MarketView for November 25

Summary 

 

It was nip and tuck all the way during the afternoon hours, however the markets by and large managed to end the day on a positive note as long as you discount the Nasdaq. In other words,

the Dow Jones industrial average and S&P 500 indexes were able to put some positive numbers up on the board.

 

The gains came as a result of some long awaited optimism that the Federal Reserve's latest rescue package might finally revive the sagging housing market and free up consumer lending. As a result, the Dow had its first positive three-day run since late August, while the S&P rose three straight sessions for the first time since mid-September.

 

Under the Fed's latest plan, the U.S. central bank will buy billions of dollars worth of debt and mortgage-backed securities to increase the flow of credit for mortgages, student loans, car loans and credit cards.

 

The Fed's move to generate consumer lending lifted financial stocks, with JPMorgan up nearly 8 percent at $29.77, and those of retailers, with Wal-Mart Stores, up 3.6 percent at $54.68.

 

However, the NASDAQ slid as technology stocks fell on more immediate concerns that demand may be weakening after bellwether Cisco Systems said it will close most of its operations in the United States and Canada for five days in an effort to reduce overhead.

 

It also did not help that before Wall Street's opening bell, the Commerce Department reported that third-quarter gross domestic product shrank 0.5 percent on a sharp drop in consumer spending. That was a downward revision from the government's first estimate that GDP had contracted 0.3 percent in the third quarter.

 

Cisco's shares fell 6 percent to $15.42, while Microsoft ended the day down 3.4 percent to $19.99 and shares of Apple closed down 2.3 percent at $90.80. Shares of BlackBerry maker Research In Motion slid 8.3 percent to $41.50.

 

Shares of Hewlett-Packard dropped almost 6 percent to $33.60, despite posting a solid quarterly profit report and giving an upbeat outlook late Monday. The stock was the largest weight on the Dow and helped limit its advance.

 

Technology is considered to be more vulnerable to slowing consumer and business spending, as well as the downturn from abroad.

 

Crude Gains Traction In Early Asian Trading

 

The price of crude rose to above $51 per barrel early Wednesday morning, after a near 7 percent fall the previous day, when data showed the economy shrank at its fastest pace in seven years.

Domestic light crude for January delivery settled up 31 cents per barrel at $51. by 8:48 p.m. EST, having settled down $3.73 at $50.77 on Tuesday after two-day gains of nearly 10 percent. The price of crude has failed to post three consecutive days of gains since September. London Brent crude rose 34 cents to $50.69.

 

Slowing demand and recession concerns have knocked oil from its peak above $147 a barrel in July, prompting members of OPEC to call for further supply reductions to support prices. OPEC ministers next meet in Cairo on November 29 for a consultative session, with the organization's next policy-setting meeting in Algeria on December17.

 

Price hawk Iran on Tuesday said non-OPEC states should cooperate with OPEC in stabilizing the oil market because, if the group acts alone, prices will continue to fall. OPEC members Iran and Venezuela have called on the cartel to cut production by at least another 1 million barrels per day, after last month's 1.5 million bpd cut failed to lift prices. Another cut, which may be decided only at OPEC's meeting in December, could fail to raise prices.

 

The weekly oil and products data, due to be released at 10:35 a.m. EST, is expected to show another rise in U.S. crude stocks.

 

Here Comes The Granddaddy Of All Bailouts

 

The Federal Reserve threw a massive life-line to consumers on Tuesday with two new programs aimed at making it easier for them to obtain loans for homes, cars and on credit cards.

 

Under the new mortgage program, the Fed will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It will also buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

 

The central bank also launched a $200 billion facility to support consumer finance, including student, auto, and credit card loans and loans backed by the federal Small Business Administration.

 

The new mortgage-support facility was intended to strike at the collapsed housing market, the core of the United States' economic woes.

 

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved financial conditions more generally," the Fed said.

 

Investor appetite for both the debt issued by Fannie Mae and Freddie Mac and the mortgage-backed securities they guarantee has dried up since the government seized the companies in September, and the Fed hopes to fill that void.

 

Under the consumer-finance facility, the Treasury will help cover any losses the Fed might face by providing $20 billion of credit protection from its $700 billion financial bailout fund, which Congress approved last month.

 

A Treasury spokeswoman said the $20 billion will come from the remaining unallocated $40 billion in the first tranche of the $700 billion financial rescue fund. That leaves Treasury with $20 billion, and once that is used it must ask Congress for access to the remaining $350 billion in the fund.

 

The Treasury noted that issuance of asset-backed securities in consumer lending categories such as credit card debt, auto loans and student loans had essentially ground to a halt in October. Last year, issuance was roughly $240 billion.

 

"Continued disruption in the ABS market could further deteriorate credit availability for consumers and increase the prospects for further deterioration in the economy generally," the Treasury said in a statement.

 

The Fed's twin announcements marked the latest in a series of emergency measures by U.S. authorities to try to keep the economy from falling into a deep and prolonged recession. Late Sunday, the government stepped in to prop up the second largest U.S. bank Citigroup.

 

The emergency steps represent a necessary, if ad hoc, response to the greatest financial shock the United States has experienced since the Great Depression. The difficulty is that the mounting costs of the measures, which have the potential to reach several trillion dollars, could eventually fuel a troubling inflation. Policy-makers, however, have signaled a willingness to do whatever it takes to try to tamp down the risk of a severe recession.

 

Economic Data Is Poor

 

The economy contracted at its fastest pace in seven years in the third quarter as consumer spending plunged to a 28-year low, data showed on Tuesday, raising the specter of a deeper recession. Separate reports showed home prices continuing their downward spiral, with the cost of single-family homes plunging by a record 17.4 percent in September from a year earlier.

 

The data painted a dismal picture of the troubled economy and backed views the Federal Reserve could push benchmark lending rates to an unprecedented zero percent by early 2009.

The grim reports partially overshadowed the Fed's announcement that it would use up to $800 billion to buy mortgage-related debt and consumer debt securities. The Dow Jones industrial average ended up 36.47 points at 8,479.86, after a choppy session.

 

Government debt prices rallied, helped by a safe-haven bid fueled by the worsening outlook. The dollar, however, fell a third session against the euro, handing the European single currency its best three-day percentage advance ever.

 

The Commerce Department revised the annual rate of decline in third-quarter gross domestic product to 0.5 percent from the 0.3 percent that it reported a month ago. It was the sharpest fall in GDP since the third quarter of 2001, in the aftermath of the September 11 attacks.

 

Corporate profits fell for a second straight quarter and business investment fell for the first time since the end of 2006, signaling a wariness about prospects for future sales.

 

Consumers, hard hit by rising unemployment and plunging home equity, held back and sent spending falling at its sharpest rate since the second quarter of 1980. Consumer spending accounts for two-thirds of economic activity.

 

The third-quarter decline in GDP was a striking contrast with the second quarter's relatively brisk 2.8 percent rate of growth. The U.S. economic decline is widely predicted to accelerate in the fourth quarter and last into 2009.

 

The housing malaise has infected other sectors of the broader economy, translating into the highest unemployment rate in 14 years and a record drop in retail sales. Steps by global authorities, including the Federal Reserve's interest rate cuts, have had limited impact in freeing up credit and stimulating demand.

 

An uptick in the Conference Board's consumer confidence index to 44.9 from in November from 38.8 in October did little to brighten the mood. Further highlighting the deteriorating economic climate, prices of U.S. single-family homes in September plunged a record 17.4 percent from a year earlier, the Standard & Poor's/Case-Shiller Home Price Indices showed.