MarketView for May 27

 

 

Summary   

 

In turnaround from Tuesday’s rising performance, stock prices hit the skids on Wednesday as a result of rising yields on government debt that in turn led to fears that both businesses and consumers could face rising financing costs. The end result would be some unneeded resistance to a full economic recovery.

 

The market’s decline, the bulk of which occurred during the afternoon, was broad based with 3M and IBM leading the parade downward. Shares of 3M fell 3.2 percent to close at $56.04, while IBM ended the day down 2 percent at $102.93.

 

The reason bond prices declined in afternoon trading, causing their yields to rise, was an abundance of concerns (mostly overdone) regarding the heavy supply of debt being brought to market as a result of the government’s efforts to stem the economic decline, despite a well-received auction of new five-year notes. The interest rates on certain Treasury securities are the underlying basis for many lending rates.

 

Wednesday's sell-off in stocks and bonds surprised many on the Street as the two tend to move in opposite directions. Treasuries prices typically fall when the demand for somewhat riskier investments, such as stocks, increases.

 

The price of the benchmark 10-year Treasury note was down over 1-16/32 and yielding 3.74 percent on Wednesday, up nearly 20 basis points in just one day and over 1.25 percentage points in just six weeks.

 

General Motors fell 20.1 percent to $1.15 as the automaker faced a failed debt exchange, setting the stage for a bankruptcy filing expected by the end of the month.

 

Semiconductor stocks had kept the Nasdaq in positive territory for much of the day after SanDisk renewed a chip license with Samsung Electronics. Shares of SanDisk closed up 14.3 percent to $15.52.

 

Rising Home Sales Point To More Stable Economy

 

Sales of previously owned homes rose in April, providing new evidence the housing market is stabilizing and backing views that the recession is nearing an end. The National Association of Realtors reported on Wednesday that sales climbed 2.9 percent to an annual rate of 4.68 million as the traditional spring home-buying season swung into gear.

 

However, there was a bit of cold water thrown on the good news however, as a separate report indicated that applications for home loans fell to their lowest level since early March last week as mortgage costs rose.

 

In addition, the increased worries regarding the government's ability to fund costly measures to rescue the economy drove longer-dated government bond yields higher on Wednesday, with the spread between the 2-year and 10-year Treasury notes widening to a record 2.75 percentage points. However, the feeling on the Street was that borrowing costs had not moved up enough to imperil the housing market's chances of recovery.

 

In general, the data was seen as a fresh hint that the steep 17-month U.S. economic downturn, triggered by the collapse of the housing market, was easing and could well end by the third quarter, as a survey published by the National Association of Business Economists predicted.

 

"The national economy is showing some initial signs of stability," U.S. Treasury Secretary Timothy Geithner said in Boston as he announced $1.5 billion in federal tax credits for community development projects. "This is just the beginning, however. We have a long way to go."

 

The Realtors report showed sales of single-family homes rose 2.5 percent last month to an annual rate of 4.18 million, while multi-family units -- the hardest-hit sector -- jumped 6.4 percent to a 500,000-unit annual pace.

 

Sales were up in three of four regions. However, the number of unsold homes swelled 8.8 percent to 3.97 million, the highest since November. At the current sales pace, it would take 10.2 months to clear that supply.

 

The median home price fell 15.4 percent from a year ago to $170,200 in April, the second biggest percentage decline on record. The Realtors group blamed distressed sales, which accounted for 45 percent of all transactions, for depressing prices.

 

A separate home price measure from the Federal Housing Finance Agency showed prices fell 7.3 percent over the 12 months through March, contrasting with an 18.7 percent drop seen in the Standard & Poor's/Case-Shiller survey Tuesday.

 

Crude Oil At 6-Month High

 

Oil prices hit a six-month high, nearly reaching $64 per barrel on Wednesday, after Saudi Arabia, indicated that the global economy had strengthened enough to cope with oil at $75 to $80 per barrel.

 

Domestic sweet crude for July delivery settled up $1.00 per barrel at $63.45, after earlier touching $63.82, the highest level since mid-November. London Brent crude settled up $1.26 per barrel at $62.50.

 

Saudi Oil Minister Ali al-Naimi, speaking on the eve of an OPEC meeting in Vienna, said oil prices would continue to rise and that the global economy was now strong enough to support $75-$80 oil. "The price rise is a function of optimism. Better things are coming in the future," Naimi told reporters in Vienna.

 

The minister said OPEC did not need to change its output policy. The group already has agreed to remove 4.2 million barrels per day of oil from the market in a bid to shore up prices battered by recession.

 

The Energy Information Administration reacted to the Saudi comment by saying higher oil prices would be detrimental to the economic recovery.

 

"I certainly would think that we are still in some pretty thick economic woods, and that it would make sense to not push things with respect to oil markets," the acting head of the EIA, Howard Gruenspecht, said.

 

Global oil demand is seen falling this year at the fastest rate since 1981, with the International Energy Agency, adviser to 28 industrial nations, predicting a decline of 2.56 million barrels per day.

 

Crude inventories have risen to around 62 days of forward cover, but inventories have been declining in recent weeks due to a slowdown in import levels.

 

Data from the American Petroleum Institute has been delayed by one day until Wednesday afternoon due to the U.S. Memorial Day holiday at the start of this week, while the EIA's weekly report will be released Thursday.

 

We Still Have A Ways To Go

 

The economy is stabilizing, but has a long way to go to recover from its current recession, Treasury Secretary Timothy Geithner said on Wednesday.

 

"The national economy is showing some initial signs of stability. Confidence has improved, the financial system is starting to heal. Credit is starting to ease a bit," Geithner said. "This is just the beginning, however we have a long way to go."

 

Geithner was speaking in Boston, where he announced the recipients of $1.5 billion in federal tax credits for community development projects.

 

EU Fine Manageable

 

Intel said the record 1.06 billion euro ($1.5 billion) fine imposed by EU regulators for antitrust violations would not cause the company to cut investment or slash its dividend.

 

"There's still plenty of cash flow from operations to invest in our business, pay the fine and pay the dividend," Chief Financial Officer Stacy Smith said at an analyst event in London on Wednesday.

 

"As we've said in the Q1 earnings call, we are not having any conversations about cutting the dividend."

 

Smith indicated that the company would spin off more than $10 billion in cash in 2009, flat or slightly down on 2008.

 

Intel addressed analyst fears that growing sales of its lower cost "Atom" processor, which is used in netbooks, would cannibalize sales of its PC chip range and put downward pressure on its former lofty 50-60 percent margins.

 

"There's great concern about the potential of the Atom mix because it's a lower selling price product, but it's also a lower cost product," Smith said.

 

"And that cost really enables us to ramp it without having an adverse effect on the overall product margin of the business."

 

Twenty percent cannibalization would mean that 20 percent of netbooks sold would otherwise have been sales of full notebooks.

 

Intel has for now cornered the fast-growing market for inexpensive netbooks, made for simple functions such as surfing the Web, with its Atom processors. Many fear that that fast market growth may be at the expense of higher-priced laptops.

 

Smith said the current economic downturn was following the pattern of previous slowdowns, with the exception that Intel reacted swiftly to cut capacity as sales slowed and inventory rose in the fourth quarter.

 

"We brought down the loadings in our factories dramatically to below 40 percent," he said. "Pretty much in one quarter we were able to get inventory back to a healthy level. The inventory levels overall through the worldwide supply chain now are at a healthy, even a little bit lean, level."

 

Smith reiterated comments made two weeks ago that gross margins would return to "normal" levels in the second half. "I think we will get gross margin back into the normal range, which I'll define as 50 to 60 pct, when we get in the second half of this year," he said.

 

Intel's gross margin slid to 45.6 percent in the first quarter from 53.1 percent in the fourth quarter.