MarketView for October 1

 

 

Summary

 

Trading on Wall Street began the first day of the new and final quarter for 2012 with a modest rally, in large part because of a surprising expansion in manufacturing during the month of September. However, after rising more than 1 percent by midday, the major equity indexes came off their highs, with the Nasdaq the hardest hit as trading began to show signs of fatigue. Among the issues weighing on the Nasdaq, Apple lost 1.2 percent to $659.39, dragging down the tech-heavy index. At the same time, Baidu fell 3.5 percent to $112.77 after Jefferies cut the stock to "hold" from "buy" and lowered their price target to $125 from $135.

 

Meanwhile, sectors associated with growth were strong. Financial stocks rose, with Goldman Sachs up 2.8 percent at $116.86 after Barron's said Goldman's stock could rise at least 25 percent in the next year as capital markets improve.

 

A number of blue-chip stocks hit 52-week highs, helping the Dow outperform the broader market. Shares of General Electric rose 0.4 percent to $22.81, after rising as high as $22.99. IBM also hit a new 52-week high at $211.75 and The Travelers rose as high as $69.48 earlier in the session. IBM ended the day up 1.5 percent at $210.47, while The Travelers closed up 1.2 percent at $69.07.

 

After a strong morning session, stocks trimmed earlier gains and the Nasdaq briefly turned negative after Fed Chairman Ben Bernanke defended the Fed’s ultra-loose monetary policy as it aims to reduce unemployment. Simulative measures from the Fed and the European Central Bank helped the S&P 500 finish the quarter up 5.8 percent, its best third quarter since 2010.

 

While his speech was more of a reiteration of the Fed's stance, it appears that the Street is becoming nervous over how the Fed's eventual exit plan will actually work.

 

Discount retailer Gordmans Stores said it could miss analysts' profit estimates for the first time since it went public in 2010. The Company’s shares fell 23 percent to close at $14.20.

 

On the economic front, manufacturing expanded in September for the first time since May as new orders and employment picked up, an Institute for Supply Management report showed. The ISM's index rose to 51.5 in September from 49.6 in August, thereby easing economic concerns and offsetting a gloomier outlook for Asia and Europe.

 

The data came on the heels of surveys in the euro zone that showed manufacturing slackened in the three months to September while Asia's factories are continuing to struggle in the face of tepid demand from the United States and Europe. About 6.3 billion shares changed hands on the three major equity exchanges, as compared to an average daily volume of 6.38 billion shares.

 

Manufacturing Surprises

 

Manufacturing unexpectedly expanded in September for the first time since May as new orders and employment picked up, but the pace of growth showed the economy was still stuck in a slow recovery. According to the Institute for Supply Management, its index of national factory activity rose to 51.5 from 49.6 in August. It was the first time since May that the index has been above the 50 threshold that indicates expansion in the sector.

 

The forward-looking new orders gauge also rose to its highest level since May at 52.3 from 47.1, while employment gained to 54.7 from 51.6. The improvement in employment boded well ahead of the larger jobs report on Friday, which is expected to show the pace of hiring picked up slightly last month.

 

Still, the overall rate of growth in manufacturing was not yet off to the races and some components remained in contraction territory. Exports continued to shrink, though the rate of contraction was not as severe with the index rising to 48.5 from 47. Similarly, production rose to 49.5 from 47.2.

 

A separate manufacturing survey from Markit showed the sector closed out its worst quarter in three years as foreign demand for U.S. goods fell sharply. After helping support the domestic economic recovery, manufacturing has faltered in recent months, stung by weaker growth in China and the uncertainty surrounding the euro zone debt crisis.

 

Euro zone factories suffered their worst quarter since early 2009, suggesting the region may struggle to avoid recession. Factory activity in China also contracted, suggesting the world's No. 2 economy lost momentum for a seventh consecutive quarter.

 

General Electric and United Technologies last week told investors they expected their earnings to grow in 2013 despite the uncertainties domestically and abroad. GE last week won $1.2 billion in orders for gas turbines from customers in the United States, Japan and Saudi Arabia, while Boeing said All Nippon Airways ordered 11 Dreamliner jets worth about $2.7 billion at current list prices.

 

Not all the news from top manufacturers has been good. Caterpillar last week lowered its long-term 2015 growth target, citing an "anemic" world economy.

 

Bernanke Speaks

 

Federal Reserve Chairman Ben Bernanke on Monday delivered a broad defense of the U.S. central bank's controversial bond-buying stimulus plan, saying it is necessary to support a flagging economic recovery. Bernanke pushed back against accusations that the Fed's policy is laying the groundwork for inflation, enabling the government to run large budget deficits, undercutting the dollar and hurting savers.

 

He said that while the country's unusually weak economic performance had forced the Fed to resort to less conventional tools after lowering interest rates to effectively zero, the Fed's goals of price stability and maximum sustainable employment have not changed.

 

"These goals mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable," Bernanke said.

 

Last month, the Fed said it would buy $40 billion in mortgage-backed securities every month until the jobs outlook improved substantially as long as inflation remained contained. The Fed's unconventional efforts to spur growth have not been without critics, including many Republicans, who have argued they threaten future inflation and were abetting profligate spending in Washington.

 

In his speech, Bernanke essentially laid out a primer on the Fed's policies that took on the criticisms one-by-one. In doing so, he underscored the central bank's resolve to continue pushing for stronger growth and more job creation, reiterating the commitment the Fed made at its September meeting to keep a heavy dose of monetary stimulus in place even after the economic rebound appears to gain traction.

 

"As long as price stability is preserved, we will take care not to raise rates prematurely," Bernanke said.

 

The Fed chief noted inflation had fluctuated close to Fed officials' target of 2 percent for a long time, and that inflation expectations have remained stable, suggesting low risk of a sudden spurt of price rises. He also downplayed fears that the central bank's policies would damage the long-run value of the dollar, saying the stronger growth that Fed officials are trying to engender would actually support the currency.

 

"I don't see any inconsistency with our policy and maintaining a strong dollar," he said.

 

Bernanke expressed confidence that the Fed had the right tools to keep inflation at bay and suggested the central bank's unconventional policy easing made the challenge of knowing when to remove stimulus no greater now than in the past.

 

"Determining precisely the right time to 'take away the punch bowl' is always a challenge for central bankers, but that is true whether they are using traditional or nontraditional policy tools," Bernanke said. "The Federal Reserve's price stability record is excellent, and we are fully committed to maintaining it."

 

He also argued against the notion that the Fed was monetizing the federal debt or effectively printing money to keep the government's borrowing costs low.

 

"That's not what's happening, and that will not happen," Bernanke said. "We are acquiring Treasury securities on the open market and only on a temporary basis, with the goal of supporting the economic recovery through lower interest rates." Bernanke disputed the charge that the Fed's policies are damaging savers, arguing they will also benefit from a strong and growing economy.

 

Fiscal Cliff Draws Nearer

 

If Congress does nothing, the "fiscal cliff" will be upon us in three months. The result will be higher taxes for 90 percent of Americans due to automatic increases in income and payroll taxes and other financial shocks, the Tax Policy Center, a Washington think tank , wrote in a report released on Monday.

 

In its latest forecast, the Policy Center said that taxes would rise by $500 billion in 2013, or an average of almost $3,500 per household. At the same time, government spending would shrink, reducing the budget deficit. But the economy would likely be thrown back into recession next year, the center said, echoing similar predictions of the devastating impact of going off the "cliff."

 

"Lawmakers could soften that near-term hit by delaying or repealing provisions in the 'cliff' or by enacting other spending and tax policies that would provide offsetting support for the economy," the center said.

 

Because Congress and the White House failed to reach a deal to cut the deficit by an additional $1.2 trillion over 10 years, the federal government is on track for draconian spending cuts in 2013 and beyond unless there is agreement on an alternative before the end of the year.

 

Lawmakers are expected to take up the matter following the November 6 presidential and congressional elections. While there is broad speculation that Congress is likely to extend at least some of the income tax cuts beyond December 31, there appears to be little support for continuing the payroll tax cut, even among Democrats who previously championed it.

 

In September House of Representatives Democratic leader Nancy Pelosi told reporters, "I would hope that we would not extend it." She added that this tax cut was intended to be in place for only one or two years to help stimulate the economy.

 

Democratic and Republican aides in Congress have voiced concerns about short-changing the Social Security retirement fund, which is fueled by workers' payroll tax payments.

 

President Barack Obama and Congress this year approved an extension of a cut in the payroll tax rate to 4.2 percent from 6.2 percent. The tax is paid by about 160 million working Americans.

 

The lower rate gives workers an average of about $1,000 a year in additional cash. Obama says the added spending power helps the struggling economy. Cuts in the individual income tax, capital gains tax, dividend tax and other taxes affecting most Americans were pushed through in 2001 and 2003 by President George W. Bush. They were extended under Obama in 2010, but will expire at the end of this year.