MarketView for July 6

 

 

Summary 

 

After spending much of the day in negative territory, stock prices recovered somewhat just before the closing bell with all but one of the major indices managing to close out the day in the black on a move into defensive stocks. Unfortunately, the tech-heavy Nasdaq slipped as money moved out of the tech sector, which is viewed as having greater reliance on the business cycle.

 

 Although the economic data coming out of Washington has had a positive bias upward in terms of economic recovery, the Street is not going to be totally convinced until there is a stronger and more consistent story to tell with regard to a sustained recovery.

 

In fact, it was not until the last half hour when the push into sectors likely to outperform in a down economy helped healthcare stocks, such as Merck, up 3.3 percent at $27.89, and consumer staples, such as Kraft Foods up 1.9 percent to close at $26.44.

 

While a report on the services sector was better than expected in June, the Institute for Supply Management's non-manufacturing data failed to relieve broader concerns raised by last week's unexpectedly weak June non-farm payrolls report. Last Thursday, the U.S. Labor Department reported a decline of 467,000 in nonfarm payrolls, nearly 100,000 more than expected. The U.S. stock market was shut on Friday for the long Independence Day holiday weekend.

 

American Express topped the Dow Jones industrial average list of percentage gainers, climbing 5.6 percent to $23.52 after a brokerage firm raised its rating on the company's stock to "hold," saying it was the least exposed to new rules on the credit card sector.

 

Many on the Street are also looking to the start of this quarter’s earnings season, which is unofficially kicked off on Wednesday, for an indication of how corporations are weathering the economic downturn. The current thinking is that not all that much has changed since the first quarter.

 

August crude futures touched a five-week low, sending the shares of Marathon Oil down 0.8 percent to $28.76.

 

Price of Crude Oil Down

 

Oil settled 4 percent lower on Monday as doubts over a potential rebound in the global economy spurred investor risk aversion. Domestic crude futures for August delivery settled down $2.68 per barrel at $64.05, after touching a five-week low of $63.40. London Brent crude settled down $1.56 per barrel from Friday's close at $64.05.

 

Optimism that an economic recovery could bolster demand has helped lift crude off December lows below $33 a barrel. However, the recent economic data, including a poor U.S. jobs report last week, has weighed on markets, however.

 

The markets were lower in early trading, despite data showing that the service sector contracted at a decelerating pace last month and posted the highest activity level since September 2008. The yen gained broadly , while the dollar also edged up as investors shunned risk and bought currencies perceived to be safe, adding pressure to commodities denominated in greenbacks.

 

Crude has also taken some support from attacks on oil installations in OPEC member Nigeria. Nigeria's main militant group said on Monday it had sabotaged a Chevron oil facility and seized a chemical tanker and six crew members, the latest in a string of disruptions to output from Africa's biggest energy producer.

 

France and Britain called for action to curtail oil price volatility as part of a move toward tougher global governance to prevent a return to economic problems that existed before the financial crisis.

 

Service Sector Improves

 

The service sector port6ion of the economy continue to lose ground last month but at a slowing pace, with activity at the highest level since September 2008, when Lehman Brothers' collapse exacerbated the global financial crisis, a report by the Institute for Supply Management showed on Monday.

 

At the same time, a separate measure of job growth fell slightly in June from May's level.

 

The Institute for Supply Management said its measure of the service sector rose to 47.0 last month from 44.0 in May. The reading was above economists' median forecast for a rise to 46.0, but it was still not indicative of a definite turnaround.

 

"It's a good number, not quite showing expansion yet, but rising closer to that 50-level that divides contraction from expansion," said Gary Thayer, senior economist with Wells Fargo Advisors in St. Louis.

 

The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.

 

Both manufacturing and service sector reports show signs that the recession that has been with us for the past 18 months, may soon end after the ISM service sector report's business activity index jumped within a hair of expansion territory, to 49.8, from 42.4 in May.

 

The new orders index rose to 48.6 in June from 44.4 in May. Prices paid rose to 53.7 in June from 46.9, driven partly by a rise in oil prices, said Anthony Nieves, chair of the ISM non-manufacturing business survey committee.

 

Much depends on the labor market. Although the job market is usually a lagging indicator that recovers after recessions end, there is some concern that the weakest labor market in a quarter century may curb economic growth or even catapult the economy back into recession.

 

The ISM report showed jobs in the services sector contracted, but at a slower pace, with the employment index rising to 43.4 in June from 39.0 in May.

 

Fitch Cuts California Debt Rating

 

California suffered a new setback in its financial crisis on Monday when Fitch Ratings cut its rating on the state's general obligation debt to just two notches above junk status.

 

Fitch cut its rating on California's long-term bonds to "BBB," two notches above speculative grade, citing the state's budget and cash crisis. The state last week started issuing "IOU" promissory notes to pay for some bills in order to conserve cash. The credit rating agency also kept California’s debt on watch for additional downgrades. California ranks as the lowest-rated state general obligation credit by Fitch, followed by Louisiana, at "A+."

 

Tom Dresslar, a spokesman for State Treasurer Bill Lockyer, said the other two main credit rating agencies, Standard & Poor's and Moody's Investors Service, could soon follow Fitch's example. "I'm sure their patience is not deep," he said. Lower ratings threaten to raise California's borrowing costs during a severe cash crunch in Sacramento, the state capital, one of Fitch's top concerns. "The folks who are going to end up paying the price are not investors, not the governor, not the legislature, but the taxpayers," Dresslar said.

 

Standard & Poor's has California's general obligation bonds rated "A" with CreditWatch with negative implications. Moody's has warned of a possible "multi-notch" downgrade in its "A2," sixth-highest investment grade credit rating of California's general obligation debt. In a statement, Fitch said it cut its "A-" rating "based on the state's continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis."

 

California faces a $26.3 billion budget deficit for its fiscal year that began on July 1 and talks between Governor Arnold Schwarzenegger and lawmakers to balance the state's books are plodding along.

 

State finance officials last week began issuing IOUs promising payments to taxpayers owed refunds to preserve the state's dwindling cash for priority bills, including payments to investors holding the state's debt.

 

Schwarzenegger seized on the Fitch downgrade to criticize state Assembly Speaker Karen Bass for not meeting for budget talks earlier in the day. "This underscores the urgency to solve our entire deficit," he said in a statement. "This is not the time for boycotting budget meetings -- all sides must come to the table and balance the budget immediately."

 

Fitch said its "BBB" rating "indicates that expectations of default risk remain low, although the rating is well below that of most other tax supported issuers."

 

The ratings agency said California needs a balanced budget agreement quickly because it will need to sell short-term debt for cash-flow purposes once it has a spending plan. Fitch indicated that the the rating agency is keeping a close eye on how California manages its cash, sharply reduced as revenues have plunged amid recession, rising unemployment and a prolonged housing slump. California is experiencing the worst drop in revenues from personal income taxes since the Great Depression. Furthermore, there are now questions as to whether California's tax-exempt IOUs can be bought, sold and traded, with the SEC looking into the matter.