MarketView for August 21

The major equity indexes ended the week at their high points for this year after a surprising rise in home sales and optimistic comments from Federal Reserve chief Ben Bernanke were a reassurance with regard to the prospects for an economic recovery. Both the S&P 500 and the Nasdaq indexes hit 10-month intraday highs, while the Dow Jones industrial average reached its  highest level in nine months. The S&P 500 is now up 51.7 percent from its 12-year closing low set on March 9.

At the Fed's annual conference in Jackson Hole, Wyoming, Fed Chairman Ben Bernanke gave his clearest signal yet that the global economy is emerging from a recession. But the Fed chairman also warned that growth would be sluggish for a time.

For the week, the Dow is up 2 percent, the S&P 500 up 2.2 percent and the Nasdaq up 1.8 percent. A key reason is the 7.2 percent increase in sales of previously owned homes for the months of July. There is no doubt that it gave stocks a shot of adrenaline. The steady rise for the fourth consecutive month to the highest level in almost two years suggested some easing in the housing crisis. As a result, home builders D.R. Horton closed up 3.4 percent at $12.66, while Toll Brothers gained 3.7 percent to close at $22.70.

In other earnings-related news, J.M. Smucker climbed 4.3 percent to $54.10 after the company reported a higher first-quarter profit and gave a strong full-year outlook. Apple led the Nasdaq, up 1.7 percent at $169.22, while Microsoft chalked up a gain of 3.1 percent to close at $24.41.

AIG climbed 1.7 percent to end the day at $32.85. Earlier, AIG's stock rose to an intraday high at $35.00 on news that the insurer had won dismissal of a federal lawsuit. The stock price has more than doubled since the start of the month.

Energy shares also grabbed the spotlight, with domestic sweet crude futures prices climbing to a 2009 high at $74.72 per barrel. The front-month crude oil contract gained 98 cents, or 1.3 percent, to settle on Friday at $73.89 per barrel. Among the oil stocks, Chevron closed up 1.6 percent at $69.73, while Exxon Mobil gained 1.9 percent to close at $69.92.

Existing Home Sales Rise Sharply

Sales of previously owned homes rose 7.2 percent in July marking the fastest pace increase in nearly two years and a strong sign that housing is pulling out of a three-year slump. Sales in July rose for the fourth straight month to hit an annual rate of 5.24 million units, the highest since August 2007, the National Association of Realtors said. July's increase was the largest monthly gain since the series started in 1999. The last time sales rose for four consecutive months was in June 2004, the NAR said.

The Realtors group heralded the July sales as a turning point, while other observers offered a more cautious view. "The housing market has decisively turned for the better. We are bouncing back. A combination of first-time buyers taking advantage of the housing stimulus tax credit and greatly improved affordability conditions are contributing to higher sales," NAR Chief Economist Lawrence Yun said.

With distressed sales accounting for 31 percent of the transactions in July, inventories rising and home prices remaining depressed, analysts said the housing market was not out of the woods yet.

The national median home price was $178,400 in July, down 15.1 percent from the same period last year, weighed down by distressed sales, because such homes typically sell for 15 to 20 percent less than traditional homes.

The inventory of existing homes for sale in July rose 7.3 percent to 4.09 million units from the previous month, NAR said. At July's sales pace, that represented a 9.4 months' supply, the same as in June.

The housing market is at the epicenter of the worst recession in 70 years. A recovery in the housing market would help to draw a line under losses at financial institutions, which have been battered by defaults on mortgages. It would also improve the psychology of households, whose net worth has been decimated by the plunge in home values, and encourage them to spend rather than save to make up for lost wealth.

Meanwhile, existing homes sales in July were 5 percent higher compared with the same period last year, the biggest year-on-year gain since November 2005. The improvement in July sales was broad-based, with sales of single-family homes, the worst-hit segment of the market, up 6.5 percent to an annual rate of 4.61 million units and multi-family dwellings up 12.5 percent to a 630,000 unit rate. Sales were up in three of the four regions.

A report from the Mortgage Bankers Association on Thursday showed late home loan payments jumped to a record high in the second quarter, with almost one in eight homeowners delinquent or in the process of foreclosure.

Crude at 10 Month High

The price of crude oil futures rose nearly $1 toward $74 a barrel to settle at a 10-month high on Friday as economic data pointed towards a potential revival in energy demand. Sweet domestic crude futures for October delivery settled up 98 cents per barrel at $73.89, the highest settlement price since October 20. London Brent crude for October delivery settled up 86 cents per barrel at $74.19. Crude prices are up $6.38 a barrel over the week, a gain of nearly 10 percent from the $67.51 settlement price on August 14.

Highway travel was up 2 percent in June compared with a year ago, rising 4.9 billion miles to 256.7 billion miles, the U.S. Transportation Department said.

The CFTC is widely expected to introduce stricter position limits for nonphysical investors or paper barrels before the end of 2009.

Fed Loans Producing Revenue and Capital Appreciation

The Federal Reserve on Friday lifted an estimate of the value of Bear Stearns and American International Group assets used to secure their rescue last year, potentially reducing taxpayer losses.

The Fed said that a quarterly revaluation of the roughly $62 billion portfolio resulted in a net increase in fair value of $1.5 billion at the end of June. Fair value means an estimate of what the assets would fetch if sold in an orderly market on June 30.

In addition, the Fed said that cash flow generated by the assets from AIG (AIG.N) during the second quarter had been used to pay down the loan that they are securing from the Federal Reserve Bank of New York by around $2.6 billion.

The Fed put up $29 billion in March 2008 to underwrite JP Morgan Chase's rescue of Bear Stearns, and was forced to step up again last September to prevent AIG from collapsing, days after the failure of investment bank Lehman Brothers.

The assets pledged to the Fed as collateral against the loans are housed in three private companies, called Maiden Lane I, for Bear Stearns' assets, and Maiden Lane II and III for the AIG assets, and they now sit on the Fed's balance sheet.

Any loss potentially reduces the amount of revenue that the Fed can pass along to the Treasury Department, and would therefore represent a loss to taxpayers. The latest fair value estimate of the asset coverage of the Fed loans stood at a loss of $3.40 billion for the Bear Stearns' portfolio, a $2.37 billion loss for Maiden Lane II and a $129 million loss for Maiden Lane III, Fed data showed.

Fed and European Central Bank Agree on Outlook

Federal Reserve Chairman Ben Bernanke and other central bankers said on Friday the worst global recession in 70 years was nearing an enc but warned it would be a long, slow climb back to normal growth.

At an annual Fed retreat set against the backdrop of the Grand Teton mountains, the officials said the coming recovery would have its ups and downs, and it was too soon to withdraw trillions of dollars in government and central bank support.

"After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good," Bernanke said.

But both Bernanke and European Central Bank President Jean-Claude Trichet said there was still much work to be done to restore the global economy to self-sustaining growth. Trichet said he was "a bit uneasy" about talk of a return to normal and that policy-makers "should be as active as possible.

The conference, held at a no-frills rustic lodge in a national park in the western state of Wyoming, is a big draw for the world's leading monetary policy-makers and economists. The event includes a mix of speeches and academic papers.

This year's event sounded more upbeat than a year ago, when Bernanke and his counterparts were still struggling to get ahead of rapidly deteriorating financial markets. It was only weeks after the 2008 gathering that Lehman Brothers bank collapsed and the rescue of AIG, touching off a tumultuous period of slumping economic growth across the globe.

A large part of Bernanke's speech was devoted to reliving those months, looking at how officials around the world responded and what lessons they had learned about how to regulate and monitor financial markets.

"We must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again," he said.

Bernanke, whose term as Fed chairman expires in January unless President Barack Obama re-nominates him and he wins Senate backing, defended the central bank's controversial emergency rescue efforts and tried to explain why the Fed helped AIG but not Lehman.

The bailouts have landed the Fed and Bernanke in the middle of a sometimes heated political debate over whether it had overstepped its authority and ought to be reined in. Bernanke credited an aggressive, coordinated policy response for averting "the imminent collapse of the global financial system, an outcome that seemed all too possible."