MarketView for August 24

 

 

Summary   

 

You could have taken the day off on Monday as far as activity on Wall Street was concerned as stock prices ended the day barely changed with the Street taking a bit of breather from the rally of the last four days, during which the major equity indexes managed to reach levels not seen for the past 10 months. Yes, prices did stage an early in the day rally but a sharp rise in the price of Treasury debt sent yields plummeting, along with equity share prices.

 

Treasury debt prices gained on Monday, with the 30-year bond up almost 2 full points, as investors did some bargain hunting after Friday's sharp losses and some buying by the Federal Reserve. Adding to moribund mood of the day were the comments by bank analyst Richard Bove, who said 150 to 200 more banks would fail during the banking crisis. Now I am not sure how he obtained that estimate since much of the data is not exactly found on the front pages of newspapers.

 

Yet, SunTrust saw its share price take a hit of 3.8 percent, to close at $21.79, after the bank said lenders face more credit losses and commercial real estate may falter through 2010. JPMorgan Chase was down 1.5 percent, to close at $43.01.

 

On the Nasdaq, Cisco Systems closed down 0.6 percent at $22.06, and Intel fell 0.7 percent to close at $18.76, dragging that index. On a more positive note, Warner Chilcott was up 27.1 percent to $20.41 after the company said it would buy Procter & Gamble's pharmaceuticals division for $3.1 billion.

 

Energy stocks also advanced, in line with a rise in the front-month crude oil prices, which topped $74 per barrel on Monday. Valero Energy was up 2.3 percent at $18.91 and Murphy Oil rose 2.3 percent to close at $60.66. Chevron, a Dow component, chalked up a 1.5 percent gain to close at $70.76.

 

Oil Prices Keep Going and Going – Upward

 

The price of oil futures rose again on Monday, briefly touching a 10-month high near $75 per barrel on expectations an economic recovery would revive ailing world energy demand. Domestic sweet crude settled up 48 cents per barrel at $74.37 after reaching at $74.81, the highest intraday price since October 21. Brent crude futures settled up 7 cents per barrel at $74.26.

 

It appears that investors are once again using commodities as a hedge against the dollar, particularly oil as OPEC producers work to restrain supply. Meanwhile, a report Monday showed implied oil demand in China, the world's second largest energy consumer, rose in July for the fourth consecutive month as refiners ramped up activity.

 

Feeding hopes the recession was waning, reports on Monday showed new industrial orders in the euro zone rebounded in June and U.S. economic activity improved again in July. A number of positive economic reports from various countries and rallying stock markets helped lift oil prices by 9.5 percent last week. Crude is up around 65 percent in 2009 and may head higher still, according to analysts.

 

Renewed tensions in Nigeria could also add support to oil prices. Nigeria's main rebel group said on Saturday it would resume attacks against Africa's biggest energy industry next month, overshadowing the surrender of hundreds of arms by rebels in a federal amnesty program.

 

Look for small inventory declines in this week’s reported data on crude oil and gasoline supplies and a build in distillates inventories.

 

Do Not Believe Everything You Read

 

From the department of Do Not Believe Everything You Read, Nouriel Roubini, said he sees a "big risk" of a double-dip recession, according to an opinion piece posted on the Financial Times' website on Sunday.

 

While it is true that Roubini established somewhat of a reputation for himself with his prediction of the magnitude of the world's recent financial troubles, remember that even a stopped clock is right twice a day.

 

Roubini, a professor at New York University's Stern School of Business, said it appears the global economy will bottom out in the second half of this year, and that U.S. and western European economies will likely experience "anemic" and "below trend" growth for at least a couple of years.

 

Yet he warned that policymakers face a "damned if they do and damned if they don't" conundrum in trying to unwind their massive fiscal and monetary stimuli to keep the global economy from toppling into a depression.

 

He said that if policymakers try to fight rising budget deficits by raising taxes and cutting spending, they could undermine any recovery.

 

On the other hand, he said if they maintain large deficits, worries about excessive inflation will grow, causing bond yields and borrowing rates to rise and perhaps choking off economic growth.

 

Roubini said another reason to worry is that energy, food and oil prices are rising faster than fundamentals warrant, and could be driven higher by speculation or if excessive liquidity creates artificially high demand.

 

He said the global economy "could not withstand another contractionary shock" if speculation drives oil rapidly toward $100 per barrel. U.S. crude oil futures traded Friday at about $73.83.

 

Roubini said the anemic growth he expects would follow a couple of quarters of rapid growth, as inventories and production levels recover from near-depression levels.

 

AMD Up On Upgrade

 

Shares of Advanced Micro Devices (AMD) rose nearly 10 percent on Monday after Citigroup upgraded the company to a "buy." Citigroup analyst Glen Yeung said the upgrade was based on signs of a stronger AMD relationship with its main customer, Hewlett-Packard, expectations of a higher gross margin and a move by companies to replace aging PCs that could occur next year.

 

"We recognize that AMD's competitive position is poor and its net debt position classifies the company as 'low quality,'" he wrote in a research note. But he added, "We see the risk/reward on AMD as favorable."

 

Gross margins suffered in the first half of 2009 as chip factories ran below capacity and AMD sought to clear inventory of older chips. But production levels are increasing due to the lower cost of newer, smaller chips.

 

"We note that as sales increase 9 percent 2H09/1H09, we expect corporate gross margin to increase from 29.0 percent in 2Q to 38.6 percent in 3Q on higher utilization," Yeung wrote.

 

But Yeung warned the stock could stay weak if an uptick in back-to-school computer sales is not as strong as hoped, if shares are diluted due to AMD refinancing its 2012 debt, and as device manufacturers increasingly look to non-industry standard microchips as a lower-cost, lower-power way to run devices like netbooks.

 

Is General Motors Becoming Greedy Again

 

General Motors is considering keeping its Opel business in Europe instead of selling it hoping instead to obtain billions of dollars in aid from the U.S. and European governments, the Financial Times reported on Monday.

 

One potential plan had GM abandoning the German government brokered sale of Opel and raising about 3 billion euros ($4.3 billion) for Opel and its British Vauxhall brand, the FT reported.

 

The U.S. government, and European governments including Britain and Spain, would be the targets of the potential financial support for the investment, the FT reported.

 

GM's board of directors failed to name a winning bidder for Opel on Friday, leaving the future of the troubled unit undecided after months of negotiations with the German government.

 

Berlin has thrown its support behind Canadian automotive company Magna International but GM executives have said the alternative bid from Brussels-based bidder RHJ International was easier to implement.