MarketView for September 15

 

 

Summary 

 

It was another positive day on Wall Street as far as the major equity indexes were concerned with the S&P 500 index closing at its highest point since last October 6. Pushing share prices higher were economic reports of stronger manufacturing and retail sales data that pushed commodity prices and shares of materials companies higher.

 

The improvement in retail sales in August reassured the Street that the rebound in economic is likely to continue. Furthermore, a Tuesday’s posted increase in the government's Producer Price Index signaled increased consumption of raw materials. The rise in producer prices and a report showing stronger New York state manufacturing suggested demand is building for raw materials.

 

As a result, metals prices rose, sending the shares of Alcoa up 8.1 percent to $13.99, while AK Steel rose 5.7 percent to $23.11 and US Steel closed up 4.8 percent at $48.98.

 

Comments by Federal Reserve Chairman Ben Bernanke that the recession was probably at an end also favored basic materials companies. Bernanke, speaking on the one-year anniversary of the collapse of Lehman Brothers said the recession "is very likely over."

 

Unfortunately, the shares of retailers also felt the undertow resulting from Best Buy and Kroger, both of which reported quarterly profits below expectations. Best Buy closed out the day down 5.2 percent to $38.32, while Kroger closed down 7.5 percent at $20.46.

 

Shares of General Electric posted and increase of 4.2 percent to $16, helped by an upwardly revised price target from Bernstein Research. The conglomerate's sharp rebound of approximately 140 percent from its 2009 closing low could be a solid indicator that better times are on the horizon.

 

After the closing bell, Adobe Systems announced a $1.8 billion deal to buy business software creater Omniture in an effort to counter falling sales from its Photoshop and Acrobat programs. Adobe fell 3.8 percent to $34.25 in extended trading, while Omniture rose more than 25 percent to $21.75.

 

Analysts' upgrades of eBay and Yahoo sent their shares higher. Yahoo closed up 5.4 percent at $16.41, while eBay added 1.3 percent to close at $24.14.

 

Economic Data Continues To Improve

 

Retail sales rose in August at the fastest pace in 3-1/2 years and a gauge of New York State manufacturing posted a reading that was close to a two-year high, offering hope for a solid recovery from a severe recession.

A separate report on Tuesday indicated that producer prices rose more than expected last month, suggesting business was improving.

 

The Commerce Department said retail sales climbed 2.7 percent after declining 0.2 percent in July. It was the largest monthly advance since January 2006 and well above expectations on Wall Street.

 

The strong data pushed treasury prices lower and pulled benchmark yields from two-month lows.

 

President Barack Obama, speaking at a General Motors assembly plant in Ohio, said measures undertaken by his administration to rescue the economy -- including a $787 billion stimulus package -- were working, but warned: "It's going to take some time to achieve a complete recovery."

 

Economists are generally in agreement that the U.S. economy is in the early phase of recovery from the worst recession in seven decades. But many remain worried about lackluster consumer demand, with rising unemployment decimating incomes.

 

The Fed will consider the data at a meeting next week at which officials will resume debate on how best to withdraw the extraordinary support they are providing the economy. One official has already questioned whether the central bank should move ahead with everything it has already planned.

 

Retail sales were bolstered by the government's "cash for clunkers" program, which gave consumers cash to swap aging gas-guzzling cars for new, more fuel-efficient models.

Motor vehicle and parts sales surged 10.6 percent last month, the biggest rise since October 2001. Rising gasoline prices also added to the increase in overall retail sales.

 

The retails sales report indicated that there is strength across most sectors, with the exception of furniture and building materials, evidence that household spending bringing up the rear of the recovery from a slump that started in December 2007..

 

Consumer spending normally accounts for about 70 percent of all economic activity and retail sales make up a third of that. Excluding motor vehicles and parts, sales increased 1.1 percent in August after falling 0.5 percent in July.

 

The day’s optimism appeared to be shared by Best Buy, which raised its earnings forecast for the full year on Tuesday and said customer traffic to its stores was stabilizing. A report from MasterCard Inc showed consumers in July and August were no longer cutting back on credit card usage as sharply as they had been earlier in the year.

 

While questions still hang over the degree to which debt-laden consumers can help fuel an economic recovery, the manufacturing sector appears to be gaining strength. The New York Federal Reserve Bank's "Empire State" business conditions index, which gauges manufacturing activity in New York State, rose to 18.88 in September, the highest since November 2007, up from 12.08 in August. The survey is one of the earliest monthly guideposts to U.S. factory conditions.

 

Business inventories fell 1.0 percent in July to the lowest level since March 2006. Businesses' will need to restock and that will have a stimulus effect on the economy over the second half of the year.

 

Economists will scrutinize a report on consumer prices on Wednesday for a clearer picture of the inflation outlook.

 

Recession Likely Over Says Bernanke

 

Federal Reserve Chairman Ben Bernanke said on Tuesday that the worst recession since the Great Depression was probably over, but the recovery would be slow and it would take time to create new jobs.

 

"Even though from a technical perspective the recession is very likely over at this point, it's still going to feel like a very weak economy for some time," Bernanke said.

 

In declaring the recession over, Bernanke sounded a slightly more upbeat tone than in late August when he had said simply that prospects for a return to growth were good. However, he cautioned that growth next year would probably be sluggish and that unemployment would only fall slowly.

 

"The general view of most forecasters is that that pace of growth in 2010 will be moderate, less than you might expect given the depth of the recession because of ongoing headwinds," Bernanke said, citing tight credit conditions and other economic restraints.

 

He spoke on the one-year anniversary of the collapse of Lehman Brothers investment bank, an event that sparked a global financial panic, and a week before Fed officials meet to review their policy options. The Fed slashed benchmark interest rates to near zero in December and has been buying mortgage-related securities and longer-term Treasury debt to give the economy a lift. Bernanke said it was possible the recovery could be stronger than expected, but cautioned that it could also be weaker.

 

"There are risks on both sides of that forecast," he said. "But if we do in fact see moderate growth, but not growth much more than the underlying potential growth rate, then unfortunately, unemployment will be slow to come down."

 

Bernanke's comments implicitly acknowledged the possibility of a stronger-than-expected "V-shaped" recovery. Economists generally estimate trend potential growth to be around 2.5 percent. Growth above that level would be needed to bring down the unemployment rate, which hit a 26-year high of 9.7 percent last month.

 

After its last meeting on August 11-12, the Fed said the "substantial" slack in the economy would likely keep inflation subdued for some time, adding that exceptionally low interest rates would likely be needed for "an extended period."

 

Fed policymakers meet next Tuesday and Wednesday and are expected to opt to keep stimulating the economy via ultra-low interest rates and massive asset purchases. With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and Treasury bonds.

 

Richmond Fed President Jeffrey Lacker, an inflation hawk within the Fed, said on Monday that the Fed must consider if it wants to continue adding stimulus to the economy with its planned purchases of mortgage-related debt now that a recovery seems on track.

 

But other officials have signaled that they favor carrying through with the program, which envisions purchasing up to $1.45 trillion in mortgage-backed securities and debt issued by mortgage agencies.

 

Some financial market participants are worried the Fed will not be able to pull back its monetary stimulus in time to avert a pickup inflation. San Francisco Fed President Janet Yellen dismissed those fears on Monday, saying the "more significant threat to price stability over the next several years stems from the disinflationary forces unleashed by the enormous slack in the economy."

 

Asked about the Obama administration's plan for a sweeping overhaul of U.S. financial regulation, Bernanke said he was optimistic it would be concluded, but acknowledged that U.S. lawmakers have so far been more focused on health-care reform.

 

"I feel quite confident that a comprehensive reform will be forthcoming. This has just been too big a calamity and too serious a problem, and clearly regulatory problems were part of it," he said.

 

Buffett Says Recession Not Over

 

The economy has not begun to climb out of the worst recession since the Great Depression, but the "terror" that followed last year's near- collapse of the financial system is gone, due in part to government intervention, Warren Buffett said on Tuesday.

 

Buffett maintained a positive outlook on the government's much criticized Troubled Asset Relief Program (TARP) for banks, saying it may ultimately turn a profit for the government.

 

"At the moment we don't see it getting better or worse, but that's better than you could say six months ago," said the billionaire known as The Sage of Omaha for his long history of successful investments. "The terror of last year is gone and that's thanks in part to the government."

 

Buffett said that "the economy has not turned up but it will turn up ... I just don't know when."It could be tomorrow," he said. He said the Obama administration was "making progress with TARP and may end up making a profit. It certainly won't be a disaster."

 

"The banks want to get out of TARP ... they will all get out of TARP," he said, adding the time frame for exiting the program "is not a crucial factor."

 

Buffett did not want to comment on Kraft Foods in which his Berkshire Hathaway is the largest shareholder and which is offering roughly $16 billion for Cadbury PLC. Buffett also said Chinese electric car and battery maker BYD Co Ltd was "doing well" and had not sought additional investment from him.

 

BYD's chairman said last month that Buffett intends to raise his stake, saying the investor believed BYD came with good prospects in the renewable energy sector. He did not elaborate. MidAmerican energy Holdings, a unit of Berkshire, bought 10 percent of BYD for $230 million last September.

 

Government Says No to Banks Exiting Bailout

 

Some of the largest U.S. banks will remain caught in the government's financial bailout program for months, as officials do not expect to grant the next wave of exit approvals until near the end of the year. Banks such as Citigroup and Bank of America have been chafing under the government's reins and want to exit the Troubled Asset Relief Program (TARP), which delivered capital infusions to banks along with limits on pay, share repurchases and dividends.

 

Citigroup has been in preliminary talks with officials on how to repay part of government funds but the process could take at least a couple quarters, according to sources familiar with the situation.

 

Regulators want to see that firms have fully taken advantage of the more open credit markets to raise significant capital buffers before they remove the government leash from more of the largest banks.

 

The Treasury Department first started releasing the big banks from the financial bailout after the government conducted an intensive "stress test" earlier this year of the firms' loan portfolios, earnings prospects and capital positions.

 

Ten banks received approvals in June to repay $68 billion in federal bailout funds. Since then, there have been few clues about when the other large banks would be allowed to exit the program and if those approvals would come piecemeal or as another group.

 

There is intense investor interest in which banks will be released, and the government is aware that granting individual approvals for the biggest banks to repay TARP could put immense pressure on the other institutions.

 

The large banks still locked in TARP include: Wells Fargo, Fifth Third, GMAC, KeyCorp, Bank of America, PNC Financial, Regions Financial, SunTrust, and Citigroup.

 

Some of these institutions demonstrated on Tuesday just how eager they are to exit TARP. Appearing at the Barclays Global Financial Services Conference in New York, leaders at SunTrust, Regions Financial and Bank of America all spoke out about how they want to repay, and do it as soon as possible.