MarketView for September 30

 

 

Summary   

 

Stock prices oscillated between positive and negative territory on Wednesday before closing out the day with the major equity indexes in negative territory. The relatively volatile trading session came after a surprising contraction in an index of Midwest business activity, but buying of technology bellwethers like Cisco at the end of a strong quarter limited losses. However, volume was light which is not unusual during the last day of the quarter.

 

The top drags in Wednesday's session were some of the quarter's best performers, including industrials, materials and banks.

 

Even so, the Dow -- up 15 percent this quarter -- marked its best quarterly performance since the fourth quarter of 1998, while the S&P 500 notched its second straight quarterly advance of 15 percent. The Nasdaq gained 15.7 percent for the third quarter.

 

For the month, the Dow rose 2.3 percent; the S&P 500 added 3.6 percent and the Nasdaq climbed 5.6 percent. These monthly gains ran counter to the historic trends showing September to be a miserable month for the stock market.

 

After a weak open, the indexes briefly turned positive by mid-afternoon, thanks to gains in the shares of such tech bellwethers as Cisco Systems and IBM. Cisco closed out the day up 1.03 percent to $23.54, while IBM chalked up a gain of 0.7 percent to $119.61.

 

JPMorgan fell 2.4 percent to $43.82, putting the stock among the Dow's worst performers, along with Boeing down almost 1 percent to $54.15 and United Technologies down 0.6 percent at $60.93. Alcoa closed down 1.4 percent to $13.12 as investors booked profits following this quarter's jump in commodity prices.

 

Exxon Mobil ended the day down 0.7 percent at $68.61 over crude oil's recent climb on industry refining margins. Crude settled up $3.90, or 5.85 percent, at $70.61 per barrel.

 

The Chicago PMI report added to the recent string of some surprisingly weak economic indicators, including Tuesday's disappointing report on September consumer confidence. It also eclipsed a Commerce Department report that showed the economy, measured by GDP, contracted more slowly than initially thought in the second quarter.

 

Even so, the benchmark S&P 500 stayed on course to end the quarter and September, a traditionally sour month for stocks, on a higher note. For 2009, the S&P is up 17 percent and from a 12-year closing low in early March, it is up nearly 60 percent.

 

After the closing bell, Penske Automotive Group saw its share price fall 8.9 percent to $17.47 on news that the company had terminated talks with General Motors to acquire the Saturn brand.

 

GDP Better Than Expected

 

The country’s gross domestic product or GDP contracted less than expected during the second quarter. GDP, which measures total goods and services output within our borders, fell at a 0.7 percent annual rate instead of the 1.0 percent decline reported last month by the Commerce Department. This was better than market expectations for a 1.2 percent contraction and an improvement from the first quarter, when GDP fell at a 6.4 percent rate.

 

The decline in GDP will probably mark the last quarter of contracting output for the economy, after it slipped into recession in December of 2007. The economy is believed to have rebounded in the July-September quarter.

 

With the second-quarter contraction, the country's real GDP has shrunk for four straight quarters for the first time since government records started in 1947. The shallow decline in activity in the second quarter reflected more moderate drops in consumer spending and business investment than previously thought.

 

Consumer spending, which normally accounts for over two-thirds of all economic activity, fell at a 0.9 percent rate in the second quarter. However, it was a smaller amount than the previously estimated 1.0 percent decline. Spending rose at a 0.6 percent rate in the previous quarter.

 

Business investment fell at a 9.6 percent rate in the second quarter instead of 10.9 percent, reflecting slightly better demand for software than previously thought. It tumbled 39.2 percent in the first quarter.

 

Weak domestic demand meant businesses continued to reduce their stock of unsold goods. Inventories plunged by a record $160.2 billion in the second quarter rather than the $159.2 billion drop estimated by the government last month. Stockpiles of unsold goods fell by $113.9 billion in the first quarter.

 

The drop in inventories subtracted 1.42 percentage points from second-quarter GDP, the Commerce Department said. Excluding inventories, GDP rose 0.7 percent in the second quarter compared to a 4.1 percent decline in the first quarter. Rebuilding of inventories is expected to be one of the main drivers of the economy's recovery.

 

While the recovery, aided by government spending, is under way, there are doubts over its strength and sustainability because of weak consumer spending. While the pace of job losses has slowed markedly, companies are still not hiring to any real degree.

 

Investment in nonresidential structures fell at a 17.3 percent rate compared to a 43.6 percent drop in the January-March quarter. Residential investment, at the heart of the worst U.S. recession in seven decades, dropped at a 23.3 percent rate in the second quarter after falling 38.2 percent in the first quarter.

 

ISM Reports Lower Reading

 

Business activity in the Midwest failed to growth mode in September as expected, and instead was slammed by a decline in production and new orders, the Institute for Supply Management reported on Wednesday. The ISM-Chicago said its business barometer fell to 46.1 in September from 50.0 in August, with a reading above 50 indicating expansion. Economists had expected a rise to 52.0. The employment component of the Chicago PMI inched up to 38.8 in September from 38.7 in August.

 

New orders and production, which both surged in August, fell back sharply. New orders dropped to 46.3 from 52.5 and production dropped to 47.2 from 52.9 a month ago. The employment component of the index inched up to 38.8 in September from 38.7 in August. Prices paid rose to 51.3 from 50.0. The ISM-Chicago index is often regarded as a factory index because the region is relatively industrialized. But service-sector and nonprofit forms are polled as well.

 

Layoffs Rise but At Slower Pace

 

ADP Employer Services reported that private employers cut 254,000 jobs in September, more than the 210,000 layoffs the market had been expecting. However the decline was less than the 277,000 jobs lost in August making the pace of layoffs the slowest in a year. The implication is that businesses may start hiring again sometime early next year. The 254,000 job loss for September was the smallest since July 2008 when 93,000 were cut.

 

The data is consistent with a slowing trend showing many sectors of the economy are deteriorating less sharply and, in some cases, have returned to growth. ADP and Macroeconomic Advisers say their National Employment Report is designed as a proxy for the government's monthly non-farm payrolls report, which is due on Friday.

 

The Labor Department's September release, due out on Friday at 8:30 a.m., is more comprehensive because it includes both the private and public sectors.

 

After Wednesday's report, Joel Prakken, chairman of Macroeconomic Advisers, said he expected payroll employment to turn positive in the early months of 2010, but the jobless rate is still likely to rise a bit more before the cutting spree ends.

 

 "I think the unemployment rate is going to kiss 10 percent," Prakken told a teleconference of journalists. "We still see employment declining through the end of the year -- today's number is consistent with that -- and the unemployment rate continuing to rise through the end of the year."

 

Currently, Prakken said there was a lot of downward pressure on state and local government employment in particular, which is not covered in the ADP report but figures into the Labor Department's non-farm payrolls report. Prakken said it would be best not to assume even modest growth in state and local government employment in the September non-farm payrolls report.

 

"You might want to actually assume a flat to slightly negative number," said Prakken, adding that the recession has hit state budgets hard, though the federal government's economic stimulus spending has mitigated this.

 

He also said that the manufacturing sector in general was displaying evidence of turning around aggressively, though factory employment has been under downward pressure even in recent economic expansions.

 

Foreclosures Rise

 

The number of home foreclosures in process and the number of delinquent mortgages rose during the second quarter, while home retention actions also increased, bank regulators said on Wednesday. According to the Office of the Comptroller of the Currency and the Office of Thrift Supervision, foreclosures increased by 16 percent to 2.9 percent of serviced mortgages, while home retention actions such as loan modifications rose 21.7 percent

 

"The mortgage data reported for the second quarter of 2009 continued to reflect negative trends influenced by weakness in economic conditions, including high unemployment and declining home prices in weak housing markets," the report said.

 

The report covers mortgages serviced by most of the industry's largest mortgage servicers, whose loans make up about 64 percent of all mortgages outstanding. The regulators said there was a lull in newly initiated foreclosures during the second quarter as mortgage servicers worked to implement the federal "Making Home Affordable" program.

 

The $50 billion program, launched in March, is designed to stabilize the housing market by helping up to 9 million Americans reduce their monthly mortgage payments to more affordable levels.

 

The OCC and OTS pointed out that the emphasis on the program contributed to a dramatic shift in the composition of home retention actions toward lowering payments. Previously, the vast majority of loan modifications either did not change or increased monthly payments.

 

The weak economy continued to drive up the number of delinquent mortgages. The number of mortgages delinquent 30 to 60 days jumped 10.9 percent during the second quarter to 3.2 percent of all mortgages covered by the report.

 

The number of mortgages that were more than 90 days delinquent increased by 11.5 percent, reaching a level of 5.3 percent of all serviced mortgages.

 

Separately, the Mortgage Bankers Association said on Wednesday that mortgage applications fell last week despite the lowest loan rates in four months, another sign that housing will likely recover slowly from its three-year plunge.

 

Questions Regarding Moody’s Remain

 

A congressional panel will expand its examination of credit rating agencies to look at why U.S. securities regulators ignored warnings from former Moody's executives regarding the company's weak compliance department and ratings process.

 

"We want to look at the fact that the Securities and Exchange Commission did not respond" to concerns from Moody's former head of compliance, Rep. Edolphus Towns, chairman of the House Oversight and Government Reform Committee, told CNBC television on Wednesday.

 

Towns' panel held a hearing on Wednesday to probe allegations from two Moody's whistleblowers that company managers favored revenues over ratings quality.

 

Scott McCleskey, a former Moody's senior vice president of compliance, sent the SEC a letter in March 2009 alleging that he was routinely ignored when he warned that the firm was not properly monitoring municipal bond ratings.

 

Eric Kolchinsky, a recently suspended managing director at Moody's, will tell Congress that analysts are "bullied" by managers who override their decisions to generate revenue.

 

Allegations that the SEC ignored the whistleblowers' concerns could be another black mark against the regulator. An SEC spokesman has said the agency has established an examination program for credit rating agencies that includes reviews of disclosures, policies, and procedures regarding municipal securities ratings.

 

"We are focusing carefully on the tips and complaints we receive and following up, where appropriate, with examinations targeting suspected problems," SEC spokesman John Nester said.

 

Global policymakers are trying to make credit agencies more accountable, after the agencies helped fuel the credit crisis by assigning top ratings to toxic mortgage securities that later deteriorated in value.

 

The industry is dominated by Moody's, McGraw-Hill's Standard & Poor's, and Fimalac SA's Fitch Ratings.

 

Will The SEC Get Serious

 

The Securities and Exchange Commission is exploring stringent action against naked short selling, considered by some politicians and academics to be a key contributor to the financial crisis, Chairwoman Mary Schapiro said Wednesday.

 

"The commission is concerned about abusive 'naked' short selling and persistent fails to deliver and the potentially manipulative effect this activity can have on our markets," Schapiro said at an SEC roundtable. "Thus, we are examining whether a pre-borrow or 'hard locate' requirement or another alternative is necessary or would be effective in addressing such activity and preventing market manipulation."

 

Schapiro said the first panel at the agency roundtable will discuss a proposal from members of Congress for an SEC study of whether a pre-borrow requirement would end naked short selling. With such a requirement, an institution would be required to arrange formally to borrow shares, or "pre-borrow" before a short sale. Industry officials also call such a requirement a "hard-locate."

 

Sens. Ted Kaufman, D-Del., and Johnny Isakson, R-Ga., two of the lawmakers seeking such a pilot program, said Tuesday in a statement that they were skeptical about whether the SEC would take serious steps toward limiting naked short-selling. They said part of their concern was that they believed the panel the agency put together to discuss the issue was "stacked against the need for restrictions on naked short selling."

 

"In the recent financial decline, there was abusive short selling enabled by the repeal of the 70-year-old uptick rule and a lack of so-called pre-borrow or hard locate requirements," Kaufman and Isakson said.

 

The agency invited officials from Goldman Sachs, Securities Traders Association, Nasdaq OMX Group, the Depository Trust & Clearing Corp., State Street Corp. AQR Capital Management, International Bancshares Corp., Direct Edge and Quadriserv Inc. to discuss the issue.