MarketView for October 12

 

 

Summary

 

The Dow Jones industrial average and the S&P 500 equity indexes managed to maintain their relentless drive upward on Monday, with the S&P chalking up its sixth consecutive day of positive numbers enabling it to end at its closing high for the year as energy shares rose alongside the price of oil.

 

Chevron and Exxon Mobil were among the Dow's largest gainers as optimism over the depth and speed of the economic recovery pushed the price of oil up 2.1 percent. Front-month domestic sweet crude futures settled up $1.50 per barrel at $73.27. Chevron's shares ended the day up 1.3 percent to close at $73.67, while Exxon saw a gain of 1.2 percent in its share price with a closing number of $70.13.

 

Nonetheless, the momentum of the morning had been reduced substantially by the closing bell as investors took some profits off the table ahead of the upcoming earnings season. Some of the largest corporate names are scheduled to post earnings this week, a reality check for whether a seven-month rally in stocks this year has further to run. Volatility was heightened by light volume, with many market players away for the Columbus Day holiday.

 

Results from the major banks will be in the spotlight this week with JPMorgan Chase, Citigroup, Goldman Sachs and Bank of America all scheduled to report earnings in the next four days. Other major companies scheduled for this week include Intel and Google. Because the last two quarters were characterized by aggressive cost cutting and layoffs, firms that do not report expected numbers will feel the brunt of the Street’s displeasure.

 

Black & Decker ended the day up 7.6 percent to close at $50.82, the result of an announcement by the company that it was seeing better-than-expected shipments and as a result was raising its third-quarter earnings outlook.

 

Google rose 1.5 percent to $524.04 after several analysts raised their price targets on the stock before its third-quarter results, due out on Thursday. Onyx Pharmaceuticals rose 5.1 percent to $28.26 after the company agreed to buy Proteolix for an upfront cash payment of $276 million. The series of recent M&A announcement is being viewed as further evidence that the economy is stabilizing.

 

Volume was light on the New York Stock Exchange, with only 946.81 million shares changing hands, below last year's estimated daily average of 1.49 billion, while on the Nasdaq, about 1.79 billion shares traded, below last year's daily average of 2.28 billion.

 

Price of Crude Rises

 

The price of crude oil rose by 2 percent on Monday on optimism about the pace of global economic recovery and as cold weather across the United States increased the demand for heating oil. The National Weather Service said total U.S. heating demand will be higher than normal this week as the first seasonal wave of cold weather hits the Northeast and Midwest.

 

Sweet domestic crude for November delivery settled up $1.50 per barrel at $73.27l, making it the highest settlement since August 24. Brent crude settled up $1.36 per barrel at $71.36.

 

Further support came from a fall in the dollar as traders and speculators positioned themselves ahead of corporate earnings later this week on expectations strong results will drive risk tolerance higher. Both groups have been looking for signs of an economic turnaround that could support fuel demand, which has been hard hit by the recession.

 

Saudi Arabia will keep steady in November its curbs on the contracted volumes of crude it supplies to Asia and Europe. U.S. weekly oil inventory data from the American Petroleum Institute will be delayed until Wednesday due to the Columbus Day holiday, while the Energy Information Administration report will be released on Thursday.

 

See, I Told You So

 

As has been discussed here a number of times, despite the fact that many have stated claims to the contrary, it appears the recession is over. Nonetheless, for the past several months I have written that the unemployment will unfortunately reach and possibly exceed 10 percent before beginning to improve.

 

This position was been reinforced on Monday when the National Association for Business Economics, also known as the NABE, released a survey of 44 professional forecasters indicating that 80 percent of the respondents believed the economy was growing again after four straight quarters of declines. In other words, "The great recession is over," NABE President-Elect Lynn Reaser said.

 

"The vast majority of business economists believe that the recession has ended, but that the economic recovery is likely to be more moderate than those typically experienced following steep declines," He said.

 

Recessions in the United States are dated by the National Bureau of Economic Research. The private-sector group, which does not define a recession as two consecutive quarters of decline in real gross domestic product, often takes months to make determinations.

 

The recession that started in December 2007 is the longest and deepest since the 1930s. It was triggered by the U.S. housing market's collapse and the ensuing global credit crisis. While the economy is believed to have rebounded in the third quarter, Main Street will probably mot see much difference due to the continued high unemployment number.

 

The NABE survey, conducted in September, predicted real GDP growth expanding at an annual pace of 2.9 percent over the second half of this year. Output for all of 2009 is expected to contract 2.5 percent and next year, rebound 2.6 percent.

 

Much of the anticipated recovery is being driven by businesses rebuilding their inventories after aggressively reducing unwanted stockpiles of unsold goods to match weak demand. Investment in the residential market would also add to growth, with the majority of the survey's respondents convinced that the housing market downturn, which has lasted more than three years, was close to coming to an end. About two-thirds of respondents believed house prices will reach a bottom this year. The survey found that high house prices would not pose a threat to the sector's recovery.

 

The survey predicted that the unemployment rate will rise to 10 percent in the first quarter of 2010 and edge down to 9.5 percent by the end of that year. The labor market was not expected to regain most of the jobs destroyed in the recession until 2012 or beyond. Furthermore, the weak labor market will continue to weigh on consumer spending, slowing the recovery.

 

The good news is that the easing of the labor market, in combination with weak wage growth, means that inflation will not be an obstacle to the economic recovery and the Federal Reserve will not be under pressure to raise interest rates, the survey found.

 

The Fed was seen leaving its overnight benchmark lending rate near zero until late next spring, followed by measured increases that would take the rate to 1 percent by the end of 2010, the survey showed.

 

Despite signs of improvement in the financial markets, most respondents believed that it would take some time for a return to normal. Only 29 percent believed this would happen in the second half of next year.

 

Respondents also expected the dollar to weaken further this year and into 2010, but did not see this contributing to a narrowing of the country's trade deficit as the economic revival stimulates demand for imports.

 

The dollar has lost about 5.8 percent of its value against a basket of currencies so far this year, largely because of worries over the government's growing budget deficit and expectations that the Fed will keep interest rates at super-low levels for a while.

 

The Obama Administration Gets a Pat on the Back – As It Should

 

The Obama administration has helped pull the U.S. economy back from the "abyss" with aggressive efforts to spur growth and stabilize financial markets, National Economic Council Director Lawrence Summers said on Monday.

 

Defending policies that Republicans have attacked as ineffective, Summers argued that measures put in place by the administration, including a $787 billion stimulus package, had helped turn back the deepest recession since the Great Depression.

 

"Thanks largely to the Recovery Act, alongside an aggressive financial stabilization plan and a program to keep responsible homeowners in their homes, we have walked a substantial distance back from the economic abyss and are on the path toward economic recovery," Summers wrote to House Republican leader John Boehner.

 

Obama is facing rising clamor to take new steps to lift the economy and jump-start job growth as the U.S. unemployment rate edges toward 10 percent. The bleak jobs picture, and soaring fiscal deficits that reflect the cost of battling the recession, could put some of Obama's Democratic allies at risk in next year's congressional elections, unless voters are convinced they are doing all they can to help the economy.

 

Responding to a letter Boehner had sent Obama, Summers pointed to a slowing pace of job losses as evidence that the administration's policies were working. "We have seen a substantial change in the trend of job loss," he said.

 

The economy lost jobs at a monthly average rate of 256,000 in the third quarter of this year, which Summers termed "unacceptably high." But he noted it was nearly a third of the 691,000 jobs per month lost in the first quarter.

 

Summers said there was no higher economic priority than maximizing economic growth and job creation. However, he warned that heavy job losses "cast a substantial shadow forward" and the economy still faced a tough slog.

 

"We need to recognize that lack of demand will be a major constraint on output and employment in the American economy for the foreseeable future," he said.

 

In a nod to concerns about the large federal deficit, inflation and the value of the U.S. dollar, Summers cautioned against simply throwing piles of public money at the economic problems without considering the longer-term consequences.

 

"No actions to combat short-term output gaps must be taken that call into question our commitment to sound money and noninflationary growth."

 

Summers told Boehner that private forecasters have estimated that the stimulus program added three percentage points to second quarter GDP, tempering what would have been an even deeper economic swoon.

 

He also said they believe the unemployment rate would be 2 percentage points lower by the end of 2010 than it would have been without the stimulus plan.

 

Most forecasters estimate the economy resumed growth in the third quarter, although some still worry about the risk of a "double dip" recession in which the recovery stalls.

 

Summers took note of the improvement in U.S. stock market performance since early this year and of recent data suggesting the housing market, which was central to the financial market collapse, was stabilizing.

 

Hitting back at Republicans who are trying to lay blame on Obama for a record budget deficit, Summers said Obama inherited a deficit well in excess of $1 trillion when he took office. He said the policies of Obama's Republican predecessor, former President George W. Bush, led to the shortfall.

 

"The bipartisan commitment to fiscal discipline that existed during the 1990s evaporated during the 2000s. Every major policy enacted during this period violated the principle of paying for new proposals," Summers wrote.