MarketView for November 6

 

 

Summary

 

It was another record high for the Dow Jones Industrial Average on Wednesday, due in large part to gains in the shares of Microsoft and encouraging European economic data. The S&P 500 index also ended the day will into positive territory but just missed setting a record of its own. The benchmark S&P 500 rose as high as 1,773 intraday, above its closing high of 1,771.95 set on Oct 29. Its all-time intraday peak came the day after at 1,775.

 

Microsoft was the largest gainer among the Dow 30 stocks after Reuters reported the company had narrowed its CEO search to a handful of names. Its shares rose 4.2 percent to $38.18 after rising as high as $38.22, the highest since July 2000.

 

However, other big technology shares slipped. Apple fell 0.3 percent to $520.92. Facebook was down almost 2 percent at $49.12. On the positive side of the ledger, Google, which fell as low as $1,015.37 earlier, closed up 0.1 percent at $1,022.75.

 

Meanwhile much of Wall Street’s attention on Wednesday was focused on being ready for Twitter's much-anticipated IPO. Twitter is expected to begin trading on Thursday in the hottest IPO of the year. The micro blogging network, which has yet to turn a profit, has amassed 230 million users in seven years, including heads of state, celebrities and activists.

 

One day before the social media giant's IPO, several other companies sold shares that debuted on Wednesday. Barracuda Networks rose nearly 20 percent to $21.55, but several other IPOs barely moved in their first day of action.

 

If all 13 scheduled IPOs price this week, it will be the busiest week of the year in terms of the number of primary issues since September 2007 According to Thomson Reuters data.

 

Another sign of encouragement came from German industrial orders rising more than expected, which is significant as the country is the economic engine of the euro zone.

 

Weighing on the Nasdaq was Tesla Motors, which saw shares slump more than 14 percent to $151.16 after the company forecast weaker-than-expected fourth-quarter earnings and its third-quarter Model S deliveries disappointed some on the Street. Shares are up 350 percent for the year, and the stock has been a target of short-sellers who see it as overvalued.

 

Ralph Lauren was up 5.5 percent to close at $180.52 after the designer clothing company raised the lower end of its full-year sales forecast on the expectation of strong gains during the holiday quarter and increased its dividend.

 

Abercrombie & Fitch fell 13.5 percent to $33.13 after the company reported a seventh consecutive quarterly decline in same-store sales and warned of a tough holiday season.

 

About 6.2 billion shares changed hands on Wednesday, according to data by Bats Global Markets.

 

Index of Leading Economic Indicators Rises

 

The index of leading economic indicators, a gauge of future economic activity, rose during September, suggesting some momentum in the economy before last month's partial shutdown of the federal government. According to a report by the Conference Board on Wednesday, its Leading Economic Index rose 0.7 percent to 97.1 in September. It had increased by the same margin in August.

 

"The September LEI suggests the economy was expanding modestly and possibly gaining momentum before the government shutdown," said Ken Goldstein, economist at The Conference Board. "Beyond the immediate fallout of the shutdown, the biggest challenge is whether relatively weak consumer demand, pinned down by weak wage growth and low levels of confidence, will recover during the final stretch of 2013 and into 2014."

 

Layoffs Rise According to Challenger, Gray & Christmas

 

The consulting firm of Challenger, Gray & Christmas announced on Wednesday that its day indicated that the number of planned layoffs rose 13.5 percent in October on cuts in the pharmaceutical and financial sectors. According to the report, employers announced 45,730 layoffs last month, up from 40,289 in September.

 

However, for the first time in five months, the October figure was lower than the year-ago tally, which came in at 47,724. For 2013 so far, employers have announced 433,114 cuts, close to the 433,725 seen in the first ten months of last year.

 

The pharmaceutical sector saw the most layoffs, with plans to cut 10,585 employees. Those cuts came mostly from Merck. Last quarter Merck reported lower sales of its Januvia diabetes treatment - its biggest product and hence the layoffs.

 

The financial sector saw the second-largest cuts, with 8,717 layoffs announced. The sector has seen the deepest downsizing so far this year, with 57,591 cuts announced since January.

 

"The banking sector is cutting workforce levels as a direct result of an improving economy. Many banks, including Bank of America, which announced 4,200 job cuts in October, are slashing positions in their mortgage department as the number of troubled mortgages and foreclosures dwindles," said John A. Challenger, chief executive officer of Challenger, Gray & Christmas, in a statement.

 

"Furthermore, improvements in the economy are also pushing interest rates back up, which is curbing demand for refinancing."

 

The figures come two days ahead of the non-farm payroll report, which is forecast to show the economy added 125,000 jobs in October with the unemployment rate edging to 7.3 percent from its current 7.2 percent.

 

EU to Fine Banks

 

A number of banks, including Royal Bank of Scotland and Rabobank face fines amounting to billions of euros. The fines are being levied by European Union regulators as punishment for colluding on global benchmark interest rates. The enforcement effort reinforces Brussels' hard line on the sector after the financial crisis.

 

EU antitrust chief Joaquin Almunia is set to unveil a record fine of at least 1.5 billion euros ($2.03 billion) on six banks, including Barclays and RBS, for rigging the yen Libor interest rate benchmark.

 

Almunia is also likely to penalize another group of banks for operating as a cartel in a separate case involving the rigging of the Euribor benchmark interest rate. The total in the two cases could run to billions of euros and will add to the spiraling cost to banks for cleaning up past misdeeds. Globally this is expected to reach about $125 billion if JP Morgan agrees a $13 billion deal with U.S. authorities over mortgages.

 

This earnings season, banks set aside more money for the rising cost of fines, lawsuits and compensation.

 

Authorities in the United States, Britain and elsewhere have so far fined UBS, RBS, Barclays, Rabobank and ICAP $3.7 billion for manipulating rates. Seven individuals face criminal charges.

 

The London inter-bank offered rate (Libor) and its European cousin (Euribor) are used to price hundreds of trillions of dollars in assets, from Spanish mortgages to derivatives.

 

A settlement with the EU over cartel allegations would require the banks to admit liability, potentially paving the way for lawsuits from investors and others who believe they have lost money because of the rates manipulation.

 

Under the Libor settlement, the world's top interdealer broker, ICAP, and Dutch cooperative bank Rabobank are among those that will be fined. Switzerland's UBS will not be fined because it was the first member of the group to come clean during the European Commission's investigation into wrongdoing. Almunia wants to hand out the fines by the end of the year, reinforcing his reputation for cracking down hard on banks' wrongdoings since the financial crisis struck five years ago. European lawmakers have responded to public anger over the cost of bank bailouts with tough measures that include the first bonus cap in the world for bankers.

 

For its Euribor settlement, Brussels is also set to fine six global banks, including Deutsche Bank, JP Morgan, HSBC, RBS, Credit Agricole and Societe Generale. Barclays, which alerted the European Commission to the suspected wrongdoing in relation to Euribor, will not be fined.

 

Almunia's investigators say interest rate derivatives' traders colluded to rig the Libor and Euribor benchmarks, using advanced knowledge of the cost of borrowing to bolster their profits. Such cartels are illegal. The Libor rate is based on a survey of what banks would charge each other for loans. Other regulators have already found that traders colluded on answers that could nudge the reported rates by amounts that were tiny but translated into big profits.

 

In the Libor settlement, all the banks have admitted to wrongdoing to reduce the size of their fine, but in the Euribor settlement several of the banks are contesting the size of the proposed penalties.