MarketView for October 14

 

 

Summary

 

Up and over we go as the Dow Jones industrial average exceeded the psychologically important 10,000 level on Wednesday as Wall Street digested economic reports showing robust company results and better-than-expected retail sales. With major indexes up more than 1 percent, the Dow's milestone is a symbol of how far the market has come since last year when investors fled collapsing financial markets as the economic outlook soured.

 

Strong results from JPMorgan and Intel bolstered Wall Street’s optimism over the earnings season that is picking up pace. A fresh 14-month low for the dollar also helped stocks as investors bet the slumping currency will lift profits of large multinational companies with big overseas sales. JPMorgan’s quarterly earnings rose sharply, raising expectations that other major Wall Street banks will report strong results this week. JPMorgan closed up 3.3 percent at $47.16.

 

Intel closed up 1.7 percent to $20.83 a day after reporting a quarterly outlook and results that soared past expectations. Meanwhile, a government report showed retail sales, excluding auto purchases, rose for a second month. The data offered cautious optimism that spending could help support the economy as it struggles out of recession.

 

The Dow was last at 10,000 in October 2008 when it dropped through that barrier in a selloff on increasing fears about the depth of the financial crisis. The index is up 52.9 percent since the 12-year closing low of early March, but is still down 29.3 percent from its October 2007 record close of 14,164.53. While the return of 10,000 was greeted with relief, the economy remains fragile. Light volume also signaled conviction was weak, which makes it easier to push stocks up.

 

Abbott Laboratories reported earnings that exceeded Wall Street forecasts. Revenue was in line with targets, a soothing note after disappointing sales report from rival Johnson & Johnson on Tuesday. Abbott closed up 3.1 percent at $51.20.

 

Retail Sales Exceed Expectations

 

Retail sales fell in September, but if you exclude motor vehicles then the number was up for a second straight month in September, raising cautious optimism consumer spending could support some degree of economic recovery.

 

According to a report released by the Commerce Department on Wednesday, total retail sales fell 1.5 percent in September, the largest decline since last December, after surging by a revised 2.2 percent in August. Sales in August were previously reported to have increased by 2.7 percent. However, overall retail sales in September were dragged down by a drop in vehicle purchases following the end of the government's popular "cash for clunkers" program in August. Motor vehicle and parts sales tumbled 10.4 percent in September, the largest fall since August 2005, after rising 7.8 percent the prior month.

 

Excluding motor vehicles and parts, retail sales rose by a better-than-expected 0.5 percent in September, after increasing 1.0 percent in August. That cemented the view that consumer spending recovered and the economy started growing in the third quarter after the worst U.S. recession since the 1930s.

 

Consumer spending normally accounts for about 70 percent of domestic economic activity. There are worries that relentlessly high unemployment will remain a drag on consumer spending and take some steam out of the economy's nascent recovery from a recession that started at the end of 2007.

 

Sales outside motor vehicles in September were probably supported by back-to-school buying, as well as the best furniture and home furnishings sales since January 2007. Gasoline station sales rose 1.1 percent in September after rising 4.7 percent in August. Excluding gasoline and motor vehicles, retail sales rose 0.4 percent versus a 0.6 percent gain in August. Sales of building materials dipped 0.2 percent in September after a 1.2 percent drop the prior month.

 

Crude Prices Hit High For Year

 

The price of crude oil rose above $75 a barrel to settle at a record high for the year on Wednesday as economic optimism hinted at a recovery in global energy demand. Sweet domestic crude for November delivery settled up $1.03 per barrel at $75.18, the highest settlement since October 14, 2008. Brent crude settled up 70 cents per barrel at  $73.10.

 

Support was provided by the weak dollar which slipped to its lowest in more than a year, making dollar-denominated commodities like oil and gold more affordable for holders of other currencies. The price of oil has more than doubled from below $33 in December amid hopes of economic recovery, a rally many say has run ahead of weak oil demand, high inventories and abundant supply.

 

Chinese trade figures provided fresh evidence of recovery in the world's second-largest oil user, while oil data showed strong year-on-year growth in China's oil imports in September. In addition, cold weather in the United States has also supported prices. Heating demand will be higher than normal this week, the National Weather Service said on Monday.

 

Intel Drives the Market Higher

 

Intel rose 4 percent on Wednesday after analysts raised their price targets for the stock following a quarterly earnings report and revenue forecast that exceeded expectations. UBS raised its price target for Intel shares to $27 from $24 after the report while Lazard upped its price target to $26 from $24.

 

Computer maker Dell Inc saw its shares rise more than 2 percent after Intel forecast fourth-quarter revenue of $10.1 billion well above Wall Street expectations for $9.5 billion. Microsoft was up 1.5 percent.

 

Profits Surge at JPMorgan

 

JPMorgan Chase reported quarterly earnings of $3.6 billion, the result of a dramatic increase in bond trading revenue. Its investment banking group reported net income of $1.9 billion, compared with $882 million a year earlier. That increase came in part from gains of $400 million on leveraged loans and mortgage-related securities that had a $3.6 billion write down in the year-earlier quarter.

 

Trading gains lifted fixed income markets revenue to an eye-popping $5 billion, up from about $800 million a year earlier. Stock underwriting revenue rose 31 percent to $681 million, and bond underwriting fees rose 19 percent to $593 million.

 

JPMorgan as a whole posted third-quarter net income of 82 cents per share, as compared to $527 million, or 9 cents per share a year ago.

 

However, JPMorgan also has a sizable consumer lending businesses, where trends are a little harder to discern. The bank posted $700 million of losses in its credit card business in the third quarter, compared with a $292 million profit a year ago.

 

Still, credit card loans deemed uncollectable rose by just 1 percent, a big deceleration from a 25 percent increase in the second quarter. Chief Executive Jamie Dimon said it is not clear if initial signs of consumer credit stabilization will continue. "The card business is going through a substantial adjustment," Dimon said.

 

Overall credit costs climbed as the bank added $2 billion to its reserves against future losses on consumer loans, bringing total reserves to $31.5 billion. Loan losses jumped and the bank reported $7 billion in net charge-offs on consumer loans on its books and held by investors, up from $3.3 billion a year earlier.

 

JPMorgan posted earnings of $302 million in its treasury and securities services unit, down 26 percent from a year earlier. That may bode poorly for earnings from companies in similar businesses, such as Northern Trust and State Street. JPMorgan has remained among the healthiest lenders throughout the financial crisis. Earlier this year it repaid a $25 billion government bailout.

 

Dollar Tanks

 

The dollar slid to a 14-month low against a basket of currencies and the euro on Wednesday, as solid earnings by JPMorgan and rising stock and commodity prices stoked optimism for an improving global economy.

 

The dollar, which has been a safe-haven investment, was hit by the sharp rise in profit reported by JPMorgan, as well as earnings from Intel and upbeat Chinese trade data. Those factors all helped brighten the economic outlook and encouraged investors to move into perceived riskier and higher-yielding currencies.

 

The dollar also remained under broad selling pressure on expectations that interest rates will stay at low levels for some time, following comments by Federal Reserve Vice Chairman Donald Kohn on Tuesday. Low rates reduce the attractiveness of U.S. assets and ease demand for the dollars to buy them.

 

Low U.S. rates also promote the use of the dollar as a funding currency in the carry trade, where investors borrow in one currency, which they then sell to buy higher-yielding assets in another currency.

 

The dollar index, which tracks the dollar's value against a basket of currencies, slid to 75.436, a trough last seen in August 2008. The Swiss franc rose to around 1.0166 francs versus the dollar, its highest since July 2008.

 

The Australian and Canadian dollars also hit their strongest levels since August 2008, while the Norwegian crown rose to its firmest since September 2008 as U.S. crude oil prices jumped to a 2009 high and gold hit a record high.

 

Fed Minutes Show Some Discord

 

The Fed’s Open Market Committee meeting last month saw some discord as to whether the Fed should increase buying mortgage securities if the economic outlook worsened and some argued that more aggressive purchases would aid the recovery.

 

"Some members thought that an increase in the maximum amount of the Committee's purchases of agency MBS (mortgage-backed securities) could help to reduce economic slack more quickly than in the baseline outlook," according to minutes of the Fed's September 22-23 meeting out on Wednesday.

 

The Fed held interest rates near zero as expected after the meeting of its policy-setting Federal Open Market Committee (FOMC) and opted to extend its mortgage debt buying campaign until the end of March 2010 from a previously announced close of December 31, 2009, while keeping the total size of the purchases the same at $1.45 trillion.

 

The central bank is buying agency mortgage debt together with longer-dated U.S. government bonds as part of its efforts to stimulate activity, and made plain that this approach could be reopened if necessary.

 

"Members discussed the importance of maintaining flexibility to expand the asset purchase programs should the economic outlook deteriorate or to scale back the programs should economic and financial conditions improve more than anticipated," the Fed said.

 

Policy-makers also raised predictions for growth over the next 18 months and said the balance of risks to their forecasts was balanced, but remained wary that the economy still remained quite fragile as it exited the worst recession in 70 years.

 

"Under these circumstances, the Committee judged that the costs of growth turning out to be weaker than anticipated could be relatively high," the Fed said.

 

The Fed stressed that inflation was likely to remain subdued given the persistence of substantial slack in the economy and with future price expectations stable.