MarketView for September 19

Summary

The major equity indexes were all in positive territory by the closing bell on Wednesday as investors picked up from where they left off after the recent pullback from a rally that sent the S&P 500 to just shy of five-year highs.

Housing stocks ranked among the day's leaders following stronger-than-expected data on home sales with by a 4.3 percent advance in Pulte Group, the second-largest home builder, to $16.43, leading the parade. The home re-sales number increased 7.8 percent in August, the fastest in more than two years. Housing starts were also higher, a hopeful sign that the housing market recovery is gaining traction. The reports came as investors looked for improving economic data to help bolster a rally of 5.9 percent in the S&P 500 since the start of August.

After the bell, shares of the Norfolk Southern railroad fell 5.5 percent to $68.70 after the railroad indicated that it was facing weaker shipments of coal and merchandise, as well as lower fuel- surcharge revenue, that would in turn reduce its third-quarter earnings when compared with a year earlier. The stock had ended regular trading at $72.69, down 1.7 percent.

Shares of Adobe Systems fell 0.5 percent to $32.94 after the close, following the release of the company's results. Adobe shares ended regular trading at $33.12, up 1.7 percent.

Shares of Bed Bath & Beyond were down 5.2 percent to $65.20 in after-hours trading. The retail chain's quarterly earnings, released after the close, narrowly missed Wall Street's estimates due to higher costs. In the regular session, the shares rose 0.6 percent to end at $68.79.

Last week, the S&P 500 reached its highest closing levels since December 2007 following a decision by the U.S. Federal Reserve to launch a new round of economic stimulus. The market pulled back or ended flat for two days, causing some investors to get back into stocks that had lost ground.

3M was the latest major company after FedEx to sound a note of caution about the economy. 3M said the "economic environment has changed" since the company adopted its long-term revenue growth target of 7 percent to 8 percent, and it now views that range as a "stretch target." 3M, a Dow component, saw its share price move up 0.2 percent to end the day at $93.63.

Both 3M and FedEx are viewed as economic bellwethers because they are involved with so many sectors of the economy. Their warnings come as S&P 500 companies are expected to post a 2 percent contraction in third-quarter earnings.

As of Friday, there were 88 major companies that have lowered their profit expectations, compared with 21 positive announcements. The ratio is the weakest showing since the third quarter of 2001, according to Thomson Reuters data.

Oil-related stocks fell as crude prices fell for the third consecutive day after Saudi Arabia said it would take action to keep prices in check.

General Mills reported higher quarterly earnings on Wednesday, helped by recent acquisitions, and stood by its full-year outlook. The shares rose 1.8 percent to $40.02.

Questcor Pharmaceuticals ended the day down 47.8 percent to close at $26.35 after Aetna dropped coverage for the company's only product, Acthar Gel, for all but one condition and that is to treat spasms in babies.

Volume was slightly lower than average, with roughly 6.12 billion changing hands on the three major equity exchanges, as compared with the year-to-date average daily closing volume of 6.54 billion shares.

Housing Recovery is the News of the Day

Home re-sales were up in August to their highest rate in more than two years and groundbreaking on new homes also climbed, strong indications that the housing market recovery is gaining traction. According to the National Association of Realtors (NAR) existing home sales increased 7.8 percent last month to an annual rate of 4.82 million units.

That was the fastest rate of increase since May 2010 when activity was being supported by a home-buyer tax credit. Prices for previously owned homes also rose when compared with a year earlier, a factor that could spur consumer spending by helping homeowners feel more confident about their finances. The median price for a home resale rose 9.5 percent to $187,400, the NAR said.

The Fed is trying to help housing build more momentum, and last week launched a program to buy mortgage-backed securities, which could push interest rates lower for both new and refinanced mortgages.

Construction of new homes will likely contribute to economic growth this year for the first time since 2005, and a separate report from the Commerce Department confirmed that expectation. Housing starts rose 2.3 percent last month to an annual rate of 750,000 units, the Commerce Department reported on Wednesday. Still, starts fell short of expectations as groundbreaking on multifamily home projects fell and July's pace was revised downward. At the same time, building permits slipped 1 percent.

Home sales have been creeping up and the steep decline in prices since 2006 appears to have bottomed. That has helped home-builder sentiment, which this month touched a six-year high. The NAR indicated that the share of so-called distressed sales - which include foreclosures and sales where the owner owes more on a home than it is worth - fell last month, a factor that likely contributed to the rise in prices.

Distressed sales tend to go with a heavy discount, and the share of re-sales in those conditions dropped to 22 percent last month, down from 24 percent in July. In August 2011 the distressed sales rate was 31 percent.

The nation's inventory of existing homes - those for sale on the market - rose 2.9 percent during the month to 2.47 million. But at August's sales pace, that would supply the market for only 6.1 months, down from 6.4 months in July.

Last Thursday, the Fed announced it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved significantly. The central bank's chairman, Ben Bernanke, said officials hoped the purchases would help unstick a housing sector that he called "a missing piston" in the economic recovery. However, many believe the purchases, the third round of so-called quantitative easing, or QE3 as it is known on Wall Street, will only lend limited support to the housing market, the reasoning being that lending standards for mortgages have tightened significantly since before the recession.

Also, while interest rates on mortgages are at record lows, yields on MBS have dipped more sharply. That suggests lenders are not fully passing on their cheaper borrowing costs to home buyers, which could make it harder for the Fed's policy to help the housing market. The spread between the yields on current coupon 30-year Fannie Mae MBS and 30-year mortgage rates measured by the Mortgage Bankers Association has risen to its widest in at least four years. Last week, fixed 30-year mortgage rates fell 3 basis points last week to average 3.72 percent, the MBA said in a separate report.