MarketView for September 30

Summary

 

If Monday’s decline on Wall Street had you upset or worried, you can relax. The markets showed their mettle on Tuesday with a major rally that eliminated much of Monday’s loss as the Street’s players bet Washington would revive a plan to stabilize the financial sector following the surprising defeat of legislation on Monday designed to do just that. Tuesday's climb marked the S&P's best one-day percentage gain since July 2002.

 

Nonetheless, strains in the credit markets persisted, suggesting banks remain reluctant to lend to each other, and September marked the benchmark S&P 500's worst month in six years. Nonetheless, there was hope arising from pledges all around that the talks on the $700 billion financial-sector rescue plan will continue in earnest.

 

Under current rules, banks must value assets based on what they would fetch in a current market transaction. Since prices for mortgage-related assets have long been at distressed levels, banks have been forced to scurry for more capital. In addition to the much publicized bailout, there could also be a move afoot to change the mark to market regulations.

 

For the month of September, the Dow Jones industrial average fell 6 percent, its worst month since June. Tuesday also marked the end of the third quarter, when the Dow fell 4.4 percent. This was the Dow's worst quarter since the second quarter of this year. It is also the Dow's longest quarterly losing streak since 1977-1978.

 

The S&P 500 lost 9.1 percent in September, its worst month since September 2002. For the third quarter, the S&P 500 finished with a 9 percent loss. This was the S&P 500's worst quarter since the first quarter of 2008. It is also the S&P's longest quarterly loss streak since 2000-2001.

 

The NASDAQ sank 12.1 percent in September -- its worst month since September 2001, when the September 11 attacks on the United States occurred. For the third quarter, the NASDAQ dropped 9.2 percent. This was the worst quarter for the NASDAQ since the first quarter of this year.

 

On Tuesday, investors snapped up beaten-down shares across the board, with financial and technology companies among the standouts. Apple Inc contributed the most to the NASDAQ's advance, a day after the iPod's maker led the index to its worst day since the bursting of the Internet bubble in April 2000. Shares of Apple rose 8 percent to $113.66. Shares of Intel Corp climbed 8.5 percent to $18.73 after Piper Jaffray, a brokerage, raised its recommendation on the chip maker's stock.

 

Among the financials, JPMorgan rose 14 percent to $46.70, making the stock a top performer for the Dow. Shares of Citigroup climbed 15.6 percent to $20.51.

 

It is not unusual for big sell-offs like Monday's to be followed by a short-term relief rally. Of the eight times the S&P fell by at least 8.79 percent, a next-day rally occurred six times.

 

Between July and September, though, the S&P 500 index posted its worst quarter since the third quarter of 2002 and its biggest monthly drop since September of the same year.

 

What happens next in Washington will be instrumental in providing direction for the broader market.

 

The bailout plan's surprising defeat rattled markets around the globe, with Asian stocks following Wall Street's Monday slide overnight. European shares recovered as a result of data indicating improvement in consumer confidence.

 

In economic news, the S&P/Case-Shiller Home Price Index showed further deterioration in housing, with prices of single-family homes down a record 16.3 percent in July.

 

But both the September Chicago PMI, a measure of manufacturing activity in the U.S. Midwest, and the Conference Board's reading on consumer confidence in September, were stronger than expected, tempering concern about the economy.

 

Atlanta Fed Says Crisis Hurting Economy

 

Stressed financial markets risk doing severe damage to the broader economy, Atlanta Federal Reserve President Dennis Lockhart said on Tuesday. We are experiencing our worst credit crisis since the Great Depression, a downturn that began with troubles in the housing sector, particularly rising foreclosures and the decline in home values.

 

The economy as a whole has managed to eke out some modest growth thus far, but many economists believe a recession may already be under way.

 

"Problems in our financial system add significant risk to the downside for the economy," Lockhart told a business group in prepared remarks.

 

Lockhart said things had become worse rather than better over the last month, noting a considerable deterioration of market conditions and ever rising reluctance on the part of banks to lend. "There has been a widespread withdrawal of confidence in counterparties that has resulted in efforts to reduce exposure," Lockhart said.

 

Against that backdrop, demand for liquidity from the Fed, already high, has picked up significantly, the Atlanta Fed president said.

 

He added labor market conditions had also become increasingly dire, with layoffs becoming more widespread and hiring intentions fading fast. In this context, Lockhart said inflation would likely be less of a problem.

 

"I feel better about inflation," he said. Still, he did not offer any hints that the Fed will cut interest rates again, as futures markets now appear to be expecting.

 

The central bank has undertake a series of extraordinary measures, thus far with only limited success, to keep credit markets from imploding. It has set up an array of lending facilities, and accepted riskier collateral for short-term loans. It has also orchestrated bailouts for large financial firms like Bear Stearns and AIG.

 

Lockhart added that one recent bright spot in the economy, export growth, was threatened by signs of slowing growth in major U.S. trading partners.

 

Anecdotal evidence indicated things would not get better any time soon. Moody's Investor Service said on Tuesday the U.S. housing market bust may not bottom until 2010, later than previously thought, adding that more home builders may fail before an eventual recovery.

 

Still, Lockhart said the Fed continued to believe the economy would skirt outright contraction, and said the prospect of an actual depression was not realistic.

 

Crude Rises on Bailout Optimism

 

The price of crude futures for November delivery settled up $6 per barrel on Tuesday $102.37 as expectations for a financial stability plan increased demand in global markets. Oil and other markets had tumbled on Monday after the U.S. House of Representatives rejected the $700 billion bailout plan. On Monday, crude futures settled down $10.52 in the second largest decline since April 23, 2003. London Brent crude settled up $4.19 at $98.17 per barrel.

 

The U.S. dollar surged and global stocks clawed back from Wall Street's worst day in 20 years as investors bet Washington eventually would pass the plan to stimulate credit markets and stave off a possible recession.

 

Oil has dropped from a record high $147.27 reached in July on signs that high energy prices and the financial crisis have cut into crude demand in the United States and other industrialized nations. Additional pressure has come as investors, who had rushed into commodities earlier this year as a hedge against inflation and the weak dollar, sold crude for safer havens.

 

Signs the financial crisis was spreading to Europe could erode demand further, analysts warned.

 

OPEC seaborne oil exports, excluding Angola and Ecuador, rose 50,000 barrels per day (bpd) in the four weeks to September 14 but fell sharply from Gulf producers, Lloyd's Marine Intelligence Unit said.

 

Pfizer Shifts Focus

 

Pfizer Inc. is shifting its research focus to diseases that have high potential for big profits and for treatment improvements, such as cancer and Alzheimer's disease. The world's largest pharmaceutical company is ending new research on conditions from obesity to heart disease, but research on drugs already in late-stage human testing will continue, spokeswoman Liz Power said Tuesday.

 

Such shifts in research strategy are standard in the pharmaceutical industry and are required on a periodic basis to as better compete in the marketplace. Pfizer expects to spend up to $7.5 billion on research and development this year, a huge budget for the industry.

 

Like most of its competitors, Pfizer has been reorganizing and cutting costs to deal with looming generic competition and a lack of blockbusters in its pipeline. Power said Pfizer needs to focus research, particularly costly late-stage human testing, on areas where patient needs aren't met by existing treatments, where there's a sizable commercial market and where the company has expertise and a good chance for scientific success.

 

Pfizer has identified six high-priority areas for future research: cancer, pain, inflammation, diabetes, Alzheimer's disease and schizophrenia. Pfizer has increasingly been investing in cancer research and probably now will move into treatments for pain and inflammation that work through different mechanisms than its blockbuster Celebrex.

 

The focus on diabetes likely will be on the type linked to the Western obesity epidemic, and Alzheimer's also will be a huge market, given the aging population. And there are no cures for schizophrenia.

Areas where the company is ending research, much of it still in early stages, include anemia, bone health, gastrointestinal disorders, muscle diseases, obesity and some approaches to osteoarthritis. The company also is dropping early research in four areas of cardiac disease: hardening of the arteries, high cholesterol, heart failure and peripheral arterial disease.

 

Pfizer markets the world's top-selling drug, cholesterol fighter Lipitor, which generates about $12 billion a year in revenue. However, it will lose its U.S. patent late in 2011, and there's already a generic version of a cholesterol drug from the same class, Zocor. Many heart drugs in other categories also have significant generic competition that is eroding sales of brand-name medicines.

 

Meanwhile, Pfizer on Tuesday gave its semiannual update for investors on its research pipeline. It now has 114 human studies of drugs in process and said that since its last update in February, the number in final human testing has grown from 16 to 25, with 19 of them being in its high-priority areas. Testing of 13 drugs, including four for rheumatoid arthritis, has been stopped since February.

 

Biotechnology drugs, which generally are extremely profitable and so far have been insulated from generic competition by their complexity, will be a big part of that pipeline, particularly in cancer research.