MarketView for August 18

Summary

Stock prices fell sharply on Monday with much of the day's loss attributable to the unpleasant prospect of continuing losses within the mortgage industry, which in turn stoked market anxiety, sending all three major indexes down more than 1 percent with the sobering reminder that the credit crisis and housing slump are far from over.

Fannie Mae and Freddie Mac each lost 18 percent after a Barron's report suggested the U.S. Treasury may recapitalize the companies, a move that could wipe out shareholders. The Treasury Department responded by saying it had no plans to backstop either of the two companies, which own or guarantee some $5 trillion in outstanding U.S. mortgage debt. Merrill Lynch slashed its price target on Freddie Mac to $5.75.

Shares of Lehman Brothers fell over 4 percent after the Wall Street Journal reported that analysts are bracing for a third-quarter loss at the investment bank of $1.8 billion or more. According to the Journal, if losses keep piling up, Lehman could need to raise additional capital beyond the $6 billion it got in June. Finally,

The Standard & Poor's Financial Index was down 3.3 percent, reversing two consecutive sessions of gains.

Adding to market jitters was a report showing home builder sentiment stuck at a record low in August, battered by ever-tightening lending conditions and a flood of foreclosed homes. Domestic crude oil futures settled down 27 cents at $113.50 per barrel, although the price of crude oil is currently taking a back seat to financial concerns. Aluminum producer Alcoa was a top drag on the Dow, falling 2.3 percent to $31.07.

Housing Sentiment Poor

Home builder sentiment was stuck at a record low in August, as stringent lending and a flood of foreclosed homes dragged on the real estate market, according to data from the National Association of Home Builders released on Monday. The NAHB/Wells Fargo Housing Market index held at 16 in August for a second straight month, the group said in a statement. Readings below 50 mean more builders view market conditions as poor than favorable.

Despite the weak reading, the Washington trade group said its members hope a recently enacted home buyer tax credit will bolster housing appetite. "Builders are anticipating the stimulative effects of this legislation and are optimistic that the tax credit will give those buyers who've been sitting on the fence the reason they need to jump back into the market," NAHB President Sandy Dunn said in a statement.

This sliver of optimism was reflected in an improvement in two of the index's three components.

The sub-index on current single-family home sales ticked up to 16 in August from a downwardly revised record low of 15 in July, and the component on the six-month sales outlook rose to 25 from a record low of 23. However, the reading on traffic of prospective buyers was stuck at a record low of 12, NAHB said.

On July 30, the Housing and Economic Recovery Act was signed into law, which included a provision that gives a temporary $7,500 tax credit for first-time home buyers who meet certain income requirements.

Meanwhile, the performances of the four regional markets tracked by NAHB diverged in August. The Northeast and Midwest markets improved, while the Western market continued to slide. The Southern market held steady at its depressed level. An increase in foreclosed sales at discounts hurt the new homes market in the West, NAHB said.

Demand for new homes has also been crimped by heightened anxiety among consumers facing worsening job conditions and tough times in obtaining a mortgage to buy a home, analysts said.

Crude Lower

Crude prices settled below $113 a barrel for the first time in over three months Monday as Tropical Storm Fay steered clear of oil-producing infrastructure in the Gulf of Mexico.

Light, sweet crude for September delivery settled down 90 cents per barrel at $112.87, after earlier rising as high as $115.35 per barrel. It was the first time crude ended below $113 since May 1. In London, October Brent crude settled down 61 cents per barrel to at $111.94.

At the pump, a gallon of regular fell another penny overnight to a new national average of $3.741, according to auto club AAA, the Oil Price Information Service and Wright Express. With consumers cutting back on driving to save money, prices have now dropped 9 percent from the record $4.114 retail gas reached July 17.

Fay, the sixth named storm of the 2008 Atlantic season, was approaching the Florida Keys after leaving at least eight people dead in Haiti and the Dominican Republic. The storm is expected to near hurricane strength later Monday but does not currently pose a threat to oil platforms in the Gulf.

Royal Dutch Shell PLC said it evacuated 425 workers from the region as a precaution but said it will redeploy them if the storm remains on its current track. So far during this year's hurricane season in the Atlantic Ocean, no storm has significantly damaged oil installations in the Gulf.

A slightly weaker dollar compared to the euro kept oil prices from slipping further. A falling dollar typically pushes oil prices higher as investors buy crude and other commodities as hedges against inflation.

A forecast from the Organization of the Petroleum Exporting Countries on Friday of lower global oil demand growth helped to keep prices from rising higher. In its monthly oil report, the organization forecast world appetite for oil this year would grow by 1 million barrels a day, a reduction of 30,000 barrels a day from its previous forecast for demand growth for 2008. It also said growth for 2009 will be 900,000 barrels a day, which it said would be the lowest growth in world demand since 2002.

Demand growth from the major industrialized countries will actually decline, OPEC said, with non-OECD countries accounting for all oil demand growth next year.

Uncertainty over the conflict between Russia and Georgia also kept trading erratic earlier Monday, as traders remain nervous that oil supplies in the region could be halted. Russia said it has begun withdrawing troops, but U.S. officials said Moscow has positioned missile launchers in the separatist South Ossetia province.

Oil market traders were also keeping an eye on possible tensions in Pakistan after President Musharraf announced his resignation Monday.

In other Nymex trading, heating oil futures fell 3.43 cent to settle at $3.0848 a gallon, while gasoline prices lost 4.5 cents to settle at $2.8152 a gallon. Natural gas futures fell 20.4 cents to settle at $7.888 per 1,000 cubic feet.

Slowing World Demand Could Hurt Dell and Hewlett-Packard

HP and Dell, the world's No. 1 and 2 personal computer makers, should deliver solid second quarter numbers. However, that is not the problem at this time. Wall Street is becoming concerned that emerging market demand for computer products from Dell and Hewlett-Packard will slow and that the dollar will strengthen during the remainder of the year hurting the earnings of both companies and subsequently their share prices.

Both companies have found themselves relying on their performance outside the United States. Domestically, the credit crunch, a deteriorating housing market and other economic troubles have crimped consumer spending on items such as personal computers. Therefore, both companies are depending on foreign markets to pull up earnings during the remaining part of 2008.

Goldman Sachs analyst David Bailey told clients in a research note earlier this month that non-U.S. markets likely contributed to strength in the most recent quarter.

"Share gains on the inkjet side combined with stronger emerging market growth on the laser side should drive another quarter of mid-single digit revenue growth in printers and operating margin above 15 percent," Bailey wrote. "Even against a tough comparison, we expect HP to maintain double-digit PC revenue growth on strength outside of the U.S."

So far, countries like Brazil, Russia, India and China -- the "BRIC" nations -- have held up global sales for HP, Dell and many other big technology companies. Any slowdown there, with no sign of a larger economic recovery in the United States, could pressure future performance this year.

Meanwhile, the Shanghai Composite Index is down about 50 percent this year, and Lenovo, based in China, is facing slowing earnings growth as it copes with weaker demand there following a devastating earthquake earlier this year. Furthermore, the recent strengthening of the dollar is making many nervous about overseas sales.

Hewlett-Packard is trying to reduce it dependency on computers with its $13.2 billion planned acquisition of technology outsourcing company Electronic Data Systems that will enable it to better compete with IBM and move into new lines of business.