MarketView for November 26

Summary 

 

The government reported Wednesday that jobless claims had remained at recessionary levels, consumers had cut back on their spending by the largest amount since the 2001 terrorist attacks, orders to U.S. factories had plunged anew and home sales had fallen to the lowest level in nearly 18 years. Nonetheless, stock prices moved sharply higher on Wednesday as tech stocks traded near their lowest levels in five years, while there were renewed hopes of a General Motors bailout.

 

Citigroup jumped nearly 16 percent to $7.05 on news late on Tuesday that a Mexican brokerage controlled by billionaire Carlos Slim recently bought $150 million worth of shares of the struggling bank.

 

General Motors was among the biggest advancers in the Dow, rising more than 35 percent to $4.81 after Deutsche Bank said the U.S. automakers' prospects of receiving a bailout have improved. Rival automaker Ford surged almost 30 percent to $2.15. The NASDAQ rose 4.6 percent, led by Apple and Cisco, which rebounded from Tuesday's big sell-off on concerns about weakening demand. The S&P's four-day advance is its best run since May.

 

Cisco Systems rose 6.3 percent to $16.39, a day after news of a five-day plant closure led to a tech sell-off.. Shares of Apple were up 4.6 percent to $95. As a result, Apple was NASDAQ’s top-weighted advancer.

 

The government's recent move to prop up Citigroup may have helped Wall Street overlook a never ending stream of economic data that continued to show a weakening economy. A 7.2 percent surge in the price of oil futures lifted energy shares, making Chevron and Exxon Mobil the two largest contributors to the Dow's advance. Chevron rose 4.4 percent to $79.93 and Exxon Mobil climbed nearly 4 percent to $80.89. Crude settled up $3.67 per barrel at $54.44.

 

Dreary economic data included government reports that showed orders for durable goods, fell in October, while consumers cut spending at the steepest rate in more than seven years. Volume was fairly heavy on the Big Board, especially on the day before the Thanksgiving holiday, where about 1.42 billion shares changed hands, below last year's estimated daily average of 1.90 billion. On the NASDAQ, about 2.00 billion shares traded, slightly below last year's daily average of 2.17 billion. During the holiday-shortened week, volume typically is lighter than average.

 

Crude Up Sharply

 

The price of crude oil rose sharply on Wednesday as a large interest rate cut in China and news of a possible Russian output cut appeared to counter another round of dour economic news and larger-than-expected domestic crude stockpiles. Trading followed this week's established pattern of volatility in the oil markets.

 

Domestic sweet light crude for January delivery settled up more than 7 percent, or $3.67 per barrel at $54.44. In London, January Brent crude settled up $3.57 per barrel at $53.95.  Oil opened the week with a 9 percent swing upward Monday on word that the government was prepared to bail out Citigroup , followed by a nearly 7 percent decline the following day on a raft of ominous economic data.

 

There were no such swings for retail gasoline, however, which have trended only down. The price at the pump fell again to a national average of $1.868 for regular unleaded, according to AAA. It marked the lowest price since January 2005. At the same time, the average national price has fallen 80 cents in just the past month and is down 40 percent from a year ago.

 

Crude's rebound Wednesday was not unexpected, given the holiday week and relatively low trading volumes on the floor of the New York Mercantile Exchange.

 

For the week ended Nov. 21 crude inventories rose by 7.3 million barrels, the Energy Department's Energy Information Administration said in its weekly report. Gasoline inventories rose by 1.9 million barrels. Demand for gasoline over the four weeks ended Nov. 21 was 2.8 percent lower than a year earlier, averaging about 9 million barrels a day.

 

However, in a report released a day early because of the Thanksgiving holiday, the EIA said natural gas storage levels fell more than expected last week and are 3.1 percent below the year-ago average. In its weekly report, the government said natural gas inventories held in underground storage in the lower 48 states dropped by 66 billion cubic feet to about 3.42 trillion cubic feet for the week ending Nov. 21.

 

Overseas, China's biggest interest rate cut in 11 years, and the fourth in three months, was expected to lead to increased demand for oil. Also affecting prices was news that Russia, one the world's largest crude producers, may join OPEC in output cuts.

 

In other Nymex trading, gasoline futures jumped 8.49 cents to close at $1.1798 a gallon. Heating oil gained 3.79 cents to settle at $1.7367 a gallon while natural gas for January delivery jumped 49.2 cents to settle at $6.878 per 1,000 cubic feet.

 

Economic Data Paints A Grim Picture

 

Housing, consumer spending and business investment all weakened sharply last month as the dizzying downward spiral of the world's largest economy gathered speed. Economic reports also showed unemployment rolls remained swollen at recessionary levels in the latest week, providing further support to the hypothesis that the economy has entered its worst downturn in decades.

 

Consumer confidence fell to a 28-year low in November and tumbling durable goods orders for October illustrated the severe constraints on the economy as households and businesses alike cut spending plans on costly manufactured goods.

 

Orders for durable fell 6.2 percent in October, as demand weakened across nearly every major sector of manufacturing. The report's proxy for businesses' investment intentions, orders for non-defense capital goods excluding aircraft, fell 4 percent in October after decreasing 3.3 percent in September.

 

The deluge of data included a report from the Institute for Supply Management-Chicago showing business activity in the Midwest contracted in November at a more severe rate than expected.

 

In the latest reminder that the current global financial and economic crisis originated in the housing market, data showed sales of new single-family homes fell sharply in October and were running at levels last seen 17-1/2 years ago. The median sales price fell also fell to its lowest since September 2004.

 

So it should ne be too surprising that 30-year mortgage rates fell for a fourth straight week, according to a survey released on Wednesday by home funding company Freddie Mac, to an average of 5.97 percent for the week ending November 26, down from 6.04 percent last week.

 

Consumers reduced their spending during October at the steepest rate in more than seven years. The spending that fuels two-thirds of our economy fell 1.0 percent, the largest decline since Sept. 11. It was a fourth straight monthly drop in spending and underlined how a credit crunch, falling home prices and steady job losses were sapping consumers' will and ability to spend.

 

Meanwhile, consumer confidence fell to a 28-year low in November as mounting job losses, falling incomes and tumbling household wealth battered sentiment, highlighting the troubles for the economy ahead. The Reuters/University of Michigan Surveys of Consumers indicated that the final index reading on consumer sentiment for November fell to 55.3 from October's 57.6, the lowest point for that statistic since 1980.

 

Finally, the Labor Department said new claims for jobless benefits fell 14,000 last week. But that still left claims at a seasonally adjusted 529,000 and well above levels typically associated with recessionary economic conditions. The four-week moving average of claims that irons out weekly fluctuations climbed to 518,000 last week from 507,000 the week before, its highest reading since January 1983.

 

Bailout Hopes Rise for GM and Ford, Send Shares Higher

 

Shares of General Motors and Ford were higher on Wednesday after Deutsche Bank said chances have improved for the struggling automakers to receive a government bailout.

 

"There is growing concern about the risks to the U.S. economy that would be derived from inaction," Deutsche Bank analyst Rod Lache wrote in a research note to clients. "The proximity of these bailout hearings to the Citigroup (C.N: Quote, Profile, Research, Stock Buzz) bailout may have also tipped the scales somewhat," Lache wrote, referring to the massive government rescue of the bank announced Sunday.

 

Shares of GM, which hit a 70-year low of $1.70 last week, were up 36.5 percent, or $1.30, to $4.86, while Ford saw its share price chalk up a gain of 26.5 percent, or 44 cents, to $2.10.

 

Lawmakers, who last week rejected pleas from GM, Ford and Chrysler for $25 billion in federal aid and asked the companies to submit detailed turnaround plans, are scheduled to reconvene out of session in the week of December 8 to review the plans and consider aid.

 

Lache wrote the U.S. automakers would likely present "relatively aggressive" plans to Congress, addressing challenges to both operating costs and revenues.

 

"We believe winning over skeptics will require U.S. automakers to submit plans that demonstrate an ability to achieve cash flow break-even at relatively low demand and conservative market share levels," Lache wrote. He added that GM could cut its annual fixed costs for North American operations to the low $20 billion range from the current $31 billion, but that would involve "significant execution and timing risks."

 

Even if GM were able to restructure outside of bankruptcy, existing shareholders would likely be diluted near no value for the stock, Lache said. The current thought on Wall Street is GM's remaining equity value would essentially be wiped out by a government recapitalization. However, trading in options on GM shares turned active and reflected speculation that GM's battered shares could rally further

 

William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York, said trading in GM calls with strike prices of $5, $6, and $7.50 was active on Wednesday. Call options give buyers the right to acquire a security at the predetermined price.

 

"There is speculation that the automakers are going to release their future business plan by Monday, which would allow the government to give the auto industry their funds for the bailout," said Lefkowitz.

 

GM shares last traded above $7 in October, before the automaker warned that it could run short of the cash needed to finance its operations by early 2009.