MarketView for October 23

 

 

Summary  

 

Stock prices once again gave up a previous day’s gains on Friday as industrial companies' weak results overshadowed robust earnings from tech and retail heavy-weights. The blue-chip Dow average finished below 10,000 for the second time this week. A stronger U.S. dollar hit commodity prices, hurting the energy and materials sectors, while an analyst's comments on a major railroad's stock hit the transports sector.

 

Shares of Burlington Northern Santa Fe Corp were down over 6 percent after an RBC Capital analyst cut his price target on the stock and helped drive the Dow Jones Transportation Average down 3.5 percent. Shares of Burlington Northern fell 6.5 percent, or $5.50, to $79.12 a day after the company reported a 30 percent drop in quarterly profit. The company hauls a variety of commodities such as coal, grain, lumber, construction materials, automobiles and consumer goods. Shares of Union Pacific Corp (UNP.N), the largest U.S. railroad, tumbled 5.6 percent, or $3.39, to $57.73.

 

The dollar rose against the pound after data showed the UK posted its sixth straight quarter of contraction in gross domestic product, the longest stretch on record, and better-than-expected housing data gave the dollar some extra momentum upward. The dollar's strength helped push oil and commodity prices lower, sending shares of companies in the energy and materials sectors down. The S&P materials sector .GSPM fell 2.1 percent.

 

But shares of Microsoft rose 5.4 percent to $28.02, while Amazon.com rose 26.8 percent to $118.49 after earlier climbing to a lifetime high of $119.65.

 

For the week, the Dow was down 0.2 percent, the Nasdaq fell 0.1 percent, and the S&P 500 was down 0.7 percent.

 

Schlumberger fell 5 percent to close at $65.20 after it warned natural gas drilling activity would remain weak until late 2010. This year, natural gas prices globally have been too low to justify much drilling of new wells, Schlumberger said. Sweet domestic crude oil futures for December delivery fell 69 cents, or 0.9 percent, to settle at $80.50 a barrel.

 

Top decliners in the tech sector included Broadcom and MEMC Electronic Materials following disappointing quarterly results. Shares of Broadcom, were down 7.3 percent to $28.50. The stock of MEMC Electronic Materials, which makes silicon, the major raw material for the solar and semiconductor industries, dropped 10.1 percent to $13.8..

 

Existing Home Sales Hit 2-Year High

 

The National Association of Realtors reported on Friday that sales of previously owned homes hit their highest peak in more than two years during the month of September; providing further evidence the housing market and economy were on the mend.

 

According to the NAR, sales rose 9.4 percent to an annual rate of 5.57 million units, the highest level since July 2007, from a downwardly revised 5.09 million units in August.

 

The housing sector's collapse and the subsequent global credit crisis helped to push the U.S. economy into recession at the end of December, its worst slump in 70 years. However, the housing market is gradually crawling out of a three-year recession, and analysts believe that in the third quarter residential investment probably contributed to economic growth for the first time since the fourth quarter of 2005.

 

Signs of recovery in the housing market, coupled with other fairly upbeat data, strongly suggest the economy started growing again in the third quarter after four straight quarters of declining output. Compared to September last year, existing home sales were up 9.2 percent.

 

Sales for both new and previously owned homes have received some impetus from a combination of the $8,000 government tax credit for first-time buyers, low prices and mortgage rates. However, there are fears that the expiration of the tax credit at the end of November could hamper the recovery.

 

The Obama administration is still considering extending the program but is weighing that against efforts to bring down the federal deficit, senior White House officials said on Wednesday.

 

"We are hopeful the tax credit will be extended and possibly expanded to more buyers ... because the rising sales momentum needs to continue for a few additional quarters until we reach a point of self-sustaining recovery," said NAR chief economist Lawrence Yun

 

The national median home price fell 8.5 percent to $174,900 in September from a year-ago. That was the smallest percentage decline in 13 months, the NAR said. Distressed properties made up 29 percent of sales last month, with first-time buyers accounting for 31 percent.

 

The inventory of existing homes for sale in September dropped 7.5 percent to 3.63 million units. September's sales pace left the supply of previously owned homes on the market at 7.8 months' worth, the lowest in two-and-a-half months, from 9.3 months' worth in August.

 

Bernanke Serious About Reform

 

Federal Reserve Chairman Ben Bernanke wants some serious financial reform. This became increasingly obvious on Friday when Bernanke laid out his most detailed description yet of the central bank's post-crisis approach to regulation and said requiring big banks to hold more capital was under consideration.

 

Bernanke said regulators should consider requiring a greater share of bank capital be held in the form of common equity, and a possible call for some firms to issue contingent capital, a debt-like security that can convert to equity in times of stress.

 

"We are working with our domestic and international counterparts to strengthen the standards governing bank capital, liquidity, risk management, incentive compensation and consumer protection, among other areas," Bernanke said.

 

Bernanke said it was imperative to push forward with regulatory reforms even though financial conditions had "improved considerably." "With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises," he said.

 

Bernanke said that to beef up oversight, which he acknowledged fell short in spotting risky practices that contributed to the meltdown, the central bank would conduct more comprehensive reviews of banks and demand more reporting. He said the Fed is unlikely to repeat the extensive stress-tests done on major U.S. banks earlier this year.

 

Still, "many of the lessons, particularly looking at the system as a whole, trying to identify system-wide exposures, system-wide practices that pose risks, will be part of our basic tool-kit going forward," he said.

 

The Fed's examination of capital buffers at the nation's 19 largest banks earlier this year helped restore confidence in the financial system and made it easier for banks to raise private capital.

 

"We will conduct more frequent, broader, and more comprehensive horizontal examinations," Bernanke said. Regulators traditionally have conducted bank-by-bank examinations.

 

Congress is wrestling with regulatory reforms aimed at avoiding a repeat of the crisis that helped push the U.S. economy into its deepest recession since the 1930s. President Barack Obama has pushed lawmakers to wrap up their efforts by year-end, but the process is likely to drag into next year as Congress wrangles over details.

Don’t Dismiss Microsoft

 

Microsoft posted earnings numbers that far exceeded Street expectations on Friday, sending its shares up 7 percent, as the PC market improved and sales of its Windows software and Halo video game were stronger than expected.

 

The results top a big week for the world's largest software company, which launched its Windows 7 operating system to positive reviews on Thursday, as it looks to regain leadership in the technology sector from rivals Apple and Google.

 

Fiscal first-quarter earnings were down 18 percent to $3.57 billion, or 40 cents per share, compared with $4.37 billion, or 48 cents per share, in the year-ago quarter. At the same time, sales fell 14 percent to $12.92 billion, partly reduced by a deferral of $1.47 billion in revenue to future quarters related to Microsoft's free upgrade to Windows 7 for recent buyers of the predecessor Vista system. That beat analysts' average forecast of $12.31 billion, the first time the software maker had done so in a year.

 

Microsoft's results are closely tied to sales of PCs, which rose in the latest quarter by about 2 percent after two quarters of declines. The company did not include any pre-sales of Windows 7 in its latest results, offering the hope that the current quarter will show a boost in sales from the new system.

 

Microsoft also played down hopes for a quick recovery from the worst recession in decades, sticking with a characteristically cautious outlook. "The fourth quarter of fiscal 2009 (which ended June 30) may well have been the bottom of the economic reset," said Chief Financial Officer Christopher Liddell on a conference call on Friday.

 

He repeated his view that technology spending should recover gradually in 2010. "We are not seeing a large rebound, but we'd like to think, certainly as we go into next calendar year, we'll start to see businesses spending again," he said.

 

The company, which is tightening its belt in the economic slowdown, also cut its outlook for operating expenses for the full fiscal year to $26.2 billion from its previous target of $26.5 billion.

 

Quarterly profit fell in Microsoft's main units, producing the Windows operating system and Office suite of applications. Profit rose in its server unit and its entertainment and devices unit, which makes the Xbox console and Halo video game series. Its loss-making online services unit, which includes the new Bing search engine, reported a wider loss than a year ago.