Week in Review: Will “January effect” repeat in 2010?

For the week ended January 8, 2010

* U.S. manufacturing jumps in December
* Construction spending dips
* Employers shed 85,000 jobs; unemployment stays at 10%
* GMAC projects significant losses
* Homebuilder Lennar posts surprising profit
* Stalemate develops between Argentina’s president and central bank chief
* BOE keeps key rate unchanged

The “January effect,” the stock market buying phenomenon that often occurs with the start of a new year, intrigues economists and investors because it often sets the market tone for the rest of the year. In 2009 stocks were up at the start of January, and they ended the year having their best performance since 2003.

It remains to be seen whether the “January effect” will occur in 2010 as investors express relief at stronger-than-expected December automobile and retail sales figures and sift through other economic data released this week, including manufacturing, construction spending, pending home sales, and December unemployment figures.

On the commodities front, the Energy Information Administration’s report concluding that the supply of crude oil and gasoline is growing in the United States seemed to foreshadow a drop in prices. However, severely cold weather blanketing much of the country played a significant role in oil prices topping $83 per barrel for the first time since the fall of 2008.

U.S. economic news

Manufacturing activity grows; service sector edges up slightly
Manufacturing grew last month at the fastest pace in more than three years. The Institute for Supply Management, a trade group of purchasing executives, reported that its manufacturing index rose to 55.9 in December from 53.6 in November. December’s figure was the highest since April 2006. The service sector, meanwhile, remains lethargic, with the ISM’s nonmanufacturing index rising to 50.1 in December from 48.7 in November. The figure, at just over 50, indicates the service sector is expanding, but just barely.

Construction spending falls for seventh straight month
The U.S. Department of Commerce reported that construction spending fell 0.6% in November, a bigger drop than the 0.4% projected by analysts. Total construction spending decreased to an annual rate of $900 billion, the slowest pace in more than six years and 13.2% below the level of activity one year ago. Private residential activity fell 1.6% in November after a 4.8% increase in October, and spending on commercial projects slipped 0.03% for the month.

Gauge of housing market activity tumbles
The National Association of Realtors reported that its index of pending home sales fell 16% to 96.0 in November from 114.3 in October. The drop, much bigger than analysts had projected, was partially the result of an October surge in home buying as people raced to make a purchase before the initial tax credit deadline. With the government’s recent extension of the homebuyer tax credit program, most NAR economists are expecting pending home sales to increase some time in the spring.

December nonfarm payrolls fall; unemployment remains at 10%
The U.S. Department of Labor reported a loss of 85,000 jobs for the month of December, following a gain of 4,000 jobs in November. Economists surveyed by Briefing.com had projected no net gain or loss in payrolls in December. The unemployment rate remained at 10%, in line with economic forecasts.
U.S. and global corporate news

Novartis has its eye fixed on Alcon
Novartis reported that it will pay Nestlé $28.1 billion as part of its bid to acquire U.S. eye care company Alcon. The deal, which began in 2008 with Novartis acquiring a 25% stake in Alcon from Nestlé, along with an option to buy Nestlé’s remaining stake, will ultimately cost Novartis $49.7 billion and result in the biggest takeover in Swiss corporate history. Novartis is seeking to gain a strong foothold in the eye care products market as sales of branded prescription drugs slow.

GMAC to post huge losses despite third government bailout
GMAC, which received a third bailout from the U.S. Department of the Treasury just last week, expects to report a loss of approximately $5 billion for the fourth quarter and $10 billion for 2009 as more borrowers defaulted on mortgages. The auto and home lender received $3.79 billion on December 30. The federal government, which has already infused $13.5 billion into GMAC in two previous rounds of bailouts, currently owns a 56% stake in the firm.

Earnings update
Homebuilder Lennar ended a two-year string of losses by unexpectedly posting a profit for the fiscal fourth quarter as the Miami-based company benefited from an adjustment in its income taxes. For the quarter ended November 30, the firm reported earnings of $35.6 million, compared with a loss of $811 million one year ago. Revenue dropped 29% to $913.7 million.

Sears, the largest U.S. department store chain, recorded a fourth-quarter profit forecast of as much as $465 million, exceeding analysts’ estimates. The company cited strong sales in its Kmart division with same-store sales for December increasing 5.3%.

Bed Bath & Beyond reported its fiscal third-quarter profit jumped 73% as sales and margins beat analyst estimates. For the quarter ended November 30, the retailer reported a profit of $151.3 million, up from $87.7 million a year earlier. Bed Bath & Beyond has 958 housewares and décor stores and operates about 125 other stores under its Christmas Tree Shops, Harmon, and buybuy Baby chains.

Global economic news

United Kingdom’s services sector continues to grow
The United Kingdom’s services sector expanded for the eighth straight month in December as new orders rose at the fastest pace since September 2007. The country’s services purchasing managers index rose to 56.8 in December from 56.6 in November, according to research group Markit Economics and the Chartered Institute of Purchasing & Supply. The modest rise in activity surpassed projections of most analysts who expected the figure to remain at 56.6, according to a Dow Jones Newswires survey. Economists say the rise in the index indicates that the U.K. economy likely emerged from recession in the fourth quarter of 2009.

Impasse looms between Argentina’s president and central bank chief
Argentina’s central bank chief Martin Redrado rejected a request by the country’s president to resign from his position after the central banker failed to sanction the use of $6.6 billion of the country’s FX reserves to finance the government’s debt obligations. The official word from the office of President Cristina Fernández de Kirchner is that Redrado was asked to step down by Kirchner because he “didn’t support the government’s economic policies.”

BOE holds key rate, pledges to spend bond purchase funds
The Bank of England’s Monetary Policy Committee kept the target for its asset-buying plan unchanged, saying it plans to spend the entire 200 billion-pound ($318 billion) set aside for its bond purchase program. The BOE also held its benchmark interest rate at a record low of 0.5%, a move that was predicted by all 53 economists in a Bloomberg News survey.

China raises key interbank rate
China’s central bank unexpectedly raised a key interbank rate for the first time in 19 weeks, saying its focus for 2010 is controlling the record expansion in lending and curbing price increases. The central bank kept its benchmark one-year lending rate at a five-year low of 5.31% last year after five reductions in the last four months of 2008.

Romania cuts benchmark rate
Romania’s central bank surprisingly cut its main interest rate to the lowest level since January 2008. At its first meeting since December’s presidential elections, the Banca Nationala a Romaniei reduced its monetary policy rate to 7.5% from 8%.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times.

Arturo E. Miranda C.
VP International Sales
Thales Securities