MarketView for October 26

Summary  

Share prices fell for a second straight trading session on Monday as investors ditched home builders and financials on fears lawmakers may let a federal home buyer tax credit expire, while commodity shares succumbed to pressure from a rising dollar. The dollar rallied from a 14-month low against the euro as falling stock and commodity prices dampened risk appetite, prompting investors to lock in recent gains in other currencies. The dollar's rise pressured commodity prices, which hurt shares of natural resource companies. Chevron, which is due to post their quarterly results this week, ended the day down 1.6 percent to close at $75.45.

Trading was choppy. Stocks initially started on firmer footing, with indexes up more than 1 percent shortly after the open, but the bounce quickly faded as the dollar rebounded and concerns arose over the financial sector's prospects. JPMorgan, down 3.1 percent at $43.82, was among the top drags, along with Bank of America, down 5.1 percent at $15.40.

The tax credit has become a hot button issue and Wall Street sold off after an incorrect media headline said research firm, ISI Group, had written the tax credit probably would not be extended when it expires November 30.

The research report, however, was similar to news on Friday that Senator Majority Leader Harry Reid wanted to phase out the tax credit over time, and not let it expire. Reid said on Monday the Senate could vote as soon as Tuesday to extend the tax break. Without the home buyer credit, investors worry that the struggling housing market might lose a crucial incentive that has spurred hopes of stabilization in recent months.

Financials also came under pressure from the news that Dutch banking, insurance and asset management company ING will split in two as part of a plan to pay back government bailout funds and return to its retail savings bank roots.

Among home builders' shares, Toll Brothers fell 4.2 percent to close at $18.36, while Lennar fell  4 percent to close at $13.57. Beazer Home was down 4.4 percent at $4.83.

The CBOE Volatility Index .VIX ended up 9.2 percent, its biggest one-day percentage gain in a month. During the session, the VIX rose as much as 11.6 percent, which marked its biggest intraday percentage jump in nearly two months.

On the bright side, RadioShack hit a 13-month high after the electronics chain reported quarterly revenue above expectations. The stock was up 15.9 percent to close at $18.15.

Economic Reports Continue to Show Slow Recovery, but…

Regional economic reports on Monday suggest that although the Great Recession is over, the recovery process will be on the slow side. Economic activity and manufacturing data for the Mid West and Texas show an improving economy, despite the Dallas Federal Reserve's Texas manufacturing output index latest reading of a negative 8.0 in October from a negative 0.5 in September.

However, the key number of economic activity is the first cut at the third quarter’s GDP reading, scheduled for release on Thursday. The expectation on the Street is for a reading somewhere in excess of 3 percent. The Street will also be watching to see if the Federal Reserve changes its language on quantitative easing measures and future interest rate decisions in response to the shifting economic conditions at the central bank's two day, Nov 3-4 policy-setting meeting next week .

Monday's Chicago Federal Reserve report showed its three month moving average of economic activity has neared levels seen at the end of previous recessions. The average, which smoothes out monthly volatility, came in at a negative 0.63 in September, up from the August revised figure of a negative 0.96, previously reported at negative 1.09. The Chicago Fed said in the past four recessions, the three-month average's rise back above minus 0.70 has coincided closely with the end of the recession.

The Chicago Fed said its Midwest Manufacturing Index rose in September, as auto sector production rebounded. The question being asked is whether the increase was solely due to the

Government’s recently ended "cash-for-clunkers" buying incentive program.

The index rose to a seasonally adjusted 82.3 in September from a revised 81.6 in August. However, compared with a year earlier, Midwest output was down 15.7 percent, steeper than the 7.2-percent national decline..

Some more indications that the housing market may be temporarily forming a bottom are expected on Tuesday, with the release of Case/Shiller home price data. However, the concern there is that the tax incentive for first-time home buyers has been a major factor spurring sales and that its expiry next month may lead to a second leg down in housing's more than three year decline.

Verizon Beats Expectations

Verizon’s third-quarter earnings fell a less-than-expected 9 percent as wireless subscriber gains offset slower-than-anticipated growth in its FiOS television service. While Verizon Wireless added a net 1.2 million mobile customers, it is still losing market share to AT&T, the exclusive U.S. provider for Apple's iPhone.

The company, which depends on mobile, broadband and TV for growth, also appeared to lose customers to cable rivals such as Time Warner Cable and Comcast. Verizon reported 191,000 FiOS TV customer additions in the quarter, short of King's forecast of 250,000.

Verizon Chief Financial Officer John Killian said that a promotion to offer netbooks to new FiOS customers did not fuel as much growth as expected, but he said there was no indication of increased pressure from cable rivals. Verizon ended a netbook promotion with Hewlett-Packard (HPQ.N) in the middle of the quarter because customers were looking for cash rather than product promotions, a person familiar with the promotion said.

The company's third-quarter profit fell to $2.89 billion or 41 cents per share before one-time items, earnings were 60 cents per share. Revenues increased 10.2 percent to $27.27 billion, helped by the purchase earlier this year of rural mobile operator Alltel. On a pro forma basis, as if Verizon had owned Alltel last year, revenue would have risen 0.6 percent.

Wireless brought almost 58 percent of Verizon's total revenue for the quarter. Verizon Communications owns 55 percent of Verizon Wireless, while Vodafone Group owns the rest.

Many on Wall Street see Verizon Wireless as an obvious second U.S. partner for Apple once AT&T's exclusive rights to sell the iPhone ends. Verizon Chief Executive Ivan Seidenberg said he would like to partner with Apple, but such a decision would be Apple's to make.

In the business segment, which has been hurt by corporate budget tightening and layoffs, Verizon surprised some investors with 2.5 percent sequential growth and the company expects more improvements as the economy recovers.

"I think our growth rate will improve in enterprise over the next several quarters," Killian said, but stopped short of giving a specific target.

Killian said the company was expecting strong growth in wireless in the fourth quarter with new devices including a touch-screen BlackBerry from Research In Motion and two devices based on Google's Android system. Verizon particularly talked up one of the Android devices, Droid, expected to come from Motorola.

The company told analysts that its 2009 capital spending would likely come in lower than its forecast of $7.4 billion to $7.8 billion and would be at the low end of that range "at worst." Killian expects capital spending next year to be a smaller percentage of revenue than in 2009.