MarketView for September 2

 

 

Summary   

 

The major equity indexes were down again on Wednesday as concerns regarding the economy prompted resulted in a fourth-straight day of profit-taking. Nonetheless, it was still a day of indecision as the major indexes fluctuated between positive and negative territory throughout the trading session before closing in the red. The S&P 500 index chalked up its worst losing streak since late May.

 

A private industry report showing more private-sector job losses in August than forecast, but nonetheless than the previous month, made investors nervous ahead of Friday's highly anticipated monthly jobs data from the Labor Department.

 

The weak data also prompted a shift in assets the object de jour being precious metals, specifically gold as gold futures hit their highest level in almost three months. The spot or market price of gold rallied to $981.50 an ounce, while shares of Gold Fields Ltd. Were up 11.3 percent to $13.20 and the NYSE Arca Gold Bugs Index rose 9.3 percent to 383.66.

 

Meanwhile, financial stocks were once again were once again the worst performers of the day with regional banks such as SunTrust closing down 7.2 percent at $20.17. Regions Financials closed down 6.3 percent at $5.19.

 

Minutes from the most recent meeting of the Federal Reserve, released earlier in the day, showed improved outlook in August, but market reaction was muted.

 

On the Nasdaq, Dell was up 0.9 percent at $15.35, helping the tech-heavy index cap some losses. Shares of Leap Wireless International also climbed 7.5 percent to $17.71 on speculation that AT&T was interested in buying the wireless service provider.

 

Another bright spot in Wednesday's market was the health insurance group. WellCare Health gained 1.9 percent to $23.62 while Aetna climbed 2.9 percent to $28.68.

 

Job Losses Down

 

Fewer private sector jobs were lost in August than in July while companies planned fewer layoffs, suggesting modest improvement in the beleaguered U.S. labor market.

 

Those clinging to hopes of recovery have latched onto evidence that the rate of job losses is slowing. ADP Employer Services said Wednesday that private employers cut 298,000 jobs in August, below 360,000 job losses seen in July.

 

While that was more than the 250,000 private job losses economists had expected, it still marked a monthly decline. That left investors hoping to see similar improvement reflected in the government's more comprehensive jobs report Friday. In July, it showed the economy shed 247,000 public and private jobs, and economists polled by Reuters expect losses to have slipped to 225,000 last month.

 

Between January and March, U.S. employers were cutting an average of 697,000 jobs a month, according to U.S. data.

 

Challenger, Gray & Christmas said planned layoffs at U.S. firms fell 21 percent in August, boosting some hopes that consumers will take out their wallets again this autumn. Still, the cumulative number of job cuts since January reached 1.07 million, a number that is 60 percent higher than in the same eight-month period last year.

 

No Inflation in Sight

 

The U.S. economy is recovering but growth will only pick up gradually and inflation is not a threat in this subdued environment, Federal Reserve Bank of Atlanta President Dennis Lockhart said on Wednesday.

 

"At this time I'm not overly worried about inflation prospects Lockhart told a panel discussion hosted by Emory University.

 

"Neither expectations nor the key indices tell me at this time that I need to be overly concerned about inflation," said Lockhart, a voting member of the U.S. central bank's policy-setting committee this year, and who is seen as being on the Fed's more dovish pro-growth wing.

 

Lockhart said that because economic activity remained fragile, businesses had little pricing power in an environment in which consumers remained wary of spending.

 

Asked about where he saw the U.S. economy one year hence, he said that it would still be healing with unemployment stuck at a "frustratingly high" level, although he declined to say if this meant it would be in double-digit territory.

 

Aggressive monetary expansion to offset the worst recession since the Great Depression of the 1930s has doubled the Fed's balance sheet to around $2 trillion, which some fear could spark inflation as the economy picks up pace. The Fed says it can exit from this unprecedented policy action when the time is right, but has also assured markets and investors that it will keep interest rates exceptionally low for an extended period.

 

The crisis was caused in large part by the collapse of the housing market, which triggered massive losses among banks and other investors, who had placed huge leveraged bets that home prices would continue to rise. Lockhart declined to speak to the timing of the Fed's exit strategy, but he did note it would not be able to remain agnostic in the face of future asset bubbles.

 

"I am sympathetic to the view that policy-makers should consider intervention in certain circumstances. That may simply be by speaking against the practices ... as opposed to taking action with interest rates," he said in reply to a question.

 

"There are a range of things that policy-makers could do to in effect step on the brakes a little bit and keep the economy more stable," Lockhart said.

 

Crude Draw Less Than Expected

 

Oil prices slipped on Wednesday as government data showing a smaller-than-expected drop in U.S. crude stocks offset a steep drop in gasoline inventories. Crude stocks in the world's top consumer dropped 400,000 barrels in the week to August 28, less than the 600,000 barrel drop expected.

 

Gasoline inventories showed a steep 3 million barrel decline as demand battered by the recession over the past year, slightly exceeded year-ago levels.

 

Sweet domestic crude futures for October delivery settled down 20 cents per barrel at $67.85, while London Brent settled down 39 cents per barrel at $67.34.

 

The hope that a turnaround in the economy will boost fuel consumption has helped support prices since then, with traders eyeing equity markets and macro economic data for signs of an end to the recession.

 

Crude stocks were mostly flat as investors digested disappointing reports on the labor market and factory orders that increased worry the rally may have run too far ahead of the economy. Traders were also eyeing news that big oil producers are increasing output. Russian oil output hit a record high in August, nearing 10 million barrels per day as the country launched a new giant field, while gas production recovered from its lows on improved demand.

 

August oil output rose to 9.97 million bpd, up 0.6 percent from 9.91 million bpd in July and 1.5 percent higher than 9.82 million bpd in August 2008. Supply from OPEC rose in August for a fourth consecutive month. As a result, OPEC is likely to leave output targets unchanged when it next meets on September 9 in Vienna.

 

Factory Orders Disappoint

 

New orders received by factories rose for the fourth straight month but the increase was a smaller-than-expected 1.3 percent in July, as a rise in aircraft orders outweighed sluggish demand for nondurable goods, according to a report by the Commerce Department released on Wednesday. Factory orders increased 0.9 percent gain in June.

 

Transportation orders were up 18.5 percent in July on a 105.1 percent surge in civilian aircraft orders. When transportation was excluded, factory orders fell 0.7 percent, the first decline since April.

 

Orders for nondurable goods, which include textiles, paper and chemical products, slipped 1.9 percent, the largest drop since December. Non-defense capital goods orders excluding aircraft are viewed as a proxy for business investment and those order fell 0.3 percent.

 

Inventories fell 0.7 percent, the 11th straight monthly decline. Inventories of durable goods were down 0.9 percent, the seventh straight monthly drop. In addition, shipments from factories have declined in 11 of the last 12 months and unfilled orders have declined 10 straight months.

 

Hedge Funds Banking On Banks

 

At least 20 top hedge funds raised their investment positions in financial institutions in the latest quarter, a sign that there is an increased desire to take additional risk with the idea of achieving longer-term rewards.

 

The push into financials indicates that fund managers including Steven Cohen and John Paulson, who are watched closely as barometers of risk, have shifted from routine merger arbitrage plays to directional bets that have more potential.

 

The aggressive switch was given credence by stress tests conducted by U.S. regulators that underscored the underlying health and viability of banks, if they could raise capital. Meanwhile, low share prices have made banks a safer play, even if their profitability was still questionable. In other words, it is a fundamental bet that they won't go to zero, and that liquidity will come into the system.

 

Positions in big financials such as Bank of America and JPMorgan Chase stood out among the holdings of hedge funds in the second quarter, according to a Thomson Reuters analysis of regulatory filings.

 

The group of 30 hedge funds in the analysis increased their exposure to the financial sector by 56 percent to $59.5 billion in the second quarter compared to the first. SEC filings indicate that at least five of the top funds bought into Bank of America, led by Paulson's purchase of 168 million shares. Shumway Capital Partners bought 24.1 million shares and Atticus Capital purchased 26.9 million.

 

The investments in the financial sector speak to improving outlooks for the economy and expectations that organic growth should follow. Hedge funds are probably looking for companies that are strong in traditional lending roles. Government-engineered aid over the past year through the Treasury's Troubled Asset Relief Program and guarantees on unsecured debt also created backstops and tailwinds for banks.

 

A lasting rebound for bank profits is in question, however, as mortgage delinquencies and foreclosures are rising despite efforts to slow the trend. There is some truth to the statement that because non-performing assets are still growing faster than bank reserves, profit growth probably will not emerge until 2011.