MarketView for July 28

 

 

Summary 

 

Wall Street was pretty much undecided as to which way to turn on Tuesday with weak consumer confidence data deleting some of the Street’s confidence, while positive earnings reports continued to add some support to the trading day. The end result was that while red ink was prevalent during most of the day, share prices recovered shortly before the closing bell,

 led by the healthcare sector. as biotech shares became a hot item after Amgen's strong quarterly earnings report.

 

The health insurance sector also chalked up some gains after Coventry Health reported earnings that exceeded Street expectations. Strong earnings have given a second wind to a market rally that showed signs of deteriorating in  June after a 40 percent gain in the S&P 500 from its 12-year closing low in March.

 

Shorter-dated U.S. Treasury debt fell after weak results in an auction of a record $42 billion of two-year notes had some on Wall Street wondering whether the global appetite for Treasury debt might be waning.

 

Prior to the opening bell, the Conference Board released its consumer confidence index, which declined more than expected in July, a second consecutive monthly fall, as a sluggish labor market continued to worry consumers.

 

Looking at some company news, Amgen saw its share price chalk up a gain of 2.7 percent to $62.42 following the company's release of much better-than-expected second-quarter earnings after the close of trading on Monday.

 

Coventry Health Care (rose 12.7 percent to $22.59 after the company's earnings topped Wall Street's estimates and the company lifted its full-year earnings forecast. Aetna was up 12.6 percent to $28.96 after at least three brokerages said the insurer's recently slashed 2009 earnings forecast is achievable.

 

However, the energy sector's shares weighed on the broader market as the weak consumer confidence data took a toll on oil prices, which had risen on optimism about the economic recovery. Crude futures settled down $1.15 per barrel, or 1.7 percent, at $67.23.

 

Exxon Mobil closed out the day down 1.2 percent at $71.89, making it the largest drag among the stocks that comprise the Dow Jones industrial average.

 

Office Depot reported a larger quarterly loss than had been expected by the Street as the recession bit into demand from corporate customers. The shares closed out the day down18.1 percent at $4.38.

 

U.S. Steel fell 2.2 percent to $40.35 after the company reported a quarterly loss and said it expected all of its business sectors to operate in the red in the third quarter.

 

U.S. single-family home prices were up in May over April, the first monthly increase in nearly three years, as indicated by the Standard & Poor's/Case-Shiller home price index.

 

Economic Data Remains Mixed

 

Home prices were higher in May for the first time in three years, the latest sign of a possible start of a recovery in the battered housing market. The severe housing slump helped create the worst economic downturn since the Great Depression recession and its turnaround is considered essential to any solid pickup of economic activity. Potential home buyers afraid of committing to a fast- depreciating asset have been clamoring for signs of stabilization in house prices.

 

Home prices have plunged more than 32 percent on average from their 2006 peaks, yet the pace of the annual declines slowed in May for the fourth straight month, according to Standard & Poor's/Case-Shiller home price indexes on Tuesday.

 

In May, the index of house prices in 20 metropolitan areas rose 0.5 percent from April, after a 0.6 percent drop the month before. The long slide was expected to persist, with a 0.5 percent drop in May forecast in a Reuters poll.

 

Those figures are not seasonally adjusted. Once adjusted, prices showed a 0.2 percent monthly dip in May, which was still a dramatic slowdown from the recent trend, according to Barclays Capital.

 

Janet Yellen, the president of the Federal Reserve Bank of San Francisco, told a meeting of Oregon and Idaho bankers on Tuesday that "we glimpse the first solid signs ... that economic growth may be poised to resume. Indeed, I expect that to happen sometime this year.

 

Sales of both new and existing U.S. homes rose in June for the third straight month, spurred by low prices and mortgage rates as well as first-time buyer tax credits.

 

Still, caution is warranted as long as the U.S. unemployment rate keeps rising, economists advised. That rate is at its highest in nearly 26 years and is headed to double-digit levels. The weakening job market hit consumer confidence in July and could add drag to the still nascent economic recovery. Rising unemployment and wage cuts are straining consumer optimism and keeping many buyers out of the housing market, impeding spending and prospects for economic rebound.

 

For a rebound, consumer confidence needs to improve, foreclosures need to start falling from their record pace and potential buyers need to have a sense that it won't be even cheaper to purchase if they keep waiting. Consumer confidence, however, fell more than expected this month because of the worsening job market.

 

The U.S. Conference Board's consumer sentiment index fell to 46.6 in July from 49.3 in June, according to data published on Tuesday. The eroding sentiment came as the percentage of Americans saying jobs are hard to get increased and those who thought jobs were plentiful fell to its lowest in more than a quarter century.

 

U.S. Treasury debt prices rose initially on the soft consumer report, but fell after the government sold $42 billion of notes, part of the record $115 billion of Treasury debt being issued this week.

 

Crude Prices Fall

 

The price of crude oil fell on Tuesday after the decline in consumer confidence spurred concerns over whether we have been too optimistic in our expectations that a true economic recovery has begun. With the index of consumer confidence falling to 46.6 in July from 49.3 in June, recording its second consecutive decline, as well as some disappointing corporate earnings results on Tuesday, pushed crude prices lower with August futures settling down $1.15 per barrel at $67.23, while London Brent settled down 93 cents per barrel at $69.88.

 

Optimism that a turnaround in the global economy could lift slumping fuel demand has been a key support to crude prices this year. Crude fell from record highs near $150 a barrel last July to below $33 a barrel in December as the recession battered world consumption.

The chief executive of Saudi Aramco, the state oil company of Saudi Arabia, expressed confidence the global fall in oil demand was temporary and that consumption growth would eventually resume.

 

However, a key gasoline refiner, Valero Energy, said it would run its 16 plants at 78 percent of capacity in the third quarter, however. Weak demand has hit profits for refiners, causing them to throttle back on output. The wild swings in oil prices have also pushed the Commodity Futures Trading Commission to consider setting position limits for crude and other finite commodities.

 

The weekly data from the Energy Information Administration is due out on Wednesday.

 

Backlash on Flash

 

The Nasdaq Stock Market supports a ban on so-called "flashes," order types that it and other stock-trading venues send to a select group of traders fractions of a second before revealing them publicly, Senator Charles Schumer said on Tuesday.

 

The New York Democrat, who has urged the U.S. Securities and Exchange Commission to clamp down on the practice, said parent company Nasdaq OMX (NDAQ.O) is willing to submit to a potential ban by the agency after it "reluctantly”, started offering flashes early last month.

 

Schumer said in a statement he discussed the controversial issue -- which has implications for fair prices and the way orders circulate through increasingly electronic markets -- in a personal call with Nasdaq CEO Robert Greifeld.

 

Nasdaq and rival BATS Exchange started on June 3 "flashing" buy and sell orders to exchange members, including big banks and hedge funds, closely mirroring a service offered by alternative venue Direct Edge, which long offered the service to a smaller group of market participants, and was growing its market share at the exchanges' expense.

 

The SEC has not proposed a rule to ban the flashes, optional services that alert computer-trading programs to the intentions of investors. Flashes are also available in some anonymous trading venues known as dark pools.

 

The agency is examining the flash orders to ensure best execution. It is also examining what regulatory actions may be needed to respond to the potential investor protection concerns raised by the dark pools. It is not known whether the SEC will propose a ban on such trades.

 

"We cannot allow our marketplaces to enter a race to the bottom that caters to certain traders at the expense of other investors," Schumer said in the statement.

 

Direct Edge has defended flashes as a way for investors to tap into liquidity that they otherwise would not have access to, and as the natural progression of competition among venues in increasingly electronic markets.

 

BATS said July 7 it supported a review of flashes, raising the possibility that they create a "two-tiered market."

 

NYSE Euronext, which runs the New York Stock Exchange and handles the most domestic equity volume, does not offer flashes and has criticized the practice.