MarketView for May 26

 

 

Summary  

 

It was a good day on Wall Street on Tuesday as Wall Street kicked off a holiday shortened week with all the major equity indexes chalking up gains of over 2 percent as data showing the largest monthly increase in consumer confidence in six years had the Street once again anticipating an economic rebound. In addition, an upgrade of Apple by Morgan Stanley added to the Nasdaq's momentum. Apple ended the day up 6.8 to close at $130.78. Morgan Stanley said the iPhone will drive strong earnings growth over the next two years.

 

Consumer discretionary shares were among the best performers on the Dow and S&P 500, with McDonald's up 3.1 percent to close at $58.84 and Macy's up 5.9 percent to close at $11.85. Part of the reason was that an index of consumer confidence rose in May, exceeding expectations as it registered the largest monthly increase since April 2003, according to the Conference Board.

 

Other data on Tuesday indicated that prices of single-family homes fell in March from a year earlier. The pace of decline, however, slowed for a second consecutive month.

 

The market's gains came after four straight days of losses that marked the Dow's longest losing streak since the five days ended March 3. Worries about a possible cut to the United States' credit rating on Friday had pressured stocks.

 

Shares of General Motors closed up a penny at $1.44 after news the automaker had failed to persuade bondholders to accept a debt-for-equity offer, setting the stage for the largest-ever U.S. industrial bankruptcy within days.

 

Housing Prices Drop Again

 

The housing sector saw prices in 20 cities decline at an 18.7 percent annual pace in March, a larger decline than February's annual pace, according to the S&P / Case-Shiller U.S. National Home Price Index. For the first quarter, home prices in the 20-city survey fell at a record 19.1 percent annualized pace when compared to a year ago.

 

Home prices in the 20-city index fell at 18.6 percent and 19 percent annualized rates in February and January, respectively. The good news, if there is any, is that March was the second consecutive month the 20-city index did not a post a record annualized decline.

 

Otherwise, March's data offered little evidence of a sudden rush of buyers into the housing market. The areas with the largest annual percentage declines were: Phoenix, -36.0 percent, Las Vegas, -31.2 percent, San Francisco, -30.1 percent, Miami, -28.7 percent, Los Angeles, -22.3 percent, and San Diego, -22.0 percent.

 

Originally ignored by Wall Street, the S&P / Case-Shiller home price data rose saw its influence increase in 2008 as it became clear that the United States' housing boom during the past decade was, in fact, a bubble. The end result was record home mortgage foreclosures and mortgage back securities defaults, which in turn resulted in the ongoing financial crisis.

 

As a result, the Street now pays closer attention to the Case-Shiller home price data in order to discern clues as to when the housing slump may end,-- a recovery that will likely lead to increased economic growth.

 

Consumer Confidence Sees Largest Increase in 6 Years

 

Consumer confidence rose in May to its highest level in eight months as the labor market showed signs of improvement. According to the Conference Board, its index of consumer confidence posted a reading of 54.9 in May, up from a revised 40.8 in April, making it the largest one-month increase since April 2003.

 

Fewer Americans said jobs were "hard to get," the survey found, with that measure slipping to 44.7 percent from 46.6 percent. Those saying jobs were plentiful increased by 5.7 percent, a number that was higher than April's 4.9 percent.

 

"Consumers are considerably less pessimistic than they were earlier this year," said Lynn Franco, director of The Conference Board's Consumer Research Center.

 

The data was in line with other evidence suggesting that, while the economy continues to contract in the current quarter, the pace of deterioration has abated somewhat.

 

The survey offered mixed messages regarding Americans' propensity to spend money. The proportion of those who said they planned on buying a car over the next six months rose to 5.5 percent, the highest level seen in at least a year. However, fewer intended to buy homes, only 2.3 percent.

 

Crude Oil At 6-Month High

 

The price of crude oil hit a fresh six-month high on Tuesday, due in part to the announced rise in  consumer confidence data and comments from OPEC kingpin Saudi Arabia that prices may continue to rise.

 

Saudi Arabian Oil Minister Ali al-Naimi told journalists ahead of Thursday's OPEC meeting he hoped oil prices would hit $75 a barrel between the third and fourth quarters of this year, well above lows in December below $33 a barrel. OPEC ministers meeting in Vienna are expected to leave output levels unchanged on expectations prices will continue to rise despite swollen stockpiles and slumping demand.

 

Sweet domestic crude oil settled up 78 cents per barrel at $62.45, the highest settlement price since November 5, after trading as high as to $62.50, the highest intraday trade since November 10. There was no floor trading on the New York Mercantile Exchange on Monday due to the U.S. Memorial Day holiday. London Brent settled up $1.03 per barrel at $61.24.

 

The economic crisis has hit crude demand, sending oil prices off record highs near $150 a barrel struck in July, prompting OPEC to agree a series of cuts since September aimed at reducing output by 4.2 million barrels per day (bpd).

 

Saudi minister Naimi said the cartel was likely to stay the course when it meets on Thursday. But he could not say if there was consensus between all members of OPEC. Naimi said he hoped oil demand would recover in the second half of 2008, and added there was already a slight "uptick" in fuel consumption.

 

Militant action in OPEC producer Nigeria has also supported prices. Nigerian militants launched a major strike against the oil industry late on Sunday, bombing a Chevron pipeline and shutting 100,000 bpd of output.

 

Due to the Memorial Day holiday, the American Petroleum Institute data will be delayed by one day until Wednesday while U.S. Energy Information Administration oil inventory data will be released on Thursday.

 

Bondholders Reject GM Offer

 

General Motors was unable to persuade enough bondholders to accept a debt-for-equity swap, setting the stage for the largest-ever bankruptcy within days. The event marks a critical disappointment for GM.

 

The word on the Street is that GM failed to gain anywhere near the 90 percent of bondholder support desired to stave off bankruptcy. Bondholders have until midnight to make their final decision on the tender. Bondholders have balked at proposals that they forgive debt in exchange for a 10 percent stake in a restructured company. GM said it would detail results of the exchange on Wednesday morning.

 

However, GM did reach an agreement on Tuesday with the leadership of the United Auto Workers. The key for GM's negotiations with the UAW has been how the two sides restructured payment terms on $20 billion that the automaker still owes to a trust fund for retiree health care (the Voluntary Employee Beneficiary Association, or VEBA).

 

The UAW has apparently agreed to take 17.5 percent of common stock in a restructured GM. The union would also be paid $6.5 billion in preferred stock and would be granted a $2.5 billion note.

 

Those terms mean that the union was successful in taking on less risk than it would have under an earlier proposal from GM that would have given it 39 percent of the automaker's common stock. As part of the plan, GM will offer buyouts to all UAW employees. Workers with 20 years or more will be offered $115,000 and a $25,000 voucher toward purchase of a new GM vehicle.

 

The UAW did not sugar-coat its view of GM's current condition. "GM today stands at the very brink of bankruptcy," the union said in a document distributed to GM workers that detailed the concessions it had agreed to make.

 

The UAW rank-and-file will vote on the contract on Wednesday and Thursday. Union officials who met in Detroit on Tuesday unanimously endorsed the pact after a briefing with UAW President Ron Gettelfinger.

 

Current shareholders would be left with just 1 percent of a restructured company.

 

Auto suppliers will be in dire need of up to $8 billion in emergency government aid over the next few months particularly if GM enters bankruptcy, Michigan Gov. Jennifer Granholm said. "We need to provide the (auto) suppliers with the means to get through the next 60 to 90 days," Granholm said at a press conference in Detroit.

 

Flanked by Michigan Congressman Sander Levin and Ed Montgomery, who is spearheading efforts to help communities suffering from the industry's worst downturn in decades, Granholm said she has asked the Obama administration for aid for suppliers.

 

She said that nationally there is an "unmet need" for $8 billion in aid for auto suppliers. Much of that aid will be needed in Michigan.

 

While much attention is on Washington and Detroit, talks continue in Europe over the possible sale of GM's Opel unit.

 

On Tuesday, Germany pressed three bidders for Opel to improve their offers for the carmaker, saying they needed to assume greater risks and make credible commitments to preserve jobs and sites.

 

In an unexpected twist, China's Beijing Automotive Industry Corp (BAIC) also submitted an offer, potentially turning the three-way race into a four-way battle. At the same time, Fiat made an aggressive last-ditch push to convince the German government to back its bid for Opel ahead of a top-level meeting in Berlin on Wednesday where a preliminary decision on preferred bidders is expected.