MarketView for October 21

 

 

Summary 

 

Share prices fell on Wednesday, hurt by a late sell-off in financial shares after a bank analyst placed a sell recommendation on Wells Fargo. Adding to the downward trend was a larger-than-expected loss from Boeing . Shares of Wells Fargo fell 5.1 percent to close at $28.90 after Rochdale Research analyst Richard Bove cut his rating on the stock, writing that loan losses were mounting. Earlier in the day, Wells Fargo had been among several banks, including Morgan Stanley and U.S. Bancorp, posting quarterly earnings above Street forecasts. Boeing fell 2.4 percent to $50.63 following a wider-than-expected quarterly loss.

 

For most of the session, stocks had traded higher as the dollar's weakness underpinned shares of natural resources companies, while results from Morgan Stanley and Yahoo added to the day’s optimism over corporate profits. However, the market hurtled downward during the last half-hour of the regular trading session, causing the major equity indexes to finish at their lows of the day. Besides Wells Fargo, other notable casualties in the bank sector were JPMorgan, down 3 percent to close at $44.65 and Bank of America, down 2.9 percent to close at $16.51. Morgan Stanley managed to hold on to positive territory, ending the day up 4.8 percent at $34.08.

 

Wal-Mart lost ground, ending the day down 2.1 percent at $50.63, after stating that it planned to cut prices as it readies for what is likely to be a tough holiday shopping season. After the bell, eBay forecast fourth-quarter numbers at the low end of analysts' estimates, ending any possibility of a substantial turnaround during the crucial holiday season. In extended-hours trading, shares of eBay fell 5 percent to $23.75.

 

Genzyme was the Nasdaq's top drag after it posted lower-than-expected quarterly earnings and cut its 2009 outlook. The stock fell 6.2 percent to close at $51.43. On a more positive note, Apple hit an all-time intraday high, two days after the company posted earnings that eclipsed Wall Street's forecasts. Apple ended the day up 3.1 percent at $204.92, a record close.

 

December crude futures briefly hit $82 per barrel on Wednesday as spot gold rose above $1,060 an ounce and the euro soared above $1.50 for the first time since August 2008.

 

Crude Jumps in Price

 

Crude oil futures slipped early in the day on Wednesday ahead of government inventory data, pressured by industry data released late Tuesday showing a large rise in crude oil stockpiles. The American Petroleum Institute reported that crude oil inventories rose 3.8 million barrels in the week to Oct. 16, twice the expected amount. The API said gasoline stocks fell 558,000 barrels and distillate stocks were down 998,000 barrels.

 

However, then the Energy Information Administration released a report showing a larger-than-expected 2.3-million-barrel draw in gasoline, while crude inventories rose 1.3 million barrels, less than the expected 1.8 million-barrel rise. As a result, December crude futures settled up $2.25 per barrel at $81.37. Brent crude settled up $2.90 at $80.14.

 

However, traders had their eyes on the weakness of the dollar rather than oil's fundamentals of demand and supply. The dollar sank against a basket of other currencies as expectations that U.S. interest rates will remain very low weighed on the greenback. The euro rose above $1.50 for the first time since August 2008. A falling dollar makes oil relatively cheap to holders of other currencies.

 

The weak dollar and anticipation of future economic recovery have been the main drivers of the oil price rally for the past few months. At the same time, the International Energy Agency, which represents 28 industrialized countries, has warned that the fast rise in oil prices could pose a risk to global economic recovery. However, Nigeria's oil minister, Rilwanu Lukman, said $80 was a fair price for oil and one that should encourage investment in new supplies.

 

Fed Reiterates Position That The Economy Is Improving

 

Economic conditions stabilized or improved modestly in most parts of the country, according to a Federal Reserve report on Wednesday that suggested the economy was slowly clawing out of a recession. In its Beige Book, the Fed noted improvement in two of the hardest hit areas, residential real estate and manufacturing.

 

"Reports from the 12 Federal Reserve districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels," the Fed said in its report, which was prepared at the Federal Reserve Bank of Richmond based on information collected before October 13.

 

"Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered."

 

The Fed also gave a grim assessment of commercial real estate, which is widely seen as one of the big remaining trouble spots for the still-struggling financial sector. "The weakest sector was commercial real estate, with conditions described as either weak or deteriorating across all districts," the Fed said.

 

A number of the regional Fed banks said businesses in their area did not expect commercial real estate to improve much, if at all in, in 2010.

 

"Tenants are demanding significant concessions -- including space improvements and one- to two-year leasing commitments -- along with low rental rates," the Boston Fed reported.

 

Labor markets were typically characterized as weak or mixed, although there were "occasional pockets of improvement." That assessment supported the view that the worst of the job losses are over, but it may be a while before growth resumes.

 

The Atlanta Fed said many employers "indicated that they were holding on to the most skilled workers, but have reduced overall hours. They feel that a sustained increase in orders and sales is a prerequisite to adding to payrolls."

 

"Compensation -- especially cash compensation -- has reportedly fallen sharply, and is expected to fall further during the remainder of the year and into 2010, most notably for the top earners in the industry," the New York Fed said.

 

The report said the "cash for clunkers" auto sales incentive program left depleted inventories and slower sales in its wake. Overall spending remained weak in most districts, although "some improvements" were noted.

 

In residential real estate, which was at the heart of the credit crisis that sparked the recession, the government's $8,000 first-time homebuyers' tax credit helped to lift sales of low- to middle-priced houses, the Fed said. However, residential construction activity remained weak in most districts.

 

Measures of discretionary and business spending were a mixed bag. In New York City, retail sales showed improvement, particularly for one unnamed higher-end department store. Broadway theaters report that attendance picked up somewhat in September and early October but remained slightly lower than a year earlier.

 

And in the Boston Fed's region, business travel was especially soft, and one contact worried that decreased corporate travel and spending will become "the new norm."

 

Auto Sales Expected To Rise in 2010

 

Automobile sales are projected to rise nearly one-fifth to 11.8 million units in 2010, influential industry tracking firm CSM Worldwide said on Wednesday, citing signs that the worst of the economic downturn had passed.

 

CSM, raising its forecast by 600,000 units, said consumer confidence will improve enough to drive the industry's recovery by the first quarter of next year, when employment and other economic indicators are expected to bottom out.

 

Sales of 11.8 million units would represent the first year-on-year increase in U.S. light vehicle sales since 2005.

 

"The move reflects cautious optimism that we will see gradual improvement in core market fundamentals following the first quarter of next year," CSM analyst Joe Barker said.

 

Separately, another leading forecasting firm, J.D.Power and Associates, said on Wednesday there are "strong signals" that the market had seen the trough of the current downturn that had saddled major automakers with mounting losses. However, Power still kept its forecast for 2010 domestic auto sales at 11.5 million units.

 

"I think the signals are strong but we are not fully out of it (slump) yet. Given what we have been through, we prefer to remain cautious," J.D.Power analyst Jeff Schuster said.

 

Both CSM and J.D.Power expect industry-wide U.S. light vehicle sales to top 10 million units this year. Outlooks from the companies are one of the benchmarks that auto manufacturers and suppliers use to plan for future production.

 

The forecast for a recovery in 2010 comes at a time when the industry is gearing up to increase output on the view that sales are headed for a slow but gradual recovery.