MarketView for August 28

Summary

  

Wall Street rallied sharply again on Thursday after the government reported the economy grew at a surprisingly robust clip in the second quarter and oil prices eased, driving gains in major industrial and financial companies. According to the government, strong export growth and consumer spending helped gross domestic product expand at a 3.3 percent annual rate between April and June, above an initial estimate of 1.9 percent.

 

That lifted the fortunes of large industrial companies. Shares of Caterpillar, often described as an economic bellwether, rose 3 percent. Chief Executive Jim Owens said Caterpillar's business in China could double by 2010.The brighter economic outlook coupled with a management shake-up at Fannie Mae added momentum to financial shares, which then led the parade of stocks moving higher. Fannie Mae reshuffled its top management ahead of implementing a plan to preserve capital and cut losses.

 

Bank of America was the top gainer on the S&P, rising 6.0 percent to $31.43. MBIA was the largest percentage winner among Big Board stocks, rising 34.9 percent to $16.15 after the bond insurer said on Wednesday it plans to reinsure a $184 billion portfolio of investment-grade U.S. public finance credits. Rival Ambac Financial added 41.6 percent to $7.42, while American International Group, the world's largest insurance company, added 7.6 percent to $21.51.

 

A retreat in the price of crude oil, which settled down $2.56 at $115.59 a barrel, eased fears about constraints on consumer and business spending. The price of crude, which had jumped above $120 earlier in the session, fell after the International Energy Agency pledged to open its emergency stockpiles if Tropical Storm Gustav damages U.S. oil and natural gas facilities in the Gulf of Mexico.

 

Boeing, hoping to avoid a strike, said it made a "best and final" contract offer to its largest labor union. Tiffany & Co rose 10.7 percent to $43.85 after it posted a higher-than-expected profit and raised its outlook.

 

Trading volume was light on the Big Board, with about 910 million shares changing hands

 

Economic Growth Likely To Be Temporary

 

Despite the surprising growth last quarter, many economists, myself included, remain unconvinced that the country has avoided a recession. GDP measures the value those goods and services that are produced within the United States and is considered by many to be the best barometer of our country's economic health.

 

According to the Commerce Department the unexpected 3.3 percent increase in the gross domestic product to stronger-than-expected consumer spending and exports, while inventories did not decline to the degree expected. At the same time there is the concern that we will will hit another economic pothole in the third and fourth quarters as the impact of the tax rebates disappears and exports tail off as other countries' economies slow down.

 

Even Federal Reserve Chairman Ben Bernanke recently warned the economy will be weak through the rest of this year. Of course, not everyone was dismissing the numbers. The stock market rallied following the report and some experts cheered that the worst may be over.

 

Housing, credit and financial troubles have pounded the economy. In turn, employers have clamped down on hiring, driving the nation's unemployment rate up to 5.7 percent in July, a four-year high.

 

The Labor Department said Thursday that the number of people signing up for jobless benefits declined last week for the third straight period, but claims remained above 400,000, an indicator of a slowing economy.

 

Employers have cut jobs every month this year and wage growth is trailing inflation. That combination raises concerns about the future of consumer spending, one of the pillars underpinning the economy.

 

The biggest factor in the second-quarter's GDP rebound was our robust sales of exports to other countries. The weaker value of the dollar has bolstered those sales. Exports grew at a 13.2 percent pace in the spring and were much stronger than the government's initial estimate of a 9.2 percent growth rate, and more than double the 5.1 percent growth rate logged in the first quarter.

 

Imports, meanwhile, fell at a 7.6 percent annualized pace in the spring, as economic troubles in the U.S. crimped demand for foreign-made goods. The improved trade picture added 3.1 percentage points to second-quarter GDP, the most since 1980.

 

Consumers increased their spending at a 1.7 percent pace in the second quarter. That was slightly better than the 1.5 percent growth rate initially report and marked the best showing in nearly a year. Government stimulus checks of up to $600 a person helped energize shoppers who had hunkered down amid the economy's problems.

 

One of the largest problems, the housing collapse, was evident in the GDP report. Builders cut back at an annual rate of 15.7 percent in the second quarter, although that was a better showing than early this year and late last year.

 

Businesses trimmed spending on equipment and software in the spring. And, they reduced investment in inventories, but not as much as initially estimated by the government. That was another factor contributing to the improved GDP reading.

 

One measure of corporate profits showed companies losing ground in the second quarter. After-tax profits fell 3.8 percent in the spring, compared with a 1.1 percent increase in the first quarter.

An inflation gauge tied to the GDP report showed all prices rising at a rate of 4.2 percent in the second quarter, the same as initially estimated.

 

Taking out energy and food, prices rose 2.1 percent. That also was unchanged from the government's previous estimate but remained outside the Federal Reserve's comfort zone.

With the economy still coping with fallout from housing and credit problems, the Fed is expected to hold interest rates steady at its next meeting on Sept. 16, and probably through the rest of this year.

 

China has head start over West for Iraq oil

 

China crossed the line first in the race for major oil contracts in post-Saddam Iraq and has gained a head start over Western oil majors in the competition for future energy deals. China's largest oil company, state-run CNPC, agreed a $3 billion service contract with Iraq on Wednesday. The deal could set a precedent for terms that fall far short of the lucrative contracts the oil majors had hoped for as they jostled for access to the world's third largest oil reserves.

 

Starved of investment since the Gulf War of 1990-1991 and the subsequent U.S.-led invasion of 2003 that removed former President Saddam Hussein, Iraq holds some of the world's last large, cheap, untapped oil reservoirs.

 

Now CNPC and China's other state-supported oil firms are likely to face off with Western oil companies in a bid round for other long-term contracts to enhance giant fields already in production. Iraq aims to sign those deals in mid-2009. Baghdad needs billions of dollars of investment to overhaul and expand its energy sector after years of sanctions and war.

 

Energy-hungry China has already provided tough competition for Western oil majors in Africa. Chinese state oil companies can take on more risk than big oil firms as securing future energy supplies is a matter of strategy rather than profit.

 

CNPC faced no competition for Adhab, a renegotiated contract first signed under Saddam in 1997. Full details have yet to emerge, but it is know that the new service contract is for a set fee, a change from the initial production sharing agreement (PSA).

 

Production sharing agreements were common in the 1980s and 1990s in the days before oil prices shot up, when the oil majors called the shots over producer countries who competed with each other for investor capital by offering generous terms.

 

Oil majors prefer PSAs as they get a share of output, providing an incentive to maximize production and allowing them a share of revenues from any oil price rise. However, governments of oil producers worldwide have moved to take a bigger slice of record oil income, PSAs have become rarer and set-fee contracts more prevalent.

 

Baghdad has yet to say publicly what contract model it will adopt for fields already discovered but not yet producing such as Adhab. But the CNPC deal may have set a tough standard.

Iraq is short of power and Oil Minister Hussain al-Shahristani has come under political pressure to do more to meet domestic electricity demand.

 

Adhab could bode well for other projects linked to power generation, such as Royal Dutch Shell's scheme to capture associated gas that is currently flared at oilfields in southern Iraq. Oil majors will hope that Shahristani's signing of Iraq's first long-term oil contract might prove good news rather than bad.

 

If anything this is a sign that Iraq is serious about these long-term contracts and that Shahristani can get them signed," said one oil company executive whose company is in the hunt for Iraq deals. "This will focus big oil companies even more on the upcoming bid round."

 

Tiffany Knocks Cover Off Ball

 

Tiffany surprised Wall Street as it posted better than expected earnings on Thursday, due in part to strong sales overseas. The company raised its full-year forecast and expects its same-store sales in the sluggish domestic jewelry market to grow in the key fourth quarter.

 

Zale's reported a lower-than-expected loss and forecast a profit for the current fiscal year that also exceeded Street expectations. The company said it will focus less on discounts and more on new products, which it expects will lure shoppers to its stores during the upcoming holidays.

 

Tiffany's domestic sales have lagged recently as consumers cut back on discretionary purchases, though its higher-income clientele tends to be less affected by economic concerns than people who frequent more hard-hit jewelers such as Zale, Finlay Enterprises and Signet Group. Tiffany's net profit nearly doubled to $80.8 million, or 63 cents per share, in its fiscal second quarter.

 

Tiffany's sales rose 11 percent to $732.4 million. Sales in the Americas, which include the United States, Canada and South America, rose 3 percent, helped by new stores. U.S same-store sales fell 4 percent. Same-store sales rose 11 percent in Europe and 1 percent in the Asia-Pacific region. Tiffany expects worldwide sales to grow about 9 percent in the year, fueled by Europe and the Asia-Pacific region, excluding Japan.

 

The company raised its full-year earnings outlook to a range of $2.82 to $2.92 per share. Previously, it had forecast per-share earnings of $2.80 to $2.90.

 

Dallas-based Zale has suffered in recent months as even its most avid shoppers resist buying jewelry due to rising prices for necessities like food and fuel. But it expects that sentiment to soften come holiday time.

 

Zale's fiscal fourth-quarter loss was $4.9 million, or 15 cents per share, compared with a profit of $1.5 million, or 3 cents a share, a year earlier. Excluding items, the loss was 48 cents per share. Total sales at Zale rose 6.1 percent to $456.2 million. Same-store sales also rose 6.1 percent. The company said it expects to earn $1.10 per share to $1.25 per share for the full-year ending in July 2009.