What's ahead for stocks: Japan and the Fed

The cost of rebuilding after Friday's earthquake and tsunami will start to come into focus; Japanese stocks plunge in Monday trading. Investors face a Federal Reserve meeting, key inflation reports and earnings from Nike and Ross Stores.

By Charley Blaine Mar 11, 2011 11:03PM

Charley BlaineUpdated: 3:30 a.m. ET Monday, March 14

 

If you're wondering how traders in U.S. markets viewed the earthquake and tsunami in Japan, it was this: clearly a terrible problem for the Japanese, but an opportunity for everyone else.

The earthquake and the tsunami that followed devastated the Japanese coastline northeast of Tokyo, with a death toll estimated at more than 10,000 and climbing. Railroads and highways, port facilities and power grids were a mess. Many manufacturers shut down their operations.

 

Japanese utility staff and authorities spent the weekend trying to contain the potential meltdown of nuclear reactors at the Fukushima Daiichi facility in northeastern Japan. Early Monday Tokyo time, it wasn't clear exactly what the damage was to the reactors.


 

There is an assumption of a partial meltdown at one reactor, with problems growing at two more reactors, but the nuclear experts told CNN on Sunday that they believe the possibility of massive radiation exposure remains low -- at least for now. More than 180,000 people have evacuated the area, and up to 160 may have been exposed to radiation, The Associated Press reported.

The immediate aftermath of the quake will be a slowdown of Japan's economy, the world's third-largest. Indeed, Japanese stocks dropped right from the open and never recovered. The Nikkei 225 Index ($JP:N225) fell 634 points, or 6.2%, to 9,640.29 in Monday trading, its biggest percentage loss since Dec. 2, 2008.  

 

Shares of Toyota Motor (TM) fell 7.9% in Tokyo, with electronic companies Hitachi off 16.2% and Toshiba off 16.3%. Tokyo Electric Power, the company that operates the troubled nuclear power facility, plunged  off 23.6%.

 

The Bank of Japan pumped $183 in liquidity into the nation's banking system so that Japan's financial system wouldn't seize up.

 

The dollar rose nearly 0.9% against the yen. The yen was quoted at 82.37 to the dollar early Monday.

 

The reconstruction that will come in Japan also means heavy spending to fix as much as possible and rebuild what can't be fixed. That's opportunity, and that's a big reason why the U.S. stock market rallied late Friday, with the Dow Jones industrials ($INDU) finishing with a 60-point gain on the day.

 

You could see that mentality at work with Caterpillar (CAT), whose shares dropped to $97.01 right after the open and jumped 3.6% to $100.50 before closing at $100.02. The gain was worth 12.3 points of the Dow's gain.

 

That mentality may offer U.S. markets a boost in the weeks ahead. Futures trading late Sunday, however, suggested U.S. stocks will open lower, with the Dow down at least 70 points. Light sweet crude oil, the benchmark U.S. crude, was trading at $99.48 a barrel at 3 a.m. Monday in electronic trading .

 

But investors will ponder other issues, including an important Federal Reserve meeting and a number of big inflation reports. Earnings are also due from Nike (NKE), Ross Stores (ROST) and and teen retailer Pacific Sunwear (PSUN).

 

U.S. stocks finished lower for the week, with the Dow down 1% and the Standard & Poor's 500 Index ($INX) down 1.3%. The Nasdaq Composite Index ($COMPX) dropped 2.5%. The Dow is up 4% for the year, with the S&P 500 up 3.7% and the Nasdaq up 2.4%.

 

A long, tough recovery ahead for Japan
The Japanese recovery may take some time to get started and longer to complete.

 

One problem, Nomura Securites noted Sunday, is that roads, bridges, power lines and the like were seriously damaged over a broad area. 

 

Second, the area affected by the Sendai earthquake has a large number of technology-related manufacturing facilities. It was unclear, however, how badly these were damaged and what shutdowns may do to supplies of flash-memory chips and other semiconductors used in smart phones and tablet devices.

 

Another: The government's deficit as a percentage of gross domestic product is three times larger than the U.S. government deficit, according to the Visual Economics website. Plus, the Japanese economy has struggled in recent years. So how the recovery is financed may be tricky.

 

Despite the presence of technology companies in northeastern Japan, the regional economy still is heavily influenced by agriculture and lumber. The center of Japanese manufacturing is south of Tokyo. SanDisk (SBNK), which makes flash-memory chips, noted that its two joint venture plants, operated with Toshibia, are 500 miles from the quake's epicenter.

Plus, many Japanese manufacturers have shifted operations to other countries.

At the same time, Japan has experience recovering from big earthquakes. The January 1995 Kobe quake struck at the center of Japanese industry. The effect of the recovery effort on the Japanese economy was very positive and measurable within two months of the quake.

So, that means new demand for steel, aluminum, copper, wood, textiles, concrete and the like. Some of the demand will be met by domestic suppliers.

But it also may require outside suppliers. Like Caterpillar. Or General Electric (GE), up 1.3% to $20.38 on Friday. Or Siemens (SI), the German industrial giant, up 0.2% to $127.13 in New York. Or Jacobs Engineering (JEC), up 4.2% to $49.08. Or Freeport-McMoRan Copper & Gold (FCX), which ships much of the copper ore from its giant mine in Indonesia to refineries in Japan. Its shares were up 3.5% to $49.48 on Friday.

And that's just a start.

There's an important offset to this bullish scenario: China.

Economic reports suggest the Chinese economy is losing some strength as the government tries to contain inflation. It ran a rare deficit in February, a major cause for Thursday's nasty U.S. sell-off. If that trend continues, the effects on the global economy and U.S. stocks will be much bigger.

 

Markets for the week



3/11/2011

3/4/2011

% chg.

YTD chg.
Dow industrials

12,044.40

12,169.88

-1.03%

4.03%
S&P 500

1,304.28

1,321.15

-1.28%

3.71%
Nasdaq 

2,715.61

2,784.67

-2.48%

2.36%
Russell 2000

802.83

824.99

-2.69%

2.45%
Crude oil 

$101.16

$104.42

-3.12%

10.70%
(per barrel)

 

 

 

 
U.S. Dollar Index 

76.77

76.42

0.46%

-3.18%
10-yr. Treasury

3.39%

3.49%

-2.84%

2.66%
Gold

$1,421.80

$1,428.60

-0.48%

0.03%
(per troy ounce)












The Fed meets; time to pay attention
The Federal Reserve's Federal Open Market Committee meets on Tuesday. Don't expect the Fed to change interest rates. But it's time to pay close attention to what the Fed says about its $600 billion bond-buying plan.

The program is dubbed QE2, short for the second round of quantitative easing. The central bank started buying $600 billion of Treasury securities in a program set to end by June 30.

Reviled by conservative economists as inflationary, unsuccessful and worse, the QE2 program is praised by others as having kept interest rates relatively low and given the stock market a huge lift since August and helped the economy work through the soft patch created by the 2010 European debt crisis.

So what you want to hear from the Fed is how it plans to end the plan. If it's a very abrupt end, it could push interest rates higher, and there's a worry about how that might affect the economy.

Elsewhere in the economy
It's a big week for the economy. Here's a quick rundown.

Tuesday: The Federal Reserve Bank of New York's Empire State Manufacturing Survey and the National Association of Home Builders' March housing index.

Wednesday: Housing starts for February and the February producer price index (PPI). The latter will be watched closely because of the concern about rising energy and food costs.

Thursday: The consumer price index (CPI) for February plus industrial production and capacity utilization for February. Like the PPI, expect a startling headline number. The Conference Board will report on leading economic indicators. The Philadelphia Federal Reserve Bank's March manufacturing survey is also on tap. And, given the disappointment with this past week's report on jobless claims, Thursday's jobless claims report will get close attention.

Two analyst meetings
Chevron
(CVX) and Hewlett-Packard (HPQ) will hold analyst meetings on Monday. The Chevron meeting will let analysts quiz the company on its economic outlook and its outlook for oil prices.

Hewlett-Packard's meeting may be contentious. Its last earnings report was a disappointment, and shares have fallen 14%. In addition, there's been criticism over how HP appointed five new directors in January. They include Meg Whitman, the former CEO of eBay (EBAY) and unsuccessful candidate for governor of California.

 A report by Institutional Shareholder Services said CEO Leo Apotheker played too much of a role in the selection of the directors. The corporate-governance advisory firm recommended a vote against three of the new directors at this year's annual meeting.

Earnings: Nike, Ross Stores, Pacific Sunwear
This is not a heavy week for earnings. There are several worth watching, including;

Pacific Sunwear reports after Tuesday's close. It's a big outdoor apparel retailer, and, as Rick Aristotle Munarriz noted on The Motley Fool this week, "PacSun has been an all-weather dud. You have to go back to the summer of 2008 to find the last time that it came through with a profitable quarter." The company is expected to report a loss of 32 cents a share for its fiscal fourth quarter. A year ago, it lost 26 cents a share.

After Thursday's close, Nike is expected to report fiscal-third-quarter earnings of $1.11 a share, up 9.9% from $1.01 a year ago. The key to Nike, however, is its future orders estimate. When it reported fiscal-second-quarter results on Dec. 21, it had $7.7 billion in futures orders due by the end of April, up 11% from a year ago.

Ross Stores is expected to report $1.37 a share in earnings for its fiscal fourth quarter, up 17.7% from a year ago for its fiscal third quarter. Revenue for the discount apparel retailer is expected to rise 7.1% to $2.12 billion. This is a company Wall Street likes. The stock is up 28.2% since Oct. 1. A reasonable question is if the shares are too pricey.
35Comments
Mar 13, 2011 7:34PM
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Active - I'm an advocate of reality and truth in everything. I don't advocate taking anything from anyone.  Likewise, I don't advocate giving anything to anyone that doesn't earn it unless there's plenty to spare. If I join a retirement program that advertises that it will pay me 7% return on the total principal I invest when I reach the age if 65 then that's a contract, plain and simple. So I and my employers pay in $250,000 over 45 years than I should get $17,500 a year; $1458 month. It doesn't matter if I'm destitute or a billionaire at 65, I get the $17,500/year.  Now, some do-gooder comes along and says, oh, this man died and left a widow and child with no income, let's see who can afford to contribute a little? Ok, let's take some from Havasu because he worked his butt off and has more than his "fair" share.  ****, nobody should have the right to steal from me what I earned. That's seizure of personal property that the 4th Amendment of the US Constitution was supposed to protect individuals from anybody; Capitalistic, Christian, Socialistic or whatever. I'm advocating giving to those that earn what's due them and if there isn't anymore to be had then life just isn't fair is it else this country is going to go bankrupt.  Same goes the other way.  If you sign a contract to purchase something and don't fulfill the terms of that contract then you lose whatever it was that you bought.  No if, buts or ands about it.  I'm not advocating class warfare downward or upward.  I'm advocating that government and individuals have a responsibility to fulfill their obligations before deciding to do anything beyond those obligations. Quit trying to figure out how much good you can do with other people's money.  We are out of other people's money.
Mar 12, 2011 1:32PM
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The insiders will win and everyone else will lose.....fixed system..for the wealthy to steal from the middle class...pension funds--401k's yes they take the money off the table when they want too..we all pay...trash,, to say the least..So the news does not matter only the greed....
Mar 12, 2011 8:11PM
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IS ANYTHING THAT EVER HAPPENS ANYWHERE IN THE WORLD EVER  NOT A BUYING OPPORTUNITY?

 

IF JAPAN BEGNS TO DUMP T-BILLS TO RAISE CASH WELL- GUESS 250 TO 400 BASIS POINTS WONT EFFECT US CAUSE BIG BEN WILL CRANK UP QE TO INFINITY.

Mar 14, 2011 2:18AM
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Smile Active, yes I'm very aware of what Social Security is and isn't. I'm also very aware of what they've advertised the benefits would be for the last 45 years while I've paid FICA taxes that have increased from 1% to the present 12.4%. Yes, I know it hasn't and isn't advertised as a full retirement system.  But it must pay what it was advertised to pay.  Why do some retirees get their benefits taxed and others don't?  A US worker has to pay FICA for 40 quarters to qualify for benefits relative to the taxes they paid in during those 40 quarters. Social Security Disability Insurance benefits (unfunded) were added to Social Security in 1956.  I did not say anyone was getting Social Security benefits that didn't deserve them. I did say that those that have paid for them are being threaten with reduced benefits because of other unfunded benefit programs. Medicaid is a perfect example.

Mar 13, 2011 11:45PM
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The Fed buying bonds?  Isn't that like me buying something from my wife, and then she puts the money back into the same bank account that I took it from???   One part of the government prints money to buy something from another part of the government?  What kind of a financial system do we have?
Mar 14, 2011 12:25AM
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havasu, I note you "advocate giving to those that earn what's due them and if there isn't anymore to be had then life just isn't fair". I get that, but almost every time I hear it (or see it) professed, its coming from some deep-seated resentment for this perceived army of lazy, non-working low-lifes, just sucking up government handouts. I don't see that, and besides, who decides what constitutes "due them"? Sure, there are skaters and gamers, but they're not just gaming the government, and they're not just low-income, aimless folks either.  They come from all levels and run costs up for us all. If you cut-off common benefits to the low-income folks, you are cutting off people who honestly couldn't earn due to unforeseen hardship, illness, age, etc.  I can't see hanging on to all my pennies while thumbing my nose at those at those who maybe weren't so fortunate with their health or luck.  Cheers.
Mar 13, 2011 7:09PM
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1. nuclear plants ready to explode and destroy a nation

2. libya beating back the rebels from an oil town/ oil ports being bombed; rebels vow to retaliate

3. yemen/ bahrain and saudi's starting to make more noise about their leaders

4. inflation ready to kick butt thru higher fuel/ food prices due to higher oil price

 

only means one thing. market does better than it has in 3 years; dow up 500!

Mar 13, 2011 11:07PM
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Hot Active - Life's not a bowl of Cherries, you have to take the Apples and Oranges with them.  Our form of government has to exist by honoring contracts with it's citizens who will respond by supporting reasonable progressive taxation. However, if the balance between Apples, Cherries and Oranges becomes unreasonable or unsustainable then the citizens will take back the power to govern and give it to those that will keep the Apple cart upright (pun intended).  We are currently experiencing such a shift because the balance has not been managed professionally. As we have agreed to in the past, the world shift in economic realities, globalization, is exacerbating the struggle to fulfill everyone's desire for the fruits of their labors or lack thereof.  It is what it is and everyone has to adapt. 
Mar 13, 2011 8:27PM
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Tongue out Not looking good Futures - DJIA -74 SP -8.40 NAS -18.25 on  3/13/2011 at 7pm

Mar 13, 2011 11:01AM
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Don't be a hater! Those companies here that rely on just in time shipments of components from Japan are going to have a rough time dealing with this disruption and that will affect their profitability so invest and plan accordingly. Live your life by minimizing your interaction with the government then. Personally, hiding in a trailer park and keeping your head down is not my style. To each his own.....
Mar 13, 2011 5:36AM
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Why are we sending aid to Japan when our own country is in more debt than we will ever be able to repay? When our own country has starving people? When our own country has homeless people who freeze to death outside? When our own country's infrastructure is crumbling away? When our own country is having disasters of its own? I don't think we should send 1 penny to Japan. Let others help out for a while. Let US worry about our own problems for a while and get our own affairs in order. Do you think other countries will have any empathy for us during a major disaster? Do you think they will send us aid? Money? Food? Or will they decide to call our huge debt due and payable immediately in an attempt to destroy the dollar's value and end the dollar as the World Reserve Currency? Research the "secret meetings" held to end the value of the U.S. dollar. The U.S. was not invited. Oh, but Japan was apparently there. When those who want to freely send and spend feel the effect of inflation, and the government no longer takes care of you because it is too busy trying to save itself, then I bet those who want to open hearts and spread compassion to other countries will be singing a different song. We ALWAYS help others out, but more and more I noticed ... other people in other countries still hate us and America, no matter how much we help and open our hearts. It is our, the taxpayer's, money, not the government's money to send everywhere else. Print! Print! Print!... but eventually, we will have to pay up. Even though not many may comment about how they really feel because so far they are "getting by" and the economy is really not yet affecting them, I would believe that the majority does not want to send anything, not food, not money, not supplies, to any other country when we cannot even take care of our own people and our own backyards! I agree with some of the comments above ~~ if it makes you feel better and you want to help Japan, open your own checkbook. I will help ... by sending prayers. God bless America.

·         1

Mar 13, 2011 2:17PM
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principal reductions “sounds like a welfare discussion, not a regulatory discussion. That’s not the appropriate role for attorneys general.”
Angry So now the bleeding heart liberals (socialists) want to nullify contract law and tell the banks that it's better to reduce principal than auction off the property that people can't afford to make payments on.  They also want to add "means testing" to determine how much of your social security benefits you get when you retire.  Next they'll add means testing to determine how much interest you receive from that 5% CD at your local bank. Well, I say let's add means testing to determine how much of our IRS taxes we pay next year to a government that's run by cheats and liars.  Oh, that's right we already have that is called progressive taxes; the more you need the less you pay.  Madoff's right the US Government is a Ponzi scheme.
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Hmmm

 

Raw resource prices now going thru the roof, valuable Japanese farm land lost just at a time Russian, Chinese and Australian farm land has been lost to drought and flood. Food prices spiking even higher.

 

Japanese selling US T-bills by the hundreds of billions to pay for this damage forcing US T-bill interest rates to spike making our fiscal deficit even worse as we have to pay double the interest rates.

 

This is a total disaster for the fragile world economy just trying to emerge from the great recession.

Mar 13, 2011 7:18PM
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Mirage- “Only Extreme left wing socialist liberals blame their failures on others...”

 

Uh, no…  In my experience, whiny behavior and failing to own one’s failures doesn’t neatly follow party lines.  IMO these folks are some of the most tortured souls around.  And it doesn’t end there, because when something actually goes well for them, since they don’t control their own failures, they also don’t own their successes.

 

They’re sad.  Moping around about the latest train wreck that is their lives.  Waiting for that inevitable next train wreck, maybe right around the next corner.  It’s coming, they just know it.  It’s like they don’t want to be happy.  Pathetic people come in all stripes, Reps, Dems, whatever.  I know wealthy people who are so gloomy.

 

It’s so true.  Wealth doesn’t buy happiness.   Most of the sad train-wreck crowd I know are current or former substance abusers, some well-heeled.  Go to an AA meeting and they’re there, mingling, eating the day-old donuts.  Drinking the bad coffee.  I was there with my ex, felt a bit bad for them, but couldn’t think like them.

 

 I screw up from time to time, occasionally spectacularly, if I do say so myself, and when I do, it’s often totally my fault.  But making sweeping generalization that only the left is whiny is an exercise in silly.  You are too, we are not!  It never really ends, does it?  We’ve chatted about this labeling and name calling before, bud.

 

So posting here multiple times daily, painting everybody who sees this or that differently from you with the same broad brush (socialist, fascist, etc.) seems to me to be a waste of your valuable time.  You’ll ultimately decide whether it is or not, but, IMHO, a smart guy like you ought to be able to do much better than that.

 

I’m sure dharma would've done much better on this post than this, but we haven’t seen him here for a bit.  I like the guy and I hope that he's well.  You have a good rest of your weekend.
Mar 13, 2011 8:19PM
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because we are a Christian country (indivisible, under God, In God We Trust, etc.) and because it is what the Good Book tells us to do.
Active - I know this is going to disappoint you but we, the USA, believe in freedom of religion and that doesn't mean we are all Christians or a Christian country. Atheists, Buddhists, Jews and Muslims are all very welcome in America.  God comes in many forms and manifestations.
Mar 12, 2011 6:26PM
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Only Extreme left wing socialist liberals blame their failures on others...

if i may add

 

.they do not take responsibility for their action's; they do not accept what is right; they do not respect others who are on the other side of their issues and create chaos and then blame the other side.....they throw stones and say it was their windows which got smashed.......!

Mar 14, 2011 1:27AM
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SoNotRight - You're correct and that's why I purposefully used the Social Security Administration as an example. If the Federal Government passes explicit legislation and advertises it's benefits and costs than it has to fulfill that obligation. It someone doesn't contribute or participate than they do not get the benefits. "Due them" is defined up front.  It's not arbitrary, nobody decides it later and nobody decides that someone gets benefits later that did not contribute. I do not care what class you are a member of or how you got there.  I'm not cutting off any benefits to any classes. I'm saying that either government stands by it's obligations to those that were asked to pay for them or the system will cease to be supported by those citizens.  I'm not thumbing my nose at anyone. I'm sick and tired of incompetence in elected officials. You're seeing the consequences of illicit government throughout Europe and the Middle East.  Socialism is a disease that in reality destroys the society it purports to protect..

Mar 12, 2011 8:24PM
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hi ho silver!!!!!!!!!!!!!!!!!!!! up,up, up, up, and i say up, and aaaawwwwaaaaaaayyyyyyyyyyyyyyyy!!!!!!Nerd
Mar 14, 2011 5:29AM
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The only part you failed to understand is.... all of it! Eye-rolling
Mar 14, 2011 1:33PM
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SS is a contract between the government and the people that pays into it, not illegals and not to be taxes when the person receives his just dues. But illegals draw it without paying the 40 quarters into it and they don't understand illegals means not legal. Also people are taxes because they do too good in life.

How about we reward the ones who goes good and penalize the ones who do not work, by cutting most of their so call entitlement out and give entitlments to the ones that earned them.

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