MarketView for August 3

 

 

Summary  

 

Oh, those nice round four digit numbers, as in 2008 for the Nasdaq and 1,002 for the S&P 500 indexes as Wall Street reaches for high ground that we have not seen for many a month, a partial result of the latest manufacturing data.

 

Adding to the positive mood, Ford gained 4 percent to $8.33 as the auto maker reported its first year-over-year monthly sales increase since November 2007. Car buyers took advantage of a government program to trade in gas guzzlers.

 

Nonetheless, the key driver behind Monday’s momentum was the report posted by The Institute for Supply Management indicating that its index of national factory activity rose to 48.9 in July, the highest level since August 2008. While the reading was below 50, the level separating contraction from expansion, it was higher than analysts had expected.

 

In the financial sector, Bank of America  saw its share price rise a sharp 3.6 percent to $15.32 after the bank agreed to pay $33 million to settle charges by the SEC that it had made false and misleading statements to investors about bonuses at Merrill Lynch. Bank of America acquired Merrill Lynch on January 1. The bank also indicated on Monday that it had recruited Citigroup veteran Sallie Krawcheck and shuffled its top executives, putting some in the running to succeed Chief Executive Kenneth Lewis.

 

In addition financial stock rallied after a number of major European banks, including HSBC and Barclays offered encouragement that they could get through the worst of the recession.

 

On the Nasdaq, Cisco, which is scheduled to report results this week, was among the top advancers, rising 2.6 percent to $22.57. Apple was up 1.9 percent to $166.43 and Google saw its share price chalk up a gain of 2.1 percent to $452.21 after both companies mutually agreed on the need for Google CEO Eric Schmidt to resign from Apple's board.

 

IBM helped out the Dow Jones industrial average after the Dow component received some encouraging word from the Bernstein research firm indicating it was raising its price target on the stock. IBM shares rose 1.7 percent to $119.92.

 

Manufacturing on the Rebound

 

U.S. manufacturing activity should grow next month for the first time since January 2008 as industrial companies work to restock customers' bare shelves, a trade group said Monday.

 

The Institute for Supply Management's better-than-expected report, improving manufacturing data overseas and a surprise jump in U.S. construction spending in June, helped push stock markets higher. Following last week's report that the U.S. economy shrank less than expected in the second quarter, many economists believe the longest recession since World War II may be over, though any recovery will be subdued.

 

The ISM, a trade group of purchasing executives, said its index measuring U.S. manufacturing activity in July showed the slowest pace of decline since last August. The 48.9 reading was up from 44.8 in June. Production and new orders jumped to their highest level in two years, while new export orders grew after shrinking for nine months.

 

"If we stay on trend ... we would expect to be above 50 next month," said Norbert Ore, chair of ISM's manufacturing survey committee. A reading above that threshold would indicate growth in manufacturing, something that hasn't happened in 18 months.

 

The pace of decline in manufacturing has been slowing since the index hit a 28-year low of 32.9 in December. And it was the third straight monthly reading above 41.2, which tends to indicate expansion in the overall economy, if sustained at such levels, according to the ISM.

 

The ISM data tracking employment contracted for the 12th straight month, although at the slowest pace since last September.

 

Construction Spending Rises

 

According to a report released by the Commerce Department on Monday, construction spending exceeded expectations, rising 0.3 percent in June, with the spending rate for public buildings reaching a record high.

 

Public construction was up 1.0 percent to $321.75 billion, the highest on record. State and local construction also rose 1.0 percent to a record $295.79 billion, while federal building was up 1.9 percent. It was the fifth month in a row that public construction, which makes up a third of total U.S. construction spending, made gains.

 

While private construction dropped for the second month in a row, by 0.1 percent, private residential building, which makes up a quarter of construction spending, rose 0.5 percent to $246.07 billion. The spending rate will likely add to hopes the housing sector, which triggered the current recession, is starting to rebound.

 

The Commerce Department said private residential construction fell 3.1 percent in May, much less than the 3.4 percent decline originally reported. At the same time, April's residential construction was revised to a 1.5 percent rise from last month's report that it was unchanged. Public residential construction was up 4.6 percent from May, as well. Compared to June 2008, total construction spending was down 10.2 percent.

 

Crude Prices Rise Sharply

 

The price of crude oil rose more than 3 percent to above $71 a barrel on Monday as positive manufacturing data, domestically and abroad, raised optimism that what appears to be the start of a serious economic recovery is also likely to increase the demand for energy.

 

Domestic crude for August delivery settled up $2.13 per barrel at $71.58, the highest settlement since June 12. At the same time, Brent crude settled up $1.85 per barrel at $73.55, its highest settlement since October 14, 2008. Brent has found support from annual North Sea maintenance and supply disruptions linked to rebel attacks in Nigeria.

 

Monday’s weak dollar, which hit its lowest point this year against a basket of currencies on Monday, amid increased risk appetite, helped to push oil prices higher. The latest gain in oil prices brings oil within sight of the 2009 high of $73.38 per barrel set in June, though some see resistance that prices could struggle to rally beyond.

 

China's crude stockpiles, including state strategic and commercial reserves, declined 2.7 percent in June from a month earlier, the first fall in four months, China OGP, a newsletter run by Xinhua, reported.

 

Supply curbs by OPEC since last year in response to falling demand have helped crude rally from below $33 in December. However, output from 11 members from the OPEC rose slightly in July, lowering its compliance rate to its agreed supply curb to 71 percent from 72 percent in June, a Reuters survey showed.

 

As always, the markets are anxiously awaiting the weekly domestic crude inventory data on Tuesday from the American Petroleum Institute and Wednesday from the Energy Information Administration.

 

Ford Chalks Up 2.3 Percent Gain in Sales

 

Ford Motor Co said on Monday that U.S. auto sales rose 2.3 percent in July, its first year-over-year monthly sales increase since November 2007, supported by the U.S. government "Cash for Clunkers" program.

 

Ford, whose shares rose as much as 10.75 percent to the highest level since November 2007, said U.S. sales rose to 165,279 vehicles for all of its brands in July, from 161,530 vehicles a year earlier.

 

Sales rose 1.6 percent to 158,838 vehicles in its core Ford, Lincoln and Mercury brands, it said. U.S. sales in its Volvo luxury car unit that is up for sale rose 25.7 percent to 6,441 vehicles, the automaker said.

 

Retail sales for the core Ford, Lincoln and Mercury brands rose 9 percent from a year earlier, Ford said.

 

For its Ford, Lincoln and Mercury brands car sales rose 8.7 percent, crossover sales rose 36.9 percent, SUV sales fell 36.1 percent and truck and van sales fell 14.5 percent.

 

Ford, the only large U.S.-based automaker that has not restructured in bankruptcy with federal funding, also said it was the first of the major manufacturers that sell cars in the United States to report a monthly sales increase this year.

 

The increase marked Ford's first year-over-year monthly rise since just before the U.S. economic downturn began. U.S. auto industry sales have been tracking at their lowest annualized rates in nearly 30 years so far in 2009.

 

The "Cash for Clunkers" program took effect on July 24, a week before the end of the July sales period.