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Market Taking Things In Stride

|Includes:BA, Morgan Stanley (MS), WFC

After faltering at the open, the major indices rebounded into positive territory as investors focused once more on solid corporate earnings performances. A number of banks including Wells Fargo (NYSE:WFC), Morgan Stanley (NYSE:MS), and US Bancorp (NYSE:USB) posted good results for the 2009 third quarter and acted as catalysts for investors to get back into equities.

The spoiler of the session so far, however, was clearly Boeing (NYSE:BA) which registered a big miss in its earnings report. However, this was not sufficient to offset the more upbeat outlook on the economy that the banking results conveyed.

Much attention continues to be directed at the declining value of the U.S. dollar as investors are beginning to mull the long-term impact. Surely, the short-term benefits have been apparent. The fact that the Dow Jones Industrial Average is in the 10,000 area only months after gloom and doom was the pervasive sentiment is in part due to the weak dollar. U.S. assets are now comparatively cheaper for foreign investors, and given the combined impact of the market correction, the investment opportunity proves to be very compelling.

However, on the flip side, crude oil prices continue to track upwards as investors flock into the commodity as the dollar weakens. Oil and other commodities have an inverse relationship with the value of the dollar. This is likely going to be a drag on economic performance if energy prices begin once again to soar.

That said, oil is trading up once again today after a technical rally in the dollar in the previous session. The greenback moved down against the euro in particular and as a result, there was a net inflow of capital into the energy-related issues.


A report this morning by the government showing that there was a smaller than expected rise in crude oil stocks also proved to be an upside catalyst for oil. Light, sweet crude oil for November delivery was trading at about $80.81 a barrel on the New York Mercantile Exchange. The next point of resistance for the commodity appears to be in the $82.00 per barrel area.

Afternoon Notes from WSS Research Desk

Carlos Guillen

So far, signs from the semiconductor capital equipment industry continue to be favorable, indicating that the sector recovery is well on its way.

Corroborating the notion that a recovery in the semiconductor industry is well on its way, according to data from SEMI, is bookings which continued to trend higher for the sixth consecutive month, and billings ramped up for the fifth consecutive month. The book-to-bill ratio also remained above parity for the third consecutive month and inched higher sequentially. In essence, all "systems go" for the semiconductor industry as we believe that end-demand is now becoming a stronger component of the recovery.

Given the most recent data from SEMI, the trailing three-month average billings in September totaled $625.0 million. This monthly result increased approximately 7.69% from the level achieved in the prior month, although it still represented a 32.6% drop from the level achieved in September 2008.



The three-month average bookings during September totaled $733.0 million, not only continuing to increase sequentially but rising above the year ago level for the first time since May 2007. The growth in bookings is simply impressive; bookings grew by a whopping 19.3% sequentially and by a surprising 12.8% year over year. This strong result continues to provide more support that a semiconductor recovery is well on its way.

In September, the overall book-to-bill ratio continued at above parity for the third consecutive month at 1.17, demonstrating that demand is stronger than supply. The increase in this ratio reflects the fact that, while bookings and billings both increased, bookings increased at a stronger pace than billings.



From a semiconductor capital equipment perspective, although the macroeconomic backdrop is still precarious, it is becoming apparent that demand is returning. As a result, many OEMs and distributors have continued to replenish significantly depleted inventories in anticipation of better than expected end-demand. Many companies are already seeing improvements in end-demand, so it is not just inventory restocking that is driving semiconductor company revenues. The fact that manufacturers and distributors have been very careful in managing inventories provides support for the notion that end-demand is indeed contributing to the rise in revenues.

We expect that the combination of stock replenishment and end-demand improvement will continue to push semiconductor industry utilization rates higher for the next several quarters, increasing the likelihood of industry capacity expansion, which will ultimately benefit semiconductor equipment providers.

David Urani

Mortgage applications took a dive last week to their lowest level in a month. However, I am more inclined to attribute the drop to unusually high activity in the past few weeks. It's no secret that mortgage rates dropped below 5.0% between the end of September and the beginning of October. In fact, the gradual rise in applications over the past couple of months fits fairly flush with falling mortgage rates. Unfortunately, mortgage rates have now edged back up above 5.0%, and as a result there is no longer a frenzy to get refinanced into lower payments. Overall it's not terrible news since 5.0% is still quite low, but it would be good to see more homeowners refinanced into low rates.



David Silver

The dollar breached the $1.50 level against the euro in trading this afternoon, raising concerns that any economic recovery in the group of overseas nations could be hindered by the currency's strength. European policy makers have tried in recent days to force the euro lower, and the dollar higher, but markets have largely ignored the rhetoric. A strong euro makes euro zone exports less competitive and can make imported U.S. goods cheaper. We have heard Treasury Secretary Tim Geithner say a strong dollar policy is good for the country, and maybe in the long-run it is. However, maybe the greenback's feebleness in the near-term could be beneficial to keeping the U.S. at a place of strength in the economic world. A weaker dollar makes exports more attractive from the U.S. (maybe giving a boost to exports) while pressuring the rebound of other countries in the world. While this may not be the free trade and world economics type of action the Administration has been in support of in the past, it does have the near-term benefit of helping the country pick itself up by its bootstraps.


Stocks: MS, WFC, BA