MarketView for September 10

 

 

Summary   

 

The major equity indexes chalked up their fifth consecutive set of gains on Thursday, the longest string of positive numbers since November, as an encouraging outlook from Procter & Gamble and a successful Treasury bond auction raised the day’s confidence level and momentum.

 

Strong demand for the sale of 30-year Treasury bonds lifted confidence in U.S. assets, including stocks. The S&P 500 stock index rose to its highest level in nearly a year. The S&P now stands 54 percent higher from its 12-year closing low on March 9.

 

Procter & Gamble was the Dow's most productive component, climbing 4.2 percent to $56.04 after it reaffirmed its earnings forecast for the current quarter and said sales would improve in the next quarter. Texas Instruments raised its sales outlooks in a signal that consumers are spending cash on personal technology..

 

Adding to optimism was the jobless claims report, which pointed to the lowest posting of new claims since July, while a separate government report indicated that imports of foreign goods rose to a record, suggesting increased strength in consumer spending.

 

Nonetheless, the news was not good all the way around. Monsanto, the world's largest seed company, fell 5 percent to $79.30 after it forecast fiscal 2010 earnings below Street's estimate expectations.

 

Health insurance stocks were higher after analysts said President Barack Obama's speech urging Congress to act on health care reform indicated a government-run insurance option opposed by the industry was less likely to pass.

 

Yahoo Inc added 4.5 percent to $15.45 after Banc of America Securities-Merrill Lynch Research upgraded the company, saying growth in user traffic continues to outpace growth in the Internet as a whole.

 

The Time Has Come For A Growth Strategy

 

Treasury Secretary Timothy Geithner indicated that a strengthening economy means the government can end some of the extraordinary support it put in place for markets and prepare for a slow recovery. Appearing before the Congressional Oversight Panel for the $700-billion Troubled Asset Relief Program, Geithner said the economy was in far better shape now than a year ago when it was "on the verge of collapse," though it still had problems.

 

"As we enter this new phase, we must begin winding down some of the extraordinary support we put in place for the financial system," he said. "We are now in a position to evolve our strategy as we move from crisis response to recovery."

 

The Panel wanted to know why taxpayer-provided aid was so available for financial firms but not to other types of businesses. Geithner said banks that received capital injections have repaid more than $70 billion, reducing the government's total investment to $180 billion. He estimated another $50 billion will be repaid over the next 12 to 18 months.

 

"We still have a long way to go before true recovery takes hold," he told the panel, adding it will be necessary to keep applying stimulus measures as necessary to get growth firmly back on track.

 

Another senior Treasury official told reporters earlier that Treasury will allow its money market mutual fund guarantee program to expire on September 18. The backstop program was created a year ago to prevent panic withdrawals of $3.4 trillion in savings after a key fund "broke the buck" when its net asset value per share fell below $1. The program took in $1.2 billion in fees from funds, but has not had any payouts.

 

Geithner said that the economy now was "back from the brink" of the free fall that it was in when the Obama administration took office in January even though recovery likely will be gradual at best. However he also pointed out several signs of progress, including the fact that the government no longer feels it needs a contingency in the budget for another $750 billion in stabilization funds.

 

Apparently the Treasury Department does intend to press ahead with so-called public-private investment funds to buy toxic assets. There is considerable interest in purchasing toxic assets among investors and money managers but the appetite among banks to sell their toxic assets has been less than anticipated.

 

Geithner also said that by providing support for U.S. automakers, the government avoided substantial job losses and that a specially assembled Auto Task Force had avoided intervening in day-to-day decisions by management of General Motors and Chrysler.

 

"Such intervention could seriously undermine the companies' long-term viability and, consequently, their ability to repay the taxpayer for its investment," Geithner said.

 

He cited a litany of problems still facing the economy, including "unacceptably high" unemployment, a shaky mortgage market outside those covered by mortgage finance sources Fannie Mae and Freddie Mac, strained financing for commercial real estate enterprises and tight credit for small business. Given those conditions, "it is realistic to assume recovery will be gradual, with more than the usual ups and downs," Geithner warned.

 

Fed Is Planning Exit Strategy but Says Implementation Long Ways Off

 

Federal Reserve Vice Chairman Donald Kohn said on Thursday the Fed was developing tools to move away from its extremely loose monetary policy, but such an exit would not happen any time soon.

 

"Any combination of these tools, in addition to the payment of interest on reserves, may prove very valuable when the time comes to tighten the stance of monetary policy," Kohn said.

 

"As the FOMC has said, that time is not likely to come for an extended period," he said, referring to the Fed's monetary policy-setting Federal Open Market Committee.

 

The paper, on the Fed's track record since the failure of investment bank Lehman Brothers at this time last year, noted the central bank's massive expansion of its balance sheet would not lead to inflation due to its ability to pay interest on reserves that are held with it by commercial banks.

 

"Paying interest on reserve balances also has important benefits and will play a key role in our exit from unusually accommodative policies when the time comes," Kohn said.

 

"Raising the interest paid on those balances should provide substantial leverage over other short-term market interest rates because banks generally should not be willing to lend reserves in the federal funds market at rates below what they could earn simply by holding reserve balances," Kohn said.

 

However, he did caution that the increase in the balance sheet was not without risks, and warned that if this led to credit losses at the Fed, it could force the Fed to go hat in hand to the U.S. government, compromising its policy independence.

 

Kohn added this outcome "seems extremely remote," and he argued that the Fed would continue to earn substantial net profits on its balance sheet for the next few years in all but the most distant scenarios.

 

"Short-term interest rates would have to rise very high very quickly for interest on reserves to outweigh the interest we are earning on our longer-term asset portfolio. With the global economy quite weak and inflation low, a large and rapid rise seems quite improbable," Kohn said.

 

It has been argued that the Fed could target higher inflation in order to lean against the risk that the severe U.S. recession pushes the country into a Japan-style deflation, where falling prices inflicted a decade of stagnation.

 

Kohn said this might work in the perfect environment of an economic model, but was a bad idea in the real world.

 

"A policy of achieving "temporarily" higher inflation over the medium term would run the risk of altering inflation expectations beyond the horizon that is desirable. Were that to happen, the costs of bringing expectations back to their current anchored state might be quite high," he said.

 

"The anchoring of inflation expectations has been a hard-won achievement of monetary policy over the past few decades, and we should not take this stability for granted."

 

Kohn, however, rejected warnings from other conference participants that the attention being paid too inflation meant that central banks were ignoring the risk of deflation.

 

"We are doing this on a two-sided basis," he told the conference in response to a question, adding Fed policies were aimed at keeping inflation and inflation expectations from falling too low as well as from rising too high.

 

P&G Sees Rising Sales

 

Procter & Gamble said it expects sales to improve in the coming quarter as new products and other investments pay dividends, sending its shares up 4.3 percent. The company has faced come under substantial pressure from cheaper store brands and also felt the pinch as retailers cut back on goods they keep in stock. At the same time, P&G's upscale products, such as perfume, have suffered as consumers shy away from small luxuries amid the recession.

 

However, Chief Financial Officer Jon Moeller said the company expects organic sales to rise 1 percent to 4 percent in the second quarter, which starts in October, after being flat to down 3 percent in the first quarter. The organic sales number excludes the impact of currency fluctuations, acquisitions and divestitures.

 

"We clearly see that we are approaching an inflection point in P&G's organic sales trends," Moeller said.

 

P&G's sales comparisons get easier in the second quarter because year-earlier results were weaker, he noted.

 

P&G said it still expects earnings per share from continuing operations of 95 cents to $1.00 for the fiscal first quarter. For the full year, P&G has forecasted earnings of $3.99 to $4.12 per share, including a one-time increase of 44 cents per share from the sale of its pharmaceuticals business to Warner Chilcott Plc. The forecast also includes 10 cents to 12 cents of dilution related to the transaction, the company said.

 

CEO Bob indicated that P&G wants to expand the number of consumers that use P&G products to 5 billion by fiscal 2015 from about 4 billion in the current fiscal year. The company is looking to do this by offering more items at lower prices, especially in parts of the developing world like India, where McDonald said the company is focused on switching consumers from cloth diapers to a version of Pampers.

 

The company also wants global per capita spending on P&G products of $14 by fiscal year 2015, up from $12 this year. U.S. consumers spend about $110 a year on P&G products, consumers in China spend about $3, and those in India spend about 60 cents, he said.