MarketView for October 24

6
MarketView for Monday, October 24
 

 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Monday, October 24, 2011

 

 

Dow Jones Industrial Average

11,913.62

p

+104.83

+0.89%

Dow Jones Transportation Average

4,901.95

p

+88.12

+1.83%

Dow Jones Utilities Average

450.67

q

-1.99

-0.44%

NASDAQ Composite

2,699.44

p

+61.98

+2.35%

S&P 500

1,254.19

p

+15.94

+1.29%

 

 

Summary

 

It was a nice day in the neighborhood of Wall Street on Monday as a combination of merger activity and strong earnings from Caterpillar sent share prices on a continuing upward swing. The markets gains have been resting on a hope and a prayer that s a resolution to Europe's sovereign debt crisis is on the horizon in combination with the latest economic forecasts and corporate datat that seem to point to a stronger-than-expected economy. And on Monday several M&A announcements in the health care and technology sectors involving deals totaling more than $5 billion certainly did not hurt the mood of the day.

 

Caterpillar rose 5 percent to $91.77 to lead the Dow Jones Industrial Average higher after the world's largest heavy equipment maker reported a 44 percent jump in quarterly profit on record revenues. Next up on Tuesday in the giant category are DuPont, 3M and United States Steel.

 

The gains on Monday put the S&P 500 up nearly 11 percent for the month, setting the benchmark index on track for its best monthly performance since December 1991. Furthermore, according to Thomson Reuters data, of the 142 companies in the S&P 500 that have reported quarterly earnings through Monday, 68 percent have exceeded Street estimates.

 

The recent rally has pushed the broad index to the top of its trading range between 1,230 and 1,250 where it has struggled to advance due to conflicting headlines from Europe. The 50-day moving average recently turned upward, reflecting the positive bias but the index has yet to break above its 200-day moving average at the 1,274 level.

 

Even though earnings fueled gains, solving Europe's debt crisis will be crucial to further gains. Light volume, about 7.87 billion shares traded on the major equity exchanges, a number slightly below the daily average of 8.01 billion,  suggested investors would remain cautious until the details of the euro zone plan were known.

 

Oracle announced that it has agreed to acquire RightNow Technologies, which provides cloud-based customer services software, for about $1.5 billion, or $43 per share. RightNow ended the day up 19.4 percent to $42.94 while Oracle chalked up a 2.3 percent gain to close at $32.87.

 

Cigna said it will acquire HealthSpring, a Medicare health provider, for $3.8 billion, or $55 a share. Cigna edged up 1.4 percent to close at $45.34, while HealthSpring gained 33.7 percent to close at $53.71.

 

However, not everybody was having a good day. Netflix saw its share price end the day down 27.2 percent to close at $86.51 after the company warned of continued steep declines in DVD subscribers this quarter and said a costly expansion into Britain and Ireland would push it into the red in the first quarter. At the same time, Netflix did also report a better-than-expected 49 percent increase in third-quarter revenue.

 

European policymakers deferred a final decision on a strategy to end a sovereign debt crisis as they neared agreement on bank recapitalization and on how to leverage a rescue fund to try to stop bond market contagion. The leaders were due to meet again Wednesday.

 

Fed Official Again Comments on Housing Market

 

The weak housing sector continues to pose a strong headwind to the economic recovery, and the Federal Reserve could potentially do more to drive down mortgage rates to support the sector, William Dudley, president of the New York Federal Reserve Bank said on Monday. He also warned of the "spillover" effects from Europe's debt crisis.

 

Dudley's comments marked the second time in a week that a Fed policy maker highlighted the possibility that the Fed could do more to support the housing market.

 

"Breaking this vicious cycle is one of the most pressing issues facing policy makers," Dudley said.

"Clearly we've indicated our interest in supporting the housing market in keeping mortgage rate spreads, and spreads between mortgage rates and Treasury yields, from getting too elevated. Depending on how the world evolves, we potentially could move to do more in that direction."

 

Dudley, who has a permanent voting seat on the Fed's policy-setting committee, said the U.S. central bank will continue to do everything within its power to help the economic recovery.

 

Faced with the worst recession in decades, the Fed in late 2008 cut rates to near zero and has since bought $2.3 trillion in bonds to spur a recovery. Nonetheless, the Fed regularly cites housing as having hamstrung the recovery from the worst recession in decades. At the same time, the purchase of mortgage securities was a controversial part of the first round of quantitative easing in 2009, and some criticize the Fed for propping up a specific sector of the economy.

 

Dudley called the housing market "a serious impediment" to a stronger recovery, which this year has been plagued by "quite disappointing" growth in gross domestic product. Yet the rebound has been weak and is now threatened by Europe's debt crisis, casting doubt on the central bank's strategy and effectiveness but also raising some expectations for more asset purchases.

 

"The Fed is doing -- and will continue to do -- everything within its power to promote jobs and price stability," said Dudley.

 

"Without robust growth, the economy is more vulnerable to negative shocks, which unfortunately seem to keep coming," he added. "It is like riding a bicycle -- at a slow speed, the bicycle wobbles and the risk of falling rises."

 

Europe, meanwhile, threatens to drag the world into another recession as policymakers there wrangled this past weekend over a possible Greek default and its impact on the European banking system.

 

Dudley, citing the effect on stock markets and on bank lending, warned, "To date, these effects have been much more acute in Europe than in the United States, but there are spillovers to our nation, and we need to monitor them carefully."

 

Dudley, however, said he sees the inflation rate, which has been higher than the Fed's preferred level of 2 percent, falling, barring more energy price jumps. "I believe that underlying fundamentals will help to subdue inflation over the next few quarters," he said.

 

Last month, the Fed announced a plan, known as Operation Twist, to replace $400 billion of short-term securities in its portfolio with longer-term debt in order to lower longer-term rates and stimulate the economy.

 

Caterpillar Facing Record Year

 

Caterpillar left analyst expectations in the dust on Monday, reporting a 44 percent quarterly earnings increase due to record revenue. In addition, the company signaled optimism in its 2012 outlook. According to the company full-year earnings and revenues are expected to be at the top end of its previous outlook range due to strong demand. In 2012, the company indicated that it sees revenue increasing 10 to 20 percent above the $58 billion in sales it expects this year, although it continues to make contingency plans for a potential downturn.

 

According to the company it ended the third quarter in one of the healthiest positions in its recent history. Backlog orders are standing at record levels and higher commodity prices are leading to a favorable environment for its growing mining business. The company expects to post record results in 2011 and improve on those results next year.

 

A key reason is that construction activity is increasing in developing markets, while buyers in more mature markets -- such as the United States -- are buying new machinery in order to replace aging fleets rather than investing for growth. Equipment-rental operators are also purchasing new equipment in order to maintain newer fleets.

 

Caterpillar is one of a slate of industrial companies outpacing analyst expectations during the current earnings reporting season. Like some of its peers, the company is encouraged by the strong results even as it remains cautious about the wider economy due to mixed economic data and tightening in key growth markets, such as China.

 

"Although there is a good deal of economic and political uncertainty in the world, we are not seeing it much in our business at this point," Caterpillar Chief Executive Doug Oberhelman said in a press release. "We believe continued economic recovery, albeit a slow recovery is the most likely scenario as we move forward."

 

The company was able to outpace analyst expectations during the third quarter due to considerably higher revenue, much of which came from the rebuilding of inventory as dealers looked to build stock. Analysts continue to express concern over the health of the so-called end users of Caterpillar products.

 

Caterpillar said heavy machinery supplies would likely remain "tight" in 2012, and the company plans to continue increasing production levels for many of its products. "We are making strategic investments in our business to position Caterpillar for continued success well beyond 2012," Oberhelman said.

 

In 2012, Caterpillar expects to achieve sales increases in mature markets, up from what it currently views as "low levels" of sales activity. Growth in emerging markets next year is expected to keep pace with the rate seen in 2011.

 

The company did caution that it is seeing a bit of a slowdown in China's demand levels due to measures the government is taking to tighten the economy. Caterpillar executives, speaking on a conference call, said the slowdown is needed and indicated the company continues to build market share in that market.

 

Caterpillar reported third-quarter net income attributable to common shareholders of $1.14 billion, or $1.71 per share, compared with $792 million, or $1.22 per share, a year ago. Sales rose 41 percent to $15.7 billion, which is a record, according to the company. The company noted that operating cash flow in its Machinery and Power Systems business nearly doubled over the first three quarters compared with the same period in 2010.

 

In its guidance, Caterpillar said full-year 2011 results would come in at the highest end of its previous outlook. It now expects annual revenue of $58 billion, including its acquisition of the Bucyrus mining business this year. Its previous forecast had been a range of $56 billion to $58 billion.

 

Earnings are now expected to be $6.75 per share for the year, compared with a prior forecast of $6.25 to $6.75. Including the impact of Bucyrus, Caterpillar expects 2011 profit to reach $7.25 per share. The company said 2011 will be a record year if it hits its earnings and revenue expectations. Caterpillar has added 4,800 jobs during the quarter, including 2,000 in the United States.

 

Euro Higher

 

The euro rose for a fourth consecutive day but was off a six-week high against the dollar on Monday as the outlook for a conclusive agreement to resolve the euro zone's debt crisis with a second regional summit scheduled for Wednesday still remains a bit muddy.

 

The euro had gained in early trade after European leaders neared a deal over the weekend on bank recapitalization, and euro zone officials said France and Germany were close to agreement on how to use the European Financial Stability Facility to stave off contagion in the bond market.

 

As the New York session began, the euro surrendered gains but once again reversed, due to renewed optimism that concrete steps to resolve the crisis will be announced on Wednesday, despite serious divisions on the size of the haircut private holders of Greek bonds will have to take.

 

However, any delay in releasing a convincing plan from Wednesday's summit, or even a delay in a statement from leaders of the euro zone economies, would likely mean another drop in the euro.

 

Meanwhile, the euro is well above its nine-month low plumbed this month and will most remain at that level or higher, at least until the conclusion of Wednesday's summit. Bids are between $1.3780 and $1.3810, with support at the 100-week moving average around $1.3660. However, resistance stands at the 200-week moving average around the pivotal $1.4000 level.

 

Keep in mind that China's vast manufacturing sector expanded moderately in October to snap three months of contraction, reflecting the resilience of robust domestic demand that is likely to soothe fears of an abrupt slowdown in the world's second-largest economy.

 

Gold Rises One Percent

 

Gold rose one percent on Monday, in sync with rising with commodities and equities on hopes that European Union leaders were making progress to tackle the region's debt crisis and signs of resiliency over China's domestic demand.

 

Bullion rose for a second day on optimism that the EU was nearing agreement on bank recapitalization and on how to leverage their rescue fund to stop bond market contagion. News that China's manufacturing sector grew in October also lifted gold as commodities led by copper and crude oil surged.

 

In recent weeks, gold has appeared to lose its usual safe-haven status, with bullion prices moving in tandem with riskier assets. Wild price swings have sent the precious metal about $300 off its record high set in early September.

 

Spot gold was up 0.9 percent at $1,655.49 an ounce by 11:33 a.m. EDT, following a 2 percent decline last week.

 

By the afternoon, gold futures for December delivery gained $21.10 to $1,657.20. COMEX futures trading volume was thin during Monday's gains, similar to a weaker-than-usual trend during the last several weeks, suggesting bullion's rally may not hold.

 

China's vast manufacturing sector picked up moderately in October, snapping a three-month contraction and underscoring the resilience of the world's second-largest economy backed by robust domestic demand.

 

Among other precious metals, silver was 1.5 percent higher at $31.80 an ounce. Platinum rose 2.1 percent to $1,537.22 an ounce, while palladium climbed 3 percent to $629.95 an ounce.

 

Oil Also Rises Along With Higher Commodity Prices

 

Oil prices were higher on Monday as data indicated expanding manufacturing in the world's second largest oil-consumer, China, along with and cautious hope that Europe can resolve its debt problems offset weak data from Europe.

 

Domestic crude's price increase outpaced that of Brent, pushing above $90 per barrel and its 100-day moving average and putting the U.S. into backwardation, which means that the front-month price exceeds the prices further out.

 

The stronger gains Texas Sweet narrowed Brent's premium to its U.S. counterpart to under $21 per barrel. Crude prices also received support from a weak dollar, which fell near a record low against the yen, and a supported euro.

 

China's manufacturing sector expanded in October, snapping three months of contraction, according to the HSBC purchasing managers' index. The flash PMI rose to 51.1 in October from September's final reading of 49.9, rising back above the 50-point level demarcating expansion for the first time since June.

 

ICE Brent December crude rose $1.40 to $110.96 a barrel by 12:03 p.m., having swung from $109.32 to $111.47 and putting front-month Brent's 100-day moving average of $111.76 in reach. U.S. December sweet crude rose $3.10 to $90.50 a barrel, having reached $90.86 and eclipsing its 100-day moving average of $89.98.

 

Recent slides in U.S. crude stocks, especially at the key oil hub at Cushing, Oklahoma, delivery point for the New York Mercantile Exchange's light sweet crude contract, and expectations that Libyan exports will continue to increase, factors cited as providing our domestic crude its added strength.