MarketView for October 22

 

 

Summary 

 

It was a good day on Wall Street on Thursday as share prices moved sharply higher sending all three major equity indexes into positive territory. Raising the momentum level were the quarterly results from insurer Travelers and regional bank PNC Financial, both of which helped out the financial sector. Travelers raised its full-year outlook and PNC offered up better-than-expected quarterly earnings.

 

Also adding to the day’s momentum were some solid earnings numbers from several companies, including Dow components 3M , AT&T and McDonald's, which in turn added credence to the idea that corporate profitability has stabilized.

 

New York Fed President William Dudley did not hurt matters when he said the Federal Reserve may not lose money on the emergency programs it put in place to fight the financial crisis.

 

After the closing bell, Amazon.com posted earnings that exceeded expectations and its shares rose nearly 15 percent to $107.38 in after-hours trading.

 

Shares of J Crew rose 15.2 percent to $43.49 after the clothing retailer raised its outlook for the third and fourth quarters, citing stronger-than-expected sales and margin trends expected to last throughout the year.

 

The New York Times turned in some quarterly revenue and profit numbers that exceeded forecasts because of cost cuts and higher newspaper prices even as advertising sales fell, driving its shares up 22.5 percent to $10.72.

 

Shares of home builders also ranked among the day’s top gainers, with KB Home ending the day up 7.5 percent to close at $16.17 and Pulte Homes up 6.5 percent to close at $10.44.

 

Index of Leading Indicators At 2-Year High

 

A gauge of the U.S. economy's prospects rose for a sixth-straight month in September to a two-year high, the Conference Board reported on Thursday, suggesting the economic recovery has begun in earnest.

 

According to the Conference Board its index of leading economic indicators rose 1 percent to 103.5, the highest level since October 2007. It said the sixth month growth rate for the index was at its highest pace since 1983.  

 

"These numbers strongly suggest that a recovery is developing," Conference Board economist Ken Goldstein said in a statement. "However, the intensity of that recovery will depend on how much, and how soon, demand picks up."

 

During the six-month span through September, the leading economic index increased 5.7 percent, according to The Board. That's the fastest increase since 1983 and it's up sharply from the 2.7 percent decline for the previous six months – an increase that's indicative of an upturn in economic activity. The Board also called the strength in the components "widespread in recent months."

 

Eight of the 10 indicators that comprise the LEI increased in September: interest rate spread, index of consumer expectations, average weekly initial claims for unemployment insurance (inverted), stock prices, real money supply, index of supplier deliveries (vendor performance), manufacturers' new orders for non-defense capital goods and manufacturers' new orders for consumer goods and materials. The negative contributors were average weekly manufacturing hours and building permits.

 

The index is designed to forecast likely economic conditions six to nine months out, although economists caution that the index is a general, multi-variable indicator, vulnerable to revisions. Hence, investors should use it as a rough gauge of overall macroeconomic trends, not as a metric that precisely pinpoints economic cycle turns.

 

Unemployment Claims Rise

 

A larger-than-expected rise in the number of new claims unemployment insurance last week signaled the labor market remained fragile. Initial claims increased by 11,000 claims to 531,000 claims last week, the Labor Department reported on Thursday, after falling for two consecutive weeks.

 

Although the data and earnings reports from some companies strongly indicate the economy started growing again in the July-September period after four quarters of decline, persistently high unemployment has raised questions about the recovery's durability.

 

Still, the pace of job losses has moderated considerably from early this year. The four-week moving average for new jobless claims fell by 750 to 532,250 last week, the lowest level since mid-January, the Labor Department said.

 

It was the seventh straight week of decline in the four-week average, which is considered a better gauge of underlying trends as it irons out week-to-week volatility.

 

There were more encouraging signs, with the number of people collecting long-term unemployment benefits dropping 98,000 to 5.92 million in the week ended October 10. That was the lowest level since March and it was the first time that continuing claims fell below the 6 million mark since April. The four-week moving average of continuing claims fell 59,250 to 6.03 million, the lowest reading since early April this year.

 

This measure has trended lower for five straight weeks. This steady decline as an indication that unemployment might be close to peaking, but it could also reflect that many jobless workers have exhausted their unemployment benefits.

 

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, edged down to 4.5 percent in the week ended October 10 from 4.6 percent the prior week, the department said.

 

Another hopeful sign was provided by a Labor Department report that showed the number of mass layoffs, defined as job cuts involving at least 50 people from a single employer, fell by 129 to 2,561 last month.

 

Crude Down Slightly

 

Oil prices fell from a one-year high on Thursday as a rise in new jobless claims sent investors seeking safer havens. Sweet domestic crude for December delivery settled down 18 cents per barrel at $81.19, after briefly hitting a one-year high of $82 per barrel on Wednesday. In London, Brent crude settled down 8 cents per barrel at $79.51.

 

Crude prices jumped on Wednesday after weekly U.S. government data showed a large drop in gasoline inventories over the past week and fuel demand rising about 4 percent year-on-year. But absolute oil inventory levels remained high globally due to slack demand.

 

Fed's Yellen: No tightening in next several months

 

The time for the Federal Reserve to start pulling back its extensive support for the economy is not close at hand and policymakers have time to decide what sequence of steps they will take, San Francisco Fed President Janet Yellen said on Tuesday.

 

"We have used the language of an extended period," Yellen, a voting member of the Federal Open Market Committee, told reporters after a Fed conference. "This is not something I anticipate happening over the next several months. Certainly not."

 

Yellen's comments are in line with recent Fed statements, which have emphasized that while the U.S. economy may be emerging from recession, the recovery will be tepid and the central bank is in no hurry to raise interest rates, which have been virtually zero since December last year.

 

Reflecting a cautious mood among policymakers about the pace of the recovery, minutes of Fed meetings released on Tuesday showed Fed regional bank directors felt the economy was gaining strength in the second half of the year although the banking sector was still strained.

 

Financial markets have been impatient for a clear sign that the Fed is beginning to ratchet back its flood of cash and ultra-low interest rates amid rising stock markets and signs of economic recovery. On Monday, the Fed announced it is testing one of its tools for withdrawing cash from the banking system, but stressed that the dry run should not be interpreted to mean it has begun to put its exit strategy into operation.

 

Yellen said the U.S. central bank has not made up its mind which tools to use and when. "I'm not sure it's necessary at this point to have decided on exactly what the sequence will be when the time comes," she said. Decisions about the exit would be influenced by economic conditions more broadly, but also by conditions in specific financial markets, Yellen said.

 

The condition of house finance markets might color whether the Fed would sell assets it bought specifically to improve conditions in those markets, she added.

 

Philadelphia Fed President Charles Plosser said the U.S. central bank needs stricter policies dictating when it should step in with bailouts, saying such measures would have reduced confusion during last year's financial crisis.

 

"Going forward, the Fed as well as other policy makers should strive to follow a systematic, more 'rule-like' approach in bad times as well as good," Plosser  said.

 

The Fed has said it will use measures like reverse repos or the sale of long-term assets to drain reserves from the banking system to prevent inflation from taking off once the economy begins to grow solidly.

 

Discussing concerns about the declining value of the U.S. dollar relative to other currencies amid worries about the yawning U.S. budget deficit and rising public debt, Yellen said imbalances in trade and capital are a vulnerability in the global economy.

 

If the United States and Asian countries address the causes of those imbalances, Yellen said those actions could increase confidence in the value of the dollar. The dollar has recently fallen to a 14-month low against a basket of currencies.

 

Yellen said she is not worried that rising asset prices in Asia are a significant problem. While one lesson from the financial crisis is that monetary policy must be more sensitive to asset price volatility, it is to be expected that capital flows will be driven by a search for higher yields, she said.

 

Amazon Is Feeling No Pain

 

After the close of regular trading, Amazon posted quarterly earnings well ahead of expectations and stated that holiday sales could come in far above expectations, sending the shares up to their highest level in nearly a decade. Amazon also said its Kindle electronic reader was its top selling item in both unit sales and dollars across all of its product categories.

 

For the key holiday fourth quarter, Amazon said it sees revenue to range between $8.125 billion and $9.125 billion, compared with analysts' expectations for $8.13 billion. The company forecast operating profit between $300 million and $425 million. The only downside at this point appears to be a growing price war with Wal-Mart, which could mean that margins could come under pressure in coming months.

 

Amazon's posted third quarter earnings of $199 million, or 45 cents per, as compared to $118 million, or 27 cents per share for the same period a year ago. Revenues increased 28 percent to $5.45 billion.

 

"The profit you see is really driven by the leverage we got from our strong revenue growth," said Chief Financial Officer Tom Szkutak. "We had very strong demand across categories and geographies."

 

Amazon has been rolling out new incentives to spur sales ahead of the holidays. To maintain its dominance in e-readers, it cut the price of its Kindle to $259 from $299 and introduced a global version. Asked whether Amazon would again lower the Kindle price before the holidays, Szkutak said the company was comfortable with the current price and would not comment on future plans.

 

Still, Amazon's Kindle faces its first major challenge with the debut this week of Barnes & Noble's Nook. That device is priced the same as Amazon's and offers features that may take market share from the online retailer.

 

Amazon recently bought online shoe retailer Zappos.com to venture further into footwear and apparel, and introduced same-day shipping in seven major U.S. cities. In North America, sales rose 23 percent in the quarter, while internationally sales grew 33 percent, the company said.

 

Media sales, which had shown slowing growth in the previous quarter, rose a healthy 13 percent in North America. They had risen a mere 1 percent in the second quarter.