MarketView for September 16

Summary  

The major equity indexes ended higher for a fifth consecutive day, making it the longest winning streak in 2 1/2 months as they chalked up their second-best week in a year, driven in part by the expectation that Europe's debt problems appear to be on track for some sort of a resolution, even if it means kicking the can farther down the road. Helping out were the words of Treasury Secretary Timothy Geithner calling on European finance ministers to reach a solution on Greece's debt problems.

Officials from countries that use the euro met in Poland to discuss solutions to the long-simmering debt problems affecting the region. The group said it would not decide until next month whether Greece has qualified for its next round of bailout money. Wall Street had been hoping the question would be decided sooner.

The price of the 30-year Treasury bond fell more than a point as the prospect of a long stretch of loose monetary policy coupled with higher inflation prompted a sell-off in the long bond. The 30-year bond was down 1-26/32 in price to yield 3.37 percent. The benchmark 10-year U.S. Treasury note fell 27/32 to yield 2.09 percent.

Crude oil rose, buoyed by the rally in equities, the weaker dollar and the improved risk appetite with Brent crude for October delivery, which expired Thursday, closing up $2.94 per barrel at $115.34, while the more heavily traded November contract gained $2.65 to settle at $112.30 per barrel. Domestic sweet crude for October delivery settled up 49 cents to close at $89.40. The December contract for gold futures fell $41.60 to $1,784.40. 

In corporate news, Blackberry maker Research in Motion fell 19 percent to $23.93 after reporting sharply lower revenue and income. The company faces stiff competition from Apple's iPhone and phones that use Google's Android software. RIM has lost 59 percent of its value this year. The company said in July it would lay off 10 percent of its work force.

Netflix saw its shares fall 26 percent over the past two days to close on Friday at 155.19, after the movie-rental company lowered its forecast of domestic subscribers. Ebay ended the day up  5 percent to close at $33.69 after an analyst upgraded the company because of expected growth in its PayPal division. Diamond Foods, maker of Pop Secret popcorn, rose 12 percent to $87.30 after its profits exceeded expectations.

United Parcel Service said the company was on track for record results this year despite the economy's "bumpy ride". General Electric's chief executive said he sees "good, decent economic growth everywhere."

Sentiment a Bit Higher

Consumer sentiment inched up in early September but Americans remained gloomy about the future with their expectations falling to the lowest level since 1980, a survey released on Friday showed. The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment edged up to 57.8 from 55.7 the month before, which had been the lowest level since November 2008. It topped the median forecast of 56.5 among economists polled by Reuters.

Consumer spending is a linchpin of the U.S. economy but confidence has been badly hit as unemployment remains high and wages stagnate. Acrimonious political debate over the United States' debt ceiling dampened sentiment over the summer. So did worries the U.S. economy could fall back into recession.

Friday's data showed consumer confidence in economic policies near historic lows. Three out of four consumers expected bad times for the economy in the year ahead. Only half of respondents said the same at the beginning of the year.

The survey's one-year inflation expectation rose to 3.7 percent from 3.5 percent, while the survey's five-to-10-year inflation outlook was at 3.0 percent from 2.9 percent. Separate data showed a measure of future economic growth was little changed in the latest week, while the annualized growth rate fell to its lowest level in a year.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index dipped a hair to 122.4 in the week ended September 9 from 122.5 the week before. That was originally reported as 123.0. The index's annualized growth rate slumped to minus 7.1 percent from minus 6.6 percent to fall to its lowest level since mid-September 2010.

Meanwhile, next week’s attention will be on the upcoming Federal Reserve meeting. The central bank is expected to unveil new measures to bolster growth, though analysts expect the Fed will only be able to take modest steps.

The University of Michigan's gauge of consumer expectations dipped to 47.0 from 47.4. It was the lowest level since May 1980. The economic outlook for the next 12 months fell to 38 from 40, the lowest since February 2009 when the world economy was gripped by the credit crisis. Still, the survey's barometer of current economic conditions came in at 74.5, as compared to the previous value of 68.7, and better than a forecast of 68.0.

Consumers See Higher Income

The Federal Reserve released a report on Friday indicating that the ratio of household debt to disposable income fell in the second quarter to the lowest level since mid-2004. The decline in the debt ratio reflected a rise in disposable income of 1.0 percent and a decline in mortgage debt of 2.4 percent, the data showed.

The data suggests consumer deleveraging has advanced a good deal since the popping of a housing bubble that triggered the 2007-2009 financial crisis, a trend that could lay the groundwork for stronger consumer spending and eventually help the economic recovery.

Household debt was 114.6 percent of disposable income during the April-June period, down from 116 percent in the previous quarter, according to Reuters calculations based on the Fed's "Flow of Funds" report. It was the lowest level for that ratio since the second quarter of 2004. Debts shrank at a 0.6 percent annual rate during the second quarter, which in turn was the smallest decline since households started steadily shedding debt in the third quarter of 2008.

The 2.4 percent decline in mortgage debt accounted for the biggest decline in household debt in the second quarter. Consumer credit, a smaller part of household balance sheets, rose by 3.4 percent. Still, total household wealth fell by $149 billion during the period, which could make consumers less willing to open their wallets as they fret about personal finances.

A drop in the value of real estate dragged down household net worth to $58.5 trillion. Wealth is well below its peak of $64.3 trillion at the end of 2006, the Fed figures show. Non-financial corporate businesses held $2.05 trillion in liquid assets, such as cash, in the second quarter, up from $1.96 trillion in the previous quarter, the data showed.

What Will Happen With the EU

European officials are refusing to come up with a "decisive solution" to their debt crisis until at least October. The decision to procrastinate comes just a day after the ECB and the central banks of the US, Britain, Switzerland and Japan announced a willingness to provide three-month dollar loans to banks in order to stave off a seizure of the European banking system.

A generous view of the Eurozone's delay is that the officials are meticulously crafting a strategy of unprecedented wisdom to virtually guarantee that the free market will have enough time to work itself out in an organic way. Another take is that the member nations of the Eurozone are using the Global Super Fed's money as a Band-Aid for the chest wound that is their financial system, fully intending to ask for more money on or about New Year's Day.

The worst-case scenario is a total and uncontrolled collapse of the EU. The problem with an endless series of short-term fixes is that they enable the member nations to continue to put off the day of reckoning until Greece finally does default on their debt. The EU needs to take precautions against a total collapse. Default or not, the EU is eating the capital infusion announced yesterday without resolution, which is could lead to the worst case scenario for all involved.