MarketView for July 30

Summary 

Wall Street rallied sharply on Thursday, the result of some solid corporate earnings and a decline in the number of ongoing claims for unemployment insurance. The gain by the S&P 500 index comes on the heels of two days of losses. The rally sent the benchmark S&P 500 index to its highest intraday level in almost nine months, putting it less than 4 points away from the psychologically important 1,000 level.

The Nasdaq briefly rose above 2,000 for the first time since October. Unfortunately, the momentum lessened shortly before the closing bell and the indexes lost some ground, finishing off their highs for the day.

The advance was underpinned by strong demand for the Treasury Department's auction of a record $28 billion of 7-year notes. Strong bids on U.S. debt diminish the chance of a rise in borrowing costs. In addition, a surge in commodity prices added to the demand for shares of raw material manufacturers.

Companies reporting better-than-expected results on Thursday included MasterCard, up 3 percent at $194.11, and Tyco International, up 2.9 percent to close at $29.64. Shares of Motorola rose 9.4 percent to $7.19 on word that the company had reduced its cost structure, while at the same time shipping more phones than had been expected.

With just one day left in the month, the Dow Jones industrial average is on track for its best monthly percentage gain since October 2002, while the S&P 500 and the Nasdaq probably likely mark their fifth straight month of gains.

At Thursday's close, the Dow was up 8.38 percent for the month of July so far, while the S&P 500 was up 7.34 percent and the Nasdaq was up 8.13 percent.

On the economic front, initial claims for state unemployment insurance benefits rose slightly above market expectations in the week ended July 25. However, the four-week moving average for new claims, considered a better gauge of underlying trends as it smoothes out volatility, fell to its lowest level since January.

Shares of Walt Disney, a Dow component, fell 2.75 percent to $25.50 in after hours trading after the company posted a drop in profit in line with Wall Street's expectations, although the revenue number missed forecasts. Disney's stock had gained 1.3 percent during the regular session to close at $26.22 on the New York Stock Exchange.

DryShips reported better-than-expected quarterly earnings, helped by a recent rise in spot charter rates and an increased contribution from its offshore drilling segment, sending its shares up 5.7 percent to $7.10 after the bell. In regular trading, the stock gained 2.9 percent to end at $6.72 on Nasdaq.

Goldman Sachs upgraded General Electric to a "buy" because they believe it is less likely that GE will have to spin off its finance arm, GE Capital. GE's shares ended the day up 6.9 percent to $13.11.

Among the Nasdaq's bellwethers, UBS initiated coverage of Google and Amazon.com with "buy" ratings; shares of both companies rose slightly over 2 percent. So far, 75 percent of the S&P 500 companies that have reported quarterly results have beaten expectations, according to Thomson Reuters data.

Crude Price Up 5 Percent

Oil rose more than 5 percent to near $67 per barrel on Thursday as economic data sparked fresh optimism that the recession may be bottoming out. Specifically, the number of workers staying on jobless rolls fell to the lowest in three months last week, while the four-week moving average for new claims fell by 8,250, to 559,000, the lowest level since late January.

Domestic sweet crude futures for August delivery settled up $3.59 per barrel, or 5.7 percent, at $66.94, nearly erasing a 5.8 percent loss posted on Wednesday on data indicating a steep build in the top consumer's crude inventories. London Brent traded up $3.58 to $70.11 per barrel.

Expectations a rebound in the global economy could bolster slumping fuel demand have helped push crude up from below $33 a barrel in December, with many looking to stock markets for early signs of a turnaround. The recession has battered global fuel consumption and sent crude tumbling from record highs near $150 a barrel struck in July 2008, prompting the Organization of the Petroleum Exporting Countries to agree a series of output cuts aimed at lifting prices.

Kuwait's oil minister said oil prices should rise later this year with the onset of winter heating oil demand in the Northern Hemisphere.

Uncle Sam Now Citigroup’s Largest Shareholder

Taxpayers now own about 34 percent of Citigroup. While a few technical details still remain, the bank has completed a months-long effort to convert preferred shares held by the government into common stock.

Citigroup, widely considered the most troubled large bank, completed two exchange offers on Thursday that will bolster the bank’s capital position. Public investors, private investors and the government swapped close to $58 billion of Citi’s preferred securities into common stock. The bank has said the swaps would leave it with more than 21 billion shares, up from 5.51 billion at the end of June.

The $25 billion swapped by the government is part of its $45 billion infusion from the federal bank bailout plan, the Troubled Asset Relief Program. Another $20 billion of that sum will remain in the form of preferred shares, throwing off an 8 percent annual dividend.

Citigroup said it will sell a 64 percent stake in Japan's Nikko Asset Management Co to Sumitomo Trust & Banking Co for 75.6 billion yen ($790 million).

Citigroup agreed to the exchange offers in February as part of a government bailout, following $37.5 billion of losses over the previous five quarters. The swaps were originally expected to total $52.5 billion. They grew to $58 billion after regulators ordered Citigroup to build a buffer following a "stress test" of its finances.

Citigroup said the swaps will make it one of the world's best-capitalized banks, with about $100 billion of tangible common equity.

Other large Citigroup investors include several sovereign wealth funds, and Saudi Prince Alwaleed bin Talal.

Lower Crude Prices Hurt Exxon

Exxon Mobil reported a steeper-than-expected drop in quarterly earnings as natural gas and crude oil prices slid from a year ago and the global recession hurt demand for fuel. Exxon, which chalked up record profits last year, has seen earnings wither as crude oil prices have fallen by more than half from a year ago. Refiners have also seen margins under pressure as weakness in industrial demand for fuels like diesel has caused a buildup in stockpiles.

Exxon reported that its second-quarter net income came in at $3.95 billion, or 81 cents per share, down from $11.68 billion, or $2.22 per share, a year earlier. Earnings excluding one-time items were $4.09 billion, or 84 cents per share. Revenue fell 46 percent to $74.46 billion.

Second-quarter production fell 3 percent from a year earlier, the company said. Earnings in the company's exploration and production business fell 62 percent to $3.8 billion, while earnings in the refining unit fell 67 percent to $512 million.

In the first six months of the year, Exxon said it spent $12.3 billion, in line with its longer-term plan for capital spending of $125 billion over 5 years. The company also repurchased 75 million shares of its stock at a gross cost of $5.2 billion. In the third quarter it expects to buy back $4 billion of stock.