MarketView for August 4

Summary  

The major equity indexes managed to stake out a small gain by the closing bell on Tuesday, despite being down in negative territory for a good portion of the day. Leading the very subdued parade was the financial sector, as recent economic reports continued to point to a sustained if slow recovery from the recession. Nonetheless, the end result was still a nine-month high for the Dow Jones industrial average and the S&P 500 indexes. The Nasdaq achieved its highest close since early October.

Meanwhile, the latest economic data indicated that consumers spent more in June, though partly because of rising gasoline prices, while at the same time contracts for previously owned homes rose more than expected. On the negative side, consumer income suffered its biggest drop in four-and-a-half years, underscoring the problem of growing unemployment.

Caterpillar saw its share price rise 6.1 percent to $47.89 after the company's CEO gave an upbeat earnings presentation and said that in future recessions, the company would be able to report annual earnings well above this year's forecast.

PepsiCo was up 5.1 percent to $59.06 after it said it agreed to buy Pepsi Bottling Group and PepsiAmericas in a deal worth $7.8 billion, as the second-largest soft drink maker behind Coca-Cola Co seeks to cut costs and increase earnings in North America.

Two of the largest mall owners, Simon Property Group and Macerich Co, posted lower results as consumers remain reluctant to spend, but the companies' CEOs said retail declines appear to be abating and shares jumped. Simon Property, up 6.9 percent at $60.91, was the top point gainer in the Dow Jones Equity REIT index, which rose 5.3 percent.

The Economic News Continues to Improve

Consumers spent more in June and there was positive news on the housing market, but a large decline in income pointed to a slow recovery from the current recession. According to the Commerce Department, spending rose 0.4 percent in June after a 0.1 percent gain in May, in large part because of higher gasoline prices. After adjusting for inflation, spending, which accounts for over two-thirds of U.S. economic activity, fell 0.1 percent after being flat in May. Savings slipped from a recent rising trend as strapped consumers had to dig deeper to spend.

While the recession's grip on the economy appears to be slackening, continuing job losses are sapping consumers' willingness to spend and heightening chances that recovery from the recession, now in its 20th month, will be tepid.

The Commerce Department also reported that personal income fell 1.3 percent in June, as the effects of one-time government stimulus checks, part of the government's $787 billion package to jump-start the economy, wore off.

The drop in personal income was the biggest decrease for any month since January 2005. During June, private wages and salary disbursements decreased $28.6 billion after dropping $11.3 billion in May, the department said. Real disposable income, money left over after taxes and adjustment for price rises, was down by 1.8 percent in June, the largest decline in a year, and savings fell, the Commerce Department said.

The amount of after-tax income Americans stashed away decreased to an annual rate of $505 billion in June from $681 billion in May. The saving rate, the percentage of disposable income saved, fell to 4.6 percent after jumping to 6.2 percent in May.

In a sign that weak demand is suppressing price pressures, a gauge of inflation closely watched by the Federal Reserve moderated slightly in June. The year-on-year personal consumption expenditures index, excluding food and energy, rose 1.5 percent after a 1.6 percent increase in May, the Commerce Department said.

Separately, the Pending Home Sales index rose 3.6 percent in June, the National Association of Realtors said. Compared to the same period last year, the index, which is based on contracts signed in June, jumped 6.7 percent.

Big Money Says Stocks Are Going Higher

Pension managers and mutual fund houses have been among the largest buyers of the Dow Jones industrial average .DJI in recent weeks, underscoring the growing belief the recession is over.

Between July 14 and July 21, when the Dow gained almost 600 points to 8915, net buying by pension managers and mutual fund managers -- or so-called "long-term" or "big" money managers -- totaled $1.9 billion, according to Thomson Reuters.

The following week, when the Dow approached 9000, pensions and mutual funds were net sellers but only at $578 million, while hedge funds were net buyers of $19 million in Dow stocks but not after selling $166 million the previous week, the settlement records showed.

The move by these institutional investors into Dow stocks corroborates with economic data and earnings that have been better than expected.

Hedge funds, which have appeared to miss the huge rally in recent weeks, also are becoming less bearish. The Greenwich Alternative Investments Macro Sentiment Indicator, which is based on hedge fund investors employing a macro view and who collectively manage a total of $30 billion in assets, showed that 50 percent of those macro managers expect the S&P to continue to move lower. That number was 60 percent in June.

Crude Feels Pressure of Profit Taking

Oil prices fell on Tuesday on expectations data will show a rise in crude inventories and profit-taking following three days of gains. U.S. crude settled down 16 cents at $71.42 per barrel, after rising nearly 13 percent in the previous three sessions. In London, Brent crude rose 73 cents to settle at $74.28 a barrel.

Pressure came on forecasts that weekly data would show an increase in crude stockpiles.

The American Petroleum Institute was to release its weekly inventory report late on Tuesday, with the U.S. Energy Information Administration report due out on Wednesday.

However, traders received a surprise when the API report, released after the close of regular equity trading, indicated a surprise drawdown in crude oil inventories last week against the forecast for a stock build. The API said that crude stocks fell 1.5 million barrels to 350.9 million barrels as imports dropped sharply.

Heating oil futures gained further as the American Petroleum Institute also reported an unexpected stock draw for distillates, which include heating oil and diesel fuel. Gasoline futures dipped, after API data showed supplies were up, going against the forecast for a drawdown. Distillate stocks declined 1.0 million barrels to 157.9 million barrels and gasoline supplies rose 2.1 million barrels to 215.7 million barrels, the API said.

Concerns about a rebound in the economy weighed on oil prices earlier in the day. Optimism that a potential turnaround in the global economy could lift sagging oil demand has helped send crude up from lows below $33 a barrel in December, with traders keeping an eye on equities markets for signs of an economic rebound.