MarketView for November 4

 

 

Summary 

 

Wall Street extended a rally that began in September with the result that the major equity indexes managed to end the day at about a two-year high, a day after the Federal Reserve unveiled a plan to stimulate the economy with an influx of about $600 billion in cash over the next six months. Confounding expectations of a sell-off after the Fed's asset-buying plan, Wall Street focused on the flood of cheap money expected to flow into the banking sector from the Fed.

 

Consumers have also begun to do their part as many retailers posted stronger-than-expected sales for the month of October. The S&P retail index .RLX gained 1.7 percent, Gap added 6.1 percent to close at $20.43. Target ended the day up 1.5 percent to close at $54.76, while Macy's was up 6.6 percent at $25.56.

 

Volume reached its highest level since July 1 with 10.34 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above the year-to-date daily average of 8.73 billion.

 

The S&P 500 index is up about 16 percent since the start of September as investors bet that Fed action and Republican gains in the midterm election would create a better environment for corporate profits. The Dow index closed at its highest since the collapse of Lehman Brothers bank in September 2008.

 

The closely watched non-farm payroll report for October will be released Friday before the market opens, and employment is seen rising for the first time since May with 60,000 non-farm payrolls added in the month. The unemployment rate is expected to remain elevated at 9.6 percent.

 

Thursday's 5.3 percent decline in the CBOE Volatility Index .VIX, Wall Street's so-called fear gauge, suggested investors were confident the Fed's efforts will support market gains. An index of commodity prices .CRB rose 2.4 percent and hit its highest level in more than two years as the dollar moved lower.

 

Freeport McMoRan Copper and Gold rose 7 percent to close at $103.89, a price not seen since 2008. Exxon Mobil ended the day up 2.1 percent to close at $69.38.

 

Starbucks saw its shares move up 2.5 percent to $30.49 in extended trading after it reported fourth-quarter earnings that exceeded expectations. The company also raised its full-year earnings guidance. Kraft Foods posted an adjusted third-quarter profit of 1 cent per share ahead of expectations. It also affirmed its full-year outlook, and its shares ended the day up 4 cents to close at $31.83.

 

In what could be seen as conflicting technical signals, the S&P 500 daily moving average convergence-divergence chart triggered a buy signal for the first time since October 18, but its relative strength index, or RSI, jumped near 76. An RSI reading above 70 indicates an overbought level.

 

Unemployment Claims Move Higher

 

Claims for unemployment benefits rose more than expected last week while unit labor costs fell in the third quarter, underlining the persistent weakness in the jobs market. Although other data on Thursday showed nonfarm productivity rebounded at a much stronger-than-expected 1.9 percent annual rate in the third quarter, the general tone remained consistent with a sluggish economy.

 

Initial claims for state unemployment benefits increased 20,000 to a seasonally adjusted 457,000, the Labor Department said, reversing the prior week's decline. The government revised the prior week's figure up to 437,000.

 

In a second report, the Labor Department said unit labor costs, a gauge of potential inflation pressures closely watched by the Federal Reserve, fell at a 0.1 percent rate after rising a revised 1.3 percent in the second quarter.

 

Concerns about the lackluster recovery and stubbornly high unemployment prompted the Federal Reserve on Wednesday to announce it would buy an additional $600 billion worth of government bonds by the middle of next year. The second round of asset purchases is intended to push interest rates further down, thereby stimulating domestic demand, and prevent the current low inflation environment from spiraling into a damaging bout of deflation.

 

The claims data has little influence on October's employment report due on Friday as it falls outside the survey period. The government is expected to report that nonfarm payrolls increased 60,000 last month, which would be the first expansion since May, after dropping 95,000 in September.

 

A Labor Department official said there was nothing unusual in the claims data and described the report as fairly clean. The four-week average of new jobless claims, considered a better measure of underlying labor market trends, rose 2,000 to 456,000.

 

The rise in productivity in the third quarter implied little need for businesses to step up hiring. However, economists say at some point firms will no longer be able to meet demand by making their operations more efficient and will need to increase payrolls. During the third quarter, hours worked increased at a slower 1.1 percent rate after a 3.5 percent pace in the second quarter.

 

Retail Sales Higher

 

Retailers reported October same-store sales above expectations, the result of both unique merchandise and lower prices. October results appeared to bode well for some retailers during the holiday shopping season in November and December, when many generate a significant portion of their annual sales. Based on reports from 28 retailers, 14 were said to exceed expectations, while 10 did not meet their objectives. The average same-store sales rise of 1.6 percent across the sector was in line with what the Street was expecting.

 

The October same-store sales rise marks the 14th consecutive month of higher numbers after a year of declines during the recession. The International Council of Shopping Centers forecast November sales would rise 3 percent to 4 percent.

 

Zumiez and Victoria's Secret and Bath & Body Works parent Limited Brands posted some of the largest gains, prompting them to raise their earnings estimates for the October quarter. Many see Limited as a destination for customers seeking smaller gifts, while Zumiez has found many fans by carrying unique brands.

 

Zumiez same-store sales rose 21.5 percent in October. Limited same-store sales rose 9 percent, compared with Wall Street's forecast of a 6.1 percent gain. Macy's also counted on exclusive brands and targeted merchandising to woo shoppers. It reported a same-store sales rise of 2.5 percent in October, beating analyst expectations of a 1.6 percent increase.

 

Despite unseasonably warm weather in most parts of the United States in October, Costco Wholesale and other retailers also beat expectations. Costco reported a 6 percent increase in October same-store sales, while Target saw same-store sales move up 1.7 percent.

 

Drugstore chains and teen apparel retailer Hot Topic were among those that missed expectations. Retailers received some assistance from Halloween-related sales toward the end of the month, evident from lackluster results at drugstore chains like Walgreen and Rite Aid.

 

Crude Oil Above $86 Per Barrel

 

The price of crude oil exceeded $86 per barrel on Thursday hitting a new six-month high, as higher-than-expected jobless claims accelerated dollar losses after Fed decision to pump more money into the economy of the world's top oil user. Crude futures for December delivery ended the day up $1.94 at $86.83 per barrel, having hit as ICE Brent settled up $1.53 per barrel at $87.91.

 

Saudi Arabia earlier this week shifted its price range up to $70-$90 a barrel but on Thursday a senior Gulf source said prices between $70-$80 is still a fair price. Many analysts said that fluctuations in the dollar will remain the principal driver in the oil market, although some have warned of long-term dangers of QE for Asian demand growth.

 

On the supply side, domestic crude inventories rose by a more-than-expected 1.95 million barrels last week as refinery utilization dropped, according to a weekly report from the Energy Information Administration on Wednesday.

 

Banks Face $31 billion loss From Mortgage Buybacks

 

The largest banks could face up to $31 billion in losses from buying back bad mortgages, Standard & Poor's reported on Thursday. Specifically, they are facing increasing pressure to buy back soured home loans that they packaged into mortgage bonds and sold to investors.

 

Bank of America and JPMorgan Chase have the most exposure to such potential repurchase obligations, followed by Wells Fargo, Citigroup, US Bancorp and PNC Financial Services Group S&P analyst Vandana Sharma wrote on Thursday. The six companies could face up to $43 billion in total losses from mortgage buybacks through 2012, but they have already accounted for about $12.4 billion of those potential losses, according to the report, which cited a recent S&P study.

 

The potential mortgage buyback losses would affect the banks' future profits, but are "not likely to affect our view of the banks' capital adequacy," Sharma wrote. However, those losses on mortgage buybacks, combined with the effects of increased regulation and an expected decrease in net interest income, "will likely hamper the financial recovery of the U.S. banks in 2011 despite declining credit costs," Sharma wrote.