MarketView for August 12

Summary

 

Stocks gave back some of their recent gains on Tuesday, sending the three major equity indexes into negative territory on Tuesday. While the recent drop in oil prices has helped to lift stocks from their July lows, uneasiness regarding the financial sector on Tuesday tempered hopes that cheaper energy prices would revitalize consumer and business spending, key drivers of profit growth.

 

Bank shares were particularly hard hit over as a result of fresh worries over the economy and further losses stemming from the mortgage crisis. News that JPMorgan Chase has chalked up about $1.5 billion of losses so far this quarter on mortgage-linked assets sent the bank's stock down more than 9 percent. The bank had largely escaped the worst of the credit crunch and its losses highlighted concerns that turmoil in financial markets may deepen.

 

JPMorgan said in a regulatory filing that it expects continued deterioration in credit trends for its consumer portfolios which in turn might require additional allowances for loan losses. In addition, Lehman Brothers cut its 2008 profit forecast for JPMorgan.

 

Shares of Wachovia were down over 12 percent after the bank increased its previously reported second-quarter loss late on Monday to cover costs to settle a probe of auction-rate securities sales.

 

Goldman Sachs also weighed on the financial sector after a number of analysts, including Oppenheimer & Co's Meredith Whitney and Deutsche Bank's Michael Mayo, cut their earnings estimates for the investment bank.

 

Mayo cut his rating on Goldman Sachs to "hold" from "buy" as well as cutting his third-quarter profit estimate and price target on the stock. Mayo said Goldman was not immune to capital market pressures, especially given its exposure to weaker European growth. Whitney also cut her third-quarter and 2008 earnings estimates.

 

Dallas Federal Reserve Bank President Richard Fisher added to negative sentiment when he said the U.S. economy was in a prolonged period of slow growth and could shrink later this year.

 

McDonald's saw its shares take a hit after UBS cut its rating on the world's largest fast-food chain to "neutral" from "buy" on valuation, citing flattening restaurant margins and shrinking currency gains.

 

Crude oil prices for September delivery were down again, this time on concerns about a slowing economy and a drop in demand. Airlines were a bright spot after JP Morgan Securities upgraded its ratings on some of the largest US airlines. The sharp drop in oil prices, combined with reduced flight schedules and surging revenue from extra baggage fees, could help the industry return to profitability next year, JPMorgan Securities said.

 

Crude Down Again

 

The price of crude oil fell again on Tuesday, dampened by a stronger dollar and more evidence that developed countries are reducing their energy use. Futures for light, sweet domestic crude for September delivery settled down 75 cents per barrel at $113.70, after falling as low as $112.31 per barrel, a new three-month low. Oil is now about $35 below its July 11 high of $147.27. In London, Brent crude for September delivery settled down $1.10 a barrel at $111.57.

 

On Tuesday, the International Energy Agency (IEA) lowered its forecast for oil product demand from 30 developed countries by 1.3 percent as compared to last year. The Paris-based energy watchdog's report arrived a day after China said its crude imports in July, while historically strong, were down 7 percent from the same month last year.

 

The IEA cautioned that it is too early to determine whether the recent fall in oil prices is a longer-term trend. It said demand in developing countries could offset declines in developed nations, and that it sees Chinese oil demand continuing to grow at a robust pace.

 

And some economists have said that given the pullback in gasoline prices, demand could come back. The average U.S. retail gasoline price was $3.799 a gallon on Tuesday, according to auto club AAA. That is a price that is 31.5 cents lower when compared to the July 17 all-time high.

 

At the same time, the energy markets, which have seen heavy liquidation from large speculative funds since crude hit its record high, continued to make the bet that energy use is on the wane. Meanwhile, a stronger dollar also weighed on oil prices. The euro traded at $1.4898, down from $1.4928 late Monday in New York and at its lowest levels since February.

 

Traders also continued to watch the conflict between Russia and Georgia, trying to figure out whether Russia's push into the country will result in a serious oil supply disruption. Russia ordered a halt to military action in Georgia on Tuesday, but Georgia insisted that Russian forces were still bombing and shelling.

 

BP said on Tuesday it shut down the 90,000-barrel-a-day oil pipeline running from Baku on the Caspian Sea to Supsa on Georgia's Black Sea coast earlier. The London-based oil company emphasized, however, that the move was precautionary.

 

Another larger pipeline operated by BP in the former Soviet Republic is already out of action after a fire last week on its Turkish stretch. A third pipeline in Georgia that BP uses to export oil, but does not operate, remains open.

 

In other Nymex trading, heating oil fell 0.14 cent to $3.1181 per gallon, while gasoline futures slipped 1.66 cents to $2.85 a gallon. Natural gas futures rose by 7.5 cents to $8.424 per 1,000 cubic feet.

 

Trade Deficit Lower

 

According to the Commerce Department, our trade deficit fell in June, much to the surprise of Wall Street, as exports advanced to an all-time high, offsetting another big surge in oil imports. The Department reported that the deficit fell to $56.8 billion in June, down by 4.1 percent from a revised May deficit of $59.2 billion. It was the smallest deficit in three months and much better than the $61.5 billion deficit Wall Street had been expecting.

 

Exports of goods and services rose to a record of $164.4 billion, helped by the dollar's declines earlier in the year, which have made U.S. goods cheaper on overseas markets. Imports also rose to a record of $221.2 billion, up 1.8 percent from the May level. But the increase was driven by a 14.6 percent surge in petroleum imports, which hit an all-time high of $44.5 billion as crude oil prices jumped to record levels.

 

The country's goods trade deficit outside of petroleum shrank to the lowest level since February 2003. Demand for a variety of consumer products from clothing to televisions and furniture has weakened, reflecting the sharp economic slowdown in the United States.

 

Through the first half of this year, the trade deficit is running at an annual rate of $702.8 billion, up only slightly from last year's deficit of $700.3 billion. The 2007 deficit was down 7 percent from 2006, marking the first annual improvement after five straight years of record deficits.

 

The deficit in June, after adjusting for inflation, was the lowest monthly imbalance since December 2001, a month when the country was struggling to emerge from the last recession. Many economists believe the 2008 slowdown will ultimately be ruled a recession too, although the gross domestic product has yet to post back-to-back negative quarters, a traditional definition of a downturn.

 

The GDP expanded at an annual rate of 1.9 percent in the April-June quarter. It may have been negative during that period had it not been for a sizable improvement in the trade balance, reflecting the drop in demand for imports and surging export sales. The concern is that the factors helping to support exports could fade in coming months if economic growth in Europe and Japan, two big overseas markets for American goods, falters.

 

Also, the politically sensitive deficit with China rose to $21.4 billion in June, the largest monthly imbalance since a record $25.9 billion deficit with China last October. The deficit is likely to rise further in coming months.

 

The Chinese reported Monday that their surplus with the world rose to the highest level in eight months in July. Its surpluses with the United States and the 27-nation European Union expanded.

Critics accuse China of unfair trade practices such as artificially depressing the value of its currency to boost the competitiveness of Chinese products.

 

The record level of exports in June reflected large increases in sales of farm products such as soybeans, corn and wheat and gains in exports of manufactured goods. Sales of aircraft engines, electric generators and computer chips all posted big gains.

Our exports to Mexico, the European Union and South and Central America all hit records in June. But America's deficit with OPEC set a record too in June as the average price of imported crude oil climbed to a record of $117.13 per barrel.

 

U.S. Could Be Facing Zero Growth

 

Dallas Federal Reserve Bank President Richard Fisher said on Tuesday the U.S. economy was in for prolonged slow growth and could shrink later this year.

 

"I expect that in the second half of this year we will broach zero growth," Fisher said in an interview with the Dallas Morning News. The outlook was for "a sustained period of anemic growth," he told the newspaper.

 

Fisher, a voting member of the U.S. central bank's policy-setting Federal Open Market Committee, is seen as an inflation hawk and voted against the majority decision on Aug. 5 to hold the benchmark federal funds rate at 2 percent.

 

Fisher said other U.S. central bank members shared his worry about the risk of inflation and said that, if necessary, the Fed would act quickly to ward off any possibility that an expectation of rising prices sets in.

 

"One of the things I have been concerned about ... is that we don't wish for these expectations to take grip and become part of the psyche of the way decisions are made in our economy," he said.

 

Fisher said a key source of weakness for the economy was that lenders have grown wary about making credit available in the wake of the subprime mortgage crisis. He said the current credit crunch was more acute than one that followed the savings and loan crisis in the early 1990s.

 

"It's broader. It's deeper," Fisher said. "We go through these periods of correction. It's not unhealthy. It's the way capitalism works."

 

Everything Is Go At Intel

 

Intel is comfortable with its forecast for third-quarter revenue of $10.0 to $10.6 billion revenue, its chief financial officer said on Tuesday, and shares of the company ticked higher. The Street is currently expecting Intel to post third-quarter revenues of $10.3 billion.

 

Last month saw Intel post a 25 percent increase in quarterly earnings, helped by strong sales of its microprocessors used in notebook computers and gave a forecast that topped expectations at the time. It continues to do well despite a weak global economic environment, aided by market share gains against its smaller rival Advanced Micro Devices.

 

In addition, demand for Intel's low-power, low-cost chip called Atom is off to a good start. It is designed to go into super-slimmed-down notebook PCs, consumer electronics devices and embedded markets such as set-top cable boxes.

 

Currently, Intel receives about 2,500 Atom processors per silicon wafer, meaning that its profitability on Atom, while not as great as on a Core or Xeon chip -- is still quite healthy.

 

Apparently, interest among customers that would use Atom in the embedded market has been strong. While it takes longer for Intel to realize revenue from the embedded market because of longer design cycles, once its product has been designed in to a car or cable box, it remains for years.