MarketView for May 28

 

 

Summary   

 

Stock prices moved sharply higher on Thursday as crude oil settled above $65 per barrel sending energy shares skyward. At the same time, a decline in bond yields in the bond market eased concerns that higher borrowing costs would hinder economic recovery. At the same time, the bond market rebounded as the benchmark 10-year notes moved 24/32 higher for a yield of 3.64 percent, 10 basis points lower on the day, after an auction of $26 billion in new seven-year Treasury notes. Another Treasury auction on Wednesday helped fuel selling of bonds and stocks as investors worried about expanding U.S. government debt.

 

There has been some concern on Wall Street that rising bond yields, which move inversely to bond prices, portend a possible rise in borrowing costs, which could choke a much-anticipated economic recovery.

 

On the Nasdaq, Costco Wholesale fell 1.8 percent to $47.97 after it posted a quarterly profit that were just short of Street expectations.

After the market's close, shares of Dell, also a Nasdaq stock, rose more than 1 percent to $11.61 a result of the company narrowly exceeding analysts' earnings estimates.

 

Financial shares also helped push the Dow higher, with JP Morgan ending the day up 5.7 percent at $36.65. Chevron Corp also led the parade in the energy sector, closing up 1.9 percent at $65.81. Exxon was up 1.4 percent at $69.23. However, General Motors trended down 2.6 percent to close at $1.12, as the automaker appeared closer to filing for bankruptcy protection.

 

Thursday's economic data was mixed, with new orders for durable goods seeing their biggest gain in 16 months, while new home sales rose slightly less than expected.

 

Economic Data Continues To Improve

 

Sales of new single-family homes were up during April, while fewer workers filed for first-time jobless aid last week, raising the possibility that the worst of the deep economic recession is over.

 

The Commerce Department said on Thursday that new home sales climbed 0.3 percent in April from March to a 352,000 annual unit pace, while prices rose 3.7 percent, the largest monthly advance since November.

 

Although the sales pace was not as brisk as had been hoped for, it was encouraging to see a drop in the stock of homes available for sale. The inventory hit its lowest level in nearly eight years.

 

The inventory of homes available for sale in April fell 4.2 percent from the prior month to 297,000, the lowest level since May 2001. At April's sales pace, that represents a 10.1 months' supply, the smallest backlog in nine months.

 

Sales, however, were down 34 percent compared to April last year, a reminder of how steeply the market had been falling. The sales pace appears to have bottomed in January when it hit a record low 329,000 unit pace.

 

A separate report from the Labor Department indicated that initial claims for state unemployment insurance benefits fell by 13,000 to 623,000 for the week ended May 23, a second straight weekly decline. The Labor Department said the number of people still on unemployment benefit rolls after an initial week of aid rose 110,000 to a record 6.79 million in the week ended May 16, and analysts expect a report on June 5 will show the jobless rate shooting to 9.2 percent in May from 8.9 percent in April.

 

The reports were the latest in a series suggesting the intensity of the 17-month old downturn that has been plagued by severe job losses and falling asset prices, is losing momentum and the economy could return to growth later this year.

 

The major stocks indexes ended up more than 1 percent on Thursday, buoyed by energy shares as oil prices rose and results of a Treasury note auction calmed fears over demand for government debt. Longer-dated U.S. Treasury debt prices also rose following the seven-year note sale, with yields retreating from six-month highs scaled on Wednesday.

 

A report from the Commerce Department on Thursday also offered some hope for the economy. The department said new orders for long-lasting U.S. manufactured goods rose 1.9 percent in April from March, the biggest gain in 16 months. But the report was tempered by a sharp downward revision to March orders, which fell 2.1 percent.

 

In addition, a closely watched gauge of business spending plans fell 1.5 percent after slipping 1.4 percent in March, an indication that manufacturers were still working to reduce their stock of unsold goods choking their warehouses.

 

Crude Past $65 Per Barrel

 

The price of crude oil rose past $65 a barrel on Thursday to a fresh six-month high after OPEC decided to keep output unchanged and government data showed a steep drop in U.S. crude inventories. Sweet domestic crude for July delivery settled up $1.63 per barrel at $65.08, after hitting an intraday high of $65.44. London Brent crude settled up $1.89 per barrel at $64.39.

 

Domestic crude stocks fell by 5.4 million barrels in the week to May 22, the U.S. Energy Administration said, as refiners ramped up output ahead of the summer. Although gasoline demand is still trailing year-ago levels, it was looking stronger during the seven days leading into the May 23-25 Memorial Day holiday weekend, which traditionally kicks off summer holiday travel.

 

OPEC Secretary-General Abudullah al-Badri has said that U.S. demand was showing signs of recovering after the economic crisis battered global consumption and sent crude prices off record highs near $150 a barrel struck in July. OPEC ministers meeting in Vienna opted to leave target output levels unchanged as they bet a strengthening economy and signs of rising demand would support prices.

 

Some members of the 12-member producer group voiced concern that high global inventories could weigh on prices, but Saudi Arabian Oil Minister Ali al-Naimi said demand was rising and would drain away excess supplies.

 

"The price is good. The market is in good shape. Recovery is under way. What else could we want?" he said.

 

Despite OPEC's optimism about demand, revised EIA estimates for U.S. oil consumption in March showed demand down more than 5 percent from year-ago levels to the lowest level for the month in 12 years.

 

GM Likely To Declare Bankruptcy On June 1

 

General Motors persuaded its major bondholders to accept a sweetened ownership plan on Thursday a deal that could result in a smoother ride for the carmaker through bankruptcy. However, the troubles for Detroit's automakers deepened when former Ford Motor Co unit Visteon Corp and another parts supplier filed for bankruptcy protection, a move some worried could affect Ford's cash position. However, Ford, played down the concerns.

 

In the biggest news of the day, GM said it had reached a debt-for-equity deal with some major bondholders that would give them a bigger stake in a reorganized automaker and could pave the way for a fast-track bankruptcy backed by the U.S. Treasury.

 

One senior U.S. government official suggested GM could emerge from a court-supervised restructuring in as few as two or three months. GM is widely expected to file no later than June 1, a U.S. government-imposed deadline for the automaker to prove its viability or seek court protection.

 

The announcement of a possible deal with bondholders was the clearest indication yet that GM, is close to filing for bankruptcy under the direction of the Obama administration. It would be the biggest-ever bankruptcy for a U.S. industrial company and the third-largest in U.S. history after Lehman Brothers and Worldcom.

 

Under the proposed deal, bondholders representing $27 billion in debt would be offered 10 percent of a reorganized GM, the same stake they had been offered previously. However, bondholders would now also receive warrants to acquire another 15 percent of the equity in the new company, provided they support a quick Treasury-backed sale process similar to one now being used for rival Chrysler.

 

A committee representing the major bondholders said they supported the revised offer as the "the best alternative, given the current difficult and dire situation. The government currently expects at least 35 percent of bondholders to accept the new offer.

 

Members of the United Auto Workers, meanwhile, were voting Thursday on an agreement that would give the union a stake in GM in return for concessions. Initial tallies suggested the rank-and-file workers would ratify the deal. The UAW will have one director on the board of the reorganized GM and a 17.5 percent stake in the company.

 

The union does not expect to exercise a warrant to buy another 2.5 percent of GM because of a requirement that the new automaker be valued at $75 billion for that to be exercisable. Both GM and Chrysler are unlikely to receive any further concessions after the recent cost-cutting contract changes negotiated by the union.