MarketView for October 15

 

 

Summary

 

The momentum on Wall Street continued on Thursday as both the Dow industrial average and the S&P 500 indexes closed at 2009 highs, due in no small part to a gain in the prices of energy stocks as oil prices moved higher. At the same time, the shares of financial institutions retreated because Wall Street was not exactly enamored with the earnings reports from Goldman Sachs and Citigroup. The Nasdaq eked out a small gain, but shares of big-cap tech companies, such as Apple and Google were a drag on the index. However, after the bell, Google’s shares rose 1.5 percent to $538.00 following an earnings announcement that exceeded Street expectations.

 

Crude oil futures hit a one-year high, rising $2.40, or more than 3 percent, to settle at $77.58 a barrel after data showed gasoline and distillate inventories fell sharply during the past week. The news sent companies such as Chevron, up 1.6 percent at $76.69, higher.

 

While Goldman Sachs and Citigroup exceeded forecasts, they failed to meet the lofty standard set on Wednesday by JPMorgan Chase, the first major bank to report earnings. Goldman's earnings nearly quadrupled, largely because of strong trading results. Citigroup's third-quarter loss was narrower than expected, but the company booked $8 billion in credit losses. Goldman's shares ended the day down 1.9 percent to close at $188.63, while Citigroup fell 5 percent to $4.75.

 

On the economic front, data showed the Consumer Price Index prices edged up in September and the number of workers filing new claims for jobless benefits dropped to a nine-month low last week. A sharp increase in New York state factory activity was tempered by a report showing factory activity in the Mid-Atlantic region grew less than expected.

 

Economic News Continues to Improve

 

Consumer prices edged up in September, the number of workers filing new claims for jobless benefits dropped to a nine-month low last week and New York state factory activity perked up this month, more proof the economy was healing after a protracted recession.

 

In a report that pointed to scant inflation pressure but some easing in the downward pressure on prices, the Labor Department stated that the Consumer Price Index rose 0.2 percent last month, after increasing 0.4 percent in August.

 

The Labor Department also reported that initial unemployment claims fell by 10,000 claims to 514,000 claims last week, a second straight weekly decline that hinted at some easing in the pace of layoffs. In a further sign hinting at some stability in the labor market, the number of people collecting unemployment benefits after an initial week of aid dropped 75,000 to 5.99 million in the week ended October 3. It was the first time these continuing claims had been below the 6 million mark since late March.

 

 

A third report from the New York Federal Reserve Bank showed a gauge of New York state manufacturing activity rising unexpectedly to hit its highest level in five years on surging new orders, shipments and employment.

 

While a sharp increase in the New York Fed's "Empire State" business conditions index fueled optimism on growth prospects, that optimism was tempered by a report showing factory activity in the country's Mid-Atlantic region grew less than expected. The Philadelphia Fed said its business activity index slipped to 11.5 in October from 14.1 in September.

 

Consumer prices last month were restrained by weak food and housing costs. Compared to September last year, prices were down 1.3 percent, with the food index declining from a year earlier for the first time in 40 years. Stripping out volatile energy and food prices, the closely watched core measure of inflation rose 0.2 percent from August, after inching up just 0.1 percent a month earlier.

 

A 0.4 percent increase in new vehicle prices following the expiration of the popular "cash for clunkers" program contributed to the rise. The program, which pushed down car prices by 1.3 percent in August, had offered discounts to consumers who traded in old gas-guzzling cars for new, fuel-efficient ones. In contrast, rental and owners’ equivalent rent indexes recorded their first declines since 1992, which economists said portended tame inflation ahead.

 

Foreclosure filings fell for a second straight month in September, but remained near a record high, amid ongoing and sweeping efforts to keep borrowers in their homes, real estate data firm RealtyTrac said.

 

Manufacturing Set to Improve

 

The Manufacturers Alliance/MAPI said its composite business index -- a weighted sum of shipments, backlogs, inventories and profit-margin indexes -- rose to 38 percent in September following a reading of 24 percent in June.

 

"While many of the individual indexes remain at very low levels, the forward-looking indexes, like that for annual orders, are at much higher levels, indicating that manufacturing activity is expected to increase in 2010," said Donald Norman, MAPI economist and survey coordinator.

 

At 38 percent the index still indicates that overall manufacturing activity is expected to contract over the next three to six months, relative to levels one year ago when the economy was entering the severe recession, MAPI said.

 

The September 2009 index marks the fifth straight quarterly reading below 50 percent, the demarcation point between growth and contraction. The last time the index reached 50 percent was June 2008.

 

The annual orders index, based on a comparison of expected orders for all of 2010 with orders in 2009, was 66 percent, while the non-U.S. investment index was 52 percent, with respondents anticipating marginally increased expenditures for capital spending outside the United States, the survey said.

 

The prospective shipments index, based on expectations for orders in the fourth quarter of 2009, increased to 30 percent from 4 percent. The non-U.S. prospective shipments index increased to 33 percent from 15 percent.

 

The investment index, based on expectations for capital spending for all of 2010 was 47 percent. However, the survey found signs the recovery still faces some challenges.

 

The prospective shipments index, which reflects expectations for fourth quarter 2009 shipments compared with the fourth quarter of 2008, improved to 30 percent in the September survey compared to 4 percent in the June report.

 

This implies that most companies will continue to see domestic shipments decrease this quarter compared to levels one year ago, MAPI said.

 

The survey was based on responses from 61 senior financial executives with firms in a broad range of manufacturing industries.

 

Factory Activity Less in Mid-Atlantic

 

Factory activity in the Mid-Atlantic region grew less than expected in October, the Philadelphia Federal Reserve Bank reported. According to the Philadelphia Fed, its business activity index was at 11.5 in October versus 14.1 in September.

 

Any reading below zero indicates contraction in the region's manufacturing sector. Above zero shows growth. Despite the unexpectedly weak outcome, separate measures within the report showed some heartening signs of improvement for an economy that is trying to shake off the worst recession in decades.

 

The new orders gauge rose to its highest since December 2007 and the six-month capital expenditures index was at its strongest since September 2008.

 

The survey covers factories in a region encompassing eastern Pennsylvania, southern New Jersey and Delaware and is looked at closely as one of the first indicators of the health of the U.S. manufacturing sector.

 

Earlier on Thursday, the New York Fed said its "Empire State" gauge of manufacturing in New York State jumped unexpectedly this month to its highest in five years on surging new orders, shipments and employment in the sector.

 

Profit Quadruples at Goldman Sachs

 

Goldman Sachs quarterly earnings nearly quadrupled, topping expectations, but its shares fell on disappointment that so much of the profit came from trading gains that might not be sustainable.

Already Wall Street's largest investment bank before the financial crisis, Goldman has become even more dominant as some rivals have fallen by the wayside. As such, Goldman remains on pace to hand out more than $20 billion in year-end bonuses. That would be equivalent to more than $630,000 per employee and could beat a record set for compensation in 2007.

 

But in a sign of weakness, Goldman's investment banking and asset management revenues were lower. The bank fell to second place behind Morgan Stanley in merger and acquisition adviser rankings for deals announced globally through the third quarter. It also dropped a spot to No. 7 in global capital markets.

 

Goldman posted third-quarter net income for common shareholders of $3.03 billion, or $5.25 a share, up from $845 million, or $1.81 per share, a year earlier.

 

Goldman, which has been under fire from some quarters over gold-plated pay so soon after taking government bailout funds, allocated 43 percent of net revenue in the third quarter to compensation and benefits, compared with 49 percent in the first half.

 

Goldman Sachs Chief Financial Officer Viniar said results lagged behind the second quarter's record earnings in part because of the summer downturn in the mergers and acquisitions business. He also said that the calendar for fourth-quarter equity underwriting appeared robust.

 

Viniar declined to compare Goldman's performance with that of JPMorgan, saying it was always hard to compare two companies quarter over quarter.

 

Goldman set aside $5.4 billion for compensation during the quarter, raising the total to $16.8 billion so far this year. The firm has drawn fire from politicians and the public for setting aside so much for bonuses so soon after repaying a $10 billion taxpayer bailout.

 

Net revenue in Fixed Income, Currency and Commodities (FICC) was $5.99 billion in the third quarter, up from $1.59 billion a year earlier. The increase reflects strong performances in credit products and mortgages, which were significantly higher compared to a difficult third quarter of 2008.

 

Net revenue in equities was up 78 percent to $2.78 billion, helped by a strong performance in derivatives and shares. Principal Investments posted net revenue of $1.26 billion after a $453 million loss in the year-ago quarter. Net revenue in investment banking and financial advisory fell during the quarter, reflecting the decline in mergers and acquisitions. Investment banking net revenue was $899 million, down 31 percent from the third quarter of 2008. Results in financial advisory were $325 million, down 47 percent. Net revenue in Asset Management and Securities Services was down 29 percent to $1.45 billion.

 

Goldman Sachs Being Unusually Careful Regarding Bonuses

 

Goldman Sachs opted to devote a smaller chunk of revenues to compensation in the latest quarter in what may be a sop to critics angry about a bonus bonanza so soon after the bank took billions in government funds. However, the move also helped boost its quarterly earnings. And Goldman Sachs employees need not lose any sleep. They are still on track to get an average of $630,000 each, rivaling their record bonuses in 2007. And that average number -- which puts the bank far ahead of rivals -- is based on Goldman's full work force, including assistants and other support staff.

 

Goldman has been heavily criticized for setting aside so much for its bonus pool so soon after the firm repaid $10 billion in taxpayers bailouts. This year, Goldman has set aside $16.8 billion for bonuses, and looks well on track to break the $20 billion mark.

 

While Goldman typically devotes about half of its net earnings to pay and benefits, another robust quarter allowed Goldman to drop the ratio of compensation to revenue to about 43 percent while still setting aside $5.4 billion for pay.

 

Goldman also announced it had made a $200 million donation to the Goldman Sachs Foundation, the company’s not-for-profit charitable arm.

 

Citigroup Posts Loss

 

Citigroup Inc posted a quarterly per-share loss as it suffered $8 billion of credit losses, raising questions about when the bank can return to sustained profitability. Although the bank did post net income of $101 million, but it also reported a $529 million loss from continuing operations before taxes. The ultimate bottom line for shareholders was negative, including one-time losses from converting preferred shares into common stock, and tax benefits.

 

Results were further muddied by accounting losses that resulted from the bank's bonds performing better. Citigroup set aside less money to cover bad loans than it did in last year's third quarter, but that may make sense because the bank's assets also declined from the year-ago period, and net credit losses declined from the second quarter. The bank said it has enough money set aside to cover losses in consumer loans for the next 13.3 months, the highest level in at least two years.

 

Citigroup posted more than $37 billion of net losses between the fourth quarter of 2007 and the fourth quarter of 2008. In the third quarter, it posted a net loss to shareholders of $3.2 billion, or 27 cents a share, compared with a loss of $2.9 billion, or 61 cents a share, a year earlier.

 

The bank reported net income of $101 million, which excludes preferred stock dividends and a $3.1 billion charge linked to converting preferred shares into common stock. In the same quarter last year the bank posted a net loss of $2.8 billion.

 

Citigroup suffered $8 billion of credit losses, compared with $4.9 billion in the same quarter last year and $8.4 billion in the second quarter of 2009.

 

The bank said revenue in its securities and banking unit dropped by about a third, to $4.89 billion. Excluding the impact of an accounting loss from improved credit spreads, the unit's revenue was $6.6 billion.

 

Net revenue at Citigroup rose 25 percent from a year earlier to $20.39 billion. Total assets rose 2 percent from the second quarter, to $1.89 trillion.

 

Citigroup earlier this year separated the businesses it wanted to keep, which it calls Citicorp, from the units and assets it aims to shed, which it calls Citi Holdings.