MarketView for October 14

Summary 

Bank shares led the parade of equities lower on Thursday as an ever increasing foreclosure crisis began to undermine the strength of the financial markets, strength that has been built up over the last five weeks. For example, the S&P 500 has rallied 11.9 percent since September 1 and volume has picked up from anemic levels. However, the rally could weaken as an index of bank stocks fell nearly 3 percent on Thursday over growing fears the foreclosure problems could bleed into the broader credit markets and the economy.

All 50 U.S. states are investigating the mortgage industry, and the Street is concerned that the investigations will be detrimental to bank earnings. As a result, JPMorgan Chase ended the day down 2.8 percent at $38.72, while Bank of America closed down 5.2 percent at $12.60. Meanwhile, the technology sector continued to show strength, with Google ending the day up more than 9 percent in extended trading after exceeding Street expectations. Advanced Micro Devices closed up more than 7 percent after hours.

Apollo Group closed down 23.2 percent to $38, dragging down the shares of other for-profit education companies to six-week lows after the sector bellwether withdrew its 2011 outlook and forecast sharp drops in new student enrollments.

The dollar's decline helped limit losses, as a weaker dollar puts a floor under commodity prices and other dollar denominated assets.

New claims for jobless benefits unexpectedly rose in the latest week. The data reinforced the view that the Federal Reserve will engage in another round of printing money to support a sluggish economic recovery.

Jobless Claims Rise Slightly

New claims for jobless benefits unexpectedly rose last week, adding to the Street’s confidence that the Fed will add additional liquidity to the economy in an effort to increase growth and lowering unemployment. At the same time, record-high imports from China helped send trade deficit higher in August, which, in turn, could result in lower economic growth, while at the same time adding to an already tense situation with regard trade and currency policy.

The trade deficit for August came in at $46.4 billion as the shortfall with China hit a record $28.0 billion, the Commerce Department said. Meanwhile, the United States is pressuring Beijing to let its yuan currency appreciate faster, while many emerging economies have taken steps to weaken their currencies to offset the impact of the dollar's decline.

Initial claims for state unemployment benefits hit to a higher-than-expected 462,000 in the latest week, the Labor Department said on Thursday. However, there was a degree of modest improvement as the number of workers continuing to collect benefits after an initial week of aid dropped in the week ended October 2 to the lowest level since November 2008.

The trade report is one of the last pieces of data U.S. Treasury Department officials will examine before deciding whether to declare China a currency manipulator in a semi-annual report scheduled to be released on Friday. Rising imports is indicative of an increase in consumer demand. However, it is also shows that the increased demand is being met by overseas rather than domestic production, putting a damper on domestic economic growth.

Macroeconomic Advisers said it cut its forecast for third-quarter GDP growth by four-tenths of a percentage point to 1.2 percent on the back of the trade report. Another report on Thursday showed inflation at the wholesale level rose twice as quickly as expected last month. With little leverage to pass on costs to consumers, the data suggests business profits could suffer.

The Labor Department reported on Thursday that. producer prices rose 0.4 percent in September. The core index, which excludes volatile food and energy prices, rose just 0.1 percent.

Fed Chairman Ben Bernanke is likely to give guidance on future policy on Friday when he is scheduled to give a speech on tools policymakers can use to try to spur growth in a low-inflation environment.

The economy slowed sharply in the second quarter, weighed down by a hefty trade gap and dwindling fiscal stimulus. The housing sector, which was at the center of the deepest recession since the Great Depression, continues to struggle. The number of homes foreclosed on by banks exceeded 100,000 for the first time in September. Foreclosures are expected to slow in coming months as lenders work through questionable paperwork, real estate data company RealtyTrac said on Thursday.

Is Yahoo in Play

Shares of Yahoo rose more than 9 percent on Thursday, on the prospect that Yahoo could be the target of a buyout by private equity firms, possibly in conjunction with another media company like AOL or News Corp.

Yahoo's shares moved above $17 in premarket trade, but stood at $16.72, up $1.47 or 9.6 percent, shortly after regular trade began on the Nasdaq. The $16.72 level represented the stock's highest mark since early May.

Yahoo's jump comes after a source said on Wednesday that several private equity firms have approached media companies including News Corp and AOL about a possible acquisition of Yahoo.

So far, Yahoo, the world's second largest search engine and a company that is struggling to revive revenue growth, has not yet been approached by the private equity firms, although Silver Lake Partners was among the firms in very preliminary discussions about acquisition scenarios.