single-family homes fell 6.8 percent last month to an annual rate of 476,000 units, the lowest since May. Starts for the volatile multifamily segment tumbled 34.6 percent to a 53,000 annual pace, extending September's slide. High vacancy rates, especially in the multi-family segment, and tight credit will likely slow building projects. New building permits, which give a sense of future construction activity, fell 4 percent in October to a 552,000 unit annual rate.

The slump is a blow to the housing market, which had shown signs of stabilization after a three-year decline. Homebuilding contributed to economic growth in the July-September period for the first time since 2005.

A slow rebound in the moribund housing market, relatively benign inflation and excess slack in the economy meant the Federal Reserve would be able to honor its commitment to keep interest rates near zero for an extended period. The Commerce Department said housing starts fell 10.6 percent to an annual rate of 529,000 units, the lowest since April. It was the largest decline in 10 months. The inventory of homes under construction touched a record low 560,000 units, while the number of permits authorized but not yet started fellto an all-time low of 93,900 units.

The recovery in the housing market has been led by a popular $8,000 tax credit for first-time buyers. It had been due to expire this month, but has since been extended and expanded. In October, it was unclear whether the incentive would be extended and this could have contributed to the slide in construction activity last month.

Meanwhile, the Labor Department reported on Wednesday that the Consumer Price Index rose 0.3 percent last month as the cost of new vehicles rose by the most in more than 28 years. However, widespread price pressures were absent and the rise in vehicle prices was quite likely due to the government's now expired "cash for clunkers" program, which had depressed auto prices by offering discounts.

The so called core consumer price index, which excludes the food and energy cost sectors, rose 0.2 percent last month, the same as in September. Over the past 12 months, core prices are up 1.7 percent, higher than in September but still well below the year-earlier measure.

Goldman Sachs Could Have Taken a Beating

Goldman Sachs could have suffered dramatic losses if the federal government had not intervened to prop up American International, according to a government report. The report by the special inspector general for the government bailout program raises doubts about Goldman's previous claims that it was hedged against potential AIG losses.

Last fall, as the financial services industry stood on the brink of collapse, the government stepped in with an unprecedented effort to rescue the system. AIG was among the companies that received billions of dollars from the Treasury's Troubled Asset Relief Program (TARP).

If AIG had collapsed, it would have made it difficult for Goldman to liquidate its trading positions with AIG, even at discounts, the report said. It also would have put pressure on other counterparties that "might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased against an AIG default."

Finally, the report said, an AIG default would have forced Goldman Sachs to bear the risk of declines in the value of billions of dollars in collateralized debt obligations.

A Goldman spokesman called the risks discussed in the report a "moot point,” stating that, “Goldman Sachs has consistently said its exposure with AIG was collateralized and hedged and therefore we had no direct credit exposure," Goldman spokesman Michael DuVally said. "Given the hedges, collateral, and government backing as a result of the bailout, the additional risks of declining market values in the event of an AIG default are a moot point," he said.

AIG has received pledges of up to $180 billion in taxpayer aid since last fall to help save it from collapse. It was revealed in March that Goldman received $12.9 billion in payments and collateral from AIG.

David Viniar, Goldman's chief financial officer, in March told reporters that the Wall Street bank did nothing wrong when it accepted payments to close out trades with AIG.