MarketView for October 30

 

 

Summary  

 

The Dow Jones industrial average suffered through its worst decline since this past July, the result of concerns that the economic recovery will not be robust enough to sustain the seven-month stock rally. Financials were hit as a result of concerns over Citigroup's balance sheet that had investors unloading shares across the board. Citigroup fell 5.1 percent to $4.09 after accounting expert Robert Willens, an independent consultant, said the bank was likely to have a $10 billion fourth-quarter charge on its deferred tax assets.

 

All 30 Dow stocks finished in the red, with JPMorgan the top drag with a drop of 5.8 percent to $41.77, followed by Exxon Mobil down 3.1 percent for the day at $71.67.

 

 Friday was also the end of the fiscal year for many mutual funds. The end result was that the S&P 500 index closed out the day on the brink of a correction. At the same time, Wall Street's favorite measure of investor fear, the CBOE Volatility Index, soared 24 percent -- its largest one-day percentage gain since October 2008.

 

Both the S&P 500 and the Nasdaq snapped seven straight months of gains. For the week, the Dow fell 2.6 percent, the S&P 500 lost 4 percent and the Nasdaq declined 5.1 percent. For the month, the Dow was unchanged, the S&P 500 shed 2 percent and the Nasdaq was down 3.6 percent.

 

The fragility of the recovery was highlighted by economic reports that showed U.S. consumers cut spending in September and consumer sentiment turned gloomier this month.

 

Apple lost 4 percent to $188.50, while Google fell 2.7 percent to $536.12. The market's slide, coinciding with technical glitches on the New York Stock Exchange, wiped out Thursday's gains, which represented the best one-day rally for stocks in three months.

 

A 10.7 percent slide in the Dow Jones Transportation Average from its post-March peak, which was reached on October 20, underscored some of the pessimism. Technically, the DJT has crossed a threshold that chartists regard as signifying the onset of a correction.

 

A huge influx of orders prevented the New York Stock Exchange from disseminating quotes shortly after the start of trading on Friday.

 

NYSE Euronext, the parent of the New York Stock Exchange, said the delays followed "an inordinate influx" of erroneous orders received as Friday's session got under way. Later in the session, the company had to temporarily transfer quote processing to a backup system.

 

The interruption on the NYSE and in the NYSE Amex cash equities trading was later resolved.

 

Consumer Spending Disappoints

 

The Commerce Department reported on Friday that consumers reduced their spending during the month of September by 0.5 percent, making it the largest decline since last December. The fallback comes after a 1.4 percent rise in August. The decline, which was in line with market expectations, followed the end of a government program to boost auto sales.

 

Consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, had been bolstered by the popular "cash for clunkers" program, which provided discounts on some new motor vehicle purchases. But that program ended in August, and consumers retrenched last month.

 

Spending adjusted for inflation fell 0.6 percent, the biggest drop since December, after rising 1 percent the prior month, the Commerce Department said. Personal income was flat, but fell for a fourth straight month after adjusting for taxes and inflation.

 

Despite the fall in disposable income, Americans saved more money last month. Savings increased to an annual rate of $355.6 billion, lifting the saving rate to 3.3 percent from 2.8 percent in August.

 

The spending report also showed a key inflation gauge monitored closely by the Fed, the price index for personal spending excluding food and energy, rose only 1.3 percent over the last 12 months. Fed officials would prefer to see it closer to 2 percent.

 

Separately, the Labor Department said wages rose a meager 0.4 percent in the third quarter, pushing the gain over the past year down to just 1.5 percent, the smallest on records dating back to 1982.

 

Factory Numbers More Encouraging

 

The factory gauge from the National Association of Purchasing Management-Chicago offered some hope manufacturing activity would help support recovery as businesses stopped paring inventories.

 

The measure rose to 54.2 in October from from 46.1 in September. It was the first time the index had broken above the 50 line that separate contraction from expansion since September.

 

Consumer Sentiment Down

 

Consumer sentiment slipped this month as consumers became preoccupied over personal finances and focused on paying down debt, the Reuters/University of Michigan Surveys of Consumers showed on Friday. The report’s final index of sentiment for October slipped to 70.6 from 73.5 in September.

 

In spite of the decline, sentiment remained well above where it was a year ago. In November 2008, the index had collapsed its worst reading since mid-1980 at 55.3. This month's reading was also a touch above the median expectation of 70.0, according to a Reuters poll.

 

But while recovery expectations have improved over the last year, "consumers continued to voice very dismal assessments of their personal financial situation," the report said. "These grim financial evaluations, coupled with (consumers') intentions to increase savings and decrease their indebtedness, will limit any rebound in consumer spending."

 

The majority of consumers reported their finances had worsened in October for the 13th straight month, the report showed, and “The longest and deepest decline in the 60-year history of the surveys."

 

The index of consumer expectations fell to 68.6 from 73.5, with half of those surveyed expecting the unemployment rate to remain around its current level of 9.8 percent, a 26-year high. The current conditions index edged up to 73.7 from 73.4, its highest level since September 2008, when it stood at 75.

 

Inflation expectations picked up, with the 1-year inflation outlook rising to 2.9 percent from 2.2 percent in September. Consumers' five-year inflation expectations edged up to 2.9 percent in October from 2.8 percent the prior month.

 

China Debuts Start-Up Stock Market

 

The ChiNext stock market, China's long-awaited Nasdaq-style second board, debuted on Friday with a speculative surge that more than doubled the price of all 28 stocks during intraday trade -- a good sign for companies lining up to list on China's stock markets.

 

The open of a market that hopes to turn local start-up firms into the next Microsoft or Intel stirred concerns about speculative froth, but analysts said circuit-breakers would curb excesses while a steady supply of new shares would help to keep mainland stock valuations under control.

 

The huge interest has created dozens of yuan billionaires overnight among the firms' founding shareholders, while retail investors lucky enough to win an IPO subscription lottery could cash in on the debut day for up to 40,000 yuan ($6,000) -- a small fortune for China's small investors.

 

ChiNext, part of the Shenzhen Stock Exchange in booming southern China, started out with a market capitalization more than 100 times that of China's main Shanghai Stock Exchange, which launched in 1990, and vastly deepens China's capital markets by expanding funding channels for small innovative firms.

 

Regulators are currently reviewing more than 100 IPO applications for ChiNext and industry officials estimate that at least 1,000 firms are preparing to float shares on the market next year.

 

China has 10 million small and mid-sized companies starved for loans from domestic banks, which favor big state-owned enterprises. Spurred in part by a lack of immediate access to funds at home, 22 Chinese start-ups have joined the U.S. Nasdaq Stock Market this year, bringing the total of such firms listed on the U.S. market to 116.

 

Market players had expected at least one-third of the ChiNext stocks to more than double on the first day, and while all 28 achieved that goal at some point during the session, only 36 percent managed to retain those gains to the close. It is typical for IPOs listing in Shenzhen to double or triple on their debut because of their low capitalization.

 

ChiNext also halted trade in all the new stocks at least once for 30 minutes during the morning after they rose 20 percent from their opening price, triggering exchange circuit-breakers intended to curb excessive speculation.

 

Most were hit with a second 30-minute halt when they extended their gains to 50 percent, and a handful, including film studio Chengdu Geeya Technology Co, were hit with a third halt after shooting up 80 percent.

 

Geeya was the biggest gainer of the day, more than tripling from its IPO price, while rival Huayi Brothers Media Corp was the most actively traded stock, with investors drawn by the famous celebrities associated with the two firms.

 

The value of Huayi Chairman Wang Zhongjun's shares in the firm ballooned to 3.1 billion yuan, while Pu Zhongjie, president of medical equipment maker Lepu Medical Technology, saw his holdings' worth surge to 3.8 billion yuan.

 

The 28 companies listed, almost all private companies in contrast with the state-owned corporations that dominate China's main board, completed recent IPOs at prices averaging 56 times 2008 earnings.

 

Based on forecasted 2009 earnings, the average price/earnings ratio for the IPO prices at around 40 times, while the huge gains in Friday's trade pushed that up to around 75. However, investors have not been deterred by the high prices. The companies raised a combined 15.5 billion yuan from their IPOs, with an average oversubscription ratio exceeding 120 times.

 

The high valuations on ChiNext appeared also to boost China's main board, where the benchmark Shanghai Composite Index closed up 1.2 percent. The average forecast PE for main-board shares is about 30 times.

 

ChiNext's initial 28 start-ups had a market capitalization of 70 billion yuan before trading started, doubling to about 140 billion yuan at the close.

 

In contrast, the Shanghai bourse listed only eight firms on its debut in December 1990, with a combined market capitalization of less than 700 million yuan. The exchange, now boasting a capitalization of 17 trillion yuan and the world's fifth largest, traded only 126,000 shares worth 494,000 yuan on its first day.