MarketView for August 20

Summary

Stock prices moved higher and the key indexes were in positive territory at the closing bell, but it was nonetheless a volatile day on Wall Street with red ink appearing as often as black. Bank and energy shares managed to rebound even as Fannie Mae and Freddie Mac were falling dramatically on fears of an imminent government bailout of the housing finance companies that would likely wipe out common shareholders. Because any bailout would be aimed at saving the housing and mortgage market, shares of big banks rose.

Energy shares also posted strong gains, supporting the S&P 500, with shares of oil producer and refiner Hess rising 5.3 percent and ConocoPhillips up 2 percent. At the same time, the price of crude was higher for the second straight day, settling up 45 cents at $114.98 as concerns swirled about Russia's possible reaction to a U.S.-Poland missile shield. Also, Goldman Sachs reiterated its year-end forecast of $149 a barrel for U.S. crude.

Wells Fargo rose 4.1 percent to $28.92, while Bank of America chalked up a gain of 4.3 percent to $29.29. On the downside, shares of Fannie Mae and Freddie Mac lost more than 22 percent each. Shares of Fannie Mae, the largest provider of mortgage loans, saw its share price fall 26.8 percent to $4.40, while Freddie shares fell 22.1 percent to $3.25.

Shares of Hewlett-Packard were up 5.7 percent to $46.16, their best one-day gain in six months, and were a mainstay to both the Dow Jones industrial average and S&P 500.

Shares of Apple rose 1.3 percent to $175.84, while Research In Motion tacked on a gain of 3.4 percent to $130.28 after Citigroup reiterated its "buy" rating on RIM. Hess climbed 5.6 percent to $104.00, while ConocoPhillips rose 2 percent to $80.85.

Concerns over consumer weakness sent shares of big manufacturers down. Textron lost 3.6 percent to $38.59

Crude Moves Higher

The price of oil revived itself on Wednesday back as traders appeared to take in stride a substantial increase in crude inventories and a stronger dollar, emphasizing instead the increasingly real possibility of supply threats. Nonetheless, it was still a volatile day for energy prices and one that seemed to mirror the volatility of the financial markets.

Prices initially retreated after the Energy Department reported a surprisingly large gain in imports that in turn sent crude inventories up by a 9.4 million barrels during the week ended Aug. 15. The figure came in much higher than the Street’s expectation of a number closer to 1.7 million barrels.

At the same time, gasoline inventories fell by a larger-than-expected 6.2 million barrels to below-average levels, the EIA said, while distillate inventories — which include heating oil and diesel fuel — rose by less than expected. Gasoline and heating oil prices, like crude, ended the session higher.

And given that the hurricane season is not even halfway over, traders remain nervous about the possibility of storms striking oil facilities in the Gulf of Mexico. Doubt over Russia's adherence to a ceasefire with Georgia, where a key oil pipeline is located, and escalating tension between Russia and the United States was also keeping a floor under prices.

OPEC is meeting in early September and supply concerns could rise further if countries decide to lower their output in response to slower demand. Venezuelan Oil Minister Rafael Ramirez said he might propose an output cut at the next OPEC meeting.

Light, sweet crude for September delivery settled up 45 cents per barrel at 114.98, after rising as high as $117.03 prior to the release of the inventory data, falling as low as $112.61, and then rebounding again. The September contract expired on Wednesday; the October contract finished up $1.01 at $115.56 per barrel.

Heating oil futures rose 3.98 cents to settle at $3.1635 a gallon on the Nymex, while gasoline futures rose 4.64 cents to settle at $2.9103 a gallon. Natural gas futures rose 10.1 cents to $8.077 per 1,000 cubic feet.

Since mid-July, crude prices are down by about $35 per barrel, or nearly 25 percent, from their July 11 trading record of $147.27. The retreat arrived as the dollar recovered ground against other major currencies, and as evidence emerged that Western Europe's and Japan's economies are weakening alongside that of the United States, which could put a damper on global energy demand.

Gasoline demand averaged about 9.5 million barrels per day over the last four weeks, or 1.6 percent less than the same period last year, the EIA reported on Wednesday.

As crude prices have fallen, so have gasoline prices. The average U.S. retail price for a gallon of gasoline was at $3.717 on Wednesday, down more than a penny from Tuesday and down nearly 10 percent from the July 17 record of $4.114, according to the AAA auto club.

Fannie and Freddie Take a Dive

Fannie Mae and Freddie Mac saw their share prices hit their lowest levels in nearly 20 years on Wednesday, while the mortgage companies' bonds rallied on the belief that an increasingly likely government bailout would wipe out shareholders but secure their massive debt.

Treasury and Freddie Mac officials met to discuss how the company can best weather the current economic woes in light of mounting credit losses.

"As you would expect, we have been in communication with the companies for months to receive updates and we've been communicating with their regulator and the Federal Reserve," Treasury spokeswoman Jennifer Zuccarelli said. Wednesday's meeting was one of several since mid-July when the U.S. Congress approved a plan to provide any necessary extra funding for both Fannie Mae and Freddie Mac.

Anxiety about the companies has risen this week following a report in Barron's newspaper that government officials may have no choice but to go ahead and effectively nationalize Fannie and Freddie as rising defaults on home mortgages undermine the value of their assets.

Freddie Mac's stock slumped 22 percent to $3.25, after falling to the lowest level since 1990, and Fannie Mae shares slid nearly 27 percent to $4.40, after hitting the lowest level since 1988.

Meanwhile, the outstanding debt of both institutions rallied, on the belief that the government will do whatever it takes to maintain confidence in the two companies, since their ability to issue debt, and use the proceeds to help fund mortgages is critical to pulling housing industry out of its worst slump since the Great Depression.

Fannie Mae and Freddie Mac own or guarantee almost half of all outstanding mortgages in the United States and the government is relying heavily on them to step up mortgage purchases to hold down home lending rates and help stabilize the flailing housing market.

It is important for Fannie and Freddie to keep operating, and recent government steps on their behalf were "appropriate," Minneapolis Federal Reserve Bank President Gary Stern said.

Foreign investment is being closely monitored, as ebbing demand means higher funding costs for Fannie and Freddie and thus rising home loan interest rates, analysts have said. Overseas central banks have sold off nearly $11 billion of agency-related securities during the past month.

No Koreans Deal For Lehman

Lehman Brothers (nearly struck a deal to raise almost $5 billion from South Korean wealth funds and institutions but the pact disintegrated, the New York Post said citing sources familiar with the matter.

One source told the paper that Lehman was aiming to raise more capital than the Korean investor was willing to invest at the time. The precise terms of the deal could not be learned, the paper said.