February 14, 2008

Retail figures lift Wall Street

Wall Street stocks advanced on Wednesday as US retail sales rose unexpectedly, providing some reassurance that consumers may continue to spend in spite of the gloomy outlook for the economy.

Solid earnings from Applied Materials (NASDAQ:AMAT) provided a boost to sentiment in technology stocks, raising expectations for growth prospects in the sector.

However, financials were sold as mortgage insurer MGIC Investment (NYSE:MTG) plunged to a $1.5bn fourth-quarter loss and amid concerns about the prospects at US brokers.

At midday, the S&P 500 was up 0.7 per cent at 1,358.15. The Nasdaq Composite rose 1.3 per cent to 2,350.90 and the Dow Jones Industrial Average put on 0.8 per cent to 12,466.65.

Equities rallied after retail sales increased 0.3 per cent in January versus a consensus forecast of a 0.3 per cent drop. Strong sales of new cars and petrol contributed to the unexpected uptick but, with these two factors stripped out, retail sales were flat. Furniture stores and building materials were among the sectors registering a decline in sales

In spite of these problems, the retail data were mostly welcomed by Wall Street, which feared that US consumers would rein in spending as house prices slumped and the outlook for the employment market darkened.

However, some analysts were less sanguine: "Although headline retail sales were above expectations in January, the details are weaker," John Ryding economist at Bear Stearns, said, noting downward revisions in previous months and the narrow sector breadth of January's gains.

After an initial surge, traders took the report as a cue to sell retail stocks, which have rebounded in recent weeks. Partially offsetting the retail news was a report showing a bigger-than-expected increase in business inventories in December as business sales declined the most in almost a year.

President Bush was on Wednesday due to sign a $152bn economic stimulus bill which is set to provide 130m Americans with tax rebates in order to provide a boost to consumer spending.

Although Wall Street expects retailers to benefit from the package, Citi Investment Research said the spending boost would be thinly spread, with any spending increase concentrated on low-margin items at discount and food retailers. In spite of the more positive mood on Wednesday, volatility remained elevated as an initial surge of more than 1 per cent on the S&P 500 faded somewhat during the morning.

Standard & Poors said that its benchmark index had risen or fallen more than 1 per cent on 17 of 28 trading days in 2008, the third most volatile start to a year on record after 1932 and 1933.

Such volatility was also in evidence on Tuesday when billionaire investor Warren Buffett said he was willing to assume the liability for up to $800bn in municipal bonds guaranteed by monoline bond insurers facing possible credit downgrades.

The S&P rallied but later cut gains in half as analysts said the plan would do little to solve bond insurers' real problem - the heavy losses they took selling insurance on structured credit securities which have turned sour. Ambac Financial rose 4 per cent to $9.26 on Wednesday.

Mortgage insurers have also struggled amid soaring home delinquency rates. MGIC Investment lost $1.5bn in the fourth quarter and said it did not foresee making a profit this year if home loan defaults continue to rise.

The company also said it had hired an adviser to explore options for increasing its capital. Radian Group (NYSE:RDN), a rival mortgage insurer, fell 12.2 per cent to $7.15.

Tech shares were given a boost after Applied Materials, up 7.3 per cent at $19.39, beat forecasts with its quarterly results. The semiconductor equipment maker noted strong demand for its flat-panel display products and a good performance from its new solar unit.

Apple chalked up solid gains on Wednesday, rising 2 per cent to $127.29 as Bespoke Investment Group said Apple was among the top five stocks trading furthest below its 50-day moving average, a potential buy signal for contrarian investors. The shares have fallen 36 per cent this year.

Coca-Cola said fourth-quarter profit jumped a better-than-expected 79 per cent to $1.21bn, helped by strong overseas sales and a favourable comparison, after it took a big impairment charge last year. The stock slipped 0.7 cent to $59.51.

Deere said fiscal first quarter earnings rose 55 per cent, as soaring global demand for food increased orders for its agricultural equipment. The results were better than analysts had forecast but the shares dropped 1.7 per cent to $84.99.

General Motors (NYSE:GM) fell 1 per cent to $26.10 after JP Morgan slashed its earnings estimates citing expected weakness in North American sales. "Despite GMs belief to the contrary, we think 2008 could push global auto profits weaker," the broker said.

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