Market Analysis

Beyond the Number

Consolidation Likely After Recent Rally
3/14/2012 9:14 AM

The major U.S. index futures are trading on a mixed note on Wednesday, with sentiment likely to be weighed down by investors’ uneasiness over the overbought levels. The rally set in motion by recent domestic data points and the Federal Reserve’s upgraded economic assessment may stall for lack of any positive triggers. Some consolidation is likely, as traders digest the recent gains and also hope that the string of positive data continues. Across the Atlantic, stocks are higher, led higher by financial stocks.

U.S. stocks skyrocketed on Tuesday, thanks to a solid U.S. retail sales report and the U.S. central bank's economic assessment along with an announcement by J.P. Morgan (JPM) concerning a $15 billion stock buyback program and a dividend increase.

The major U.S. averages opened modestly higher and moved sideways in early trading. Thereafter, the indexes climbed steadily and legged up further in late trading before closing notably higher. The Dow Industrials ended 217.97 points or 1.68 percent higher at 13,178, the highest closing level since December 31st, 2007, and the S&P 500 Index climbed 24.86 points or 1.81 percent before closing at 1,396, while the Nasdaq Composite Index closed up 56.22 points or 1.81 percent at 3,040. The S&P 500 Index closed at its best level since June 5th, 2008 and the Nasdaq ended at an 11-year high.

All thirty of the Dow components closed higher, with J. P. Morgan Chase (up 7.03 percent), Bank of America (BAC) (up 6.26 percent), Alcoa (AA) (up 4.46 percent), Caterpillar (CAT) (up 4 percent), Disney (DIS) (up 3.94 percent) and United Technologies (UTX) (up 3.07 percent) leading the gains.

The Fed released the results of the latest stress tests, which showed that 15 of the 19 biggest banks subjected to the tests boasted adequate capital to weather a severe recession. The results were released 2 days ahead of schedule and showed that some banks such as Citigroup (C), Sun Trust (STI), MetLife (MET) and Ally Financial did not make the grade in the tests, which assessed the health of banks under adverse situations such as when the unemployment rate climbs to 13 percent and house prices drop by 21 percent.

Separately, the Federal Reserve held a monetary policy meeting. The post-meeting policy statement noted a moderate expansion in overall economic activity, further improvement in labor market conditions and a notable drop in the unemployment rate. The central bank also made a reference to rising crude prices while discussing inflation. The Fed's assessment of economic growth over the coming quarters was upgraded to 'moderate' from 'modest.'

As expected, the central bank maintained the fed funds target rate at 0-0.25 percent and repeated its intention to maintain rates at exceptionally low levels at least until 2014. The Fed also expressed its commitment to continue with its asset purchase program.

The Commerce Department reported that retail sales rose 1.1 percent month-over-month in February, while the previous month's 0.4 percent increase was upwardly revised to 0.6 percent. Auto sales climbed 1.9 percent, offering support to the headline number. Gas station sales climbed 3.3 percent. The strength was broad based, with clothing & accessories and building materials also showing firmness. On the other hand, furniture sales slid 1.2 percent. Core retail sales, excluding autos, gas and building materials, which is used in GDP calculations, rose 0.5 percent.

A separate report released by the Commerce Department showed that business inventories rose 0.7 percent month-over-month in January and were up 7.6 percent from a year-ago. Meanwhile, business sales rose 0.4 percent compared to the previous month and accordingly, the business inventories to sales ratio was at 1.27 compared to 1.26 in January 2011.

Currency, Commodity Markets

Crude oil futures are receding $0.45 to $106.26 a barrel after rising $0.37 to $106.71 a barrel on Tuesday. The American Petroleum Institute’s inventory report showed that crude oil stockpiles rose by 2.8 million barrels in the week ended March 9th. Meanwhile, gasoline and distillate stockpiles fell.

An ounce of gold is currently trading at $1,645.60, down $48.60 from the previous session's close of $1,694.20. On Tuesday, gold fell $5.60.

On the currency front, the U.S. dollar is trading at 83.556 yen compared to the 82.96 yen it fetched at the close of New York trading on Tuesday. Against the euro, the dollar is valued at $1.3055 compared to yesterday's $1.3083.


Most Asian markets, with the exception of the Chinese and Hong Kong markets, advanced, drawing comfort from the fairly positive U.S. bank stress test results and the Fed’s positive commentary on growth.

Japan’s Nikkei 225 average opened notably higher and moved roughly sideways for the rest of the session. The index closed up 151.44 points or 1.53 percent at 10,051, the highest closing level since July 26th 2011. The market witnessed broad based buying interest, with only defensive utility and pharma stocks moving to the downside.

Australia’s All Ordinaries ended up 39.10 points or 0.90 percent at 4,376. Material stocks led from the front on a day when most sectors moved modestly higher. Meanwhile, Hong Kong’s Hang Seng Index closed 31.81 points or 0.15 percent lower at 21,308, with Cathay Pacific, which issued a profit warning, pacing the declines. The Chinese market retreated, as property stocks served as a drag after Chinese premier Wen Jiabao said measures announced in a bid to cool the housing market will not be rolled back.

On the economic front, a survey by Westpac and the Melbourne Institute showed that the consumer confidence index based on the survey fell 5 percent month-over-month in March. Consumer confidence took a hit from the impact of a stronger Australian dollar.

Japan’s industrial output rose at a downwardly revised monthly rate of 1.9 percent in January, a revised report from the Ministry of Economy Trade and Industry showed.


The major European markets opened higher and are advancing further. The French CAC 40 Index is rising 0.75 percent and the German DAX Index is gaining 1.08 percent, while the U.K.’s FTSE 100 Index is moving up 0.33 percent.

In corporate news, German re-insurer Hannover Re reported a full year operating profit of 841.4 million euros, lower than 1.2 billion euros in the year-ago period. However, fourth quarter operating profits rose 11 percent to 350.6 million euros. Meanwhile, U.K. insurer Legal & General reported a higher annual operating profit for 2011 and also raised its dividend by 35 percent. Tullow Oil also reported strong profits and revenues for the full year.

German utility E.ON reported a loss for 2011, hurt by Germany’s decision to exit from nuclear power and lower power prices. That said, the company said it expects profits to increase in the coming year.

A report released by the U.K. Office for National Statistics showed that the U.K.’s claimant count rose by 7,200 in February. The unemployment rate based on ILO standards for the three months ended January was unchanged at 8.4 percent.

Eurostat confirmed the eurozone annual February consumer price inflation at 2.7 percent, while month-over-month, consumer prices were up 0.5 percent. A separate report showed that the eurozone’s industrial output rose a less than expected 0.2 percent month-over-month in January. The annual change in industrial output was a negative 1.2 percent compared to a negative 0.8 percent expected by economists.

U.S. Economic Reports

U.S. import and export prices both increased in the month of February, according to a report released by the Labor Department, with the increase in import prices largely due to a notable jump in fuel prices.

The report showed that import prices rose by 0.4 percent in February after coming in unchanged in each of the two previous months. Economists had expected import prices to increase by 0.6 percent. Excluding a 1.4 percent increase the price of fuel imports, import prices actually fell by 0.1 percent in February compared to a 0.1 percent increase in January.

Export prices also increased by 0.4 percent in February following a following a 0.2 percent increase in January. The increase in export prices compared to economist estimates for a 0.3 percent increase.

Federal Reserve Chairman Ben Bernanke is scheduled to speak to the Independent Community Bankers Association conference in Nashville at 9 am ET.

The Energy Information Administration is scheduled to release its weekly petroleum inventory report for the week ended March 9th at 10:30 am ET.

Crude oil stockpiles rose by 0.8 million barrels to 345.7 million barrels in the week ended March 2nd. Inventories were in the upper limit of the average range.

On the other hand, gasoline inventories fell by 0.4 million barrel and yet were in the upper limit of the average range. Distillate inventories were down a steeper1.9 million barrels, with inventories remaining in the middle of the average range. Refinery capacity utilization averaged 84.2 percent over the four weeks ended March 2nd compared to 84 percent over the previous four weeks.

Stocks in Focus

Following the release of U.S. bank stress test results, SunTrust said it would maintain its common stock dividend at 5 cents per share. The bank also said it expects its first quarter earnings to exceed the consensus estimate. PNC Financial (PNC), which passed the tests, said its board is expected to consider an increase in its quarterly stock dividend at its next meeting on April 5th. Wells Fargo (WFC) announced an additional first quarter dividend of 10 cents per share, which together with the previously announced dividend of 12 cents per share for the quarter brings up the total dividend for the quarter to 22 cents per share.

KeyCorp. (KEY) said its board has authorized a common stock repurchase program up to $344 million and will evaluate an increase of its quarterly common stock dividend at its regular meeting in May. Regions Financial (RF) announced a $900 million stock buyback program. BB&T (BBT) announced a 25 percent increase in its quarterly dividend to 20 cents per share. U.S. Bancorp. (USB) announced a 56 percent increase in its common stock dividend and also a new $100 million stock buyback program.

Health Net (HNT) said its board approved a $323.7 million increase to its 2011 stock repurchase program. Meanwhile, PMC-Sierra (PMCS) said its board has approved a new stock buyback program for up to $275 million worth of its common stock.

Analog Devices (ADI) said it is transferring its listing to the Nasdaq Global Select Market from the NYSE, effective April 2nd, 2012.

Pacific Sunwear (PSUN) reported fourth quarter non-GAAP loss of 19 cents per share, narrower than the net loss of 31 cents per share last year. The company's net sales slid to $234.2 million from $237.6 million last year. The loss was narrower than what analysts expected, while the revenues trailed estimates. For the first quarter, the company expects a loss of 26-34 cents per share on a non-GAA basis. Analysts estimate a loss of 24 cents per share for the quarter.

Books-A-Million (BAMM) reported a fourth quarter net income from continuing operations of 48 cents per share compared to 43 cents per share last year. Sales rose 10.7 percent to $166.9 million.

Ingersoll-Rand (IR) reaffirmed its previously stated 2012 revenue and earnings from continuing operations guidance.

LSI Corp. (LSI) raised its first quarter guidance, citing stronger than expected hard disk drive market recovery and ramp of flash-based products.
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