MarketView for September 8

 

 

Summary  

 

Share prices skidded lower on Thursday primarily during the last hour of the trading day after Federal Reserve Chairman Ben Bernanke indicated that the Fed would do everything possible to help improve the economy but then failed to give any details as what new measures he was considering. In other words, we are going to have to wait until after the Fed meets on September 20-21 to see if any of the details are going to be revealed. The S&P 500 struggled to hold up the 1,200 mark although it broke above that level earlier in the day, which could mark a significant resistance level for the market.

 

A rise in jobless claims reported earlier in the day underscored once again the nation’s economic weakness and came ahead of President Barack Obama’s speech to the joint members of Congress. In that speech, Obama will likely define his plan for creating jobs.

 

Banks were the largest decliners after sharp gains on Wednesday and remain one of the most turbulent sectors in terms of the volatility that seems to continue unabated. Among the bank shares, JPMorgan fell 3.8 percent to $33.51, making it the largest decliner among the 30 stocks comprising the Dow Jones industrial average, while Bank of America fell 3.7 percent to $7.20.

 

The VIX volatility index rose 2.8 percent to 34.32. Although down from levels seen in August, it is still up from the levels earlier in the year. At the same time, volume on the three major equity exchanges was 7.46 billion shares, 13 percent below the 20-day moving average, a sign that participation is weakening after the high volume sell-off in August. Translated, this means that short-term views are dominating and company fundamentals are taking a back seat.

 

A U.S. appeals court on Thursday overturned a lower court ruling that the federal government could not compel people to buy health insurance or face paying a penalty. The appeals court ruled only that Virginia did not have standing to challenge the federal law. It did not rule on whether the mandate itself was constitutional.

 

On the upside, Yahoo rose 6.1 percent to $14.44 after a top shareholder, Third Point LLC, demanded that Yahoo overhaul its board of directors. Shares of SanDisk rose 2.4 percent to $38.52.

 

In economic news, the Commerce Department reported that our trade deficit fell considerably in July, a positive signal for economic growth in the third quarter after a sluggish first half.

 

Economic Data Continues to Show Life

 

Economic reports released by the government Thursday morning pointed to a weak labor market but also a better performance on trade that should to increase third-quarter gross domestic product.

 

According to a report released by the Labor Department, the number of new claims for jobless benefits rose unexpectedly last week, rising to 414,000 in the week ending September 3, from an upwardly revised 412,000 the prior week. Excluding one week in early August, jobless claims have held above 400,000 since early April. The Labor Department said there was no discernible effect from recent hurricanes and storms on the national figures this week.

 

The four-week moving average of claims, which removes some of the data’s volatility, rose to 414,750 from 411,000 the prior week. Meanwhile, continuing claims eased to 3.72 million from 3.75 million in the week ended August 27, the latest available data. The number of total recipients on benefit rolls was 7.17 million in the August 20 week.

 

On a more cheerful note, the Commerce Department reported on Thursday that the nation’s trade deficit came in at $44.8 billion in July; down sharply from June's $53.1 billion deficit and much lower than forecasts around $51 billion. The 13.1 percent decline was the biggest month-to-month percentage drop in the deficit since February 2009. The considerably narrower trade deficit for July offered a ray of hope for economic growth in the third quarter following a sluggish first half of the year.

 

Exports rose 3.6 percent to a record $178.0 billion, driven by record shipments to countries in South and Central America and higher demand from China and major oil producers. Records were also set for two large categories, goods and services, as well as for capital goods and autos.

 

Meanwhile, imports fell 0.2 percent in July to $222.8 billion, as the average price for imported oil declined for a second consecutive month to $104.27 per barrel and the volume of crude oil imports also fell. Imports from China, however, rose 2.1 percent.

 

China and Japan Facing Possible Downgrade

 

Fitch Ratings stated on Thursday that China's credit rating could be facing a downgrade within two years as the country's banks struggle with debt loads following a lending surge to help lift the economy during the 2008 financial crisis. It also said that Japan, weighed down by a public debt load twice the size of the $5 trillion economy, faced a greater-than-even chance of a downgrade in part due to a political impasse that is stalling plans to clean up its finances.

 

Asia's two biggest economies are in the ratings firing line alongside Europe and the United States as they deal with massive debts built up during the global financial crisis.

 

Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, was quoted by Reuters as saying that China's local currency debt rating could be downgraded over the next 12 to 24 months. "We expect a material deterioration in bank asset quality," he said. "If the problems in the banking system pan out as we expect or are even worse over the next 12 to 24 months, then that would incline us to take the rating downwards."

 

Fitch downgraded the outlook on China's long-term local currency debt to negative from stable in April because of concerns about the country's financial stability following a lending surge encouraged by Beijing to help maintain economic growth during the global downturn.

 

Fitch's China long-term local currency rating is AA minus, its fourth highest level, on a par with Italy and a notch below Spain. Fitch has sounded the loudest warnings of the three main ratings agencies about the surge in lending in China and is the only one with a negative outlook on the long-term local currency debt rating.

 

China reported local government debt of 10.7 trillion yuan ($1.67 trillion) as of the end of 2010. More than 347 billion yuan in urban construction investment bonds were issued in the five years to 2010.

 

According to Colquhoun, non-performing loans at Chinese banks were about 2 percent of the total, but if lending to local government financing vehicles was appropriately classified, the figure would be more like 6-7 percent.

 

"That by itself is sufficient to exhaust the banks' internal absorption capacity," he said. "So any further deterioration in asset quality beyond that... would lead to a requirement for sovereign support, which then affects the sovereign credit profile."

 

While in general terms it was known how much stimulus during the financial crisis cost European countries and the U.S., Colquhoun said, because in China it was done through the banking system, "in a nutshell we don't know how much it cost. We haven't seen the full cost come through yet," he said

 

According to comments made to the media by Jonathan Lee, Fitch's senior director of financial institutions, there is a risk that asset quality could deteriorate further because bank lending was still running at a fast pace. According to Lee, Fitch estimates that bank loans would increase this year alone by 18 trillion yuan.

 

"This is the equivalent to 55 percent of China's GDP, which is an extremely high number and a potential problem for banks' asset quality," Lee said.

 

Japan's credit rating has already been cut this year by Standard & Poor's and Moody's, citing the inability of Japan's leadership to come up with a plan to reduce the debt load over time.

 

According to statements by Fitch the ratings on current trends are more likely than not to go down.  In order to shore ratings up at their current level Fitch says it would need to see a credible fiscal consolidation plan.

 

The three major agencies rank Japan's credit ratings at their fourth highest levels. However, both Fitch and S&P have a negative outlook, suggesting further rating downgrades unless Japan is able to come up with a credible plan to sort out the debt.

 

"Our confidence that we will see it is not high because of the track record of the politics," Colquhoun reportedly said.

 

Hopes now rest on Yoshihiko Noda, appointed last week as Japan's sixth prime minister in five years, to forge a political consensus in the divided parliament, or Diet. The costs of reconstruction following the March 11 earthquake and tsunami and the recession it triggered is adding to Japan's debt burden.

 

Google to Buy Zagat

 

Google has agreed to buy Zagat, the longtime guide to restaurants around the country, in an effort by the search giant to expand its local offerings. Terms of the transaction, including price, were not disclosed.

 

Known for its 30-point scale and its quote-laden reviews, Zagat has grown from a two-page typed list to a global empire with millions of loyal readers and reviewers happy to rave about their favorite restaurants and bars.

 

But the company has faced several challenges in recent years, notably a slew of Internet-based competitors who provide an alternative outlet for restaurant reviews.