MarketView for October 12

 

 

Summary 

 

After patiently waiting until the announcement was released at 2:15 PM regarding the minutes of the last meeting of the Federal Reserve, the Street took its cue from the Fed’s statement that it would likely take additional action, specifically the purchase of Treasury and/or mortgage backed bonds, thereby adding additional cash to the economy. If the Fed carries through with its plan as stated, it was likened to dropping interest rates by about another 0.7 percent.

 

Meanwhile, of drilling contractors rose after the Obama administration announced that it was lifting its ban on deep water drilling seven weeks ahead of schedule. As a result, the shares of Transocean rose 4.7 percent to close at $64.81 as Diamond Offshore ended the day up 4 percent to $69.37.

 

Among the technology stocks, Intel rose 1.1 percent to close at $19.77 during regular trading hours, and then added another 1 percent to $19.97 in afterhours trading, following stronger-than-expected third-quarter results and a forecast for better sales in the fourth quarter.

 

Apple gained 1.1 percent to close at $298.54 and led the Nasdaq's advance after Barclays raised its price target on the company's stock. Technology stocks are at their cheapest in 20 years and the weaker dollar will likely benefit the entire sector.

 

The expectation of more cheap cash helped lift bank stocks, with Bank of America ending the day up 2.8 percent at $13.52.

 

Shares of Pfizer, the world's largest pharmaceutical company and a Dow component, gained 0.5 percent to $17.47 after it agreed to buy King Pharmaceuticals for $3.6 billion. King Pharma shares jumped 39.4 percent to $14.15.

 

The dollar index .DXY, a gauge of the dollars standing against a basket of currencies, erased its earlier gain and was down 0.16 percent at the close. The 30-day correlation between the index and the S&P 500 ticked down to -0.90.

 

China's bid to cool down its economy partly offset the Fed's resolve, as it sparked concerns it could crimp global growth. An official Chinese newspaper reported the government raised bank reserve requirements by 50 basis points, the fourth hike this year, due to excessive lending.

 

Fed Minutes

 

Federal Reserve officials believed in September the struggling recovery might soon need more help, and they discussed several ways to provide support, including the possible adoption of a price-level target.

 

Policy-makers had a "sense that (more) accommodation may be appropriate before long," the central bank said on Tuesday.

 

In minutes of the its last policy-setting session held September 21, the Fed said officials discussed several approaches to aiding the economy but focused on buying additional longer-term Treasury securities and ways to nudge the public into expecting higher levels of inflation in the future.

 

To help shift inflation expectations, policy-makers debated providing more detailed information about what rates of inflation they would prefer, or the possibility of making clear they would tolerate a higher level of inflation on a temporary basis, a policy approach known as price-level targeting. They also discussed the possibility of targeting a path for GDP growth.

 

The Fed has kept overnight interest rates near zero since December 2008 and has bought about $1.7 trillion in mortgage-linked securities and longer-term government debt to lower other borrowing costs to help the economy recover from the worst recession since the 1930s.

 

As the recovery showed signs of fading over the summer, sapped by the drying up of government stimulus measures and the shock of a sovereign debt crisis in Europe, Fed officials said they would consider additional stimulus measures to support the sluggish economy.

 

The September meeting's minutes showed a number of Fed officials were close to pulling the trigger.

 

"Many members considered the recent and anticipated progress toward meeting the committee's mandate of maximum employment and price stability to be unsatisfactory," the Fed said.

 

Several officials felt that unless conditions improved, they would consider it appropriate to take action soon in hopes of spurring a stronger recovery.

 

Intel Says Fourth Quarter Looks Strong

 

Intel forecast strong fourth-quarter sales and margins as demand from emerging markets and corporations offset weak consumer spending, indicating that the technology sector could end 2010 on a strong note. As a result, the company’s shares hit $20 in extended trading after closing 1.07 percent higher at $19.77. Furthermore, Intel will likely set a positive tone for the latest tech earnings.

 

Intel's forecast for a better-than-expected December quarter gross margin of 67 percent -- plus or minus a couple percentage points -- affirmed hopes that higher-end spending on servers or data centers may help offset the loss of computer sales to a booming tablet segment.

 

Chief Executive Paul Otellini told analysts on a conference call on Tuesday that early demand for Sandy Bridge -- its next-generation chip combining central processing and graphical functions -- was much greater than originally anticipated.

 

The company forecast revenue of $11.0 billion to $11.8 billion in the final three months of 2010, in line with analysts' expectations of $11.32 billion.

 

"We'll see the consumer market growing but likely a little less than you'd normally expect. I attribute that to consumers pulling back a little bit based on economic uncertainty," Intel Chief Financial Officer Stacy Smith said.

 

Its third-quarter net profit was $2.955 billion, or 52 cents a share, versus $1.86 billion in the year-ago quarter. That was slightly higher than the expected 50 cents per share. Revenue in the quarter ended September 25 was $11.1 billion, slightly above the $10.99 billion expected.

 

Since Intel warned in August about weak consumer demand for personal computers, semiconductor stocks have surged in part on expectations that the worst may be over for the technology sector, and investors are looking for signs of strength to back their bets -- or sell.

 

Longer term, Wall Street remains concerned about the threat to Intel, whose microprocessor brains drive eight out of 10 of the world's personal computers, from the fast-growing tablet segment popularized by Apple's iPad.

 

"Consumers will have a limited amount of discretionary income and some will choose to purchase a tablet instead of upgrading an existing PC or purchasing a netbook in any given period," Otellini conceded on the conference call.

 

The PC industry has also struggled in recent months with soft demand in the United States and Europe as well as rising inventories for chips and other components that have led some customers to reduce their orders for new parts.

 

Intel's results were buoyed by a 3 percent sequential increase in data center sales, a business with higher margins than chips for PCs. Intel has yet to develop much of a presence in smartphones and tablets, which are often powered by energy efficient processors designed by ARM Holdings.