MarketView for August 17

 

 

Summary  

 

It was a tough day on Wall Street on Monday as weak data from Japan and a disappointing outlook from Lowe's had the Street toned down the Street’s ebullience of the past few weeks. Japan's gross domestic product showed its economy pulled out of recession in the second quarter, but at a slower pace than expected, prompting a sell-off in major Asian markets that spilled over into Europe and North America.

 

Lowe's shares fell 10.3 percent as the company offered up few reasons to be positive about the outlook for increased consumer spending, thereby amplifying worries over the possibility of continued weak consumer spending following last week's poor data on consumer sentiment and retail sales.

 

Lowe's third-quarter earnings outlook came in below expectations and the home improvement retail giant made it clear that the plan now was to slow down plans for expansion. Chief Executive Robert Niblock said consumers remain under pressure even though housing is showing signs of bottoming out. Lowe's stock closed down $2.36 at $20.47.

 

The day’s selling activity was broad-based, but shares sensitive to the economy's cycles were hurt the most. As a result, the Dow Jones industrial average and the S&P 500 had their worst one-day percentage sell-offs since July 2, while the Nasdaq had its worst day since June 22. However, the S&P 500 index is still up about 45 percent from its early March lows.

 

Shares of Caterpillar fell 4.5 percent to $43.95, leading the Dow's major decliners. The health-care sector outperformed other groups, with managed care companies boosted by the view that a public health-care plan was fading.

 

On a more positive note, a report by the New York Federal Reserve indicated that activity at New York state factories grew for the first time since April 2008, suggesting manufacturers could lead the economy out of its worst downturn since the Great Depression.

 

Home Builder Sentiment At High For Year

 

Home builder sentiment in August rose to its highest level in over a year, according to a survey released on Monday. The National Association of Home Builders/Wells Fargo Housing Market Index edged up to 18 from 17 in July. It was the highest level for that index since June 2008 and marked the second consecutive monthly gain for the index, which measures builder confidence in the market for newly built, single family homes.

 

The NAHB attributed the rise to the government's tax credit incentive for first-time buyers, but warned the small gains in the housing market could be wiped-out if that incentive was not extended when it expires in November.

 

Recent data ranging from housing starts to sales have suggested a bottoming in the three-year slump. Housing is at the center of the worst U.S. recession since the Great Depression of the 1930s. Restoring stability to the housing market is crucial to reviving the economy.

 

The NAHB survey also showed two out of three sub indexes of the Housing Market Index rising in August. Specifically, the current sales conditions gauge was unchanged at 16, while the sales expectations measure for the next six months climbed four points to 30 in August. The traffic of potential buyers index rose three points to 16 in August.

 

Credit Card Defaults Stabilizing

 

Credit card defaults showed signs of stabilizing last month, an indication that American consumers may not be in as bad shape as feared despite job losses and the housing slump. Bank of America in a regulatory filing on Monday indicated that credit card default rates dropped in July after several months of a steep deterioration. JPMorgan Chase, Citigroup and Discover Financial Services also stated that bad-loan levels fell.

 

Bank of America, the bank with the highest default and delinquency rates among the top credit card issuers, said its charge-off rate, or debt the company believes it will never collect on, inched down to 13.81 percent in July from 13.86 percent in June.

 

Even more encouraging was JPMorgan's report that defaults fell to 7.92 percent from 8.04 percent for second straight month, while Citigroup's default rate declined to 10.03 percent from 10.51 percent. Discover's charge-off rate fell to 8.43 percent from 8.75 percent.

Capital One bucked the trend, however, as its annualized net charge-off rate rose to 9.83 percent in July from 9.73 percent in June.

 

Wall Street did like the continuation of the decline in delinquencies, an indicator of future defaults, in American Express, Bank of America, and JPMorgan. These reports come a few weeks after American Express sparked optimism for credit card issuers after posting a second straight month of falling defaults. American Express said it saw the first signs of improvement for the industry in 18 months and stressed the decline in losses was not seasonal.

 

Some on Wall Street attributed the recent slowdown in defaults to seasonal effects, as Americans use tax refunds to pay down debt, and predict bad-loan levels will increase until later this year or early 2010. Credit card defaults usually track unemployment, which is expected to peak at more than 10 percent by year-end. It was at 9.4 percent in July.

 

Crude Prices Fall One Percent

 

The price of crude oil futures fell 1 percent to below $67 per barrel on Monday as due to a more cautious outlook with regard to the global economic recovery and the subsequent revival of the demand for energy in general and crude oil in particular.

 

Domestic sweet crude oil futures for September delivery settled down 76 cents per barrel at $66.75 after earlier falling to $65.23, the lowest since July 31. Brent crude for October settled down 90 cents per barrel at $70.54

 

The decline added to the market's $3.01, or 4.3 percent slide on Friday, the largest loss since July 29, after the Reuters/University of Michigan Survey of Consumers showed confidence in early August dropped.

 

Meanwhile, with the Atlantic hurricane season beginning to finally kick in and which can disrupt Gulf of Mexico oil and gas production, the substantial crude currently stockpiled in the United States would limit the impact of a storm on oil prices. In that regard, hurricane Bill, the first of this season, is expected to strengthen to a category 3 by Wednesday, possibly reaching the area of Bermuda early on Saturday, the U.S. National Hurricane Center said.

 

Tropical storm Claudette was downgraded to a tropical depression over southern Alabama and tropical depression Ana was on a track that could take it into the Gulf of Mexico by the end of the week.

 

Schwab Sued By New York State Over Auction Rate Securities

 

Charles Schwab was sued by New York Attorney General Andrew Cuomo, who accused the discount brokerage of fraudulently misleading investors about the safety of auction-rate securities. The civil lawsuit was filed Monday in New York State Supreme Court in Manhattan and it represents an escalation of Cuomo's efforts to punish brokerages and force them to repurchase the debt at face value from investors who were misled into believing the securities were as solid as cash.

 

Much of the debt became illiquid in February 2008 when dealers stopped supporting the $330 billion market. Cuomo has already gotten more than a dozen other banks and brokerages to buy back more than $61 billion of the debt.

 

Thousands of customers of San Francisco-based Schwab held about $787.9 million of auction-rate securities as of February 13, 2008, Cuomo's office estimated. Schwab said the lawsuit lacks merit. According to the complaint, recordings of brokers' conversations with clients included one where a broker labeled auction-rate securities "great alternatives to cash, frankly."

 

Another called an investor who was planning to buy a home and had been keeping cash in a money market fund. Expressing a "humble opinion," the broker told the investor that auction-rate debt would be a "very safe" place for that money.

 

"Schwab owed its customers a duty to properly understand and make accurate representations," Cuomo said. "Anyone in the industry who misrepresented the risks of investing in auction-rate securities will be held accountable."

 

Cuomo charged Schwab with four counts of fraud, including action under the state's Martin Act, which gives Cuomo wide powers to fight financial fraud. He wants Schwab to buy back auction-rate debt from clients at face value and pay penalties, among other remedies.

 

According to the complaint, Schwab sold customers "a product it did not fully understand and could not properly explain," despite "advertisements promising expertise." The company also knew, or was reckless or negligent in not knowing, of the market's problems in the summer of 2007, when auctions began to fail, the complaint said.

 

In a July 24 letter to Cuomo, released Monday, Schwab said it did not actively market or induce the sale of auction-rate debt, and never made any commitment to support that market.