MarketView for October 20

 

 

Summary 

 

Wall Street gave in to a combination of a new round of old worries and some profit-taking on Tuesday as disappointing housing and inflation data sent share prices lower despite strong results from bellwethers including Apple and Caterpillar.

 

New home construction rose less than expected in September and the producer prices posted an unexpected decline, both pointing to an anemic economic recovery.

 

DuPont fell 2.2 percent to $33.87, making it a top drag in the S&P materials sector and the Dow Jones industrial average after the company posted higher-than-expected third-quarter earnings, but revenue fell short of expectations.

 

After the closing bell, Yahoo reported that its third- quarter earnings number more than tripled from a year ago, sending its shares up 4.1 percent to $17.88. SanDisk also reported results after the bell that easily topped Wall Street's expectations. Its stock rose almost 10 percent in extended trading to $23.62.

 

During regular trading, shares of companies in the materials sector declined as commodity prices fell, while crude oil closed lower for the first time in nine days. Caterpillar hit a 12-month high after the machinery maker's third-quarter earnings soared past expectations. Closing up 3 percent at $59.61, it was the Dow's best performer.

 

Among other Dow components reporting on Tuesday, United Technologies fell 0.1 percent to $65.40 after earnings declined from the year-ago quarter. Pfizer was also down, losing 0.3 percent of its share price to close at $17.93, despite better than expected earnings. Coca-Cola fell 1.3 percent to $54.07 after reporting sales that also missed expectations.

 

Crude oil hurt the shares of energy companies. November crude oil futures expired at the close and settled down 0.65 percent, or 52 cents per barrel at $79.0. As a result, Chevron and Exxon Mobil were down about 0.8 percent, with Chevron closing at $77.03 and Exxon at $73.02.

 

Brokerages lifted their price targets on Apple, a day after the iPhone maker posted earnings and sales that were higher than expected. Apple closed up 4.7 percent at $198.76.

 

In spite of Tuesday's decline, the stock market's trend in the third quarter has been mostly positive, with share prices rising steadily as S&P 500 reporting companies have largely exceeded earnings expectations. Through noon Tuesday, with 95 of the benchmark S&P 500 companies having reported earnings, 79 percent have beaten expectations and only 11 percent have fallen behind, according to Reuters data.

 

Data Points Towards Recovery, but Not A Quick One

 

A lower number of housing starts last month and a drop in prices paid at the farm and factory gate pointed to an anemic economic recovery, backing views that interest rates could stay low for a while. A report by the Commerce Department indicated that new home starts rose 0.5 percent to an annual rate of 590,000 units in September. The August figure was revised down to 587,000 units.

 

New building permits fell unexpectedly by 1.2 percent to an annual pace of 573,000 units in September, the Commerce Department said. It was the largest percentage decline since April and took permits 28.9 percent below their year-ago level.

 

The number of housing units completed last month dropped to 693,000, the lowest on records going back to 1968. In addition, the inventory of houses under construction hit a record low 582,000 units and the number of permits authorized but not yet started also dropped to an all-time trough at 96,900 units.

 

Separately, the Labor Department reported that its producer price index fell 0.6 percent last month after rising 1.7 percent in August. According to the Labor Department, prices were down 4.8 percent on the year.

 

Excluding food and energy, prices declined 0.1 percent in September from the prior month, with the year-over-year increase slowing to 1.8 percent from the 2.3 percent gain seen in the 12 months through August. The year-on-year increase was the slowest in two years.

 

Prices for government debt rallied as investors viewed the reports as more evidence that the Federal Reserve would keep lending rates near zero for a prolonged period. The Fed has held benchmark overnight rates near zero since December.

 

San Francisco Fed President Janet Yellen said on Tuesday she did not anticipate the Fed would withdraw its support to the economy any time soon and adding that economic conditions would be the main deciding factor.

 

The rise in housing starts last month was held back by a 15.2 percent drop in groundbreaking in the volatile multifamily sector. Starts on single-family homes, often seen as a better harbinger for the direction of the market, rose 3.9 percent, partially reversing a fall in August. Compared with September last year, housing starts were down 28.2 percent.

 

Wall Street is worried that the disappointing housing start numbers in September could be related to worries over the expiration of a popular $8,000 tax credit for first-time buyers. The incentive, which ends next month, has been widely cited as a crucial force behind the housing market's steady recovery.

 

Housing and Urban Development Secretary Shaun Donovan on Tuesday expressed doubts that the country could afford to extend the tax credit. But he said the administration had not yet decided whether to back an extension.

 

FDIC Ends Debt Guarantee Program

 

The Federal Deposit Insurance Corp voted on Tuesday to end a government program that guarantees some debt issued by banks, but also to set up a 6-month safety net facility. All five members of the FDIC panel of regulators voted to end the Temporary Liquidity Guarantee Program, or TLGP, on October 31, as planned. Debt could be issued and guaranteed under that program up until the deadline. The guarantee on that debt would expire no later than December 31, 2012.

 

"It should be clear that this is not a continuation of the program but an ending of the program," FDIC Chairman Sheila Bair said at an open meeting. However, the program leaves open a 6-month safety feature for institutions suffering from market disruptions beyond their control. Under the 6-month facility, subject to approval, a bank's senior unsecured debt issued after October 31 would be guaranteed through April 30, 2010, the FDIC said.

 

In September, the FDIC voted to put out for public comment two approaches to ending the program. One would let the program expire at the end of the month. Another would include a limited 6-month emergency guarantee facility for some banks on a case-by-case basis.

 

The FDIC established the TLGP last October to boost confidence in the banking industry, add more liquidity and reduce the risk of bank runs. It provides a government guarantee on some senior unsecured debt and mandatory convertible debt, and on banks' transaction deposit accounts.

 

Regulators want to phase out the program because conditions in the credit markets have eased, and officials do not want to promote reliance on the government aid. The agency started to phase out the program in March by extending the deadline to issue guaranteed debt by four months to October 31, but also making it more expensive to participate in the program. Participation under the 6-month safety net could also be more costly, depending on the risk level. As of October 14, there was $309.4 billion in FDIC-guaranteed debt outstanding.

 

Senator Schumer Speaks Out Against Dark Pools

 

Senator Charles Schumer on Tuesday jumped in to the debate over anonymous trading venues known as dark pools; calling for tough new regulations a day before the U.S. Securities and Exchange Commission meets to consider new rules.

 

Schumer, among the most vocal of lawmakers pressing for market structure reform, urged in a letter to SEC Chairman Mary Schapiro that the regulator adopt some of the most robust measures now on the table, and called for a new market-wide monitor.

 

He said the growth of dark pools, which now number more than 40, risks undermining fair and transparent markets, and that regulation has not kept pace. The private venues are used primarily to trade large blocks of stock, and have proliferated this decade as the marketplace went electronic.

 

"We want to keep them in existence ... but we want a much more level playing field, which is what we don't have right now," Schumer said on a media conference call, adding the fragmented market "compromises the ability of regulators to monitor and enforce such abuses as front running and market manipulation..."

 

Dark pools, the largest of which are run by banks such as Goldman Sachs and Credit Suisse, account for an estimated 10 to 15 percent of overall U.S. equity volume.

 

The SEC meets Wednesday to consider proposals for changes that are expected to shed more light on the venues, including requiring them to display more quotes and publicly reveal more data on volumes.

 

The industry also expects more clarity on whether actionable indications of interest, or IOIs, which dark pools and exchanges use to communicate, should be treated as quotes.

 

Schumer said all actionable IOIs should be treated as quotes, which would effectively kill them, and that the threshold beyond which dark pools must display quotes should be dropped from 5 percent to 1 percent.

 

He also called on the SEC to consider real-time reporting of dark pool trades to the consolidated tape -- a measure that many expect, but that some warn could hamper institutions' ability to execute big, complicated orders.

 

NYSE Euronext, which runs the New York Stock Exchange and participated in Schumer's conference call, on Tuesday said it would begin next month offering a means by which dark pools and broker-dealers could report trading.

 

The service -- which effectively dusts off a so-called trade-reporting facility, or TRF, that has been mostly dormant for a year -- is backed by units of Goldman, Barclays PLC, UBS AG, Knight Capital, and by Getco, the big high-frequency market-maker. All U.S. off-exchange trading is now printed on Nasdaq OMX's TRF, which accounts for some 35 percent of overall volume. NYSE's rival TRF would standardize volume reporting, print it daily on its website -- and represents a way for the exchange to facilitate any new SEC rules.

 

Schumer said dark pools should face more robust start-up regulations, and should share the costs of providing market-wide surveillance -- an argument long held by NYSE Euronext CEO Duncan Niederauer, who was also on the call.