MarketView for June 26

Summary  

Of the three major equity indexes, the only one to make any headway on Friday was the Nasdaq and even that was minimal at best. M=The malaise of even the Nasdaq came despite the interest in Palm after the company posted a narrower-than-expected loss late on Thursday and said demand was strong for its new Pre smart phone. Palm shares were up almost 16 percent to $16.22.

The Dow Jones industrial average was dragged lower by sliding energy shares as oil settled below $70 per barrel. But strength in some financial stocks helped cushion the S&P 500's decline.

Weighing on sentiment, a jump in the savings rate suggested that the debt-burdened U.S. consumer may not drive the economy out of recession as fast as hoped. According to the data posted on Friday, savings rose to a record annual rate of $768.8 billion, the highest level since record keeping began in 1959.

Nonetheless, Friday’s trading session was relatively quiet after a busy week that included Federal Reserve Chairman Ben Bernanke's contentious appearance on Capitol Hill and the sale of $104 billion in U.S. Treasury debt.

A fall in oil prices hit energy bellwethers Chevron, down 1.4 percent at $65.95, and Exxon Mobil, down 1.2 percent at $68.05.

Goldman Sachs was among the financial sector's stronger stocks, up 1.6 percent at $146.74, while JPMorgan (JPM.N) added 0.9 percent to $34.45.

Economic Data Continues to Improve Overall

Consumer spending was higher during May, making it the first increase since February with savings reaching a record high as federal stimulus measures sent incomes higher and consumers became more accepting of the idea that the economy was close to emerging from recession. At the same time, consumer sentiment was higher this month reaching its highest level since February 2008.

According to the Commerce Department, consumer spending, which accounts for more than 70 percent of economic activity, rose 0.3 percent in May. The department also revised up April's figure to unchanged, from a small decline previously. Personal income rose 1.4 percent last month, again due to higher social benefit payments from the government's massive economic stimulus. The stimulus provided for one-time payments of $250 to people receiving Social Security, supplemental security income, and other benefits.

Personal savings hit a record annual rate of $768.8 billion. The saving rate climbed to 6.9 percent, the highest since December 1993, the department said.

A separate report showed U.S. consumer confidence improved in June to the highest since February 2008. The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for June stood at 70.8, up from 68.7 in May, equaling February 2008's reading. The index of consumer expectations edged lower, however.

Since the November 2008 low of 55.3, the sentiment index has gained 15.5 points, recouping about one-third of the loss posted since the peak in January 2007.

"Such a sizable gain has usually indicated that an end to the economic downturn is on the horizon as consumers begin to increase their spending on houses, vehicles, and large household durables," the Michigan report said in a statement. It warned, however, this recovery won't be accompanied by strong bursts of spending, because consumers are intent on rebuilding their reserve funds and significantly paying down their debt.

Reflecting persistent worries about the future, consumers' assessment of the 12-month economic outlook fell to 69 in June from 75 the previous month. Meanwhile, their one-year inflation expectations rose to 3.1 percent in June, the highest since October 2008, from May's reading of 2.8 percent.

Rig Count Up

The number of drilling rigs working rose for a second week as improved crude oil prices lured back drillers even as natural gas activity weakened, according to figures from Baker Hughes Inc on Friday. The increase appeared to support predictions made a few months ago by oil services company executives for a bottoming of the closely watched rig count in the second or third quarter.

In the week to Friday, the overall domestic  rig count rose by 18 rigs to 917, having touched a six-year low of 876 two weeks before. However, the number of rigs drilling for natural gas fell again; down by five at 687, as gas prices remained subdued by massive production and weak demand.

However, crude oil price futures have doubled in the past four months, even if they are still only half their level of a year ago.

The domestic rig count, which is far more volatile than international numbers, peaked above 2,000 last year.

Crude Prices Fall

The price of August domestic crude futures fell by more than a dollar on Friday, pressured by weakness on Wall Street and news top African oil producer Nigeria would halt a battle with rebels in its energy-rich Niger Delta. They settled down $1.07 per barrel at $69.16. London Brent settled down 86 cents per barrel at $68.92.

The losses came as the equities markets were hit by a bout of profit-taking. Oil has moved in tandem with stocks for months as energy dealers look to equities for guidance on the economic outlook and its implications for ailing world oil demand.

Adding to oil's losses Friday was news that Nigerian security forces said they would observe a 60-day ceasefire in the Niger Delta under a federal amnesty program that four rebel factions said on Friday they might be willing to take part in.

Pipeline bombings, attacks on oil and gas installations and the kidnapping of industry workers over the past three years have prevented Nigeria from pumping much above two-thirds of its installed oil output capacity of 3 million barrels per day.

President Umaru Yar'Adua on Thursday offered a presidential pardon to gunmen in the Niger Delta from August 6 to October 4 to try to end years of unrest that have cost the OPEC member billions of dollars in lost revenue.

Shell said it was investigating reports of an attack on its Afremo platform B facility, which had been shut down following an attack on the Trans Escravos pipeline in February.

Hartford on Government Dole for $3.4 Billion

Hartford said on Friday it has taken $3.4 billion of federal bailout money, the maximum it was authorized to accept, to bolster capital in the wake of large investment losses. The insurer is one of six insurers that won preliminary government approval last month to participate in the Troubled Asset Relief Program. Four of the other five insurers decided not to accept bailout funds. The sixth, Lincoln Financial, said on June 15 it would accept up to $950 million.

Like most TARP recipients, Hartford is issuing to the government preferred shares that carry an initial 5 percent dividend. It said the government also received warrants to buy up to $510 million of common stock at $9.79 per share.

Chief Financial Officer Lizabeth Zlatkus said in a statement it is prudent for Hartford to hold additional capital "until such time as the markets, as well as the broader economy, are on more stable footing."

Hartford lost $2.75 billion in 2008, hurt by investment losses and the cost of guarantees it provided to holders of variable annuities. The insurer also said it plans to limit sales under a previously announced plan to sell up to $750 million of common stock. It said it has issued 1.2 million shares so far.