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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Monday, October 24, 2011
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.
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MarketView for October 24
MarketView for Monday, October 24