MarketView for August 10

 

 

Summary  

 

As is often the case after a sustained rally, stock prices pulled back a little on Monday as a result of some expected profit-taking after the S&P 500 index reached a 10-month high last Friday. The decline comes in advance of a number of economic reports that are expected to be released this week, including the Federal Reserve's statement on interest rates and the economy, as well as government figures for monthly retail sales.

 

The share prices of materials companies felt the brunt of the day’s downturn after a rise in the dollar curbed the desire to hold dollar priced commodities. For example, AK Steel Holding fell 4.7 percent to $20.31, while Nucor closed down 4.1 percent at $47.10.

 

The retail group was also a weak performer during Monday's regular trading session, with Best Buy down 5.3 percent at $37.66 after Goldman Sachs downgraded the electronics retailer to "neutral."

 

Research in Motion was also one of the day’s top drags, closing down 4.9 percent at $73.34. The stock was down for a third-straight session after UBS downgraded it to "neutral" from "buy" on concerns that Verizon Wireless, one of RIM's largest customers, may launch a version of the  iPhone.

 

On the upside, McDonald's reported stronger-than-expected July sales, sending the Dow component's stock up 1.9 percent to $56.27 Merck rose 1.7 percent to $30.60 after the pharmaceutical’ company’s stock was reinstated by Goldman Sachs with a "buy" rating, and added to its Americas conviction buy list.

 

The Federal Reserve meets on Tuesday and Wednesday. That meeting, along with the week’s economic data, could be pivotal in relation to the direction of oil prices.

 

Crude Prices Down

 

The price of crude oil was down on Monday, tracking modest losses in the equity markets on the eve of a meeting of the Fed, and after OPEC's president said current prices are "not bad." Domestic sweet crude futures for August delivery settled down 33 cents per barrel at $70.60, after spending much of the day in positive territory. London Brent crude settled down 9 cents per barrel at $73.50.

 

Oil's losses came after OPEC President Jose Botelho de Vasconcelos said prices are not bad at the current levels, a strong indicator that the cartel is unlikely to cut output at a meeting next month. OPEC has already agreed to cut some 4.2 million barrels per day from the world market since last September to counter slumping prices and demand in the economic slowdown.

 

OPEC kingpin Saudi Arabia appears set to keep oil supplies to Asian, European and U.S. customers unchanged in September, according to market sources.

 

Adding some price support was word from the U.S. National Hurricane Center that a low pressure system southwest of the Cape Verde Islands could develop into the first tropical cyclone of the Atlantic hurricane season. Tropical storms and hurricanes can impact energy supplies by shutting down offshore platforms and coastal refineries.

 

Belief That Recession Will End This Quarter Intensifies

 

The worst recession since the Great Depression will likely die with a whimper by the end of the third quarter, but uncertainty exists over the speed and duration of the economic recovery, according to the Blue Chip Economic Indicators survey of private economists released on Monday. The survey indicated that about 90 percent of the respondents believe the “downturn” will be declared to have ended this quarter.

 

This upbeat assessment followed recent government data indicating that GDP was down a meager 1.0 percent rate in the second quarter after a decline of 6.4 percent in the first quarter. Recent data, including housing and key labor market indicators, have suggested a bottoming in the recession and the economy close to turning the corner. The economy slipped into recession in December 2007.

 

The Blue Chip survey's findings indicated that nearly two-thirds of respondents believed the economy was set for a U-shaped recovery, marked by below-trend growth in gross domestic product before stronger growth took hold in the second half of 2010.

 

About 17 percent of the respondents anticipated a V-shaped rebound, where growth pulled back to its trend rate on a sustained basis, while the same percentage fretted that a W-shaped recovery could follow, the survey showed.

 

"In their view, GDP growth will pop higher for a quarter or two only to falter again before a lasting recovery takes hold," the survey said.

 

Growth in the second half was expected to garner support from a reduction in the pace of business inventory liquidation, marginal improvements in consumer spending and residential investment. The survey predicted that non-residential investment, however, would remain a drag on GDP.

 

Despite the improved economic picture, unemployment was expected to remain a problem, with the jobless rate predicted to peak at just over 10 percent late this year or early 2010, the survey showed. It was seen falling only slowly thereafter.

 

Government data on Friday showed the unemployment rate nudged down to 9.4 percent in July from 9.5 percent in June, but mostly because many people dropped out of the labor force.

 

"About 70 percent of the panelists believe the jobless rate will not dip below 7.0 percent on a sustained basis until the second half of 2012 or later," the survey said.

 

However, job losses could fade late this year or early 2010 and payrolls start to expand as companies rebuild inventories, which should lengthen the workweek, according to the survey.

 

The weak labor market, together with excess capacity in many business sectors were seen dampening inflation pressures.

 

"Consumer price inflation, excluding food and energy costs, will increase by slightly less in 2010 than in 2009," the survey said.

 

State Street Could Be Running On Empty

 

State Street, a large institutional money management firm, said on Monday it may not have set aside enough money to cover fees and penalties linked to lawsuits and investigations by regulators into risky investments.

 

Two years ago State Street, which manages $1.6 trillion for investors, set aside $625 million to cover costs stemming from lawsuits by clients charging that the company misrepresented its investment strategy. At the end of June, the company, which also earns fees for keeping records for investment managers, said it had $193 million left in the reserve.

 

Federal and state regulators are investigating allegations that Boston-based State Street made inappropriately aggressive bets on subprime mortgages. Its clients allege that while they thought they were buying low-risk fixed income funds, the funds may have been stocked with more aggressive instruments.

 

"Depending upon the resolution of these governmental proceedings, the remainder of the reserve established in 2007 may not be sufficient to address ongoing litigation, as well as any such penalties or remedies," State Street wrote in a regulatory filing released on Monday.

 

Earlier this year, the SEC alerted the company that it might face a civil enforcement action over selling these funds. On Monday, the company said SEC staff members had asked the agency to authorize an action alleging State Street violated antifraud provisions of federal securities laws. The company said it is holding discussions with the SEC, the Massachusetts attorney general's office and the Massachusetts secretary of state's office about the probes.

 

The Big Mac Remains Popular

 

McDonald's reported on Monday that sales at restaurants open at least 13 months rose a better-than-expected 4.3 percent in July, helped by gains in Britain, France and the United States. The company's new McCafe coffee drinks helped the bottom line. Same-store sales rose 7.2 percent in Europe, 2.6 percent in the United States and 2.1 percent in the company's Asia Pacific, Middle East and Africa (APMEA) segment.

 

In the United States, where diners have been struggling with the longest recession since the Great Depression, results got a boost from coffee drinks and traditional menu items, which include the Big Mac hamburger and Chicken McNuggets. Results from the APMEA region were driven by momentum in Australia, which analysts said was partially offset by continued weakness in China, Taiwan and Japan.

 

McDonald's said late last month that it expected July same-store sales to be similar to or better than June's 2.6 percent rise. McDonald's is one of the best-performing companies in the restaurant sector and the July results helped allay concerns stemming from disappointing June same-store sales.

 

The world's largest hamburger chain and some other fast-food restaurants have benefited as the global economic downturn has led diners to seek out lower-priced fare, but long-term economic doldrums and rising unemployment have taken a bite out of breakfast and beverage sales.

 

McDonald's said system wide sales slipped 0.3 percent in July but were up 6.2 percent excluding the impact of currency fluctuations. The company recently has shifted its advertising toward its core and value menus and away from higher-priced food items, with the exception of its new Angus burger, which is being introduced across the United States.

 

McDonald's offered free samples of McCafe mocha drinks on Mondays during July to entice U.S. consumers to try its new coffee-based drinks, which take aim at Starbucks' main business and are the first wave of the fast-food chain's plan to sell more high-margin beverages. While some analysts had predicted that McDonald's entry into the fancy coffee market would hurt sales at Starbucks, it appears the two operators continue to appeal to different customers.