MarketView for August 27

Summary

Stock prices were sharply higher on Wednesday, sending all three major equity indexes well into positive territory as surprisingly strong data on durable goods orders soothed some concern about the sluggish economy while Fannie Mae and Freddie Mac led a rally in financial shares. The news on durable goods orders drove up the price of the shares of Alcoa and Boeing. Fannie Mae and Freddie Mac rallied for a third straight day as Wall Street grew more confident that there will not be a government bailout that would wipe out their equity.

At the same time, Merrill Lynch became the third major Wall Street bank to cast doubt on speculation that the Treasury would add direct support to the companies, since both have adequate capital to offset losses for "several quarters." That helped lift stocks of the large banks and financial companies, many of which have significant underwriting business with the two government-sponsored mortgage finance firms.

Shares of Bank of America were among the largest contributors to the S&P and Dow, rising 2.17 percent to $29.65. Lehman Brothers rose 5.35 percent to $14.78. Energy shares gained with higher oil prices, which rose for the third straight day on fears that Tropical Storm Gustav could interrupt oil and natural gas output in the Gulf of Mexico.

Trading volume, which has been light for much of August, was especially thin ahead of the Labor Day holiday weekend. Thin trade can exaggerate price moves.

The resurgence in oil prices, which settled up 1.6 percent at $118.15 per barrel, helped energy stocks, such as ConocoPhillips, which was up 1.32 percent at $83.47, while Chevron added 0.97 percent to $86.62.

On the NASDAQ, shares of Amylin Pharmaceuticals AMLN fell almost 25 percent on news that its diabetes drug, Byetta, which it sells with Eli Lilly was linked to four more deaths in pancreatitis patients, adding to two deaths announced by federal regulators last week.

Bristol-Myers Squibb and Pfizer fell after they said late Tuesday their blood clot preventer apixaban failed its primary goal in a late-stage trial and they no longer plan to seek marketing approval for it next year. Bristol-Myers was off 2.09 percent at $21.52 and Pfizer fell 1.04 percent to $19.08.

Trading volume was light on the New York Stock Exchange, with about 819 million shares changing hands, while on the NASDAQ, about 1.55 billion shares traded.

Orders for Durable Goods Higher

According to a report released on Wednesday by the Commerce Department, new orders for durable goods, which are expected to last three years or longer, rose by a surprising 1.3 percent in July as businesses increased spending plans and demand for a wide array of items increased.

Strong demand for manufactured goods may ease some concerns over the current decline in economic growth amid slowing consumer spending and the long-slumping housing market. While strong exports have buoyed the factory sector, a stronger dollar and slowing economies overseas could reverse that contribution down the road.

The Department also revised upward the previously reported 0.8 percent gain for June to 1.3 percent. Treasury debt prices fell as the report suggested resilience despite the deep housing correction and credit crunch. Stock indexes were also higher on the news but the dollar slipped as lingering doubts about the banking sector weighed heavily on the trading day.

Resilient manufacturing could strengthen the argument of some Federal Reserve officials who have called for higher interest rates to combat inflation. The Fed has held interest rates steady at 2 percent since April despite persistently high inflation as a consensus has prevailed that low rates are necessary to counter soft labor markets and lingering financial turmoil.

At the same time, it is possible the economy could falter in the second half of the year after being pushed ahead at a reasonable clip in the second quarter by government stimulus checks.

Transportation orders rose 3.1 percent in July, the largest gain since February, on a 28 percent rise in civilian aircraft orders. Orders for machinery and primary and fabricated metals rose, while demand for computers and appliances waned.

Even when volatile transportation orders were stripped out, demand for durables rose 0.7 percent. Non-defense capital goods orders excluding aircraft, seen as a barometer of business spending, jumped 2.6 percent, the strongest gain since last April.

Fannie Mae Changes Management

After the closing bell, Fannie Mae announced a management shake-up in an effort to come to grips with mounting credit losses and a shrinking capital base. The company's chief financial officer, Stephen Swad, was replaced, and the chief business officer, Peter Niculescu, will take on an expanded role. A new chief risk officer was also named.

Daniel Mudd, the company's chief executive, will remain in place and has the confidence of the board of directors, said board chairman Stephen Ashley. "The board of directors is firmly committed to Dan Mudd," Ashley said in a statement. "The board will continue to work closely with Dan and his management team to guide the company and support the housing finance system through a very challenging period."

Fannie Mae has booked billions of dollars in losses as the national housing market has been hit by a wave of loan defaults and falling home prices. Both Fannie Mae and Freddie Mac have seen more than 90 percent of their market capitalization evaporate since January and last month the Treasury Department promised to re-finance Fannie Mae and Freddie Mac if either were facing collapse.

Trading in shares of Fannie Mae was briefly suspended for the announcement and prices fell 2.0 percent in extended trade after the news.

The management shakeup means a greatly expanded role for Niculescu who will run three divisions: single-family mortgage guaranty, capital markets, and housing and community development. He joined Fannie Mae in March 1999 after leaving investment bank Goldman Sachs where he was the managing director and co-head of Fixed-Income Research and Strategy.

Gulf Platforms Being Evacuated

Oil and gas companies with drilling platforms in the Gulf of Mexico, began evacuating personnel from those platforms as a precautionary measure due to the possibility of damage from what could become hurricane Gustav.

Forecasters expect the storm to intensify into a major hurricane before it hits the Gulf, potentially forcing the shut-in of 85 percent of production in the region that accounts for a quarter of U.S. oil output and 15 percent of natural gas.

Shell Oil said it was evacuating about 300 nonessential workers from Gulf of Mexico platforms, while Transocean said it has pulled 30 workers off drilling rigs. BP said it was also pulling nonessential workers from the Gulf. Shell and BP said production was unaffected by the evacuations. Other companies were preparing to remove staff as well, according to a helicopter company involved in evacuations, while companies such as ConocoPhillips were still monitoring the storm.

U.S. crude oil futures rose to a high of $119.63, before sliding back to trade above $117 a barrel, up nearly $2, while natural gas jumped more than 2 percent to $8.492, on fears about Gustav's impact on Gulf production.

If current storm tracks hold, Gustav will be the first major storm to blast oil and natural gas infrastructure in the Gulf since hurricanes Katrina and Rita devastated the region in 2005, shutting 25 percent of U.S. oil and fuel production.

Somewhere between Houston and New Orleans there is going to be a problem. That's the heart of the platforms. And right now the forecast is for a Category 3 or higher hurricane to hit the area. Forecasters expect the storm to pack winds of more than 111 mph when it enters the Gulf of Mexico by Sunday.

Private and government forecasters said the storm could make landfall by midweek near Gulf refining centers. The U.S. National Hurricane Center forecasts the storm will most likely strike the Louisiana coast.

Companies first fly nonessential workers from platforms and then remove workers who are essential to production. It is around that time when the companies halt offshore production.