MarketView for October 17

 

 

Summary

 

The major equity indexes hit a slick patch and slid downward to their worst loss in two weeks on Monday after comments from Germany's finance minister resulted in a perception that Europe's solution to its debt crisis may crawl to the finish line as opposed to sprinting.

 

The S&P index had chalked up gains for two straight weeks for the first time since July, riding a wave of euphoria built on optimism that European leaders had a newfound sense of urgency with regard to tackling the crisis that has threatened the ongoing global financial stability and growth.

 

German Finance Minister Wolfgang Schaeuble, speaking of an October 23 European Union summit on the debt crisis, tempered enthusiasm, saying, "we won't have a definitive solution this weekend."

 

The result on Wall Street was a stampede to seek protection in the options market against losses. The CBOE Volatility index VIX, Wall Street's so-called fear gauge, rose 18.2 percent to 33.39, its highest one-day jump since August. The VIX is a 30-day risk forecast of stock market volatility conveyed by S&P 500 index options; it generally moves inversely to the S&P benchmark.

 

If that was not enough, then you had bank earnings, or rather the lack of them and especially a lack of organic growth of earnings, also contributing to the selling pressure. Wells Fargo saw its share price fall 8.4 percent to $24.42 after earnings fell short of expectations.

 

However, trading volume remained light with just 6.87 billion shares changing hands on the major equity exchanges, a number that was well below the year's daily average so far of about 8 billion shares.

 

Events in Europe also overshadowed a $21 billion deal by Kinder Morgan to buy rival El Paso, thereby combining the two largest natural gas pipeline operators in North America in a huge bet on the fast-growing market for that fuel. El Paso's shares ended the day up 24.8 percent to close at $24.45, while Kinder Morgan closed up 4.8 percent at $28.19.

 

Shares of Citigroup fell 1.7 percent to $27.93. The bank reported higher third-quarter earnings as it set aside less money to cover bad loans and recorded an accounting gain available to banks in turbulent markets.

 

After the closing bell, IBM reported third-quarter revenue that met expectations. The t company ended 2 percent lower at $186.59 during regular trading, but in after-hours action IBM shares fell 3.6 percent more to $179.81 after reporting results.

 

Of the 45 companies in the S&P 500 that have reported earnings, 62 percent have beaten analyst expectations, according to Thomson Reuters data.

 

Industrial Production Increases

 

Industrial production rose 0.2 percent in September, in line with expectations, as a gain in manufacturing offset a drop in utility output, a Federal Reserve report indicated on Monday. September's industrial output gain followed a downwardly revised reading of flat output in August.

 

Utility output fell 1.8 percent in September after dropping 2.9 percent in August following a July heat wave.

 

But manufacturing production rose 0.4 percent, with consumer durables rising 0.9 percent as production rose for automotive products and home electronics. This followed a downwardly revised 0.3 percent rise in August factory output.

 

Mining output rose 0.8 percent, matching the gain posted in August.

 

Capacity utilization, which gauges firms' performance relative to their full potential, edged up to 77.4 percent in September, from a downwardly revised August reading of 77.3 percent.

 

Four Million in Three Days

 

Apple said on Monday that it had sold 4 million of its new iPhone 4S cell phones in the three days since it went on sale October 14. Sales in stores began on Friday in Japan, Australia, France, the UK, Germany, Canada and the United States.

 

The company took more than 1 million online orders in the first 24 hours after the release of the iPhone 4S, exceeding the 600,000 for the iPhone 4, though it was sold in fewer countries.

 

Unveiled just a day before Apple Chairman Steve Jobs died, it was initially dubbed a disappointment, partly because it looked identical to its predecessor. But anticipation of its "Siri" voice software helped it set an online record in orders on October 7.

 

Along with the new iPhone, more than 25 million customers are using the iOS 5 mobile operating system, in the first five days of its release, and more than 20 million customers have signed up for its free cloud services, Apple said. The latest iPhone will be available in 22 more countries on October 28 and more than 70 countries by the end of the year.

 

Paper Gains Mean Profitability for Citigroup

 

Citigroup announced earnings of $3.8 billion, or $1.23 a share, on Monday morning. That makes it seven straight quarters of positive earnings. The 74 percent increase in the third quarter came despite dismal results of its investment bank.

 

However, it is important to note that Citigroup benefited from a paper gain of nearly $2 billion, reflecting a sharp increase in the perceived riskiness of its debt — an adjustment that gave JPMorgan Chase a similar earnings increase last week. That contributed about one-third of its pre-tax operating profit, and helped offset weak trading results as well as another round of heavy losses in its domestic mortgage unit.

 

Citigroup also delivered another $1.4 billion to its bottom line from reserves set aside to cover future loan losses. Together, they accounted for more than 85 percent of its earnings.

 

Over all, revenue was flat at $20.8 billion amid the global economic slowdown and some of the most turbulent markets in decades.

 

Citigroup’s results came after JPMorgan kicked off earnings season with its first decline in earnings since the financial crisis, but still a $4.26 billion profit. Despite strong resurgence in lending, JPMorgan executives had a very cautious outlook amid all of the uncertainty gripping the world’s economies and financial markets.

 

Investors, too, have been skeptical about Citi and other banks’ ability to grow. Like the rest of the banking industry, Citigroup has come under pressure from rising expenses, slim lending margins and the evaporation of many of the lucrative fees that kept its consumer businesses afloat.

 

Citi shares have fallen sharply since the bank completed a reverse stock split in early May that brought its price to $45 from around $4.50. The stock was up just over 1 percent to $28.70 in early trading Monday.

 

Standard of Living Falls

 

Among the large numbers of issues that are said to prove that the recession never ended is whether Americans can afford the “basics” that have been part of what the middle class has been able to expect for decades. Fewer and fewer Americans can. This means that a lack of demand for some services, like medical treatment, will undermine the ability of some services to exist at all — at least at current levels.

 

Medicine, like any other economically based system, needs some base amount of demand to provide the financial scale that allows R&D and a delivery infrastructure to exist.

 

A new Gallup poll reports that “Fewer Americans had access to basic life necessities in September. The nation’s Basic Access Index score fell to 81.4 last month — on par with the 81.5 measured in February and March 2009 amid the recession.” This is a testament to the high unemployment levels of the past four years.

 

The fact that the economy does not bleed jobs at the rate of 500,000 a month as it was in early 2009 does not help those who have lost jobs and not regained them. Some would say the joblessness trouble in the U.S. is not getting worse. That only means that the recession, which is still a horrible fact of the lives of most Americans, had not improved at all.

 

The two largest drops in “basics” are the number of people with a personal doctor, down 4.2% to 78.3% in September compared to September 2008. The number of Americans with health insurance coverage has dropped by 3.6% to 83.3% over the same period. At some point, the ability of hospitals and doctors to operate in current numbers falters. The same is probably true with expensive medical R&D. The government will only fund so much of it, particularly in an age of austerity. Private donations low because even the well-to-do have cut back charity.

 

The survey results are based on telephone interviews conducted as part of the Gallup-Healthways Well-Being Index survey Sept. 1 – 30, 2011, with a random sample of 29,313 adults, aged 18 and older, living in all 50 U.S. states and the District of Columbia, selected using random-digit-dial sampling.