MarketView for December 3

 

 

Summary

 

Share prices fell on Thursday after data showed the services sector unexpectedly shrank in November and the Street in its infinite wisdom began to worry that Friday's non-farm payrolls report may show the recovery is sluggish. The services sector index fell to 48.7, indicating that this huge component of the economy had experienced contraction last month, according to a report from the Institute for Supply Management.

 

The ISM data hurt sentiment a day before November's unemployment figures are released in an even more influential economic report. The end result was that all three key equity indexes fell prey to late in the day selling and all three closed out the day in negative territory.

 

Leading the decline were the financials, as Bank of America’s massive equity offering spurred concerns that other banks could sell new shares and dilute existing shareholders' equity. However, shares of Bank of America, ended the day up 0.7 percent to close at $15.76 on optimism that its plan to repay $45 billion of government bailout money will free the bank from government restrictions, especially on executive pay.

 

After the bell, Bank of America sold $19.3 billion of common securities, according to a pricing document sent to investors. The bank sold 1.286 billion common equivalent securities at $15 a share. The bank plans to use proceeds from the securities sale to help repay bailout funds from the government's Troubled Asset Relief Program, known as TARP.

 

In other news after the bell, shares of Take Two Interactive Software fell 7.5 percent to $10.10 as the video game publisher warned about its financial outlook.

 

A bright spot was provided by Comcast, up 6.5 percent at $15.91 after the company struck a deal to buy a majority stake in NBC Universal from General Electric. The transaction, once closed, will create a media superpower. GE’s shares fell 0.4 percent to $16.

 

Among the other most closely watched numbers, U.S. retailers posted much weaker-than-expected sales for November in a slow kickoff to the holiday shopping season. Shares of Abercrombie & Fitch, a clothing retailer that caters to teens, fell 9.3 percent to $36.21as a result of news that the chain’s same-store sales fell17 percent.

 

Other data on Thursday indicated that the number of U.S. workers filing new claims for unemployment benefits fell last week, according to a government report.

 

Economic News Mixed

 

The services sector contracted in November to its lowest reading since July, according to a report released on Thursday that shocked economists forecasting the economic recovery was picking up steam.

 

The services-sector news offset a report showing new applications for U.S. jobless benefits unexpectedly fell last week to the lowest level in more than 14 months, suggesting a labor market edging toward stability.

 

The Institute for Supply Management said its services index shrank to 48.7 in November from 50.6 in October. A reading above 50 indicates expansion in the sector. The services sector, which represents about 80 percent of U.S. economic activity, includes businesses such as banks, airlines, hotels and restaurants.

 

Initial claims for state unemployment aid slipped 5,000 to 457,000 from 462,000 in the previous week, the Labor Department reported on Thursday. Claims have fallen for five consecutive weeks.

 

In yet more evidence of the weak labor market, Harley-Davidson Inc said on Thursday it had ratified a new contract with the machinists' union representing employees at its largest factory that involves job cuts of almost 50 percent.

 

Retail sales also were being eyed for clues on the economy's health. The current expectation is that retail sales will increase by about 2.1 percent. Yet, that would still be the best showing since April 2008 and it marks a shift in gears from a drop of 7.8 percent in 2008.

 

Treasury Secretary Timothy Geithner said on Thursday the economy was slowly healing, but he told CNBC that given there were still problems in the housing market and credit remained tight, economic problems were far from over.

 

Federal Reserve Chairman Ben Bernanke, making a case for a second term, told the Senate on Thursday at a hearing on his nomination for a second term as Fed chief that the Fed's forceful actions prevented a devastating financial crisis from being even worse. Under his tenure, the Fed has slashed interest rates close to zero and pumped more than $1 trillion into the financial system to beat back the worst financial crisis since the Great Depression.

 

Hedge Funds Looking Towards Much Higher Prices for Crude Oil

 

Some of the largest hedge funds are betting heavily that high oil prices are here to stay as they have added to stakes in Suncor Energy Inc (SU.TO), one of the large-cap energy stocks most sensitive to the price of oil.

 

Among those increasing their stakes in the third quarter were George Soros' Soros Fund Management LLC, which snapped up an additional 2 million shares, and Richard Chilton's Chilton Investment Co, which added 42,000 shares, according to data compiled by Thomson Reuters.

 

Suncor, fresh off its C$22.5 billion ($21.4 billion) friendly acquisition of Petro-Canada, is one of the largest owners of oil sands in the world -- as much as 22 billion barrels' worth, or almost 3 billion barrels more than the entire proven oil reserves of the United States.

 

However, because oil in the Canadian sands is among the most difficult and expensive to extract, Suncor's value can seesaw dramatically as the price of oil rises and falls. Back in May 2008, as oil was hitting $120 a barrel, Suncor's stock topped $70 only to tumble below $20 six months later when the price of oil collapsed. The stock has since climbed back to $37.

 

That leverage has attracted plenty of buyers to Canada's largest energy producer. Suncor was the most popular new purchase in the third quarter among the largest equity hedge funds.

 

Along with Soros and Chilton, Diamondback Capital Management LLC and other funds also boosted their Suncor stakes over the quarter, with Diamondback adding 386,000 shares. Representatives of those funds declined comment or could not be reached.

 

Buying Petro-Canada, a once state-owned oil company whose shares had suffered as it expanded globally and repeatedly failed to meet profit forecasts, brought Suncor two new Canadian refineries, the second-largest chain of retail gas stations and new oil and natural gas production in Canada, the United States, the North Sea and elsewhere.

 

But the driver behind the deal was the heft the expanded company brought to the oil sands of northern Alberta. After completing planned asset sales of C$2 billion to C$4 billion ($1.9 billion to $3.8 billion), 65 percent of Suncor's production will come from oil sands, up from 50 percent now, Chief Executive Rick George said last month.

 

Canada's oil sands have the largest oil reserve outside the Middle East but exploiting the resource is expensive and technically challenging. The multibillion-dollar oil sands projects have been buffeted by severe inflation, with costs rising 50 percent or more from their original budgets, as producers competed for scarce materials and skilled labor.

 

The rampant inflation and technical challenges make the oil sands one of the most expensive sources of oil. More than C$100 billion worth of projects planned for the region were canceled, delayed or deferred after oil prices plunged last year because of the recession.

 

However, Suncor's new size brings economies of scale. The company estimates that buying Petro-Canada shaved C$400 million in combined operating costs and saved C$1 billion in capital expenditures, along with giving the market power to command lower costs from suppliers.

 

The company, which expects to produce 300,000 barrels of oil per day from its oil sands operations, said in November it aims to boost production by as much as 12 percent per year through 2020 and make a 15 percent profit from its operations with oil prices at $70 per barrel.

 

Crude Oil Prices Slip

 

U.S. crude prices fell on Thursday as weak service sector data and rising oil inventories outweighed losses in the dollar. Domestic sweet crude for January delivery settled down 14 cents per barrel at $76.46. London Brent crude settled up 48 cents per barrel at $78.36.

 

Oil traders have watched wider macroeconomic factors this year for signs of a turnaround in the economy that could support flagging fuel demand.

 

 Crude prices fell on Wednesday after the release of inventory data, which showed crude and gasoline inventories jumped last week as the weak economy continued to batter demand in the world's top consumer. Investors have taken cash out of oil and other commodities and into safe haven plays like the dollar at times this year when negative economic data is released.

 

Kuwaiti Oil Minister Sheikh Ahmad al-Abdullah al-Sabah said that OPEC preferred oil prices remain in the $70-80 a barrel range, adding he supported leaving crude output targets unchanged when the producer group meets on December 22 in Angola.

 

OPEC last year agreed to output cuts of 4.2 million barrels per day as part of efforts to prop up oil prices and balance markets, after slumping demand sent crude from record highs near $150 a barrel in July 2008 to below $33 in December 2008.

 

Adding to OPEC's challenges, Russia, the largest non-OPEC oil exporter, set a fourth consecutive monthly output record in November, averaging more than 10 million barrels per day.

 

Retail Sales Disappoint

 

Retailers from Macy's to Costco posted much weaker-than-expected sales for November as shoppers focused only on big bargains at the start of the key holiday selling season. Many retailers said the weak sales were in line with their expectations and that margins should remain intact due to inventory cuts and other cost saving measures.

 

For example, Victoria's Secret owner Limited Brand Inc forecast a low-to-mid-single-digit decline in December same-store sales, but said it would offer fewer promotions. However, retailers could still blink to attract more sales.

 

Macy's shares fell 3.2 percent in morning trading, while Costco declined 3 percent. Among teen retailers, Aeropostale dropped 11.3 percent after forecasting quarterly results that could miss analysts' estimates, while disappointing monthly results from Abercrombie & Fitch sent its shares down 7 percent.

 

A total of 81 percent of retailers tracked by Thomson Reuters missed estimates, including Costco, Children's Place and Walgreen. Over the U.S. Thanksgiving weekend that began on November 26, shoppers focused mostly on promotions and made few impulse purchases as concerns about the economy remain top-of-mind. Early data on weekend shopping showed only a slight increase in retail sales from 2008, when consumers were hammered by a deepening recession and credit crisis.

 

The International Council of Shopping Centers forecast a 2 to 3 percent increase in December same-store sales, which would result in an estimated 1 percent rise for the November-December holiday season.

 

Retail sales are closely watched as consumer spending makes up roughly 70 percent of the U.S. economy. However, the figures do not include many key holiday destinations such as Wal-Mart.

 

Macy's said on Thursday that same-store sales fell a worse-than-expected 6.1 percent during the month. It stood by its forecast for quarterly earnings of $1.00 to $1.05 a share, excluding items, but that was below expectations.

 

Abercrombie & Fitch's same-store sales fell 17 percent, far worse than the analysts' average view of a 9.3 percent drop. Aeropostale sales were slightly worse than expected, with a 7 percent rise. The company's quarterly earnings forecast also disappointed.

 

Costco said same-store sales rose 6 percent, missing the analysts' average estimate of 8.1 percent. Same-store sales at U.S. locations rose 2 percent.

 

Children's Place posted a 13 percent drop in comparable sales, including online sales, compared with analysts' expectations of a 1 percent rise.