MarketView for September 14

 

 

Summary  

 

The major equity indexes turned in positive gains for the day making it the third day in a row that the markets chalked up positive numbers. Wednesday’s results came after European leaders displayed new urgency in efforts to contain the contagion of a euro zone debt crisis. To that end, German and French leaders called on Greece to implement all financial reforms "strictly and effectively," a German government spokesman said.

 

Greece expects policymakers to report that Athens is on track to fulfill its targets and receive the aid it needs to avoid any chance of a debt default, a Greek official said.

 

Adding to the relief, Italian Prime Minister Silvio Berlusconi won a confidence vote on an austerity plan for Italy, the euro zone's third-largest economy.

 

Fears that Europe's crisis could plunge it into recession and drag down global growth have hammered stocks for weeks. Stocks that are typically well positioned to benefit from economic growth, such as General Electric were the top performers during the day. GE ended the day up 2.5 percent at $15.79.

 

Tech stocks also were among top gainers, and the Nasdaq outperformed the other two major indexes for the third consecutive day. Shares of Nvidia chalked up a gain of 5.2 percent to close at $15.28, while SanDisk rose 4.2 percent to close at $42.66.

 

Dell was up 3.3 percent to end the day at $14.86 a day after its board authorized an additional $5 billion stock buyback program.

 

Sentiment received an early boost on word that plans for a common euro zone bond, seen by many as a key tool to ease the region's festering debt crisis, would soon be presented. The actions by European leaders followed an urgent call by Treasury Secretary Timothy Geithner for them to act forcefully to solve Europe's debt crisis. Geithner said they have the financial and economic capacity to do so. Geithner will attend an informal meeting of EU finance ministers in Poland on Friday.

 

The day’s volume on the three major equity exchanges was 8.5 billion shares changing hands, a number that was above last year's average of roughly 7.6 billion shares.

 

Looking at the day’s economic data, retail sales growth stalled in August while business inventories were higher in July, suggesting caution by firms about demand at the start of the third quarter.

 

Retail Sales and the Producer Price Index Remain Unchanged

 

According to a report released Wednesday morning by the Commerce Department, the level of retail sales was relatively unchanged during the month of August, as consumers remained wary in large part due to the battle over spending in Congress and ongoing concerns over the question of whether we will be able to avoid a double-dip recession. It was also a weaker reading than expected and sales growth during June and July were revised downward.

 

Consumers spent less on autos, clothing and furniture in August, as a result auto sales fell 0.3 percent in August. Sales at clothing stores declined 0.7 percent. Gasoline sales rose. Major automakers reported healthy sales increases in August, largely because dealers introduced new models and offered cheaper financing. The nation’s major retailers reported solid results from the all-important back-to-school shopping.

 

A weak month for retail sales suggests that the economy may struggle to gain momentum in the second half of the year. Consumer spending accounts for 70 percent of economic activity in the United States. Still, most categories were higher compared with a year ago. Auto sales were 6.9 percent higher than in August 2010, and clothing stores were 5.6 percent higher.

 

The increase in sales of electronics, gasoline and food was balanced with drops in purchases of cars, furniture and clothes. Spending at restaurants and bars also fell somewhat. If you remove sales of gasoline, autos and building materials, then the so-called core retail sales number was up 0.1 percent in August, pointing to some resilience by the consumer. Excluding just autos, sales also were up 0.1 percent.

 

At the same time, the Commerce Department reported that business inventories rose slightly less than expected in July, suggesting firms remained cautious about future demand at the start of the third quarter. Inventories were up 0.4 percent, following an upwardly revised 0.4 percent rise in June.

 

A separate report from the Labor Department indicated that producer prices were unchanged in August, held down by a drop in energy goods costs that offset higher food costs. The producer price report sends the Fed mixed signals about price pressures, with energy costs abating but core prices showing some pass-through of recent surges in energy and food costs.

 

The Producer Price Index, which measures price changes before they reach the consumer, was unchanged in August, the Labor Department said, after a 0.2 percent rise in July. Excluding the volatile food and energy categories, core wholesale prices edged up 0.1 percent, the smallest increase in three months. The figures indicate that inflation pressures are easing. Core prices rose 2.5 percent in the past 12 months, the same pace as July.

 

Food prices rose 1.1 percent in August, the largest increase since February. Wholesale gasoline prices, meanwhile, fell 1 percent in August, and home heating oil dropped 1.2 percent.

 

Sharp increases in the prices of oil, food and other commodities pushed up most measures of inflation earlier this year. But now that many commodities are becoming less expensive, inflation pressures are fading.

 

Two French Banks Receive Ratings Cuts

 

Moody's cut the credit ratings of two French banks on Wednesday because of their exposure to Greece's debt, highlighting growing risks to Europe's financial sector from a deepening euro zone sovereign debt crisis. The ratings agency's one-notch downgrade of Societe Generale and Credit Agricole came hours before the leaders of Greece, France and Germany were to hold a video conference on measures to head off a potential Greek default, which has prompted rising global alarm.

 

Moody's kept BNP Paribas on review for a ratings downgrade saying the bank's profitability and capital base provided an adequate cushion to support its Greek, Portuguese and Irish exposure.

France's biggest bank announced a plan to sell 70 billion euros in assets to help ease investor fears about leverage and funding that hit its two main rivals.

 

Bank of France Governor Christian Noyer said the Moody's action on French banks was relatively good news, noting it put them on a par with other major European lenders regarded as healthy such as HSBC, Barclays and Deutsche Bank.

 

"It's a very small downgrade and Moody's had a higher rating than the other agencies so it's just put them on the same level or slightly better than the others," Noyer said.

 

At the same time, the euro and European stocks were lifted by an announcement by the head of the European Commission that it would soon present options for issuing a common euro zone bond, despite huge political hurdles especially in Germany.

 

China added its voice to U.S. concerns over Europe's apparent inability to stop debt contagion spreading, while Indian and Brazilian officials said major emerging economies were discussing increasing their euro sovereign holdings. A senior Indian official said finance ministers of Brazil, Russia, India, China and South Africa would discuss a Brazilian proposal to increase their holdings of euro zone bonds when they meet in Washington on September 22. However, Greece's deputy finance minister injected a note of skepticism, saying those countries had shown little or interest in buying short-term Greek debt despite invitations to do so.

 

Credit markets are factoring in a 90 percent chance Greece will default on its debts and they demanded the highest risk premium on Italian five-year bonds at auction on Tuesday since the country joined the euro in 1999.

 

Italian Prime Minister Silvio Berlusconi's government won a parliamentary confidence vote on a 54-billion-euro austerity package, which lawmakers were due to finalize later in the day. The moves have done little so far to stem doubts about whether the euro area's third-biggest economy can manage its debts. There is the possibility that a combination of a Greek default and a financial meltdown in Italy could engender a banking crisis akin to the 2007-8 global credit crunch and risk tearing the euro zone apart.

 

Greece has said it will run out of cash within weeks unless it gets the next 8 billion euro aid tranche in October to pay wages and pensions.

 

Microsoft Seeks to Enhance and Maintain its Entrenched Position

 

In an effort to make sure it remains entrenched in the world of computer technology as the key player, Microsoft Corp handed out 5,000 sleek Samsung tablet computers running a test version of Windows 8 at its annual developer conference, hoping to stoke excitement over its new operating system.

 

The devices, powered by Intel Corp i5 chips, are the first chance for people outside Microsoft to work with Windows 8, the temporary code name for its next software system that includes features tailored for touch screens and tablets. The company is betting the new system will stem the tide of consumers switching to Apple's iPad.

 

Microsoft, whose software continues to find a home on more than 90 percent of personal computers, needs the new system to appeal to developers in the hope that they will create thousands of applications to attract users. At the same time it must appeal to a younger, tech-savvy audience if it is going to halt the march of Apple devices into Microsoft's business market. Microsoft hopes to woo an applications development community that has already taken to Google's Android and Apple, by making the process of building apps in a variety of computer languages simpler.

 

Manufacturers of tablet computers are expected to start selling products with Windows 8 by the middle of next year at the earliest.

 

Windows 8 supposedly boots up in seconds and features a home page filled with colorful tiles taking the user directly into applications such as Facebook, messaging or news feeds. Rebuilt from the ground up, Windows 8 is said to use less memory to run than Windows 7, freeing up space for apps. The test Samsung device, using Internet Explorer 10 as its browser, worked smoothly, although some of the demonstrations on stage at the conference did not work perfectly.

 

Windows 8 is less likely to appeal to business users, analysts said, given that many companies are still working their way toward switching to Windows 7, released in 2009. Nonetheless, Microsoft has sold almost 450 million Windows 7 licenses in two years since it was introduced, but the newest version still accounts for less than one-third of global Windows users, many of whom are clinging to older versions.

 

The new system is the first to be compatible with low-power chips designed by ARM Holdings, which have become the standard for mobile devices. In addition, Windows unit chief Steven Sinofsky stressed the new operating system is the first to focus on applications -- it will contain an online app store for the first time -- reflecting the way people now use computers, tablets and smartphones. He said tablets running Windows 8 will be able to connect easily to printers, cameras and other devices. Windows 8 will also work on PCs with regular mouse and keyboard commands.

 

Apparently, the word is that Microsoft wants Windows 8 devices in stores for the "back-to-school" season next year, starting around July, or the holiday shopping season at the latest. Nonetheless, Microsoft has not set a firm schedule publicly for the release of Windows 8, stating that the process would be "driven by quality, not by a date.

 

BlackRock CEO Favors Equities

 

BlackRock CEO Laurence Fink said beaten-down European equities and stocks that pay dividends are still a good bet during current tumultuous markets. At the same time, it might be prudent for investors to avoid low-yielding U.S. debt and some European debt as Europe battles its worsening debt crisis, the head of the world's largest asset management firm said on Wednesday.

 

Fink said tough steps are necessary in Europe but he is confident moves will be made to prevent the common currency union from collapsing. "We are going to find a solution in Europe, and Germany will have to play a major role," he said.

 

However, there will be uncertainty for some time, and it might make more sense to invest in stocks instead of bonds, he said. "You could still be buying European equities," Fink said. "The companies have been beaten down and they will be fine." Fink recommended some beaten-down European blue chip stocks like conglomerate Siemens AG, insurance giant Allianz and food maker Nestle.

 

He also said the housing sector is still weighing on economic growth, but he forecast the sector would recover in a few years. "The housing picture is improving but it will still take two or three years to fix," he said. In the precious metals area, Fink said gold stocks could still be profitable, particularly as they have not yet fully reflected the rally in the metal's price.