MarketView for July 16

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MarketView for Friday, July 16
 

 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Friday, July 16, 2010

 

 

Dow Jones Industrial Average

10,097.90

q

-261.41

-2.52%

Dow Jones Transportation Average

4,119.00

q

-137.16

-3.22%

Dow Jones Utilities Average

377.65

q

-6.10

-1.59%

NASDAQ Composite

2,179.05

q

-70.03

-3.11%

S&P 500

1,064.88

q

-31.60

-2.88%

 

 

Summary 

 

Economic data that failed to inspire, in combination with some anemic revenue statistics from GE and Citigroup and Bank of America, served as an Albatross around the neck of Wall Street on Friday, sending the major equity indexes down more than 2 percent. The slide in the S&P 500 was a decisive break of an 8 percent rise over the last two weeks as Wall Street came to the conclusion that it would take more than strong earnings to overcome doubts about the economic outlook.

 

GE, Bank of America and Citigroup joined the list of major companies that exceeded Wall Street's expectations, but investors took money off the table after all three reported a drop in quarterly revenues. Bank of America slid more than 9 percent as new worries surfaced with regard to how banks will profit going forward. During Friday's session, GE's stock fell 4.6 percent to $14.55, while Citigroup lost 6.3 percent to $3.90. Bank of America was down 9.2 percent at $13.98.

 

For the week, the Dow was one percent lower, the S&P 500 was down 1.2 percent and the Nasdaq fell 0.8 percent.

 

Weak energy costs pushed consumer prices down for a third straight month in June, the Labor Department reported. Add in the Thomson Reuters/University of Michigan data and to Wall Street the economic indicators are pointing to a definite slowing of the economic recovery.

 

Google saw its share price fall after the company failed to meet profit expectations for the first time in two years. The shares closed down 7 percent at $459.61.

 

Among the Nasdaq's other leading decliners, Gilead Sciences fell 8.5 percent to $31.94 after Jefferies cut its price target on the stock to $38.00 from $48.00.

 

The Thomson Reuters/University of Michigan survey of consumers showed U.S. consumer sentiment fell far more than expected to 66.5 in a preliminary July reading, down sharply from 76.0, June's final number.

 

Consumer Prices Fall

 

The Labor Department’s primary index of consumer prices, the CPI, was lower for the third straight month in June while consumer sentiment nearly hit its lowest point in nearly a year in July.

 

According to the Department, June’s CPI fell 0.1 percent in June after falling 0.2 percent in May. The so-called core number, which removes the volatile food and energy sectors, was up 0.2 percent, its largest monthly gain. The discrepancy in June is due to energy prices falling 2.9 percent, while food prices were unchanged.

 

A rise in rental costs after months of stagnation allowed the core CPI to move higher. The core rate had risen 0.1 percent in May and markets had expected a similar gain last month.

 

A second report from the Labor Department indicated that consumer sentiment early this month pulled back from a near 2-1/2 year high on worries over income and the pressing unemployment situation.

 

Consumer prices have not declined for three successive months since October-December 2008. In the 12 months to June, the CPI rose 1.1 percent, the smallest advance since October, and a sharp slowdown from the 2 percent in the period through May.

 

Recent data ranging from consumer spending to manufacturing imply the recovery from the longest and deepest recession since the 1930s has come close to stalling in recent months.

 

With inflation subdued, the unemployment rate at a 9.5 percent rate and domestic demand lackluster, it is unlikely the Federal Reserve will move to raise interest rates before the second half of next year.

 

Wholesale price readings have also suggested scant inflation pressure. Prices received by farms, factories and refineries fell for a third straight month in June, the government said on Thursday. Furthermore, the minutes of the Fed's last policy meeting, released on Wednesday, showed a few officials have begun to worry about the risk of deflation -- an economically disabling, broad-based decline in consumer prices.

 

The monthly core inflation rate was bumped up by a 0.8 percent in apparel costs, the largest increase in 16 months. Used cars and trucks, which rose 0.9 percent last month, also contributed to the rise in core inflation, as did a 1 percent rise in tobacco prices.

 

In the 12 months to June, the core inflation rate rose 0.9 percent, increasing by the same margin for a third straight month. The rise was in line with market expectations and matched the lowest core inflation rate since January 1966. Most Fed officials would like to see inflation in a 1.7 percent to 2 percent range.

 

The SEC Came Out the Winner over Goldman Sachs

 

At first glance, the $550 million settlement looked like a victory for Goldman Sachs and a loss for the Securities and Exchange Commission and its ambitious charges against the Wall Street titan. However, a closer look suggests the SEC played a relatively weak hand pretty well.

 

The settlement, over charges that Goldman marketed a subprime mortgage product fraudulently, was little more than a slap on the wrist for the investment bank financially. No heads have rolled and the internal changes to which it agreed were relatively modest.

 

The bar was high, though, to prove fraud, and Goldman's admission that it made a mistake when marketing a subprime product is rare in such deals. Even a few billion in fines would seem like a pittance to Goldman.

 

"They took on the biggest investment bank in the world, charged it with fraud, received a settlement in excess of half a billion, and a concession that Goldman omitted significant facts," said Harvey Pitt, a former Republican chairman at the agency. "It's a huge win for the SEC."

 

Securities lawyers including former SEC officials were surprised that the agency, which in recent years has been criticized as weak and ineffective, forced Goldman to admit it made a mistake.

 

If a federal judge approves the settlement as expected, it will represent an accomplishment for the head of SEC enforcement, Robert Khuzami, and his staff.

 

The former federal prosecutor was hand picked by Schapiro to help restore the agency's reputation after it was humiliated for failing to stop Bernard Madoff's $65 billion fraud.

 

Goldman, of course, gets to put the whole affair behind it with little admission of wrongdoing and a small fine. However, the SEC still has a lot more to prove and is under pressure from critics who say the agency was asleep at the wheel in missing big scams in recent years, like Madoff's Ponzi scheme.

 

Many now look to the new powers given the SEC in the landmark financial overhaul bill Obama will sign next week.

 

Crude Oil Futures Fall

 

Crude oil futures fell below $76 per barrel on Friday as weak consumer sentiment and falling consumer prices took a toll. Texas sweet domestic crude for August delivery settled down 90 cents per barrel at $75.72 after touching an intra-day high of $77.15. London Brent's new front-month September crude oil futures contract settled down 86 cents per barrel at $75.23.

 

Oil was on track to log a modest weekly decline from the week of July 9, when oil settled up 5.5 percent to $76.09. That data overshadowed a decline in the U.S. dollar, which is usually bullish for crude because it makes oil cheaper for buyers that hold other currencies.

 

U.S. crude prices have traded in a range between $71 and $80 a barrel for almost six weeks as volatility related to the European debt crisis dwindled. This week they have found support near the $75 per barrel range. Over the year, prices have stayed within a $23 span, hitting a 19-month peak above $87 and a trough below $65, both in May.