MarketView for August 19

 

 

Summary  

 

Stock prices moved higher again on Wednesday, in response to a surprising drop in crude oil stockpiles that might suggest an improving demand outlook. As a result, Exxon Mobil and Chevron, both components of the Dow Jones industrial average, led the blue-chip advance. Exxon closed up 2.3 percent at $68.00, while Chevron ended the day up 1.8 percent at $68.16. Murphy Oil was also up 3.1 percent at $58.05.

 

The domestic front-month crude oil rose 4.7 percent, or $3.23, to settle at $72.42 a barrel after a report showed the biggest drop in inventories since May. Wall Street had opened lower after the Shanghai Composite index fell to a two-month low on worries that China's 20 percent slide over the past two weeks would continue.

 

Healthcare stocks also outperformed the broader market. Shares of Merck led the healthcare sector's advance. Merck’s shares closed up 2.5 percent at $31.48. Shares of were up 2.4 percent at $16.37.

 

However, the tech-heavy Nasdaq's climb was curbed by Hewlett-Packard, which was down 0.3 percent at $43.83 after the company expressed caution regarding future business demand late Tuesday. Deere also took a beating on Wednesday with the shares closing down 2.9 percent to $43.78 after the tractor and farm equipment maker said it expected to barely break even in the fourth quarter.

 

With many traders on vacation, volume was light on the Big Board, with only about 988 million shares changing hands, sharply below last year's estimated daily average of 1.49 billion. On the Nasdaq, about 1.99 billion shares traded, also below last year's daily average of 2.28 billion.

 

Crude Oil Sharply Higher

 

Oil surged more than 4 percent on Wednesday after government data indicated a sharp drop in crude imports and inventories. Crude stockpiles fell by 8.4 million barrels in the week to August 14 as imports dropped to the lowest level since September 2008 and refiners hiked runs, according to data released by the Energy Information Administration.

 

The import drop may have been caused by companies holding more inventories in tankers offshore and waiting for higher prices before importing the extra crude. Gasoline inventories also showed a bigger-than-expected drop, while distillate stockpiles showed a surprise drop.

 

Domestic sweet crude futures settled up $3.23 at $72.42 a barrel. London Brent crude settled up $2.22 per barrel at t $74.59 a barrel.

 

The American Petroleum Institute (API) said U.S. oil demand in July showed signs of improvement, with demand down 3 percent year-on-year last month compared with an average drop of around 6 percent in the first half of 2009.

 

Oil prices fell earlier on Wednesday, hitting a low of $68.05 after a near 5 percent slump in Chinese shares sent doubts rippling through global markets about the strength of the world economic recovery.

 

Good News For Housing - Mortgage Applications Up

 

Mortgage applications rose last week, largely reflecting a jump in demand for home refinancing loans as interest rates slid to a five-week low, data from an industry group showed on Wednesday. Applications for loans to buy a home, an early indicator of sales, rose for a third consecutive week. The trend bodes well for the hard-hit U.S. housing market, which has been showing nascent signs of stabilization.

 

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended August 14 increased 5.6 percent to 527.0.

 

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.15 percent, down 0.23 percentage point from the previous week. It was the lowest since the week ended July 10, but above the all-time low of 4.61 percent set in the week ended March 27. The survey has been conducted weekly since 1990.

 

Interest rates, however, were well below year-ago levels of 6.47 percent. The MBA's seasonally adjusted purchase index rose 3.9 percent to 277.7.

 

 

The U.S. housing market has suffered the worst downturn since the Great Depression and its impact has rippled through the recession-hit economy as well as the rest of the world.

 

But the housing market has been showing signs of stabilization in recent months, with sales rising and home price declines moderating in many regions of the country. In fact, home prices in some regions have risen.

 

The Mortgage Bankers seasonally adjusted index of refinancing applications increased 6.9 percent to 1,982.5. The refinance share of applications increased to 53.3 percent from 52.3 percent the previous week, but remained significantly lower than the peak of 85.3 percent in the week ended January 9. The adjustable-rate mortgage share of activity increased to 6.5 percent in the latest week, up from 5.8 percent the previous week.

 

Fixed 15-year mortgage rates averaged 4.52 percent, down from 4.71 percent the previous week. Rates on one-year ARMs decreased to 6.66 percent from 6.71 percent.

 

Budget Deficit Cut

 

The Obama administration will cut its budget deficit forecast for fiscal 2009 to $1.58 trillion, officials said on Wednesday, amid high investor anxiety over the record budget funding shortfall. An administration official said the drop in the projected deficit was due to the elimination of $250 billion that had been earmarked for possible financial rescues.

 

The new estimate involves a calculated judgment that financial markets have sufficiently stabilized and the administration will not have to go back to the Congress to ask for additional money to bail out any more banks.

 

President Barack Obama says there are signs the economy is returning to normal and that his $787 billion stimulus program is working, although any recovery has a long way to go.

 

Officials said the government's budget office would announce next week that deficit this fiscal year would total $1.58 trillion, about $262 billion lower than the deficit forecast in May. A further $78 billion set aside for the Federal Deposit Insurance Corp to pay for bank failures will also be saved because fewer than expected banks went under.

 

Economists had predicted the $250 billion placeholder could be removed because of the reduced likelihood that the government would have to use more taxpayer money to bail out troubled banks. Congress last year granted $700 billion under the Troubled Asset Relief Program to protect the country's financial system from a global credit crisis.

 

The improved deficit forecast may help Obama politically as he tries to overcome opposition from fiscally conservative Democrats and others opposed to the $1 trillion price tag for his healthcare overhaul. However, it may not comfort investors looking for evidence that the United States is controlling spending or generating higher revenues due to a healthier economy.

 

The government officials said spending this fiscal year would total $3.653 trillion and revenues would be $2.074 trillion. The decline in the size of the deficit, from an estimate of $1.84 trillion in May, would peg it at 11.2 percent of U.S. gross domestic product, the officials said.

 

Obama has vowed to halve the deficit by the end of his four-year term, but he says massive government spending is needed now to end the country's worst recession since the Great Depression of the 1930s.

 

Clawback on Compensation Gets Street Attention

 

Wall Street is warily watching the Obama administration's pay czar and wondering if he will flex his muscle to "claw back" past bonuses paid to some of the biggest players in high finance. Such a move, which Kenneth Feinberg first publicly hinted at this past weekend, could roil the industry, which lately seemed to have successfully toned down congressional efforts to curb outsized pay packages.

 

Feinberg heightened speculation he could use his powers when he told a crowd on Martha's Vineyard on Sunday that Congress gave him broad discretion to recover compensation paid to bailout recipients.

 

"It is a very difficult issue," Feinberg said during his remarks at the island off the Massachusetts coast. "I'm not sure it is a good idea for the U.S. Treasury to be a bill collector or try to get money back as an institution." Still, he said: "There may be some egregious cases where it is in the law, I've got the discretion, and I may exercise it."

 

Feinberg's ability to claw back compensation -- even at firms that have paid back TARP money -- was tucked into a rule the U.S. Treasury implemented in June. It gives Feinberg sweeping power to recover money paid out to employees while the firm was in the TARP, if those payments "were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria."

 

But the rules are unclear about what would constitute an "inaccurate" pay formula, leaving that judgment to Feinberg. Furthermore, actually trying to use that power could be problematic and run into a thicket of legal challenges.

 

For now, Feinberg is focused on reviewing lists of the 25 highest paid employees of seven major firms who are still locked in TARP, including Citigroup, AIG) and Bank of America.

 

Feinberg, a Washington lawyer and unpaid appointee, now has 60 days to review the proposals.

 

Buffett Speaks...Again

 

Warren Buffett said the economy has avoided a meltdown and appears on a slow path to recovery, but Congress must now deal with enormous amounts of debt that threaten to erode purchasing power.

 

In an opinion column published on Wednesday by the New York Times, Buffett wrote that he "resoundingly applauds" actions by the Federal Reserve and the Bush and Obama administrations to pump trillions of dollars into the financial system. However, the "gusher of federal money" has run up a high level of debt that could fuel inflation, he said. "The United States economy is now out of the emergency room and appears to be on a slow path to recovery," Buffett wrote.

 

"But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself."

 

Buffett, who runs insurance and investment company Berkshire Hathaway Inc, likened the economic threat of "greenback emissions" to the environmental threat of greenhouse gas emissions, leaving the United States with a deficit of $1.8 trillion or 13 percent of gross domestic product this year.

 

In July, the government posted a $180.68 billion monthly budget deficit, a record for July, marking only the third time in the past 30 years that the government ran a deficit for 11 months in a row.

 

Buffett said a revived economy will not be able to generate enough revenues to bridge the gap between outlays and receipts, so changes in taxes and spending will be required.

 

Politicians will not likely have the will to raise taxes or slow spending, so they may opt to quietly let inflation increase, a move that will "confiscate" wealth and allow the United States to evolve into a "banana republic economy", he said. "Our immediate problem is to get our country back on its feet and flourishing -- 'whatever it takes' still makes sense," Buffet said in the paper.

 

But once recovery is gained, Congress must end the rise in the debt-to-GDP ratio and keep its growth in obligations in line with its growth in resources, he wrote.

 

"Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar's destiny lies with Congress," he said.