MarketView for October 6

 

 

Summary  

 

The major equity indexes were on a roll upward for the third consecutive day on Thursday as developing euro zone plans to backstop European banks once again gave rise to expectations that the threats of a financial crisis were on the wane.

 

New claims for unemployment benefits rose slightly less than expected last week, hinting at an improved labor market a day before the closely watched non-farm payrolls report. About 9.14 billion shares traded on the major equity exchanges, a number that was above the year's daily average so far of about 8.02 billion shares.

 

Bank shares led the day’s parade on word that the EU planned to recapitalize banks. The European Central Bank said it was ready to buy bonds to provide longer-term cheap money for European lenders in need of funding.

 

Europe's woes were the primary cause behind the selling that briefly dropped the S&P 500 into bear-market territory on Tuesday. Since hitting a 13-month low near 1,075 that day, the S&P 500 has gained 8.4 percent. Highlighting the recent volatility, Thursday marked the fifth consecutive day of moves above 1.7 percent in the S&P 500.

 

Market attention will now turn to Friday's payroll report for September with a prayer and a hope that the ensuing jobs numbers lead unequivocally to the conclusion that the economy is on a slow but nonetheless deliberate slog to higher ground.

 

The ECB's bond-buying is intended to boost confidence in stocks and other risky assets. A similar move by the Fed last year was able to accomplish the same goal. One immediate result was that Morgan Stanley, who has been plagued recently by fears of its exposure to European banks, rose more than 21 percent in three days to close Thursday at $15.18.

 

A rally in copper prices off 14-month lows helped lift shares in the materials sector. Dow component Alcoa rose 5.4 percent to $9.88.

 

Apple shares gave up earlier gains and slipped 0.2 percent to close at $377.37, a day after co-founder Steve Jobs died at the age of 56.

 

Retail Sales Rise

 

A revival in retail sales, particularly back-to-school sales, benefited retailers in September. As a result, several retail chains posted strong sales growth suggesting optimism for the holiday season. Shoppers largely brushed off the prolonged economic malaise and the recovery after Hurricane Irene. Chains with fresh items enticed shoppers while others were left to question their strategies heading into the critical winter holiday shopping season. Overall, 23 retailers posted an average sales gain of 5.1 percent at stores open at least a year.

 

Back-to-school shopping is the second-largest retail spending season behind the holiday period of November and December. Early autumn momentum can also indicate how shoppers will respond to holiday spending.

 

Holiday season forecasts have largely been tepid as the economy takes its toll on consumer sentiment. The National Retail Federation expects November and December sales to rise 2.8 percent after a 5.2 percent gain in 2010.

 

Back-to-school sales from July to September rose 6 percent based on his firm's review, hovering just below its forecast of 6.2 percent.

 

Retailers also are preparing for the holidays by keeping inventories lean to avoid the margin-sapping deep discounts they were forced to take in 2008 and 2009.

 

Port of Long Beach, California, Executive Director Richard Steinke said retailers were being cautious about building up inventory. In August, imports going through the port -- which is a major hub for goods coming from Asia -- were down more than 10 percent.

 

Kohl's said it attracted more shoppers as it launched Jennifer Lopez and Marc Anthony clothing lines. Target saw a rush for the Missoni line it launched on September 13 that even crashed its recently updated website. The discount chain said children's clothing was one of its strong categories.

 

Chains catering to teens, young women and families such as Zumiez, Buckle and Limited Brands did much better than expected. Target and Kohl's each with new exclusive lines, exceeded forecasts. Others in the same categories, such as Wet Seal and JC Penney, fell short of expectations. The largest percentage decline was a 4 percent drop at Gap Inc.

 

The tally gives a glimpse into consumer spending, as the retailers that issue monthly reports account for a small fraction of overall sales. Wal-Mart, Home Depot, Best Buy, Abercrombie & Fitch and other big chains do not issue monthly sales.

 

EU Picks Up The Pace

 

European Union moves to shore up ailing banks moved into higher gear on Thursday. The EU's executive arm said it would present a plan for member states to coordinate a recapitalization of their banks, as regulators met in London to reassess the capital buffers of stressed lenders that received a clean bill of health in July. Meanwhile, the European Central Bank launched fresh liquidity measures to help banks weather the euro zone's debt crisis, easing one of the major concerns overhanging markets.

 

The European Central Bank (ECB) threw a lifeline to commercial banks by turning up its liquidity pumps to provide longer-term cheap money for the growing number of European lenders which have seen wholesale funding dry up as market confidence ebbs.

 

The ECB, wary of the region's fiscal woes spiraling into a global crisis, said it will revive 12-month loan operations and purchases of covered bonds, while it kept key interest rates unchanged at 1.50 percent. The ECB's buying of covered bonds is intended to boost confidence in stocks and other risky assets such as commodities and high-yielding bonds.

 

The moves came amid fears that Greece, the most heavily indebted euro zone state, may default within months, setting off a chain reaction of sovereign downgrades and bank failures.

 

"We are now proposing member states to have a coordinated action to recapitalize banks and so to get rid of toxic assets they may have," European Commission President Jose Manuel Barroso said in a television interview relayed on YouTube. It was the most explicit statement yet from a top European official on joint action to help restore confidence in a banking sector that is increasingly being shunned by investors as the euro zone debt crisis deepens.

 

However, it is unlikely that there would be a common European mechanism to deal with toxic assets, and most likely no joint "bad bank" for Europe.

 

Ratcheting up pressure on European leaders, he said he hoped they would have a concrete plan in time for a November 3-4 Group of 20 summit to overcome the debt crisis by creating enough "firepower" to help weaker member states.

 

In the first case of a bank felled by the crisis, Franco-Belgian municipal lender Dexia's board will vote on a break-up plan on Saturday as the French and Belgian governments argue over how to split the cost to the taxpayer.

 

Barroso would not speculate on how much money would be needed for recapitalization across the 27-nation bloc but his comments helped push European shares up 2.4 percent on the day as investors welcoming signs of action.

 

The ECB disappointed some investors by leaving interest rates unchanged at 1.5 percent, on a split decision, despite signs of a sharp slowdown in the European economy. But it compensated with a raft of measures to boost liquidity.

 

ECB President Jean-Claude Trichet announced after chairing his final monetary policy meeting before retiring that the ECB will provide unlimited one-year funding in two operations and revive its policy of buying covered bonds for up to 40 billion euros.

 

German Chancellor Angela Merkel said Europe should not hesitate to recapitalize its banks if this prevents greater economic damage, and leaders would take very seriously expert advice that the time was ripe for such a step.

 

Jean-Claude Juncker, chairman of euro zone finance ministers, said banks in need of capital should turn first to the markets, then to national governments and as a last resort to the euro zone's rescue fund.

 

Some officials fear other lenders could suffer a similar fate to Dexia, even though they passed the European Banking Authority's (EBA) July stress test of 91 banks in the EU.

 

Those tests concluded that only eight banks failed and that they needed a collective 2.5 billion euros ($3.3 billion) -- a fraction of the up to 200 billion euros the International Monetary Fund believes EU banks require. EU Competition Commissioner Joaquin Almunia said there was a need to reassess bank assets, especially sovereign debt, to promote recapitalization, but public money should be used only as a last resort and in line with the bloc's state aid rules.

 

The EBA, which set the criteria for the tests carried out by national regulators, held the second day of a board meeting to review banks' capital needs based on the same data which formed the basis of those tests. The EBA is preparing the ground by determining which lenders should be included in any coordinated recapitalization that its members would oversee. The European Commission has no power to impose a recapitalization plan on EU states.

 

Markets and industry officials say the key missing piece is whether enough money can be found fast enough to fund a recapitalization plan and stop contagion from Greece or Dexia.

 

The EBA, made up of regulators and central bankers from EU member states, said it was asked by the European Systemic Risk Board last month to "coordinate efforts to strengthen bank capital. It is under pressure after its chairman, Andrea Enria, admitted on Tuesday that this year's stress test, which Dexia passed with flying colors, failed to reassure investors.

 

Labor Market Is Improving

 

Thursday’s report by the Labor Department indicated that Initial claims for state jobless aid climbed by 6,000 claims to a seasonally adjusted 401,000 new claims. However, that is at about the level normally associated with improving labor market conditions, a hopeful sign for the struggling economy. It was the second straight week first-time claims hugged the 400,000 mark.

 

The data falls outside the survey period for the government's closely watched employment report for September, which will be released on Friday and is expected to show a still sickly labor market.

 

The National Retail Federation estimated retailers will hire about 480,000 to 500,000 employees this holiday season, about the same as last year, which suggests the sector will not provide a meaningful boost to the government's employment gauge.

 

While the jobs market remains troubled, data ranging from manufacturing to motor vehicle sales have suggested the economy, which expanded at a 1.3 percent annual rate in the second quarter, will avoid an outright contraction in output.

 

Although the labor market stalled in August, it appears to have regained some footing in late September. The four-week moving average of initial claims -- considered a better measure of labor market trends -- fell for a second straight week.

 

Growth Not Recession

 

The economy is not slipping back into recession but will face a long, slow recovery as political gridlock in Washington and Europe make businesses wary of investing, according to General Electric's Jeff Immelt and other top executives.

 

"Recovery is underway, but it's a long, slow recovery. Slower than we'd like," the head of GE told a group of about 500 executives from mid-sized companies.

 

"This is a lot different than 2008, guys," said Immelt, CEO of the largest U.S. conglomerate. "There's liquidity, there's pockets of growth and I think people have confidence that they might be able to find the right pockets of growth."

 

Other top voices from corporate America offered a similar assessment on Thursday, including FedEx CEO Fred Smith and ExxonMobil's Rex Tillerson.

 

Data released on Thursday is backing them up. Activity in manufacturing, business spending and motor vehicle sales suggested that the economy, which expanded at a 1.3 percent annual rate in the second quarter, could avoid an outright decline in output.

 

"We don't see a contraction; we don't see a recession," said FedEx's Smith, who founded the world's No. 2 package delivery company. "It's steady as you go, slow growth."

 

ExxonMobil's Rex Tillerson sounded a similar note. "I am not as optimistic as I was six months ago. It will continue, I am afraid, to be a sluggish economy, and globally the economy will not perform as well as we expected," Tillerson told the Washington Ideas Forum. "We will have positive growth (but) it is not going to be as positive as we hoped."

 

Immelt and Smith spoke at an event where GE Capital and Ohio State University's Fisher College of Business unveiled research on the "middle market" sector of U.S. business, companies with $10 million to $1 billion in annual revenue.

 

The study found that tier of business is an underappreciated jobs engine for the U.S. economy that accounts for about one-third of employment and continued to add workers through the recession, while big U.S. companies were shedding people.

 

Immelt and Smith said political logjams in Washington and Brussels have made businesses more reluctant to invest and hire -- stubbornly high unemployment is the biggest roadblock to the United States' recovery from the 2007-2009 recession.

 

Immelt cited this summer's standoff in Washington over whether to raise the nation's debt ceiling or allow the United States to slip into default. "Congress just doing one bipartisan thing, however small, would be conducive to the market. It would be a positive to investors," Immelt said.

 

However, not all the blame lies with politicians, Smith said. He suggested that CEOs, who command considerable public attention in their own right, could do more to tamp down the partisan bickering that has flared in the United States.

 

In part, he said, CEOs can afford to be more candid in commenting on when they agree or disagree with policymakers than can officials who face election.