MarketView for November 18

 

 

Summary 

 

Share prices were higher on Thursday, due in no small part to expectations for a resolution of Ireland's banking crisis. At the same time, the S&P 500's inability to break through its current resistance level suggests stocks could be in a tight range through the end of the year. Shares of the Bank of Ireland were up 33.3 percent to close at $2.88.

 

General Motors gained 3.6 percent as it returned to public trading and accounted for about 5.1 percent of regular session volume. However, given how much Ireland's financial woes hampered stocks in recent days, GM's success was a side note to the rescue of another troubled European country's finances.

 

GM shares rose as much as 9.06 percent as investors bet that GM can show a sustained recovery as it returns to the market after its successful IPO. The stock ended up 3.6 percent at $34.19.

 

Despite the bullish sentiment, the S&P 500 index remained at about 1,200 for most of the session but failed to hold above the key level at the closing bell. This could mean the index's trading range will remain tight for the rest of the year.

 

Piercing the 1,200 level would leave the S&P 500 facing hefty technical resistance near 1,228, the highest it has been in more than two years. Meanwhile, reflecting less market uncertainty, the CBOE Volatility index .VIX fell 13.8 percent, its largest percentage daily drop in more than 5 months.

 

Alcoa was the top percentage gainer in the Dow Jones industrial average, up 3.4 percent to close at $13.38. After the closing bell and adding to the upbeat sentiment, Dell pointed to strong demand from large corporations as key for its quarterly margins and profit landing above Wall Street expectations.

 

Dell shares closed up 6.6 percent to $14.56 in extended trading after a gain of 2.4 percent during regular hours.

 

Earlier on Thursday, data showed U.S. weekly applications for unemployment insurance hit a two-year low last week and factory activity in the country's mid-Atlantic region accelerated in November, suggesting the economy's recovery was gaining speed.

 

Unemployment Improves

 

New claims for unemployment insurance rose slightly last week, but the underlying trend remained tilted toward improvement with a moving average hitting a fresh two-year low.

 

Initial claims for state unemployment benefits climbed 2,000 to a seasonally adjusted 439,000, the Labor Department said on Thursday. The four-week average of new jobless claims, considered a better measure of underlying labor market trends, fell by 4,000 claims to 443,000 claims, the lowest level since the week ending September 6, 2008.

 

Despite the rise in initial claims last week, the labor market distress is showing signs of easing, with payrolls data showing employers adding jobs last month for the first time since May. The number of people still receiving benefits after an initial week of aid fell 48,000 to 4.30 million in the week ended November 6, in line with expectations and the lowest since November 2008. The prior week's figure was revised up to 4.34 million.

 

The number of people on emergency unemployment benefits rose 66,767 to 3.97 million in the week ended October 30. A total of 8.85 million people were claiming unemployment benefits during that period under all programs.

 

Jobless benefits for 800,000 people will expire on November 30 unless Congress renews them. In total, two million unemployed people would lose benefits by the end of December. The benefits have been renewed several times as the country struggles with a 9.6 percent unemployment rate.

 

Holiday Shopping Outlook Improves

 

As many as 138 million shoppers could be hunting for Black Friday bargains during the three days after Thanksgiving, a slight increase over last year's projections, according to a retail trade survey released on Thursday. Nearly 60 million Americans plan to hit the stores, more than last year's forecast of 57 million, while an additional 78 million might join the crowds of shoppers this year if the bargains are good enough, the National Retail Federation said.

 

The total number of possible shoppers is 4 million more than forecast last year, when the NRF forecast up to 134 million Americans would be out shopping over the three-day weekend. The group does a follow-up survey to ascertain how many of those consumers actually did shop over the weekend, but it includes shoppers on Thanksgiving day.

 

Black Friday, which falls on November 26, is a key date for retailers, representing the traditional post-Thanksgiving kickoff to the holiday shopping season. Some store chains make up to one-third of annual sales during the November-December period, but many fear that sales this year will be threatened by a weak economy and high unemployment.

 

Retailers from Macy's to Best Buy try to lure shoppers through "door-buster" deals offering low prices on coveted gifts and the deals continue through the weekend. This year, Wal-Mart will sell Emerson high-definition TVs for $198 and Kodak digital cameras for $59 on Black Friday, as well as offering free shipping during the season in a threat to Amazon.com Inc.

 

The higher turnout expected for the Black Friday weekend supports an earlier NRF forecast of a 2.3 percent increase in sales in November and December, compared with a 0.4 percent increase in 2009. In 2008, during the worst financial crisis in decades, sales fell by 3.9 percent.

 

A separate poll this week found that 31 percent of households plan to shop on Black Friday, up from 26 percent a year ago. The Saturday and Sunday after Thanksgiving should be even busier, with 37 percent of households expecting to shop, according to the survey from the International Council of Shopping Centers.

 

Pent-up demand could drive shopping over the weekend. The ICSC survey found that consumers had completed only 15.7 percent of their holiday purchases by November 12-14, compared with 20.5 percent at the same time in 2009 and 28.3 percent in 2008.

 

The widely-expected uptick in shopping this year is welcomed by retailers, but they remain wary, leaving little to chance in their fight for holiday sales. Knowing consumers are still hesitant to spend and are looking to save money, many are focused on increasing sales by poaching customers from their rivals.

 

Amid high unemployment and a tepid economic recovery, more U.S. consumers are paring back their spending for the holiday season, according to a survey from consumer research firm America's Research Group. Nonetheless, this year's higher forecast for Black Friday shoppers is smaller than the change from 2008 to 2009, when an additional 6 million shoppers were expected.

 

Fed Defends Program

 

Two top Federal Reserve officials came out as officially supporting the central bank's $600 billion bond buying plan, which has incurred the ire of both lawmakers and foreign capitals alike. Minneapolis Federal Reserve Bank President Narayana Kocherlakota said he backed the decision, a surprise endorsement from a policymaker who had been skeptical of the impact of further monetary easing.

 

"I believe that QE (quantitative easing) is a move in the right direction," he said.

 

Cleveland Fed chief Sandra Pianalto also defended the plan as a way help lift "uncomfortably low" inflation to fend off the risk of a debilitating broad drop in prices.

 

The Fed's November 3 decision to purchase approximately $600 billion of Treasury securities has been attacked by governments around the world which are anxious it may weaken the dollar and undermine their exports. The Fed has also recently been a target for Republican politicians and economists with ties to the party who say it could ignite inflation.

 

The attacks have led the Fed to go enact a plan of offense. Fed Chairman Ben Bernanke had a closed door meeting with lawmakers on Wednesday, while Vice Chair Janet Yellen and New York Fed President William Dudley have given rare on-the-record interviews to make the central bank's case. The Fed Chairman is expected to deliver a public defense in remarks on Friday.

 

The Fed has cut overnight borrowing costs to near zero in December 2008, and bought $1.7 trillion in longer-term securities after that to help pull the economy out of recession. The asset buying is known as quantitative easing because the Fed aims to stimulate the economy by pumping vast amounts of money into the financial system now that it can no longer lower overnight rates. The new round of bond-buying is often referred to as "QE2".

 

Kocherlakota, who rotates into a voting slot on the Fed's policy panel next year, said he expects the ultimate effects of the latest program to be relatively modest, but that the effort was worthwhile given sluggish growth and the low level of inflation.

 

"I think it is safe to say that, given the situation, the Fed would have liked to have been able to cut its target interest rate," he said.

 

He said the program will lower longer-term interest rates by strengthening the Fed's stated commitment to keeping short-term rates low for a long period. Longer term rates encompass investors' views of where short-term rates will be in the future.

 

"QE provides a significant supplement to this explicit verbal communication," he said. "One could readily argue that buying $600 billion of Treasuries is a much more convincing form of communication of the Fed's plans than any words could ever be."

 

Similarly, Pianalto, a Fed voter this year, said it was important to inoculate the economy from the type of deflationary outcome that has afflicted Japan. "Responding to inflationary and disinflationary pressures gets to the heart of what a central bank can and must do," she said.

 

Another Fed official, Fed Governor Kevin Warsh did not offer explicit backing for the easing program, saying monetary policy has an important, but not a predominant, role to play in pushing the economy into higher gear. Instead, he argued that greater certainty in terms of fiscal, trade and regulatory policies would do more to spur business activity.

 

Warsh, who voted for the new policy, said last week the program should be curtailed if the economy were to accelerate or if signs the policy was backfiring began to emerge, but other policy-makers have made clear they expect the Fed to follow through with the full $600 billion of purchases.

 

Warsh, who worked as an aide to former Republican President George W. Bush, questioned calls from Republican lawmakers to alter the Fed's mandate by removing the requirement that it pursue full employment and leaving it with only a price stability directive.

 

The debate could keep lawmakers from addressing the uncertainties holding back business spirits, he said. "If it were to take oxygen away from what I believe are much more pressing issues," Warsh said, "it strikes me as not seizing the window of opportunity."