MarketView for August 6

 

 

Summary  

 

Wall Street pulled back a little on Thursday as Wall Street tried to steady its nerves ahead of the government report on July employment, resulting in some profit-taking that sent the major equity indexes into negative territory for the day. The all important non-farm payrolls report, which will show the number of jobs lost in July will be released before the opening bell on Friday. The day’s losses were broad-based, with the consumer staples and telecommunications services sectors among the day’s largest decliners.

 

Before the opening bell, numbers from the Labor Department showed initial jobless claims fell 38,000 to a seasonally adjusted 550,000 for the week ended August 1, down substantially from the 588,000 the previous week. The latest weekly claims were well below the forecast calling for 580,000.

 

Positive data also came from July retail sales, as some U.S. retailers reported sales declines that were not as steep as expected. Investors are looking for signs of life among recession-weary consumers to help underpin a potential economic recovery.

 

Procter & Gamble fell for a second day after posting an 11 percent decline in quarterly sales on Wednesday. The shares closed down 4.5 percent at $51.46, making it the worst performer among the companies making up the Dow Jones industrial average. Meanwhile, Dow component, Cisco Systems also weighed heavily on the index as its Chief Executive John Chambers said that it's too soon to call a recovery. After losing ground in morning trading, Cisco rose 0.6 percent to close at $22.308.

 

After the closing bell, shares of Nvidia rose 3.7 percent to $13.60 after it reported quarterly results. The shares had closed at $13.12, down 2.1 percent in regular trading.

 

Jobless Claims Fall

 

New claims for unemployment insurance fell sharply last week, raising hopes that the labor market was recovering and that the broader economy was stabilizing. Initial claims fell 38,000 to a seasonally adjusted 550,000 in the week ended August 1. In a sign that the trend was firmly toward a moderation in the pace of layoffs, the four-week moving average for new claims fell 4,750 to 555,250 in the week ended August 1.

 

The four-week moving average is considered a better gauge of underlying trends as it irons out week-to-week volatility. The moving average has declined for six consecutive weeks. However, the number of people collecting long-term unemployment benefits rose by 69,000 to 6.31 million in the week ended July 25, though the four-week moving average declined for four straight weeks.

 

However, White House economic adviser Christina Romer cautioned that economic recovery will be painful and that Friday's widely watched report on July unemployment likely will show hundreds of thousands more jobs were lost. Romer, who chairs the White House Council of Economic Advisers, said on Thursday the U.S. government's $787-billion stimulus program was stabilizing the economy despite "unacceptable" job losses that may continue for some time.

 

"Unfortunately, even once GDP (gross domestic product) begins to grow, it will likely take still longer for employment to stop falling and begin to rise," she said.

 

Labor market weakness is casting a shadow over the economy's recovery prospects as high unemployment exerts pressure on incomes, severely curtailing households' spending capacity. Consumer spending is the main driver of economic activity and there are signs that shoppers may be coming back to the malls.

 

Crude Prices Decline Somewhat

 

The price of crude oil was down a bit on Thursday, pulled lower by weakness on Wall Street and gains in the dollar. Sweet domestic crude for August delivery settled down  3 cents per barrel at $71.94 per barrel. In London, ICE Brent crude fell 68 cents to settle at $74.83 a barrel.

 

Adding downward pressure to crude prices was the dollar, which made some upward headway against other currencies, lowering the purchasing power of holders of other currencies. Meanwhile, crude inventories rose by a much-higher-than-expected 1.7 million barrels in the week ending July 31, according to data from the Energy Information Administration on Wednesday.

 

The premium of ICE Brent futures to U.S. crude increased on Thursday and was as high as $3.99 a barrel, helped by summer maintenance in the North Sea and high U.S. inventories at Cushing, Oklahoma. The gains in Brent were also due to a lower perceived regulatory risk on ICE, following calls for greater scrutiny of commodities trading in the United States. The U.S. Federal Trade Commission on Thursday announced new rules aimed at curbing energy market manipulation.

 

Meanwhile, the U.S. Commodity Futures Trading Commission has been studying position limits in energy markets to clamp down on speculation. The UK Financial Services Authority and the UK Treasury also met with oil industry representatives this week to discuss market transparency and regulation, but issued no statement.

 

Federal Trade Commission Steps Up Pressure on Manipulators

 

Energy traders and companies will face fines of up to $1 million a day if they manipulate oil markets, the Federal Trade Commission ruled on Thursday in a crackdown on fraud that they said causes widespread damage to the economy. The agency issued a rule, which takes effect November 4, to prohibit fraud or deceit both in the cash, or physical, energy markets and on the regulated futures exchanges.

 

"This new rule will allow us to crack down on fraud and manipulation that can drive up prices at the pump," said FTC Chairman Jon Leibowitz. "We will police the oil markets -- and if we find companies that are manipulating the markets, we will go after them."

 

The announcement comes as the Obama Administration moves on other fronts to contain speculation in commodity trading, a sharp contrast to President George W. Bush's team that was perceived as friendly to Big Oil. Congress has also pushed tough oversight of trading after crude rose to a record $147 a barrel last summer.

 

The American Petroleum Institute slammed the rule, stating that oil companies would see fines jump a hundred-fold from $11,000.

 

"We are concerned the new rule could lead to a less competitive market that would ultimately not be in the best interests of American consumers of gasoline, diesel and other petroleum products," the trade group said.

 

FTC Commissioner William Kovacic voted against the rule, saying it may cause unnecessary disruptions in energy transactions that ultimately benefit consumers.

 

Violations include making false announcements of pricing or petroleum output, false data, and so-called "wash sales", where it appears there has been a sale or purchase of a commodity even though no ownership change has taken place.

 

The FTC said the price of energy significantly affects the daily lives of American consumers and businesses. "Because fraudulent or deceptive conduct within wholesale petroleum markets injects false information into the market process, it distorts market data and thus undermines the ability of consumers and businesses to make purchase and sales decisions congruent with their economic objectives," the agency said.

 

Patricia Galvan, a deputy assistant director of the FTC, emphasized the agency would go after wrongdoers in the wholesale market and not at the retail level.

 

For example, she said the FTC would not pursue charges against a retail service station owner that raised gasoline prices after a hurricane. However, she said the agency could fine the company selling the gasoline to the service station if the company claimed it boosted prices because of low fuel inventories when it actually had plenty of supplies on hand.

 

In addition to looking for fraudulent activity in the cash market, Galvan said the agency would "coordinate" with the Commodity Futures Trading Commission on manipulation in the regulated futures markets.

 

However, she said the FTC would not rule out acting alone in charging traders in the futures markets with manipulation if the CFTC decided not to pursue possible wrongdoing.

 

Market sources have said cash products traders often try to influence price indexes, like the Platts oil benchmark, by using multiple low-volume trades in order to get good terms on larger supply deals benchmarked to those indexes. Some oil traders said the ruling was long overdue.

 

Retail Sales Still Under Pressure

 

Retail sales fell for the 11th straight month in July as consumers continued to search for bargains and basics in the downturn. Nonetheless,  chains including Macy's and Gap gave upbeat profit forecasts as they discounted less merchandise and cut costs and margins improved.

 

Rising unemployment, cool weather and a lack of tax-free holidays like those in July 2008 kept shoppers at home or buying just what they needed last month, rather than stocking up heavily on back-to-school items.

 

July sales at stores open at least a year, a measure known as same-store sales, fell 5.1 percent from a year earlier, compared with June's 4.9 percent decline,

 

All eyes are on August and September, with tax-free periods in some states moving into August and the later Labor Day holiday spelling delayed back-to-school shopping for many. September 2008 was the start of the streak of negative same-store sales, so comparisons will start to ease for retailers who have struggled to get shoppers into stores.

 

The largest decline in July same-store sales was reported by teen apparel retailer Abercrombie & Fitch, a drop of 28 percent. American Eagle Outfitters and Aeropostale missed sales expectations, but both teen retailers raised their second-quarter forecasts. Children's Place forecast a slighter narrower loss than Wall Street expected.

 

Over at department stores, Saks reported the steepest decline, while Kohl's posted an unexpected rise in same-store sales.

 

Monthly retail sales reports have been less of a barometer of the overall economy since Wal-Mart stopped disclosing its data earlier this year. It is set to report quarterly results next week.

 

Dollar Tree said it is seeing more shoppers visit its stores in search of cheap health and beauty products, cleaning supplies and food. Its sales rose more than expected. However, sales at Big Lots fell more than expected as higher-ticket items like furniture were weak.

 

TJX, which has attracted more customers to its off-price T.J. Maxx and Marshalls chains, reported a better-than-expected rise in same-store sales and said earnings should come in near the high end of its previous forecast. Limited Brands saw same-store sales fall less than expected and its shares soared 15 percent to their highest level in nearly 10 months. Even though J.C. Penney sales fell more than anticipated, it raised its earnings guidance as margins and operating expenses improved.

 

Lower gasoline prices may have spurred some consumers to spend, but crimped sales at stores that sell gas, such as Costco Wholesale and BJ's Wholesale Club. Sales fell more than expected at both chains.