MarketView for October 1

 

 

Summary   

 

Both the Dow Jones industrial average and the S&P 500 equity indexes endured their worst one-day fall in three months on Thursday after economic reports fueled fears about the recovery's strength. The decline came a day after the financial markets ended the third quarter with strong gains, with the Dow and S&P each up 15 percent from the previous quarter.

 

Cyclical stocks, which are sensitive to the economy's cycles, were among the worst performers, including technology and bank shares.

 

The Institute for Supply Management's index of national factory activity declined in September from the ISM’s August reading, and although the latest index number still pointed towards an expanding industrial sector. The difficulty was that the actual and the predicted were far apart. In the ISM report, the manufacturing reading fell to 52.6, a small decline from the August reading of 52.9.

 

Data on jobless claims also was worse than expected.

A report from the Labor Department report indicated that initial claims for state unemployment insurance rose more than expected.

 

Those reports overshadowed data from the Commerce Department indicating that personal spending rose 1.3 percent in August, the largest gain since October 2001.

 

It was the third straight day of declines for stocks and the Nasdaq’s worst decline since June 22, just before the market suffered a modest pullback.

 

All 30 Dow components finished in the red, with the Dow's biggest decliners including JPMorgan Chase, down 5.6 percent at $41.37, and Boeing, down 3.8 percent at $52.11. Caterpillar, another key Dow component ended the day down 3.7 percent, closing at $49.45.

 

Shares of Bank of America fell 4.2 percent to $16.21 after CEO Ken Lewis said he was retiring after months of being dogged by a series of government investigations into the company's acquisition of Merrill Lynch. The company did not name a successor. The news was announced late Wednesday.

 

Among the Nasdaq's major losers were Apple, down 2.4 percent at $180.86, Qualcomm, down 5.1 percent at $42.70 and Microsoft, down 3.3 percent at $24.88. Goldman Sachs removed Microsoft from its Americas Conviction Buy list, saying the company may have one more soft quarter.

 

Economic Data Is Again Mixed

 

Consumer spending in August rose at its fastest rate in nearly 8 years, but a weak labor market and the below forecast growth in September for the manufacturing sector could hamper a nascent economic recovery.

 

The Commerce Department reported on Thursday personal spending jumped 1.3 percent, the largest gain since October 2001, after a 0.3 percent increase in July. Spending was up for a fourth straight month.

 

Optimism over the rise in spending, which normally accounts for over two-thirds of U.S. economic activity, was clouded by reports showing a rise in the number of people applying for first-time unemployment benefits last week and an expansion in manufacturing activity last month that did not meet the more lofty expectations of Wall Street. Specifically, the Institute for Supply Management reported that its index of national factory activity fell to 52.6 in September from 52.9 in August

 

However, a report from the Labor Department showed initial claims for state unemployment insurance rose to a seasonally adjusted 551,000 last week from 534,000 in the previous week. Despite the rise in weekly claims, the underlying trend remains toward gradual improvement in the labor market.

 

The four-week moving average of new claims fell to 548,000, the lowest since 547,000 reported in the week ending January 24. Continued claims of workers still collecting jobless aid after an initial week of benefits fell to 6.09 million in the week ending September 19 from a 6.16 million in the prior week. The Labor Department will release September's employment report on Friday.

 

Still there was positive news for the economy. Pending sales of existing homes rose sharply in August, for a seventh consecutive month of gains. The National Association of Realtors index of pending home sales, which is based on contracts signed, was up 6.4 percent to 103.8, the longest consecutive month-on-month gain in the history of the series, which began in 2001.

 

There are concerns that weak domestic spending could stall the economy's recovery from its worst recession in 70 years. Government data on Wednesday showed spending dropped at a 0.9 percent annual rate in the second quarter after rising 0.6 percent in the January-March period.

 

Personal income rose 0.2 percent in August after rising 0.2 percent in July, the Commerce Department said. Real disposable income inched up 0.1 percent in August. Savings declined for a third straight month. Savings slipped to an annual rate of $324.1 billion, with the saving rate easing to 3 percent from 4 percent in July.

 

Fed and Congress Back Away From Omnipotent Fed Idea

 

The Fed and Congress on Thursday backed away from a controversial provision of the Obama administration's financial regulation reform plan, saying new oversight by the Fed on "systemic risk" should be shared with other regulators. Fed Chairman Ben Bernanke told a congressional panel that a new council of financial regulators, not just the Fed, should monitor big-picture risks threatening the financial system.

 

"There were some, myself included, who earlier this year thought that the Federal Reserve would have a larger role in this. Now it looks like it will be part of a councilor structure," said House of Representatives Financial Services Committee Chairman Barney Frank at a hearing with Bernanke.

 

The comments from Frank and the Fed chairman come amid growing skepticism in Congress about an administration proposal to give the Fed the lead role in policing the economy for systemic risk, albeit in coordination with an inter-agency council.

 

The Fed is "well suited" to supervise major financial institutions whose failure could hurt the economy, Bernanke told Frank's committee. He also said all systemically important financial firms should answer to a consolidated regulator, whether or not they own banks. But an inter-agency council should be used to monitor the very broadest sorts of risk, he said, placing new emphasis on an idea embraced by increasingly vocal critics of the Fed.

 

While the administration has backed the idea of creating an inter-agency council to work with the Fed, it has been firm on its determination to place the most power in the Fed.

 

Bernanke said it was a good idea for one single regulator to be responsible for supervising individual firms. "However, the broader task of monitoring and addressing systemic risks that might arise from the interaction of different types of financial institutions and markets -- both regulated and unregulated -- may exceed the capacity of any individual supervisor," he said.

 

"Instead, we should seek to marshal the collective expertise and information of all financial supervisors to identify and respond to developments that threaten the stability of the system as a whole."

 

Frank has been trying to find a new formulation that would give the council more power, but preserve a central Fed role. A key to the final outcome of the debate will be if the Fed gets clear power to intervene when systemic risk is detected.

 

Cisco Does Video...Again

 

Cisco has agreed to buy Norwegian videoconferencing company Tandberg for $3 billion in cash; its latest big bet that video will drive demand for its core data transmission gear. The acquisition will fill the wide gap between Cisco's high-end TelePresence video meeting service for executives and its WebEx tool used by millions of office workers for online meetings, and could bring videoconferencing to a mass market.

 

Tandberg's board has recommended the Cisco offer to its shareholders and Chief Executive Fredrik Halvorsen told investors that major shareholders had voiced support for the offer of 153.50 Norwegian crowns ($26.49) a share. Halvorsen will continue to lead the unit if the acquisition goes through.

 

In October 2008 Tandberg ended takeover talks with Silver Lake Partners, blaming market turmoil. A person familiar with the matter said the bidder was technology specialist. Potential rival suitors include Hewlett-Packard, which is also active in Web collaboration. The market has also linked telecoms gear maker Ericsson with Tandberg. DnB NOR Markets named in a report on Thursday Juniper, IBM, Sony and Siemens.

 

The offer values Tandberg at about 23 times 2010 earnings, slightly above rival Polycom's multiple of 21.7. If approved by shareholders and regulators, the acquisition will be Cisco's largest deal since its acquisition of WebEx for $3.2 billion in 2007.

 

Chief Executive John Chambers said Cisco, which had a cash pile of $35 billion as of July 25, would step up the pace. "You're going to see us more aggressive over the next 12 months than you have seen us as a company," he told a news conference in Oslo. "We will be very aggressive with internal start-ups, partnering ... and also in acquisitions."

 

Cisco said it hopes to close the deal in the first half of 2010, subject to regulatory approval. The acquisition would give the company a broad portfolio that rivals would struggle to match, although one anti-trust lawyer said he saw few issues. Cisco believes it can bring its network expertise to bear to make videoconferencing -- a tool it considers underused due to the difficulty of the technology -- a far smoother experience, and improve its popularity.

 

Tandberg also has its own 'telepresence' offering, designed gives the impression of conference participants being in the same room, which it launched earlier this year.

 

It is the first that can connect to systems of rivals including those of Polycom and Microsoft, removing the need for companies to buy whole systems from those providers.

 

Tandberg sells about 15,000-16,000 of its regular videoconferencing units every quarter for about $7,500 each, while Cisco has sold fewer than 10,000 in total of its TelePresence systems, which cost about $250,000.

 

Cisco estimates the total value of collaboration tools, including everything from videoconferencing to conference calls to Google Apps, to be worth about $34 billion. The market could also receive a boost from the recession, which has slashed corporate travel budgets that are not expected to be completely restored when the economy recovers.

 

Cisco says it has reduced its own global travel expenditure to about $260 million from $720 million, thanks to its investment in TelePresence as well as cuts it would have made.

 

($1=5.794 Norwegian crowns)

 

No Need For Unemployment To Fall Before Raising Rates

 

The jobless rate does not have to start falling before the Federal Reserve starts tightening monetary policy, Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said on Thursday. According to Lacker, the Fed could place more weight on the outlook for economic growth, and in particular, consumer spending.

 

"I don't think it's a show stopper if the unemployment rate hasn't started falling," Lacker said, reiterating similar comments he made in August. However, the Fed needs to look for growth to establish itself firmly before raising interest rates, he said.

 

Some Fed officials, including Governor Kevin Warsh, have argued that once the Fed decides to tighten policy, the pace of interest-rate hikes could also be swift.

 

"I think there is something to that, but we'll have to judge as the data comes in," Lacker said. "The question of timing and pace, that is a big open question."

 

The Fed has the tools it needs to shrink its balance sheet, Lacker said. He also noted the Fed's ability to tighten even with a large balance sheet by paying interest on reserves.

 

"We want to think about doing both ... How we time those out, how we stage those, I think that's for future work," he said. Inflation expectations are well-anchored, he said.

 

Lacker said he had been heartened by recent data on consumer spending, but added that it will take months before it is clear whether the consumer spending recovery is a trend.