MarketView for February 22

 

 

Summary 

 

Wall Street suffered its worst day since this past August on Tuesday as stocks were sold of as a result of the violence taking place in Libya, a major exporter of crude. More importantly, the major equity indexes have seen a tremendous amount of upward momentum, which usually means that some sort of a correction cannot be too far behind. In other words, this could be the start of a long-anticipated pullback after a lengthy rally. The benchmark Standard & Poor's 500 lost 2.05 percent, its worst one-day percentage drop since August 11

 

Rising volatility and heavy volume added heft to the possibility of a larger pullback. With 9.76 billion shares traded on the major exchanges, it was the highest volume session for the month and the second-highest for the year. The CBOE Volatility Index, Wall Street's so-called fear gauge, rose 26.6 percent to end at 20.80, its highest one-day increase since May 20, 2010.

 

Oil prices held near a 2-1/2 year high as the Libyan unrest cut supplies from the OPEC nation. Heavy energy-consuming sectors were among the hardest-hit. The Dow Jones Transportation Average lost 3.8 percent, with FedEx down 5.1 percent at $93.29.

 

Despite the sharp pullback, the benchmark S&P 500 Index managed to hold a key support level near 1,313, representing highs reached earlier in February. At the same time there has been continuing expectation among those who trade the market  regularly that a pull-back was most likely over due. The S&P 500 index is currently double its 12-year low hit in March 2009.

 

Wal-Mart saw its share price fall 3.1 percent to $53.67 after posting its seventh straight sales decline. After the closing bell, Hewlett-Packard fell 10 percent to $43.42 in extended trading after the company cut its 2011 revenue projections on falling consumer demand for its personal computers.

 

Libyan leader Muammar Gaddafi used tanks, helicopters and warplanes to quell a growing revolt and scoffed at reports he was fleeing after four decades in power.

 

Consumer confidence rose in February to a three-year high on improved optimism regarding both the economy and income prospects, according to the Conference Board, a private group.

 

Consumer Confidence Reaches Three-Year High

 

American consumers are more confident than at any time in the last three years, the result of rising prospects for both the economy and employment , even as another report indicated that  prices of homes are still in a decline.

 

The Conference Board reported on Tuesday that its index of consumer confidence rose to 70.4 in February from a revised 64.8 in January. Nonetheless, confidence remains low by historical terms, although there is strength in the underlying numbers. Consumer confidence was at its highest level since February 2008 and better than a forecast of 65 by economists.

 

The expectations index, which accounts for what consumers expect to see in six months, rose to its highest level since December 2006 at 95.1 from 87.3. The present situation index advanced to 33.4 from 31.1.

 

Consumers' assessment of the labor market improved modestly, though the overall view of employment conditions was mixed.

 

The Conference Board report indicated that consumers' expectations for inflation in the coming 12 months were at their highest since June 2009, rising to 5.6 percent from 5.5 percent the month before. There was also a change in the survey's data provider that prompted revisions back to November 2010.

 

Separately, the Standard & Poor's/Case Shiller composite index of home prices in 20 metropolitan areas declined 0.4 percent in December from November on a seasonally adjusted basis. Prices for single-family homes fell for the sixth month in a row, bringing them closer to a trough in 2009 that marked the low point after the U.S. housing bubble burst.

 

Economist Robert Shiller, who helped devise the index, warned that house prices could fall another 25 percent.

 

"My intuition rates the probability of another 15, 20, even 25 percent real home price decline as substantial. That's not a forecast, but it's a substantial risk," Shiller told reporters on a conference call.

 

Unadjusted for seasonal impact, home prices fell 1 percent for the month, leaving them just 2.3 percent above their April 2009 troughs, S&P said. While the composite held above its 2009 low, 11 cities hit their lowest levels since home prices peaked in 2006 and 2007, the report showed.

 

Furthermore, the weakness in home prices since the expiration of government stimulus last summer is weakening, though the large amount of foreclosures entering the market will continue to pressure prices.

 

Crude Rises Due to Libya Revolt

 

The price of crude oil remained near 2-1/2 year highs on Tuesday, as worries regarding the turmoil in Libya that sent prices soaring the previous session eased as a result of expectations that OPEC and the International Energy Agency could meet any shortfall in oil supplies.

 

At least three international oil companies have halted production in Libya, which pumps nearly 2 percent of world output. Some companies have been pulling employees and their families out of Africa's third-largest producer, though others say they are keeping oil flowing there.

 

Oil prices rose as much as 6 percent on Monday, taking Brent crude in London to almost $109 a barrel at one point for the first time since 2008. Prices remained strong on Tuesday, but closer to $106.

 

Brent crude for April delivery rose 4 cents to settle at $105.78 a barrel, the highest close since September 2008 but off earlier highs of $108.57. Brent hit a 2-1/2 year high of $108.70 a barrel on Monday.

 

Domestic sweet crude for March delivery, which expired on Tuesday, rose to $93.57 per barrel, after touching $94.49, the highest since October 2008. It was up $7.37 a barrel from Friday; although the market traded on Monday, it did not print an official settlement price due to a holiday. The more actively traded April contract gained $5.71 from Friday to trade at $95.42 a barrel.

 

Two more oil companies, Italy's ENI and Spain's Repsol, halted output, cutting some 13 percent of its 1.6 million barrels per day (bpd) of crude oil production. U.S. companies said their output was still flowing. Lebow said that traders were not buying oil at the same rate as Monday, but few wanted to go short with so much uncertainty in the Middle East.

 

Option investors bet on higher crude prices and more volatility, with the Crude Oil Volatility Index, known as the "Oil VIX," surging more than 22 percent.

 

However, oil futures pared gains after reassurances on supply from Saudi Arabia, the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), and from an official from the International Energy Agency (IEA), who reiterated that the agency stood ready to address any real disruptions by tapping member stockpiles.

 

Saudi Arabian Oil Minister Ali al-Naimi, speaking on the sidelines of the International Energy Forum in Riyadh, said the group would meet any real supply shortages, though he stopped short of announcing more production immediately, saying prices were driven primarily by speculation and fear.

 

"What I would like you to convey to the market: right now there is absolutely no shortage of supply," Naimi told a news conference. "I think this is a situation of fear, concern which will be very short term and will have no long range effect," adding he did not see prices spiking toward $150 a barrel as they did in 2008, before crashing as the economic crisis took hold.

 

Spare capacity in the first-half of 2008 was only around 2 million bpd, far lower than the estimated 5-6 million bpd now that could be called upon to meet any disruptions. The IEA rarely opens the taps but members hold 1.6 billion barrels of emergency oil stocks. They were last tapped in 2005 after Hurricane Katrina crippled U.S. Gulf oil operations.

 

Wintershall, the oil and gas exploration arm of Germanchemicals company BASF, said Monday it was temporarily shutting down its 100,000 bpd production partnership with Libya's National Oil Corporation.

 

Oil product traders operating in the Mediterranean also said exports from Libya were severely disrupted on Tuesday, but some traders are of the opinion  that  tankers were continuing to load.