MarketView for June 8

 

 

Summary   

 

Some days on the Street are characteristically dull and Monday was one of those days, as the major equity indexes ended the day on Monday pretty much at the same point they were when the opening bell rang 6 ½ hours earlier. While it is true that the major indexes had fallen more than 1 percent, before rallying in the last hour of trading in a valiant effort led by bank shares, at the end of the day there was little if any substance to show for the day’s efforts.

 

Financial stocks led the rebound, with JP Morgan up 2.4 percent at $35.39 as the Street anxiously awaited word from the Federal Reserve and Treasury as to which banks will be allowed to repay TARP funds.

 

Meanwhile, the markets ignored lighter-than-expected sales from McDonald's and lowered iPhone prices from Apple. However, the move by the S&P 500 index to a position above its 200-day moving average was considered to be a positive sign for investors, providing some confidence to buy stocks on dips in the market.

 

McDonald's was the Dow's primary laggard. The world's largest hamburger chain reported that May sales at domestic restaurants open at least 13 months rose 2.8 percent, but were significantly less than the 6.1 percent growth in the previous month. McDonald’s shares ended the day down 1.9 percent to $58.72.

 

Apple closed down 0.6 percent to $143.85. The stock was the heaviest weight on the Nasdaq after the company cut the price on its base model 8-gibabyte iPhone. Earlier, Apple unveiled a cheaper Mac notebook at its annual developers' conference.

 

AT&T closed down 0.7 percent to $24.40 after the exclusive carrier of Apple's iPhone was removed from the "conviction buy" list at Goldman Sachs, which cited the stock's recent underperformance. AT&T said late in the session that it will start selling the reduced price iPhones without impacting its profit targets.

 

After the closing bell, Texas Instruments rose 5.2 percent to $20.80 on word that the company was raising its earnings per share and revenue outlook for the second-quarter.

 

Crude Prices Slide Downward

 

Oil prices slipped on Monday, pressured by a stronger dollar and Monday’s ensuing weakness on Wall Street. Domestic sweet crude for July delivery settled down 35 cents at $68.09 per barrel, off a seven-month high of $70.32 hit last Friday. London Brent settled down 46 cents per barrel at $67.88.

 

The slim losses came as the dollar strengthened. A stronger dollar tends to weaken commodities markets by reducing the purchasing power of non-U.S. buyers. The day’s decline was  tempered somewhat by expectations regarding data being released by the  Energy Information Administration on Wednesday, the expectation being that the data will point to a 400,000-barrel decline in crude stockpiles.

 

Large oil inventories in the United States have been shrinking slowly in recent weeks as OPEC production cuts dig into import levels. OPEC members have promised to cut 4.2 million barrels a day of oil from their production levels since this past September and so far the indication is that they have met about 75 to 80 percent of that pledge. In addition, Saudi Arabia has said that an oil price of about $75 to $80 per barrel is fair and would encourage future investment.

 

Also trimming oil's losses Monday, JP Morgan raised its forecast for fourth-quarter 2009 oil prices, this time to $65 a barrel, versus above $55 in their May monthly energy report.

 

Supreme Court Stays Chrysler Sale

 

Supreme Court Justice Ruth Bader Ginsburg, in a one-sentence order, granted a request to put on hold the sale of Chrysler to a group led by Fiat SpA. According to the words used by Ginsburg, the orders of the bankruptcy judge allowing the sale "are stayed pending further order of the undersigned or of the court."

 

Ginsburg acted as a 4 p.m. EDT deadline from a U.S. appeals court in New York was due to expire. The appeals court order would have allowed Chrysler to proceed with its sale to Fiat, a union-aligned trust and the U.S. and Canadian governments.

 

It was not clear if Ginsburg's order was designed to give the high court more time to consider the dispute. Her order made no mention of when briefs in the appeal would have to be filed or whether the Supreme Court would hear the underlying legal challenge to the sale.

 

Indiana pension funds and consumer groups had asked the Supreme Court on Sunday to stop the sale of Chrysler while they challenged the deal. The Obama administration, earlier on Monday, urged the Supreme Court to allow the sale, writing that blocking the sale would have "grave consequences."

 

Elena Kagan, the administration's lawyer before the Supreme Court, said in a written argument that blocking the sale could force Chrysler's liquidation. In addition, the Chrysler case could set a precedent for General Motors, which is using a similar quick-sale strategy in its bankruptcy in New York.

 

The Indiana pension funds argued that the sale of Chrysler unlawfully rewards unsecured creditors ahead of secured lenders and amounts to an illegal reorganization plan, and that the U.S. Treasury Department overstepped its legal authority by using bailout funds for Chrysler when Congress intended the money for banks.

 

Possibility of Higher Interest Rates Weighs on Short-term Treasurys

 

Shorter-term Treasury prices fell on Monday, hurt by the view the recession would end later this year and the Federal Reserve could then hike interest rates. The sell-off followed a similar decline on Friday and into the weekend after the Labor Department reported that there were far fewer jobs in May than had been forecast.

 

The two-year note, sensitive to potential changes in interest-rate policy, fell 4/32,sending its yield upward to 1.37 percent from 1.30 percent late Friday and from 0.96 percent late on Thursday. At the same time, the difference between the yield on 2-year notes and 10-year notes narrowed to 246 basis points in early dealings, after widening to as much as 281 basis points on Friday.

 

With the government selling huge amounts of bonds to finance its economic recovery and financial rescue efforts, the latest move up in yields reinforced a trend that has been in place since the start of the year.

 

Investors have grown complacent, expecting that the Fed's near zero-percent short-term rate policy could last indefinitely. So when the market began to anticipate a potential Fed tightening, a lot of people were simply caught off sides. The Fed cut short-term interest rates to near zero last year to battle the worst financial crisis since the Great Depression.

 

The lower prices and higher yields could soon draw in some buyers, even with the Treasury selling $65 billion in three-, 10- and 30-year debt this week. In addition, the shift in market psychology that has led to lower prices and higher yields could make it easier to underwrite and distribute the Treasury's auctions this week than might have been otherwise. The Treasury will sell $35 billion in three-year notes on Tuesday.

 

However, there is also the opinion on the Street that while the yield curve could flatten more, it would not be the start of a new trend, given the support for the 10-year yield at 3.905 percent, and resistance in the area of 3.765 percent to 3.72 percent.

 

The benchmark 10-year note was up 2/32 in price, its yield easing to 3.83 percent from 3.84 percent late on Friday. The 30-year bond was up 24/32, its yield falling to 4.49 percent from 4.63 percent late on Friday.

 

The Federal Reserve bought $7.5 billion of Treasuries maturing May 2014 through April 2016 on Monday, the New York Fed said. Dealers submitted $29.971 billion of bids for consideration in the purchase, which is part of the U.S. central bank's efforts to lower long-term borrowing costs.

 

Five-year Treasuries fell 9/32 in price, their yields rising to 2.90 percent from 2.84 percent on Friday.

 

AT&T Says Its Margin Is in Tact

 

AT&T stated on Monday that despite halving the price of the existing iPhone from Apple beginning on Monday evening and the initiation of a new version of the phone on June 19 profit margin remains intact.

 

According to AT&T, the exclusive domestic service provider for iPhone, its costs to sell the newly announced iPhone 3G S would be similar to those for the original 3G iPhone, which pressured its profits last year. However, unlike when it announced the first 3G iPhone last year, AT&T said it was sticking by its target for wireless margins in the "low 40 percent range" based on operating income before depreciation and amortization.

 

On June 19 AT&T said it will sell the new iPhone 3G S for $199 for versions with 16 gigabytes of storage space, and $299 for a 32-gigabyte model for customers who commit to a 2-year service plan. The new iPhone 3G S will allow Web surfing at twice the speed of today's iPhone and have a 3 megapixel camera that can record video, according to Apple.