MarketView for September 29

 

 

Summary   

 

Stock prices took a decided turn in the downward direction on Tuesday after the Conference Board reported an unexpected decline in consumer confidence. The news overshadowed positive news in the housing industry and solid earnings from Walgreen. With the third quarter drawing to a close, trading was volatile and volume light. Walgreen saw its share price close up 9.2 percent at $37.35.

 

Stocks started higher but then turned lower as the Conference Board's Consumer Confidence Index for September fell, underscoring concerns about personal finances amid the worst job market in 26 years. Even so, investors were reluctant to sell, and trading shifted between small losses and break-even for most of the trading day.

 

After the bell, Nike posted a quarterly earnings number that exceeded Street forecasts, sending its stock up 4 percent. Nike shares had ended the regular session up 1.9 percent at $60.09.

 

Major drags of the day included some of the stellar performers in Monday's run-up, including 3M, down 1.4 percent to close at $73.94 and Cisco, down 1.3 percent at $23.30. Apple closed down 0.4 percent at $185.38.

 

Retreating oil prices weighed on energy shares, with Chevron off 1.1 percent at $70.91. Crude for November delivery settled down 13 cents per barrel at $66.71.

 

An improved S&P/Case-Shiller home price index reading that hinted at stabilization in the housing industry.

 

Shares of Moody's and McGraw-Hill moved higher after Piper Jaffray analysts said the rating agencies were in a favorable position as debt issuance improved substantially in September year-over-year. Moody's closed up 10.9 percent at $20.81, while McGraw-Hill, parent of Standard and Poor's, rose 7.3 percent to close at $26.11.

 

Window dressing -- when fund managers sell laggards in favor of outperformers to spruce up portfolios -- tends to make quarter-end trading volatile. The S&P 500, up 15.4 percent so far this quarter, is making a run for its best quarterly performance since the fourth quarter of 1998. The benchmark index has rallied nearly 60 percent from the 12-year low of early March. A year ago on Tuesday the Dow suffered its biggest slide ever when it plunged 778 points after U.S. lawmakers first rejected a $700 billion financial bailout.

 

Consumer Sentiment Down Unexpectedly

 

Concerns over job security rose unexpectedly in September, resulting in a widely watched barometer of consumer confidence to fall unexpectedly and raising more concern about the upcoming holiday shopping season.

 

The New York-based Conference Board, a private research group, said that its Consumer Confidence Index dipped to 53.1 in September, down from the revised 54.5 reading in August. Economists surveyed by Thomson Reuters had expected a reading of 57.

 

The index — fueled by signs that the economy might be stabilizing — had enjoyed a three-month climb since hitting a historic low in February of 25.3. A reading above 90 means the economy is on solid footing, while a reading above 100 signals strong growth.

 

One reason that economists pay attention to consumer sentiment is that spending on goods and services for consumers, including housing and health care, accounts for about 70 percent of all economic activity as defined by government statistics.

 

The Conference Board's Present Situation Index, which measures consumers' current assessment of the economy, declined to 22.7 from 25.4. The Expectations Index, which measures consumers' outlook over the next six months, dipped to 73.3 from 73.8 last month.

 

"While not as pessimistic as earlier this year, consumers remain quite apprehensive about the short-term outlook and their incomes," said Lynn Franco, director of The Conference Board Consumer Research Center. "With the holiday season quickly approaching, this is not very encouraging news."

 

The big concern is the job market. Labor Department figures to be released this Friday are projected to show unemployment ticking up to 9.8 percent in September from 9.7 percent in August. I have been and continue to forecast that unemployment will reach 10 percent before beginning to trend downward.

 

The weak job market, along with tight credit, means that the all important holiday retail shopping season could be flat from a year ago when we saw the weakest holiday season since at least 1967 when the Commerce Department began collecting the data.

 

The survey showed that consumers' appraisal of the job market was less favorable than the previous month. Those claiming jobs are "hard to get" increased to 47.0 percent from 44.3 percent, while those claiming jobs are "plentiful" decreased to 3.4 percent from 4.3 percent.

 

Price of Crude Oil Skids Lower

 

Crude oil futures for November delivery were lower on Tuesday as consumer confidence data weighed on markets and the government revised downward demand for July. Oil markets have looked to wider economic data and equities markets for signs of a turnaround in the economy that could lift slumping fuel demand. Retail gasoline demand rose 0.9 percent last week compared with the previous week.

 

Sweet domestic crude for November delivery settled down 13 cents per barrel at $66.71. London Brent futures settled down 5 cents per barrel at $65.49.

 

There was some additional downward pressure on crude prices after the Energy Information Administration revised downward its estimate for July demand by 133,000 barrels per day to 4 percent below year-ago levels, marking the lowest July level in 13 years.

 

The markets were also keeping an eye on tensions between the West and OPEC member Iran over Tehran's nuclear program. Iran said it would refuse to discuss a newly declared nuclear plant at forthcoming international talks and cautioned Western powers it could curb cooperation further if they repeated "past mistakes."

 

Washington has suggested possible new sanctions on Iran's banking and oil and gas industries if Tehran fails to assuage Western fears it seeks nuclear weapons.

 

The oil market was also awaiting weekly inventory reports, with the EIA's report due out on Wednesday.

 

Fed Could Increase Rates Rapidly

 

To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the economy is back on firmer footing, Richard Fisher, president of the Federal Reserve Bank of Dallas, warned on Tuesday.

 

"I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity" to when the Fed was slashing rates to battle the recession and the financial crisis, Fisher said.

 

Although Fisher has a reputation for being one of the Fed's toughest inflation fighters, he was echoing the words of Fed member Kevin Warsh, who last Friday stated that the central bank will need to move swiftly when the time comes to raise rates.

 

It's all part of a high-wire act that the Fed has to perform as the economy transitions from recession to recovery. If the Fed raises rates and reels in the unprecedented support too soon, it could short-circuit the rebound. If the central bank waits too long to rein in its stimulus, inflation could be unleashed.

 

"The wind-down process needs to begin as soon as there are convincing signs that economic growth is gaining traction and that the lending capacity of the banking system is capable of expansion," according to excerpts of a speech Fisher delivered in Dallas.

 

Yet, at the close of its recent Open Market Committee meeting, the Fed announced that it had decided to hold its key bank lending rate at a record low near zero and pledged to keep it there for an "extended period." Most economists read that to mean the Fed would keep rates at super-low levels through this year and into part of 2010.

 

The notion that central banks should act forcefully — versus gradually — in raising rates after a financial crisis was a subject of discussion at a Fed conference in Wyoming in August. Consumers, businesses and investors must feel confident that an inflation spiral will not take place.

 

On other matters, Fisher said Tuesday that despite some signs of improvement, the housing market is "still on life support."

 

The Fed last week announced it was slowing down a program intended to lower mortgage rates and aid the housing sector. "The market for housing will not become truly robust until market forces replace the prostheses of government support," Fisher said.

 

SEC Mulling Over Short-Selling Dilemma

 

The SEC is eyeing new restrictions on the multi-trillion dollar securities lending market used by short-sellers after the credit crisis revealed the industry was "anything but low risk." Some pension funds, mutual funds and foundations that loaned their securities were "significantly harmed," Mary Schapiro, chairman of the Securities and Exchange Commission, said at the start of a two-day public meeting on the matter.

 

Historically, institutional investors viewed securities lending as a way to put their dormant assets to work. But during the financial crisis many of them lost money from their cash collateral reinvestment programs that invested money received from stock lending.

 

"For a long time, securities lending was regarded and described as a relatively low risk venture, but the recent credit crisis revealed that it can be anything but low risk," Schapiro said.

 

Securities that are loaned are often used by short sellers, who make profits on a stock's decline. Short selling has been blamed by some lawmakers and corporate executives for last year's dramatic drop in stock prices.

 

Short selling, a legitimate investment strategy is when an investor borrows stock and sells it in the hope that its price will fall. If the price does drop, the seller profits by buying the stock back at the lower price.

 

The public meeting was the latest in a series of steps the SEC has taken to broadly address the issue of short-selling. The agency has already proposed reinstating a version of the uptick rule, which could curb short selling. That has been opposed by big Wall Street players such as Goldman Sachs and Vanguard.

 

Schapiro has previously said the SEC aims to finish work on the uptick rule by the end of the year.