MarketView for October 4

 

 

Summary  

 

Investors rushed in to buy technology and other beaten-down sectors as the S&P 500 dipped in and out of a bear market on Tuesday, and a late rally drove the index to its largest gain in more than a week. Once again Europe was the news de jour.

 

Reports that European finance ministers agreed to prepare action to safeguard their banks, following the first lender bailout as a result of the crisis, were cited as giving stocks a boost heading into the close. Adding to the late day enthusiasm bargain hunting by bottom feeders after the S&P 500 briefly fell more than 20 percent from its 2011 closing high set four months ago.

 

Chip makers and large-cap technology companies led the way even after Apple’s unveiling of its latest iPhone didn't live up to the hype. Volume increased late in the day - with nearly 15 percent of the day's composite trading taking place in the last half hour of the session.

 

Despite the large gains, it is still not clear whether the latest reports mean there is progress in Europe's effort to keep its sovereign debt crisis from spreading out of Greece and into the banking system. The European finance ministers put their heads together for a plan to shore up their banks after collapsing confidence in municipal lender Dexia forced France and Belgium to rush to its aid.

 

The Dexia bailout came as euro-zone finance ministers delayed a vital aid payment to debt-stricken Greece, which could run out of cash shortly.

 

The concern is that a Greek default will force banks to write down billions of dollars from their books and kick-start another credit crisis like the one that brought lending to a halt three years ago and generated a recession.

 

About 13.1 billion shares traded on the on the three major equity exchanges, more than 60 percent above the daily average so far this year of 8 billion shares.

 

Apple Leaves Its Fans Disappointed

 

Apple's newest iPhone left Wall Street disappointed over what is considered to be merely a somewhat enhanced version of last year's device, igniting rare criticism of an Apple launch. Furthermore, CEO Tim Cook failed to ignite the sort of excitement and buzz that the charismatic Apple co-founder once did.

 

Expectations were high at this critical juncture, when Android phones by Samsung Electronics and other rivals are closing in on Apple's lead and the important holiday shopping season gets started.

 

The Street was looking to be blown away by some amazing surprise, did not get it and as a result the shares immediately fell as much as 5 percent before recovering with the market to end the day down 0.6 percent.

 

Cook showed off a device that comes with voice recognition and a better camera, but looks identical to the last phone and does little to lift the bar for smartphones.

 

While the voice-enabling technology that helps users vocalize everything from stock price searches to sending messages appears to be more efficient than on Android phones or Research in Motion Blackberries, basically all you get is an A5 processor in the existing iPhone 4.

 

The iPhone, which accounts for more than 40 percent of Apple's sales, has been a success since it came out in 2007, making Apple into one of the world's leading consumer electronics companies.

 

On a brighter note, the company would seem to be making inroads into potentially pivotal new markets. It said more than 90 percent of Fortune 500 companies are testing or using its iPhones and iPads, expanding its presence in a corporate market dominated by RIM.

 

The two-generation-old iPhone 3GS will be offered free, as long as users sign a contract. Analysts said that would help to expand its market in lower-end Asian and developing markets.

 

Heading in to the event, many on Wall Street had questioned Cook's ability lead the company as Jobs did. In terms of stage presence, Jobs was a tough act to follow, but the Street’s subsequent opinion was that Cook handled himself well.

 

The latest version of the iPhone comes as the economy slows and competition intensifies. People activate more than 550,000 Android-based devices -- including tablets -- each day. Nielsen data shows the iPhone was No. 2 in the United States with a 28 percent market share, with Android at 43 percent.

 

Globally, iPhone shipments rose 9.1 percent in the second quarter while Nokia's plummeted more than 30 percent, handing the top spot to Apple with a market share of 18.4 percent, according to IHS iSuppli. Samsung, whose shipments grew faster, is coming on strong with a market share of 17.8 percent.

 

Bernanke Ready to Act

 

The Federal Reserve is prepared to take further steps to help an economy that is "close to faltering," Fed chairman Ben Bernanke told the Joint Economic Committee of Congress on Tuesday. It was his bleakest assessment yet of the recovery. Citing anemic employment, depressed confidence, and financial risks from Europe, Bernanke urged lawmakers not to cut spending too quickly in the short term even as they grapple with trimming the long-run budget deficit.

 

He made clear that the Fed's policy committee considers inflationary pressures well under control and given high unemployment, would be ready to ease monetary conditions further following the launch of a new stimulus measure in September.

 

"The Committee will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in the context of price stability," Bernanke said.

His language was firmer than the policy-setting Federal Open Market Committee's statement less than two weeks ago, when the Fed said it would monitor the outlook and was "prepared to employ its tools as appropriate."

 

Since then, uncertainty about the outcome of the euro zone's sovereign debt crisis has undermined both business and consumer confidence and helped to slow economic growth. The business cycle monitoring group ECRI last Friday said that the U.S. economy is tipping into a new recession.

 

Asked whether another round of bond purchases, known as quantitative easing, was in store, Bernanke was noncommittal.

 

"We never take anything off the table because we don't know where the economy is going to go. We have no immediate plans to do anything like that," he said.

 

"Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead," he told the Joint Economic Committee.

 

Bernanke said government belt-tightening was likely to prove a significant drag on the world's largest economy, which averaged less than 1.0 percent annualized growth in the first half of the year.

 

"An important objective is to avoid fiscal actions that could impede the ongoing economic recovery," he said,

 

Stressing that higher inflation earlier in the year had not become ingrained in the economy, Bernanke argued price pressures will remain subdued for the foreseeable future.

 

That backdrop made it easier for the Fed to launch its latest monetary easing effort in September, when it announced it would be selling $400 billion in short-term Treasuries and using the proceeds to buy longer-dated ones.

 

Bernanke estimated the new policy would lower long-term interest rates by about 0.20 percentage point which he said was roughly equivalent to a half percentage point reduction in the benchmark federal funds rate. Already 10-year Treasury note yields are at multi-year lows of 1.83 percent, helping keep mortgage and corporate borrowing costs extraordinarily cheap.

 

"We think this is a meaningful but not an enormous support to the economy. I think it provides some additional monetary accommodation, it should help somewhat on job creation and growth. It's particularly important now the economy is close -- the recovery is close -- to faltering," Bernanke said.

 

"We need to make sure that the recovery continues and doesn't drop back and the unemployment rate continues to fall downward."

 

Bernanke was categorical in defending the Fed's record of price stability in recent decades. He noted inflation has averaged 2.0 percent during his tenure and blamed regulatory failures, not excessively low rates, for the financial crisis.

 

In response to the financial crisis and recession of 2008-2009, the Fed slashed interest rates to effectively zero and more than tripled the size of its balance sheet to a record $2.9 trillion, buying bonds off banks’ balance sheets. Bernanke said this was not bailing out Wall Street, but was part of its mandate to provide price and financial stability.

 

China Yelps and Threatens Over Possible Passage of Trade Bill

 

An angry China warned Washington on Tuesday that passage of a bill aimed at forcing Beijing to let its currency rise could lead to a trade war between the world's top two economies. China's central bank and the ministries of commerce and foreign affairs accused Washington of "politicizing" currency issues and putting the global economy at risk after U.S. senators voted on Monday to start a week of debate on the bill.

 

The response suggested China sees a greater risk from the proposed bill than it has in the past when U.S. lawmakers attempted to put forward similar legislation to speed up the pace of appreciation in the yuan, or renminbi.

 

Beijing made similar remarks last year after the House of Representatives passed a currency bill that later failed to make any further progress in Congress.

 

Tuesday's coordinated salvo and the central bank's warning of a trade war and a slowdown in China's exchange rate reforms indicated Beijing was taking the latest currency bill more seriously.

 

The Senate vote opened a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

 

Lawmakers, with an eye on the 2012 elections, said keeping China's currency undervalued had cost American jobs and that a fairer exchange rate would help cut an annual trade gap Washington puts at more than $250 billion.

 

China's exchange rate has long been a bone of contention between Beijing and Washington. The yuan has appreciated some 30 percent against the dollar since it was revalued in 2005, although critics say it is still valued too low and gives Chinese exporters an unfair advantage.

 

The emergence of China as the world's fastest-growing major economy has led to often testy relations with the United States. The most recent tension was over U.S. plans for a $5.3 billion upgrade of the F-16 A/B fighter fleet of Taiwan, which Beijing considers to be a breakaway province.

 

Monday's vote bolsters prospects for the bill to clear the Democrat-run Senate later this week, but prospects for action in the Republican-controlled House of Representatives are murky.

 

If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.

 

China has routinely denied claims that its policies are responsible for trade imbalances and a high rate of unemployment in the United States, saying that structural problems were to blame. China's central bank said in a statement that the bill failed to address the underlying issues in the U.S. economy.

 

The Senate move had to be viewed in the context of deepening economic and political uncertainties in the United States, as well as dwindling approval ratings ahead of next year's elections, the state news agency Xinhua said in a commentary.

 

Critics of China's currency policy have gained some traction as a weak economy keeps U.S. unemployment stuck above 9 percent and as 2012 presidential elections draw near.

 

Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by traditionally free-trade-friendly Republicans.

 

A China currency bill passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, the bill already has more than 200 House co-sponsors and this week supporters expect to reach 218, the number needed to pass it. However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it is unclear if the bill would ever face a vote in that chamber.