MarketView for November 7

 

 

Summary

 

The broader market was hurt by weak earnings from Whole Foods and Qualcomm. As a result the tech-heavy Nasdaq index recorded its largest daily decline in a month. Whole Foods ended the day down $7.21 to close at 57.26 after the company forecast revenue below expectations. Tesla Motors fell 7.5 percent one day after a big fall on lackluster earnings and a third car fire. Tesla remains a favorite among short-sellers who believe it is overvalued. Qualcomm ended the day down 3.8 percent to close at $67.09

 

Meanwhile, Twitter soared as much as 92 percent in its first day of trading on the New York Stock Exchange as investors snapped up shares in a frenzy that brought back memories of the days of the dot-com bubble. Twitter’s shares opened at $45.10 a share, up from the initial public offering price of $26 set Wednesday, then added to those gains, hitting a high above $50. The stock closed up 73 percent at $44.90 with 117 million shares traded.

 

Wall Street paid little attention to the European Central Bank's move to cut interest rates after a slump in inflation sparked fears the euro zone's economic recovery could stall. The move reinforced expectations global central banks will continue to buoy struggling economies.

 

The economy grew 2.8 percent in the third quarter, but that estimate, which will be revised, was affected by a larger-than-expected build-up of inventories, which tends to subtract from growth later on. Initial jobless claims fell 9,000 to a seasonally adjusted 336,000 last week, roughly in line with expectations.

 

Those economic reports, as well as this coming Friday's much-anticipated jobs numbers, will give the Street some insight into how long the Fed will keep buying $85 billion a month in bonds. The central bank's stimulus has been a key component of the 24.1 percent year-to-date gain in the S&P 500, putting the index on pace for its best yearly performance since 2003.

 

About 6.7 billion shares changed hands on the three major equity exchanges according to data by Bats Global Markets.

 

Twitter Has Successful IPO

 

Twitter rose 73 percent in a frenzied trading debut that drove the seven-year-old company's value to $25 billion and evoked the heady days of the dot-com bubble. The stock closed out its first trading day at $44.90 a share from the initial public offering price of $26 set late on Wednesday, falling back from a near-doubling in price at a session high of $50.

 

Investor enthusiasm for the company defied traditional valuation analyses. The shares traded at about 22 times forecast 2014 sales, nearly double the multiple at social media rivals Facebook and LinkedIn, even though Twitter is far from turning a profit and posted a loss of almost $70 million for its most recent quarter.

 

Yet fans believe that Twitter, which has 230 million users globally, has established itself as an indispensable Internet utility, alongside Google and Facebook, and that it has only scratched the surface of its potential as a global advertising medium.

 

The IPO was shadowed for months by Facebook's troubled 2012 debut, yet Twitter's opening appeared to go off without a hitch. Still, Twitter may find itself subject to the opposite criticism, that it had priced the shares too low and left more than a billion dollars on the table.

 

Heavy demand for the IPO shares was apparent before the final pricing. Apparently, investors had asked for 30 times the 70 million shares on offer in the IPO, representing about 13 percent of Twitter's outstanding common shares.

 

Twitter could raise $2.1 billion if an underwriters' over-allotment is exercised, as expected, making it the second largest Internet offering in the United States behind Facebook's $16 billion IPO last year and ahead of Google 2004 IPO, according to Thomson Reuters data.

 

The NYSE, which snatched the listing away from its tech-focused rival, Nasdaq, marked the occasion with an enormous banner with Twitter's bird logo along its Broad Street facade.

 

The hefty valuations were cause for celebration for some insiders but they sounded alarm bells for some investors who cautioned that the froth was unwarranted. At Twitter's headquarters in San Francisco, offices opened early and hundreds of employees flocked to the 9th floor cafeteria to watch the festivities on TV while eating "cronuts," a croissant-donut hybrid, made by Twitter's resident chef, Lance Holton.

 

The public debut is the latest milestone for a service that was born out of a nearly-defunct startup in 2006 and was derided by many in its early years as a silly fad dominated by people talking about what they had for breakfast.

 

However, Twitter quickly began to penetrate popular culture in unexpected ways, with its open design and broadcasting format attracting celebrities, athletes, politicians and anybody who wanted to share short, punchy thoughts with a digital audience.

 

Its business potential developed more slowly, and the company appeared to be floundering as recently as three years ago, when it was riven by management turmoil and frequently crippled by service outages.

 

The company has rapidly ramped up its money-making engine by selling "promoted tweets," messages from marketers that are distribute to a wide-ranging but targeted group of users. In the third quarter, Twitter made $168 million in revenue, it said, more than double from a year prior.

 

The 140-character messages have spawned an Internet culture of its own. The "hashtag," a pound symbol devised by early Twitter users to denote the topic of a conversation, has become ubiquitous, with the word even becoming an ironic expression parodied by the likes of "Saturday Night Live."

 

As Twitter's stock soared after the opening, the company's market value, including restricted share units and other securities that could be exercised in the coming months, was over $28 billion. Fund managers who got small allocations at the IPO were hopeful the stock would trade down after Thursday's pop.

 

Growth Up, Spending Down

 

The economy grew faster than expected during the third quarter as businesses restocked shelves. However, a slowdown in consumer and business spending pointed to an underlying weakness. Meanwhile, a separate report from the Labor Department suggested the jobs market continued to gradually improve.

 

Gross domestic product expanded at a 2.8 percent annual rate, the quickest pace since the third quarter of 2012, the Commerce Department said on Thursday. It was acceleration from a 2.5 percent clip in the second quarter and exceeded Street expectations for a 2.0 percent rate.

 

Details of the first estimate of third-quarter GDP were generally weak, with inventories contributing 0.83 percentage point to GDP growth. Excluding inventories, the economy grew at a 2.0 percent rate after expanding at a 2.1 percent pace.

 

Consumer and business spending growth slowed sharply, lending the report a weak tone and validating the Fed's decision to stick to its $85 billion monthly bond-buying program. With near-term growth prospects not that bright, a reduction in the purchases, which aim to keep interest rates low, is not expected this year.

 

Consumer spending, which accounts for more than two-thirds of all economic activity, grew at a 1.5 percent rate, the slowest pace since the second quarter of 2011. It grew at a 1.8 percent rate during the April-June period.

 

Some of the slowdown in consumption is blamed on weak demand for utilities because of unseasonably cool weather in the summer. However, households have also been wary of loosening their purse strings as the pace of job gains slowed significantly during the quarter.

 

Initial claims for state unemployment benefits fell 9,000 to a seasonally adjusted 336,000 last week. The uncertain economic outlook is making businesses cautious about ramping up hiring. They are also holding back on spending on capital goods. As a result, business investment moderated, largely due to spending on equipment, which fell for the first time since the third quarter of 2012. Spending on nonresidential structures rose for the second consecutive quarter.

 

The economy grew at a 1.8 percent rate in the first half of 2013, held back by a tightening in fiscal policy at the start of the year. Growth had been expected to gain speed in the fourth quarter as the drag from fiscal policy lifted.

 

The economy has received support from a slowdown in import growth, which helped to limit the rise in the trade deficit. Trade added 0.31 percentage point to growth in the third quarter. The decline in government spending appeared close to running its course in the third quarter, with sturdy growth in spending by state and local authorities.

 

Government spending grew for the first time in a year, even though federal spending continued to decline. Economists say this fading fiscal drag would have set up the economy on a stronger growth path in the fourth quarter, were it not for the government shutdown.

 

The housing market appeared to weather a spike in mortgage rates, with spending on residential construction increasing strongly. Other details of the GDP report showed some pick-up in inflation during the quarter, but not enough to alter the picture of benign price pressures.

 

Consumer Credit Rises

 

Consumer credit rose more than expected in September but credit card usage fell for a fourth straight month, which could help shed some light on the slowdown in consumer spending during the third quarter. Total consumer credit increased by $13.74 billion to $3.05 trillion, the Federal Reserve reported.

 

Revolving credit, which mostly measures credit-card use, fell by $2.06 billion, falling for a fourth consecutive month. The sustained drop could help explain the pullback in consumer spending in the third quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at its slowest pace in two years during the July-September quarter, a government report showed on Thursday.

 

Non revolving credit, which includes auto and student loans, was up by $15.80 billion during the month of September, following a $15.04 billion increase during August.