MarketView for September 18

Summary  

Share prices were higher on Friday, with all three major equity indexes ending the day in positive territory, driven in part by a brokerage upgrade of Procter & Gamble, which in turn helped to push the share prices of consumer staples companies upward and set the markets up a second week of gains. Citigroup said P&G, which makes Tide detergent and Pampers disposable diapers, is poised to win market share through aggressive pricing. P&G’s shares ended the day up 3.3 percent to close at $57.38.

Other companies seeing their shares upgraded included Chevron, upgraded by Credit Suisse, resulting in its share price closing up 1.5 percent at$73.07. Toll Brothers and KB Home were both upgraded by J.P. Morgan Securities, which said the housing sector will continue to recover over the next 24 months and drive the current rally in home builders' stocks. Toll shares ended the day up 3.4 percent to close at $22.27, while KB Home's stock closed 3.4 percent higher at $20.36.

"Quadruple witching," the expiration and settlement of four different types of September equity futures and options contracts, created some market choppiness.

Crude Futures Fall

Crude oil futures slipped on Friday on profit-taking from a 5 percent rally earlier in the week. Domestic sweet crude futures for October delivery settled down 43 cents per barrel at $72.04, while London Brent settled down 23 cents per barrel at $71.32.

Oil prices began the week below $70 per barrel and then rose on strength in the equities markets and heavy losses in the dollar that pushed up the purchasing power of commodities buyers using other currencies.

Oil was also under pressure from a government report this week showing growth in refined fuel inventories, with distillates at their highest levels since 1983. Losses were limited somewhat by mild gains on Wall Street.

Look for oil prices to move higher in coming weeks as some recent positive economic data continues to support expectations that a global economic revival is under way and energy demand will likely recover.

Fed Considering Regulating Bank To Reduce Risk

The Federal Reserve plans new rules on bank pay to curb the type of excessive risk-taking that sparked the global financial crisis and triggered international demands for action. Public outrage at the stratospheric compensation of some bankers has boiled up to the level of the Group of 20 nations, whose leaders meet next week in Pittsburgh.

The United States, under pressure to act on pay at the G20 from France and Germany, has already said it aims to curb the culture of excessive risk-taking at the root of the crisis.

Possible guidelines could be proposed in the next few weeks and would apply to any employee able to take risks that could imperil an institution, not just the executives who have been the main target of popular ire. The rules will be aimed at all firms the Fed regulates and be enforceable under its existing powers. The Fed oversees more than 5,000 bank holding companies and over 800 smaller state-chartered banks.

Massive losses inflicted by risky subprime mortgage bets destroyed some of the oldest names in finance and intensified a recession that has cost millions of jobs, putting both the banks and the regulators under scrutiny. The Financial Stability Board, which answers to the G20 and will issue guidelines at the September 24-25 summit, said on Tuesday that poorly capitalized banks should not be allowed to pay large bonuses.

The Obama administration has already appointed a "pay czar" to oversee executive compensation at firms getting taxpayer aid, and has indicated it will take further steps. "Properly designed compensation practices constitute an important measure in ensuring safety and soundness in our system," White House adviser Lawrence Summers said on Friday.

The Fed's proposal would take a two-pronged approach. A top tier of the largest banks, numbering around 24, would get particularly close scrutiny, while all other lenders under the Fed's supervision would receive less-intensive treatment. Larger firms would also be subject to a review that would compare their practices against rivals, and would be required to submit their pay policies to the Fed for its approval. This would put the burden on the big firms to modify existing compensation practices, while leaving them with flexibility to customize compensation to best fit their needs. Practices at smaller banks would be reviewed as part of existing regular bank exams, the Fed source said.

Goldman Sachs, which set aside $11.3 billion in the first half of the year toward employee bonuses but which has also spoken out against excessive pay at firms that lost money, said excessive risk-taking should not be rewarded.

The Fed board has yet to vote on the proposal, but the timeline for the guidelines should advance in weeks, not months. The proposed rules would then face a period of public comment before they could be made final. But the Fed plans to launch the review process for the large firms as soon as the proposal goes out.

The guidelines would not apply a one-size-fits-all prescription to cap pay at any specific level. Rather, the guiding principle would be to aim for a longer view of profits that squeezes out risk-taking that could lead only to short-term gains.

Officials are also discussing the possibility of "clawing back" compensation when it later becomes apparent excessive risks were taken. The Fed plans to outline ways to defer pay, for example by using restricted shares that take longer to vest, which would give bank management more time to judge if the revenues from a particular activity really lived up to expectations. It will also point out the ability to weigh compensation according to the riskiness of the activity involved, as some already do to internally allocate capital.