MarketView for May 18

 

 

Summary 

 

Stock prices rose sharply higher on Monday, partially because of an announcement from Lowe’s indicating some numbers that exceeded Wall Street expectations. Lowe's shares ended the day up 8.1 percent to $19.94 after the company raised its full-year forecast due to signs that the housing market's decline may be ebbing. Lowe's Chief Executive Robert Niblock said consumer confidence has improved in recent weeks, and housing turnover is showing "signs of a bottom."

 

That optimism also sent the shares of Home Depot up 6.6 percent to $26.02 a day before the Dow component is set to deliver its own quarterly scorecard. Add it all together and you had the latest round of some solid broad-based buying on the idea that the recession is easing and consumer spending is stabilizing. From there the optimism spread to sectors closely aligned with economic growth, including homebuilders, banks, energy companies and retailers.

 

Positive notes from Goldman Sachs on Bank of America sent those shares up nearly 10 percent to $11.73, thereby adding momentum to the financial sector. Rising prices for crude oil helped out the energy sector. Goldman raised its recommendation on Bank of America's stock to "buy." Separately, Citigroup said it now expects Bank of America will report a second-quarter profit instead of a loss.

 

The Chicago Board Options Exchange Volatility Index fell 8.7 percent to close at 30.24, its lowest level in more than eight months. The 30 level is considered to be important psychologically.

 

Shares of Exxon Mobil closed up 2 percent to $70.50, while ConocoPhillips ended the day up 3.6 percent at $45.52. Crude rose $2.69, or 4.8 percent, to settle at $59.03 a barrel, its highest close since November 11.

 

Among the Nasdaq's major advancers, Qualcomm closed up 3.1 percent at $41.99, as the semiconductor sector was bolstered by positive broker comments. Shares of IBM chalked up a gain of 3.2 percent, to close at $104.58, making it the largest gainer on the Dow Jones industrial average.

 

Crude Higher Again

 

Oil prices were up about 4.8 percent, reaching a six-month high as violence in Nigeria and a fire at a key East Coast refinery once again brought about concern over supplies. Domestic sweet crude for June delivery settled up $2.69 per barrel at $59.03, making the highest settlement price since November 11. London Brent for July settled up  $2.49 per barrel at $58.47. The June crude oil futures contract expires Tuesday. Whenever a front-month contract expires, it usually leads to increased volatility.

 

The gains came after Nigerian militants said they had blown up two oil and gas pipelines in the Niger Delta and would blockade waterways in the region in an effort to disrupt energy exports from the OPEC country.

 

Meanwhile, an explosion rocked Sunoco's oil refinery in Marcus Hook, Pennsylvania, setting a fire and disrupting production from the 178,000-barrel-per-day plant heading into the peak summer driving season. The fire sent the price of gasoline futures to a seven-month high of more than $1.76 a gallon.

 

Supply curbs by OPEC are also adding to the price equation. OPEC has reduced its output by 4.2 million barrels per day (bpd). The oligopoly meets next on May 28 to revisit policy. The feeling of OPEC’s ministers appears to be that the group is unlikely to reduce supply further. But prices are still lower than some in the group would like.

 

Iranian President Mahmoud Ahmadinejad said on Monday that believes that an oil price of $80 to $90 barrel would be "suitable," the semi-official Mehr news agency reported.

 

Markets Mending Says Geithner

 

Treasury Secretary Timothy Geithner said on Monday that borrowing costs were falling as credit markets gradually thaw, but warned that what lies ahead could still be painful. Answering questions at a luncheon sponsored by Newsweek magazine, Geithner said unemployment likely will keep rising for some time as the Obama administration tries to find a way to wrench the economy out of recession.

 

"We're not going to have a steady, even process of repair. It's going to be bumpy, still feel fragile for a while," he said. "Even as growth starts to turn positive, which will happen...it's not going to feel better for a long time for millions of Americans."

 

Since taking over Treasury in January, Geithner has been immersed in the effort to administer a government bailout for the severely stressed financial sector. He said proposals for a broad regulatory overhaul will be made public within a few weeks and suggested it will be sweeping.

 

"We have an incredibly archaic, segmented, complex oversight regime across our system," he said. "It did not prevent huge amounts of risk building up in pockets of the system...and we're going to have to change a lot of aspects of the regulatory system to reduce the risks."

 

Geithner said huge paychecks for Wall Street figures during the boom years of the 1990s and early 2000s angered many Americans and said compensation needs to be changed, though he rejected the idea of setting upper limits on executive pay for companies receiving taxpayer-financed bailouts.

 

"I don't think our government should set caps on compensation," Geithner said. "What I think we need to do is make sure we set in place some broad constraints on the incentives (that) compensation systems create."

 

He said the financial crisis was fueled by excessive risk-taking in search of short-term pay incentives but there were means for controlling that.

 

"Through supervisory standards and through the kind of disclosure requirements the SEC (Securities and Exchange Commission) can put in place I think we can bring about broader reforms to compensation...that will make it much less likely that people will get paid to take large amounts of short-term risk at the expense of their firms," Geithner said.

 

With regard to the issue of moving slowly, Geithner responded by saying, “I actually think we're doing quite well in terms of speed, quality of policy." he said, insisting that Treasury has moved swiftly on "an extraordinarily complex set of programs" to deal with the housing crisis and financial system turmoil.

 

"I think the American people want to see us moving to change things, not just waiting," he said, adding that means there may be some areas in which "we're going to err on the side of constraining risk rather than letting it get around the new rules," he said.

 

Homebuilder Sentiment Up Sharply

 

According to a report by the National Association of Home Builders, the NAHB/Wells Fargo index hit its  highest level in eight months during the month of May, adding to the hypothesis that the three-year housing slump might be running its course. The index posted a reading of to 16, up from 14 in April. The NAHB also said its measure of housing affordability surged 10 points to a record 72.5 in the first quarter of this year.

 

The NAHB attributed the second straight monthly increase in the housing market gauge, which measures builder confidence in the market for newly built, single-family homes, to "the best home-buying conditions of a lifetime."

 

The group's chief executive officer, Jerry Howard said that, “… we are approaching the bottom and market stability could be just around the corner, that is what we are hoping for."

 

"We are looking to reach bottom during the course of this summer and probably bounce along the bottom until early fall before things really start to get back to normal. We don't expect market equilibrium until 2012," Howard said

 

The Federal Reserve's aggressive cuts in interest rates to almost zero percent and buying of mortgage-backed securities have lowered the cost of home loans. That, together with an $8,000 tax credit for first-time buyers, is helping to lend some stability to the distressed housing market. Other housing indicators have recently shown a sharp slowing in the pace of the market's decline, raising optimism that a bottom is not too far away.

 

Howard said he was also encouraged by a gradual reduction in the stock of unsold existing houses, currently at around an 11-month supply. He said the ideal level for inventories of existing home sales was a supply of six months.

 

The collapse of domestic house prices and the subsequent global credit crisis were the main catalysts causing the recession, now in its 17th month, and restoring stability to the housing market is a key element to a recovery in the economy.

 

Housing starts and building permits data due out on Tuesday could bolster the argument of a gradual market recovery. NAHB chief economist David Crowe told reporters that while affordability was the best in years, thanks to mortgage rates at historic lows and house prices at levels last seen in 2003, access to credit posed a major headwind to recovery.

 

"Our greatest concern is the access to credit for both the borrower and the builder. Underwriting standards have been tightened. Buyers are sometimes asked to put larger payments down and builders are finding it difficult to get credit to build those homes," said Crowe.

 

The NAHB report also showed two out of three sub-indexes of the Housing Market Index rising in May. The current sales conditions gauge climbed two points to 14, while the sales expectations measure for the next six months rose three points to 27. The prospective buyers index was unchanged at 13 for May.

 

Lowe’s Sends Wall Street Higher

 

Lowe's reported earnings on Monday, that took Wall Street by surprise. Its better quarterly numbers were accompanied by a statement that it saw some strength in outdoor projects like gardens and lawns in the spring, even as consumers still shunned big home renovations.

 

Lowe's net profit fell to $476 million or 32 cents a share, for the first quarter ended May 1, as compared to $607 million, or 41 cents a share, for the same period a year ago. The Street had been expecting a consensus number of about 25 cents per share.

Sales fell 1.5 percent to $11.83 billion. Sales at stores open at least a year fell 6.6 percent in the quarter. For the second quarter, Lowe's said it expects to earn 51 to 55 cents per share, on a sales decline of 2 percent to an increase of 1 percent.

 

Outdoor products, which make up 35 percent of Lowe's sales, reported vastly stronger same-store sales than its indoor products such as kitchen and flooring items, the company said. Apparently consumers are undertaking more "do-it-yourself" home projects such as painting, instead of paying someone else to do it, as they tried to save money in the recession.

 

Lowe's also said it still expects to open 60 to 70 stores in the year. Lowe's also revised full-year sales plans to a range of a decline of 2 percent to an increase of 1 percent. Same-store sales are still expected to decline 4 to 8 percent for the year.

For the full year ending January 29, Lowe's now expects to earn $1.13 to $1.25 per share.