MarketView for July 7

 

 

Summary 

 

Share prices on Wall Street hit their lowest level in 10 weeks on Tuesday as the need for a possible second government stimulus program reasserted concerns that the economy is not yet on the path to recovery and that corporate earnings for the second quarter will come in less that expected.

 

A member of the Obama administration's economic advisory panel said the United States should plan to possibly provide a second round of stimulus funds to prop up the economy. The comments are deflating the idea that the economy was healing itself and had driven share prices up as much as 40 percent since early March.

 

Cyclical stocks in the materials, energy, and industrial sectors, which had ridden a recent upswing in raw material prices on recovery hopes, led the market downward as commodity prices eased. Copper, a barometer of global economic strength, fell nearly 2 percent. Caterpillar, key among the key stocks in this arena, closed down 4.5 percent at $30.29.

 

The S&P 500 closed at its lowest level since May 1 while the Dow industrials closed at their lowest level since April 28.

 

An initial snapshot of the second-quarter performance of natural resource companies will come on Wednesday when Alcoa begins the quarterly earnings season. The aluminum producer, a Dow component, is expected to post a third consecutive quarterly loss.

 

Doubts about the strength of an economic recovery and subsequent demand for oil have sent crude prices tumbling in the last week. New York crude fell 1.8 percent on Tuesday and is down about 14 percent from the intraday peak hit on June 30. Its slide has pressured energy stocks.

 

Schlumberger fell 4.4 percent to $49.20 while Exxon Mobil was down 2.3 percent to $66.56.

 

Non-cyclical areas of the market, which have been stronger in recent weeks as investors sought out companies better positioned to weather a weak economy, initially withstood the sell-off on Tuesday. But by the end of the day even the defensive sectors were destined to feel the pressure of the market’s downward slide.

 

Health care, a classic defensive sector, traded in positive territory for most of the day but by the close it to came under pressure.

 

Pfizer, one of the few stocks making up the Dow Jones industrial average to finish in positive territory, closed up 0.1 percent at $14.59.

 

Loan Delinquencies Rise Dramatically

 

Delinquencies on credit card debt and home equity loans rose to an all-time high in the first quarter as a record number of cash-strapped consumers fell behind on their bills. Delinquencies on the value of all card debt soared to a record 6.60 percent from 5.52 percent in the fourth quarter as more cardholders relied on plastic to meet day-to-day expenses, the American Bankers Association said.

 

Late payments on home equity loans rose to 3.52 percent from 3.03 percent, and on home equity lines of credit climbed to 1.89 percent from 1.46 percent.

 

A broader gauge showing late payments on eight categories of loans rose for a fourth straight quarter to a new record, edging up to 3.23 percent from 3.22 percent. That rate actually understates consumer pain because it excludes credit cards. The ABA tracks loan payments that are at least 30 days late.

 

Consumers ended March with $939.6 billion of revolving credit outstanding, a rough approximation of credit card debt, according to Federal Reserve data. The ABA in June said it expects the recession to end this quarter, despite rising unemployment. The overall ABA delinquency rate includes direct auto, indirect auto, closed-end home equity, home improvement, marine, mobile home, personal, and recreational vehicle loans.

 

Delinquencies rose to 3.01 percent from 2.03 percent on direct auto loans, to 3.70 percent from 2.96 percent on mobile home loans, to 3.47 percent from 2.88 percent on personal loans, and to 1.52 percent from 1.38 percent on recreational vehicle loans.

 

They fell to 3.42 percent from 3.53 percent on auto loans made through dealers, to 2.04 percent from 2.35 percent on marine loans, and to 1.46 percent from 1.75 percent on property improvement loans.

 

Crude Down Again

 

The price of domestic sweet crude oil settled down $1.12 per barrel at $62.93 per barrel on Tuesday as growing uncertainty over an economic recovery spurred investor risk aversion. London Brent settled down 82 cents per barrel at $63.23.

 

Crude prices have dropped from $73 a barrel in late June on worries a rebound in global fuel demand may be far off, after economic optimism helped lift prices from lows under $33 struck in December.

 

The U.S. Energy Information Administration raised its outlook for global oil demand by 170,000 barrels per day (bpd) in a report released on Tuesday.

 

"There has been stronger economic activity in Asia than was previously anticipated, and the current forecast reflects higher expected oil consumption in that region," the EIA said.

 

Surging demand from China and other developing economies launched oil and other commodities on a six-year rally that sent crude to a record high near $150 a barrel last year, before the economic crisis hit demand.

 

Weekly U.S. inventory data is expected to show a fall in crude oil stockpiles and a build in gasoline and distillate stocks in the week to July 3, the build up to the long U.S. Independence Day holiday weekend when summer gasoline demand typically peaks.

 

Data from the American Petroleum Institute is scheduled to be released later Tuesday, with the EIA's weekly inventory report due out on Wednesday.

 

Crude has found limited support from OPEC member Nigeria, where militants have launched at least four attacks against oil installations in the past 10 days, helping to underpin prices on Tuesday.

 

Is a Second Stimulus Package Necessary

 

Congress and the Administration should be open to the possibility of a second stimulus package to jolt the economy out of a recession still causing job losses, House of Representatives Majority Leader Steny Hoyer said on Tuesday.

 

But in the Senate, Majority Leader Harry Reid was more skeptical of the need for more stimulus spending -- an idea that rattled markets fearful that the economy is far from well and corporate earnings could suffer.

 

Reid said he saw no evidence another stimulus was needed, saying the "shoots" of economic recovery "are now appearing above the ground."

 

President Barack Obama led the charge for a two-year $787 billion stimulus package that his fellow Democrats who control Congress pushed through the House and Senate in February and he has argued it would help create or save up to 4 million jobs.

 

Despite continued large job losses, both Reid and Hoyer said not enough time had passed since first package was approved for it to have the full impact on the economy, which has been in a recession since December 2007.

 

"It's certainly too early right now ... to say it's not working," Hoyer said of the initial stimulus package. "In fact we believe it is working. We believe there are a lot of people who otherwise would have been laid off, lost their jobs, who haven't done that."

 

The rate of job losses was slowing, but "it's not where it ought to be," he added. Some areas of the economy were still in trouble, he said, "housing being the leading sector."

 

"I think we need to be open to whether we need additional action," Hoyer said. Last month employers shed some 467,000 jobs, which sent the unemployment rate up to 9.5 percent, the highest in nearly 26 years.

 

However, the jobs outlook is expected to get worse in coming months, with Obama and many economists predicting it will surge past 10 percent.

 

In the Senate, Reid said only a little over 10 percent of the initial stimulus money had been spent so far. The rest, he said, is "going to move more quickly now.

 

"As far as I am concerned there is no showing to me that another stimulus is needed," Reid told reporters.

 

Suggestions of a second stimulus have been bubbling up amid criticism by Republicans who have argued that the first package was misdirected and wasted money on programs that so far have not sufficiently boosted the economy and created jobs.

 

Senate Republican Leader Mitch McConnell poured scorn on the very idea of another economic stimulus package.

 

"I think a second stimulus is an even worse idea than the first stimulus, which has been demonstrably proven to have failed," he told reporters.

 

"And we're -- we're spending $100 million a day on interest on the first stimulus," he added. "Rush and spend is what this administration is about, rush and spend. This needs to stop."

 

Debt prices dropped on Tuesday in part because of concerns about further federal borrowing and appetite by investors. The deficit is expected to hit an eye-popping $1.8 trillion in the 2009 fiscal year, which ends September 30.

 

Are Curbs on Commodities Trading Coming

 

The top regulator of futures markets is considering a clampdown on excessive speculation in energy and commodity trading by restricting holdings of big players, part of a broader move by the Obama administration to stabilize the financial markets.

 

Commodity Futures Trading Commission Chairman Gary Gensler said in a statement on Tuesday that the agency will hold hearings in the next few weeks to seek comments from consumers and market players on whether to set position limits on all commodity futures contracts.

 

"Our first hearing will focus on whether federal speculative limits should be set by the CFTC to all commodities of finite supply, in particular energy commodities such as crude oil, heating oil, natural gas, gasoline and other energy products," said Gensler, who took office on May 26.

 

The CFTC will also seek comment on who should qualify for exemptions from position limits. Currently, CFTC does not set position limits on oil and other energy contracts, although futures exchanges do. CFTC has position limits on some agricultural contracts.

 

"The commission will be seeking views on applying position limits consistently across all markets and participants, including index funds and managers of exchange-traded funds; whether such limits would enhance market integrity and efficiency; whether CFTC needs additional authority to fully accomplish these goals; and how the commission should determine appropriate levels for each market," said the statement.

 

A slew of anti-speculation bills are pending in Congress and the CFTC's move could prove popular among lawmakers, especially among Democrats.

 

"It is a relief to know that the Obama Administration does not plan to stand by silently while inflated crude oil prices top $70 per barrel despite ample oil supplies and low demand," said Senator Carl Levin, a Democrat from Michigan who led investigations into the impact of oil price speculation. Oil is now trading at more than $62 a barrel.

 

Gensler said CFTC also would revise its weekly Commitments of Traders report to show the activities of swaps dealers and hedge funds. He said the "enhancements" would appear in the near term but did not set a date.

 

He said the hearings during July and August would help determine how CFTC should use its powers to ensure fair trading. No hearing dates were announced.

 

Besides showing hedge fund and swaps positions, the Commitments of Traders report will be modified to show data on foreign contracts linked to U.S. contracts and on contracts that play a leading role in setting prices.