MarketView for November 22

 

 

Summary 

 

It was another down day for Wall Street on Tuesday, the fifth consecutive one, as the market remains tied to concerns over the worsening debt crisis in Europe where rising yields suggest the outlook continues to deteriorate and stocks have been tied to the European credit market's volatility. News that the International Monetary Fund would make short-term credit available for struggling euro-zone countries gave stocks a temporary boost, but the gains quickly evaporated.

 

Spain's short-term borrowing costs hit a 14-year high on Tuesday as political uncertainty about a solution to the euro zone's sovereign debt crisis punished another vulnerable southern European country.

 

The S&P managed to hold near 1,187, seen as the next technical support, representing the 61.8 percent retracement of the 2011 high to low. The index fell below the 1200 mark last week.

 

The market showed a muted reaction to minutes from the Federal Reserve's recent policy meeting in which some officials said they were prepared to do more to support the domestic economy. But the committee decided to hold off taking action amid an uncertain outlook.

 

Hewlett-Packard fell 0.8 percent to $26.65 after the computer and printer maker gave a 2012 profit outlook that was below consensus late Monday.

 

Among Nasdaq stocks, Groupon fell as much as 14 percent on Monday on concern about increased competition, leaving shares of the largest daily deal company at $20.07 compared with its $20 initial public offering price.

 

About 6.99 billion shares changed hands on the three major exchanges on Tuesday, a number that was well below the current daily average of 8 billion shares.

 

Economic Growth in 3Q Less Than Previously Forecasted

 

The economy grew more slowly than previously estimated in the third quarter as businesses sold inventory to meet strong demand, although a need to restock will likely help propel the recovery this quarter. Gross domestic product grew at a 2.0 percent annual rate in the July-September quarter, the Commerce Department said in its second estimate on Tuesday, down from the previously reported 2.5 percent.

 

While the growth pace was weaker than economists had expected, the composition of the report, particularly still-firm consumer spending and the first drop in businesses inventories in nearly two years, set the stage for a stronger performance in the final months of the year.

 

Deterioration in consumer sentiment likely had led businesses to anticipate weaker demand. With consumer spending showing resilience, analysts said they will now have to rebuild inventories, keeping factories busy.

 

Data so far suggest the fourth-quarter growth pace could exceed 3 percent, which would be the fastest in 18 months.

 

Despite the downward revision, last quarter's growth is still a step-up from the April-June period's 1.3 percent pace. The government revised third-quarter output to account for an $8.5 billion drop in business inventories, the first decline since the fourth quarter of 2009. The inventory decline cut 1.55 percentage points from GDP growth, which was partly offset by strong exports. If you exclude inventories, the economy grew at an unrevised brisk 3.6 percent pace after expanding 1.6 percent in the second quarter.

 

Consumer spending was taken down a notch to a 2.3 percent growth pace from 2.4 percent, but remained the quickest pace since the fourth quarter of 2010.

 

However, weak income growth could crimp spending going forward. Taking inflation into account, disposable income fell at a steeper 2.1 percent rate instead of 1.7 percent, the report showed. It had declined 0.5 percent in the prior three months.

 

The failure of a congressional "super committee" to agree on a deficit reduction package of at least $1.2 trillion also clouds the outlook. It is less clear now that Congress will extend a payroll tax cut and emergency unemployment benefits expires next month.

 

That potential fiscal drag, together with the festering European debt crisis, could undermine growth early next year.

 

Part of the pick-up in output during the last quarter reflected a reversal of factors that held back growth earlier in the year.

 

A rise in gasoline prices had weighed on spending in the first half of the year, and supply disruptions from Japan's big earthquake and tsunami in March had curbed auto production.

 

Business investment was revised down to a 14.8 percent rate from 16.3 percent as estimates for investment in nonresidential structures and outlays on equipment and software were lowered.

 

The Commerce Department also said after-tax corporate profits increased at a 3.0 percent rate after rising 4.3 percent in the second quarter.

 

Exports grew at a stronger 4.3 percent rate instead of 4.0 percent, while imports rose at a much slower 0.5 percent rate rather than 1.9 percent.

 

Elsewhere, there were revisions to show modest residential construction and weak government spending.

 

The GDP report also showed inflation pressures subsiding, with a price index for personal spending rising at a 2.3 percent rate, instead of 2.4 percent. That compared to a 3.3 percent rate in the second quarter.

 

A core inflation measure, which strips out food and energy costs, rose at a 2.0 percent rate rather than 2.1 percent. The measure -- closely watched by the Federal Reserve -- grew at a 2.3 percent rate in the prior three months.

 

Tis the Season for Discounts

 

Retailers trying to woo shoppers with early deals and longer hours this week, and throughout the holiday season, could be putting their profits at risk as shoppers search for bargains and not much else. It seems that Wal-Mart, Toys R Us and outlet malls are hoping that big discounts on Thursday night will attract shoppers hungry for deals after Thanksgiving meals. Others such as Target, Macy's and Kohl's will join the fray during the wee hours of Friday, opening their doors hours earlier than in past years.

 

The early sales, along with more advertising spending, show that retailers are taking no chances as they fight for their share of the limited amount shoppers plan to spend. The moves, which include adding staff, securing bargains on video games and offering free shipping, also can eat into profit margins.

 

Gross margins at department stores and broad line chains are expected to fall an average of 0.4 percentage points this year because of higher product, labor and transportation costs. Discounts just add to that margin pressure.

 

Some 152 million shoppers plan to hit stores on November 25, the day after the U.S. Thanksgiving holiday, up 10.1 percent from 138 million people last year, according to a survey by the National Retail Federation.

 

American Eagle Outfitters is one of the best-positioned teen chains this holiday season, with a good assortment of items and inventory. Shares of AEO have climbed this month, outpacing a small decline in the S&P retail index. At the same time, Abercrombie & Fitch is looking to be less promotional this season, which cause them a problem if other chains offer deep discounts.

 

This year, almost 81 percent of consumers told market research firm NPD that the economy will have an effect on their spending, up from 79 percent in 2010 and 78 percent in 2009. A survey from the Consumer Federation of America and the Credit Union National Association showed that 41 percent of consumers plan to spend less than they did in 2010, while just 8 percent plan to spend more. Still, holiday spending plans are "substantially stronger than they were" in 2008 and 2009, according to CUNA.

 

Wal-Mart is counting on early sales, layaway, price matching and other tactics to help it hold on to the shoppers who have come back to the world's largest chain, pushing sales at its stores into positive territory starting in July. That bodes ill for competitors. Wal-Mart’s decision to bring back layaway has already eaten into toy sales at Target, showcasing the fierce competitive race underway.

 

Wal-Mart advertised items on the cover of its Black Friday circular at lower prices than last year's, while others such as Kmart and Sears are promoting higher-priced goods, according to Goldman Sachs.

 

The toy game will get hotter on Friday when Wal-Mart and Best Buy slash prices on some popular video games.

 

The game for retailers is to determine how to convert shoppers who come in for specific items into loyal customers.

 

The calendar also has an impact. There are five Saturdays between Thanksgiving and Christmas this year, after just four last year, when Christmas fell on a Saturday. With Christmas landing on a Sunday this year, shoppers have a chance to buy last-minute gifts that could be discounted by chains that did not see stellar business earlier in the month.

 

Also, many Americans have off on Monday, December 26, giving them time to shop for what they really wanted and to start redeeming gift cards, which are popular.

 

Online sales are growing more rapidly than sales at stores as shoppers do more browsing and buying on computers, tablets and mobile phones. Retail e-commerce holiday sales are expected to soar 17 percent to $46.7 billion, while total retail sales should grow about 3 percent this season, according to eMarketer.

 

Fifty-one percent of online retailers plan to offer promotions on Thanksgiving, according to a survey from the National Retail Federation. Retailers such as Best Buy are touting free shipping from their web sites all season, while others such as Wal-Mart will ship for free depending on how much is spent.

 

Potential benefactors include FedEx and United Parcel Service. Both hired more seasonal workers to handle the online shopping-related rush.

 

The National Retail Federation expects total sales to rise 2.8 percent to $465.6 billion in November and December combined, after a 5.2 percent rise in 2010.

 

Oil Prices Volatile

 

Oil prices were volatile Tuesday on concerns that Middle East strife could disrupt supplies and that U.S. and European economies would continue to struggle.

 

West Texas Intermediate crude, the benchmark used to price oil in much of the U.S., was up 92 cents at $97.86 a barrel in New York. Brent crude, which is used to price oil produced in many foreign countries, was up $1.75 to $108.41 a barrel in London.

 

Oil prices rose more than a percent Tuesday morning on worries that international sanctions on Iran would reduce the flow of oil from the world's fourth biggest oil producer. Also, large, violent protests in Egypt stirred fears that upheaval in the region could spread and disrupt supplies. Egypt is not a major oil producer, but it does control important energy supply lines and it wields considerable influence over the region because it is the most populous Arab nation.

 

Prices lost ground after the Commerce Department said that the U.S. economy grew more slowly over the summer than the government had earlier estimated. That picture of a sluggish economy also helped drive the stock market lower as well.

 

There is also the ongoing concern about Europe's debt crisis pushing the region toward recession. Investors worry that the world financial system could seize up if European banks and banks with ties to Europe stop lending.  When the global economy slows, demand for crude oil and refined products like diesel and gasoline falls because fewer goods are produced and shipped, and people travel less.

 

The price of gasoline futures rose, however, with mild, fair weather forecast for much of the U.S. over the Thanksgiving weekend. That's expected to motivate drivers to hit the road to visit families and shop. Gasoline futures were up 5 cents at $2.5433 a gallon in New York.

 

At the pump, retail gasoline fell almost a penny to a national average of $3.34 per gallon on Tuesday, according to AAA, Oil Price Information Service and Wright Express. In coming days, though, the higher price of wholesale gasoline could push up pump prices.

 

Gasoline demand has been weak in the U.S. over the past several months. U.S. demand began to fall sharply as prices rose above $4 per gallon in many states last winter and spring. Prices, while still high, are 16 percent below the peak national average of $3.98 per gallon reached on May 5.

 

In other energy trading in New York, natural gas fell 2 cents to $3.542 per 1,000 cubic feet, and heating oil rose 4 cents to $3.0308 a gallon.

 

I.M.F. To Provide Short-term Help

 

The International Monetary Fund announced a set of measures designed to “bolster the flexibility and scope” of its emergency programs to aid nations that may face liquidity problems. The changes come as the I.M.F. gears up to take a yet bigger role in helping ease the European sovereign debt crisis. Risk-averse investors are paring back exposure to Europe, hiking borrowing costs across the Continent. Numerous countries, including Italy, Spain and Hungary, are struggling to finance their debt.

 

The fund said it approved revisions to help countries with “relatively strong policies and fundamentals” affected by the debt crisis in the euro zone — in its words, “crisis-bystanders.” It said it will be able to offer assistance in a “broader range of circumstances” than previously allowed.

 

The goal, the fund said, is to “break the chains of contagion.”

 

“The fund has been asked to enhance its lending toolkit to help the membership cope with crises,” said Christine Lagarde, I.M.F. managing director, said in a statement. “The reform enhances the fund’s ability to provide financing for crisis prevention and resolution. This is another step toward creating an effective global financial safety net to deal with increased global interconnectedness.”

 

The fund is replacing an instrument called the “precautionary credit line” with a more flexible instrument it called the “precautionary and liquidity line.” It will now offer credit to countries in relatively good fiscal shape facing liquidity problems. Previously, the fund offered such credit lines only as a precaution against financing problems for countries that may encounter trouble. It will also provide credit lines with durations as short as six months.

 

The fund additionally announced that it will consolidate its natural-disaster aid and post-conflict aid programs under a new “rapid financing instrument.” The changes come as the I.M.F. takes a more prominent role in stemming the European debt crisis and attempting to prevent global contagion.

 

European leaders have fumbled in enacting their plan to ease countries’ spiraling borrowing costs. For instance, they have not yet fully funded the European Financial Stability Facility, a trillion-euro rescue fund. The half-measures have failed to ease the concerns of global investors, and borrowing costs have kept rising.

 

A bolstered I.M.F. could provide the liquidity that Europe needs and its involvement could reassure investors, experts said. But the fund would require significantly more resources to be able to help big euro zone countries, like Italy.

 

Cash-rich emerging-market countries including China and Brazil have indicated a willingness to help ease the euro zone crisis by contributing funding to the I.M.F. At a press conference last week, David Hawley, a spokesperson for the fund, said that “emerging market countries have expressed readiness to augment the resources of the fund.” Some European officials have also floated the idea of the European Central Bank lending to the I.M.F., which would then lend to and help enact fiscal reform in euro zone countries. The fund has declined to comment on the idea.

 

For now, the I.M.F. is playing a supporting role. But that role is getting bigger. Later this month, it is sending a team to assess the Italian economy, though Italy has not requested I.M.F. aid.

 

The changes announced today will help countries seeing borrowing costs rise even if they are in decent fiscal shape. The new resource is relatively modest and would do little to aid large European countries facing heavy debt burdens. For instance, Italy would be able to borrow about $123 billion from the I.M.F., 10 times its current quota. It needs to refinance more than $350 billion of its debt in the next six months alone.

 

But the new facility might aid smaller countries hurt by exposure to the euro zone crisis. On Monday, Hungary, which does not use the euro currency, announced it had asked the I.M.F. and the European Commission for a line of credit should it need short-term funds. The country does not have as heavy a debt load as many other European countries, about 80 percent of its annual economic activity, compared to 120 percent for Italy. But Hungary is nevertheless facing financing troubles related to problems in the euro zone.

 

Weak demand in Europe has reduced Hungarians exports and slowed its economic growth. Its currency, the forint, has slumped. It also has problems with its housing market, since a high proportion of Hungarian mortgages are denominated in foreign currencies.

 

Hungary said it had sought “insurance” from the I.M.F. and the European Commission. A feisty statement by its ministry for national economy promised that the new arrangement would “not increase government debt” and would be taken out only as an “insurance contract” to encourage investment in Hungary and to bolster growth.