MarketView for January 2

Summary  

Wall Street started out the New Year with a nice rise in the major equity indexes as the Street looked beyond yet another piece of grim economic data on hopes that a recovery is on the horizon after a disastrous 2008.

In fact, there seems to be substantial discounting of the recent economic data, including Friday's release showing a sharp contraction in factory activity, in anticipation of a turnaround in the second half of 2009. Those expectations helped push indexes to their highest levels since early November, although volumes were light with trade wedged between Thursday's New Year's holiday and the weekend.

Specifically, the markets shrugged off a report by the Institute for Supply Management that showed factory activity falling to a 28-year low in December. However, as has been the case in the last several days, volume on the major exchanges has been low as a result of the Christmas and New Year’s holidays. Therefore, do not read too much into the recent rallies.

Chevron was among the top performers among the stocks making up the Dow Jones industrial average as oil prices rose above $46 a barrel amid tensions between Russia and Ukraine and violence in the Middle East. Delays in Gulf Coast tankers due to fog also lifted oil prices.

Chevron saw its share price end the day up 3.5 percent to $76.52, while Exxon Mobil gained 2.3 percent to $81.64. The S&P Energy index climbed 4.3 percent. Large cap tech stocks, including Apple and Microsoft, which are seen as better positioned to withstand a weak economy due to large cash reserves, helped send the NASDAQ higher.  Apple ended the day up 6.3 percent to $90.75 while Microsoft added 4.6 percent to $20.33.

Consumer discretionary stocks rose after Starwood Hotels signed a confidentiality agreement with property magnate Sam Zell's Equity Group Investments LLC, which could be in preparation for Zell acquiring a larger stake in the company. Starwood rose over 16 percent to $20.80.

Wall Street is watching closely to see how President-elect Barack Obama will try to shake the U.S. economy out of its worst slump in decades. Obama is due to meet leaders in Congress on Monday to discuss his stimulus plan. Some Republicans are worried that their Democratic rivals could expand the plan to as much as $1 trillion.

General Motors saw its share price end the day up 14 percent to $3.65 after the treasury Department announced on Wednesday that it had paid out the first $4 billion in emergency loans to support GM. A parallel rescue payment for privately held Chrysler was on hold until the New Year. Chrysler said it remained in talks with Treasury to finalize its own $4 billion loan agreement and expected to receive its share of the funding soon. Shares of Ford Motor Co rose 7.4 percent to $2.46 even after it forecast a sharp drop in industry-wide auto sales for December.

Factory Activity Falls

Factory activity fell to a 28-year low in December as the deepening of the year-old recession continued, producing a bleak outlook at the start of 2009. The Institute for Supply Management said on Friday its index of national factory activity fell to 32.4, the lowest reading for that statistic since 1980. Its jobs gauge was also at its lowest level since 1982 and prices were the weakest since 1949.

The manufacturing report echoed the dour tone set in factory surveys around the globe and indicated rough times ahead, with a gauge of new orders hitting its lowest level ever. December's result represents a significant slump, since any reading below 50 in the overall ISM index indicates contraction.

None of the manufacturing industries in the index reported growth and only two, leather and allied products, and petroleum and coal products, reported no change in activity compared to November.

"Manufacturing activity continued to decline at a rapid rate during the month of December," the report said. "Manufacturers are reducing inventories and shutting down capacity to offset the slower rate of activity."

Earlier, a similar report showed manufacturing activity in the euro zone sank to a record low for the survey in December, and the outlook remained grim as new orders also sank to new lows. Factories in China and India also slashed output and jobs at a record pace in December.

Global manufacturing activity contracted for the seventh consecutive month in December to a record low, with price pressures tumbling, a survey showed on Friday.

Crude Up Again

The price of crude oil futures for February delivery rose 4 percent on Friday amid higher tensions in the Middle East and the ongoing dispute between Russia and Ukraine hat has Europe worried about the future of natural gas supplies.

Fighting continued between Israel and Hamas, with Palestinian Islamists vowing to avenge the death of a senior Hamas leader. The market is watching closely to see if the fighting spreads to other areas of the Middle East.

Meanwhile, Russia, the world's biggest non-OPEC oil nation, shut off natural gas to its neighbor Ukraine on Thursday after a contract dispute, but said it had increased supplies to other European states to try to reassure its premium-paying customers.

As a result, domestic sweet light crude settled up $1.74 per barrel at $46.34, while London Brent settled up $1.32 per barrel at $46.91.

OPEC's most recent agreement in mid-December to slash 2.2 million barrels per day from January 1 was the cartel's biggest-ever output cut, and the group's kingpin Saudi Arabia has signaled it could cut further if needed.

The Department of Energy said late on Friday it was seeking to purchase 12 million barrels of oil for the Strategic Petroleum Reserve in the first four months of the year and further boost the reserve through 2009. The announcement comes after China said earlier in the week it would take advantage of lower oil prices to boost its reserves.

Oil prices fell 54 percent as a whole in 2008, from $95.98 to $44.60 a barrel at the close on December 31, with the spike to $147.27 set on July 11. On the last trading day of 2008, prices surged 14 percent after weekly data indicated that there was a decrease in refinery activity and an unexpected 500,000-barrel rise in crude stocks.

Steel Expects Great Things from the Stimulus Plan

The steel industry is pressing and hoping that President-elect Barack Obama will set forth an aggressive stimulus plan to revive the sagging market that would subsequently result in an increase in the demand for steel as buyers move to restock shrinking inventories. Shares of Nucor and U.S. Steel fell sharply in recent months after steel buyers withdrew orders because of frozen credit markets and the slumping U.S., European and Chinese economies.

Service companies, which have been tapping their own inventories to supply construction customers rather than making purchases from the producers, are likely to increase their orders as their supplies shrink. Nonetheless, the industry is pressing the incoming Obama administration for a public works plans that would reach $1 trillion over two years to help revive steel demand.

Daniel DiMicco, chairman and chief executive of Nucor, told the New York Times the industry was asking the incoming administration to "deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a 'buy America' clause."

The industry supports building mass transit systems, bridges, electric power grids, schools, hospitals and water treatment plants, all of which would require large amounts of steel.

Obama, who is to be sworn in on January 20, has not revealed details of his soon-to-be-announced plan for spurring the weakest economy since the Great Depression. Aides have indicated most of the package will probably go into infrastructure spending rather than tax breaks.