MarketView for November 4

 

 

Summary

 

Why is the media never miss an opportunity to make the point that many investors seem to always see the glass as half empty. Monday was no exception as all three major equity indexes moved higher in light trading volume; the stated reason was that investors were reluctant to make big bets with S&P 500 index just below the all-time closing high. In other words, the day's lackluster activity was supposedly due to the Dow and S&P 500 indexes' chalking up four consecutive weeks of gains. Investors were also awaiting the all-important non-farm payrolls report due Friday for further clues on when the Federal Reserve may begin to start tapering its stimulus, despite the fact that the Fed has made its position abundantly clear. However, it is true that the Street is always cautious ahead of the jobs report.

 

Among the day's major news items driving the markets, BlackBerry ended the day down 16.4 percent to $6.50 after hitting a 52-week low of $6.40. The company said it was abandoning a plan to sell itself. With Monday's drop, the stock is at levels unseen since October 2003. In addition, Twitter raised the upper end of the projected price range for its initial public offering later in the week, an encouraging sign for the social media company.

 

The otherwise quiet start to the week follows a week of record highs for the indexes. It remains to be seen whether the market can push higher, with a heavy dependency on the steps the Federal Reserve will take in the months ahead in response to economic data. The Fed's massive bond purchases have helped prop up the economy and the equity market for much of the year. The benchmark S&P index is up 4.3 percent over the past four weeks.

 

St. Louis Federal Reserve President James Bullard told CNBC television the Fed should not rush a decision to scale back its asset purchases because of low inflation.

 

Recent manufacturing data have been stronger than expected, lending weight to the argument that the economy may be sturdy enough to handle an earlier-than-expected reduction in the central bank's bond-buying program.

 

In earnings, Kellogg closed up 0.7 percent at $62.72 after the company reported a 3 percent rise in its quarterly earnings number, and said it would slash 7 percent of its workforce by 2017.

 

With about 75 percent of S&P 500 companies having reported results so far, 69 percent have exceeded Wall Street's expectations, above the long-term average of 63 percent. Just 53 percent have exceeded revenue forecasts, below the 61 percent average since 2002, Thomson Reuters data showed.

 

Approximately 5.1 billion shares changed hands on the three major equity exchanges, a number that was below the average daily closing volume of about 6.2 billion shares this year.

 

Business Spending Falls

 

Orders for capital goods were lower than expected in September, a sign companies have sharply reduced their investment plans. According to a report released by the Commerce Department on Monday, new orders of non-military capital goods other than aircraft, an indicator of business spending plans, fell 1.3 percent during the month.

 

While the data suggests Washington’s political impasse may have been partially responsible, corporations may have already been in an investment reduction mode over doubts regarding the economy's strength. Previously, the government had estimated that the gauge of business spending plans dropped 1.1 percent in September.

 

A surge in volatile aircraft orders helped push overall orders of factory goods to rise 1.7 percent, in line with the Street expectations. The report also indicated that overall new orders for factory goods slipped 0.1 percent in August.

 

Shipments for the core capital goods category, which strips out aircraft and military wares and also directly feeds into the Commerce Department's calculations of economic growth, fell 0.2 percent in September.

 

Major Shakeup at Blackberry

 

BlackBerry is abandoning a plan to sell itself and instead will replace its chief executive officer and raise about $1 billion from institutional investors, including its largest shareholder, the company said on Monday. The company said it would raise the money with a private placement of convertible debentures.

 

John Chen will be appointed executive chairman and will be interim CEO while the company looks for a new leader. He is the former CEO of Sybase, a database software company that SAP AG acquired in 2010. Chen joined private equity group Silver Lake as senior adviser last year.

 

BlackBerry's largest shareholder, Fairfax Financial Holdings, will buy $250 million of the debentures. BlackBerry said the subordinated debentures would be convertible into common shares at $10 and have a seven-year term.

 

Fed Members Remain Undecided

 

The Federal Reserve should scale back its asset purchase program only when the economy improves and even then only slowly, one member of the Fed said on Monday. Another said there is no need to rush the process.

 

The two Fed officials, St. Louis Federal Reserve Bank President James Bullard and Federal Reserve Board Governor Jerome Powell, did not say exactly when they believe the Fed will begin withdrawing stimulus, a question that is at the forefront of many investors' minds.

 

Powell called the timing "necessarily uncertain" because it depends on the strength of the recovery.

 

But their comments underscored Fed Chairman Ben Bernanke's repeated promise that the Fed will not reduce stimulus according to a set timeline, but rather in response to economic developments.

 

"What it's reasonable to expect us to do is to be transparent and to move gradually when it is time to withdraw accommodation, or even to begin reducing the pace at which we add accommodation and go slowly in doing that," Powell told the Asia Economic Policy Conference.

 

The Fed should also "hold to our obligation to only do that as demand does strengthen in the United States," he said. "Those are the things that we can do and we must do, should do."

 

The Fed is buying $85 billion in long-term assets each month to boost investment and hiring by pushing down long-term borrowing costs. Last month the Fed stuck to that program, saying it needed more evidence of stronger growth before reducing stimulus. Both Bullard and Powell voted with the 9-1 majority.

 

"For me, you don't have to be in a hurry because of low inflation," Bullard told CNBC television. Bullard said he wanted to see inflation heading back up toward policy-makers' 2 percent goal before tapering bond buying. Inflation has been running much closer to 1 percent, he noted.

 

The Fed's October decision followed bitter partisan battle in Washington that led to a 16-day partial government shutdown and flirted with a devastating debt default. Bullard said he did not think the shutdown in itself would do lasting harm to the economy, although he acknowledged that the political fighting had hurt confidence. But the Fed should not wait for a permanent budget deal before taking policy action, he said.

 

"I think we can't really wait for the political situation in Washington to be just right because, evidently, they could be bickering forever," he said.

 

He also played down the impact that the central bank's leadership transition would have on decision-taking, after President Barack Obama nominated Fed Vice Chair Janet Yellen to take over the helm from Ben Bernanke when his term expires at the end of January. Yellen's appointment must be confirmed by the U.S. Senate.

 

"I don't think the committee would put very much weight on anything like that. It is a continuous process and it is a committee that is making the policy and they want to adjust at the right time," Bullard said. He also said that he expected she would help ensure policy continuity once she was in charge.

 

Powell, speaking in a conference room at the San Francisco Fed named after Yellen, devoted most of his remarks to debunking the idea that easy accommodative policy in the United States and other advanced economies has been primarily responsible for the massive capital inflows, currency appreciation and asset price rises that some emerging economies have blamed on policies implemented by the Fed and other major global central banks.

 

While accommodative monetary policies "likely contributed to some of these flow and price pressures," he said, and may also have contributed to the buildup of potential financial imbalances in certain emerging markets, "other factors appear to have been even more important."

 

Among those factors, he said, are expectations that some emerging economies will grow more slowly than before.

 

A third Fed policymaker, Dallas Fed President Richard Fisher, told a group of economists in Sydney that he does not see the Fed continuing its bond-buying program indefinitely, or increasing it. However, even Fisher, a stalwart opponent of the Fed's current easy policy, said he could see the Fed holding rates low for a very long time.

 

J&J to Fork Over $2.2 Billion

 

Johnson & Johnson will pony up $2.2 billion to end civil and criminal investigations into kickbacks to pharmacists and the marketing of pharmaceuticals for off-label uses, Attorney General Eric Holder said on Monday. The resolution of the long-running case covers the marketing of the anti-psychotic drugs Risperdal and Invega and the heart drug Natrecor over several years.

 

From 1999 through 2005, J&J and its subsidiary Janssen Pharmaceuticals promoted Risperdal for unapproved uses, including controlling aggression and anxiety in elderly dementia patients and treating behavioral disturbances in children and in individuals with disabilities, according to the complaint. The off-label marketing cost government insurance programs hundreds of millions of dollars in uncovered claims, the complaint said.

 

Under the settlement, Janssen will plead guilty to a single misdemeanor violation for its promotion of Rispersdal. Meanwhile, the company paid millions of dollars in kickbacks to Omnicare, the nation's largest pharmacy specializing in dispensing drugs to nursing home patients, under various guises including "educational funding."

 

Johnson & Johnson's conduct "recklessly put at risk" the health of children, dementia patients and others to whom the drug was prescribed at a time it was only approved by the U.S. Food and Drug Administration to treat schizophrenia, Holder said.

 

Janssen's sales representatives "aggressively" promoted Risperdal to doctors and other prescribers who treated elderly dementia patients, and through a special "ElderCare sales force" targeted nursing home operators.

 

"The company also provided incentives for off-label promotion" and based sales representatives' bonuses on total sales, not just sales for FDA-approved uses, the DOJ said.

 

Under FDA regulations, doctors may prescribe drugs for unapproved, or off-label, use. At the same time, pharmaceutical companies are allowed to market their drugs in the United States only for FDA-approved uses. The FDA said it had delivered repeated warnings to Janssen about "misleading marketing messages" to doctors, and later initiated a criminal complaint.

 

"Our investigators devoted considerable time and resources to this case, to help ensure that pharmaceutical companies do not mislead healthcare providers and the general public," John Roth, director of the FDA's Office of Criminal Investigations, said in a statement.

 

As part of the settlement, Justice Department lawyers filed a civil complaint against Johnson & Johnson in U.S. District Court for the Eastern District of Pennsylvania on Monday. Johnson & Johnson said that the settlement of "the civil allegations is not an admission of any liability or wrongdoing, and the company expressly denies the government's civil allegations."

 

Monday's settlement also resolved allegations that J&J and a subsidiary, Scios Inc., marketed Natrecor for off-label uses not approved by the FDA and not covered by federal healthcare programs.

 

J&J disclosed in a securities filing in 2011 it had reached an agreement to resolve criminal penalties related to the promotion of Risperdal, which was once one of the company's biggest sellers, but that certain issues remained open.

 

The company on Monday said no additional charges will be recorded to earnings in connection with the settlement. "We reached closure on complex legal matters spanning almost a decade," said Michael Ullmann, general counsel of Johnson & Johnson.

 

Most large pharmaceutical companies have had to pay major fines the past decade for alleged improper marketing of their medicines. Pfizer in 2010 agreed to pay $2.3 billion to settle allegations it improperly marketed 13 drugs, including kickbacks to healthcare providers.

 

Last year, GlaxoSmithKline agreed to pay $3 billion to resolve criminal charges that it improperly targeted its Paxil depression treatment to children, sold its Wellbutrin antidepressant for unapproved uses and failed to inform regulators of safety risks seen with its Avandia diabetes drug.

 

Glaxo is now under the microscope of Chinese police, who in recent months alleged it has participated in a widespread bribery and corruption scheme in which the company used travel agencies to funnel illegal payments to doctors and government officials to bolster drug sales.