MarketView for October 17

Summary 

 

Stock prices were lower again on Friday as weakness took hold in both manufacturing and financial stocks after the release of less than optimistic data on consumer confidence and construction. Nonetheless, the Dow Jones industrial average was still able to break a disastrous three-week losing streak with it best weekly gain in more than 5 years.

 

It was a week marked by extreme volatility, and Friday's trading was no different, with stocks swinging back and forth between positive and negative territory. A big afternoon rally was snuffed out in the last hour of trading as uncertainty took hold before the weekend.

 

Caterpillar and United Technologies led the Dow lower, after a report that U.S. housing starts, or the construction of new homes, fell to a 17-1/2-year low last month, adding to recession fears. Also weighing on manufacturers, Honeywell International cut its fourth-quarter profit forecast and said it was bracing for "recessionary conditions" in the United States and Europe next year.

 

Retailers, such as Wal-Mart, fell after a report on U.S. consumer confidence showed the steepest monthly drop on record in October. A rally in energy stocks fizzled late in the day as oil prices settled off their highs for the session.

 

For the week, the Dow was up 4.8 percent, its best week in 5-1/2 years, while the S&P 500 had its best week since February with a gain of 4.6 percent. The NASDAQ rose 4.1 percent for its best week since early August.

 

The week featured one of Wall Street's best days ever on Monday, followed by it worst day since the 1987 stock market crash on Wednesday.

 

But there was some positive news. Major global money rates fell, supporting the view that central banks have turned the tide in their fight to unlock credit for cash-strapped banks and borrowers.

 

Google rose 5.5 percent to $372.54 after its profits surpassed Wall Street's expectations after the company said Web traffic and revenue growth were strong. Another good sign for technology investors came from Advanced Micro Devices, which posted stronger-than-expected results, sending its shares up 2.2 percent to $4.21.

 

In a move that encouraged some investors to scour the market for beaten-down shares on Friday, billionaire investor Warren Buffett, writing in the New York Times, said he is buying U.S. stocks.

 

Housing Starts Plummet

 

The Commerce Department reported Friday prior to the opening bell that construction starts on new homes fell 6.3 percent in September to a seasonally adjusted annual rate 817,000 units, their slowest pace since January 1991, a 17-1/2 year low as builders scaled back amid a worsening housing slump and growing turmoil in financial markets that helped pushed permits for new homes to a nearly 27-year low.

 

The September rate of starts on single-family homes fell 12.0 percent to a 544,000-unit annual rate, the slowest pace since August 1982. With falling home prices, soaring foreclosures and financial turmoil that was curtailing the availability for of mortgages for prospective home buyers, builders in September were clearly bracing for a deeper downturn.

 

A barometer of future building also dropped to the weakest level in more than 25 years, as new applications for building permits fell 8.3 percent in September to an annual rate of 786,000 units. The building industry is now on pace to construct the fewest new homes and apartments this year since the end of World War II.

 

The declines last month reflected weakness in many parts of the country. It was led by a 20.9 percent drop in the Northeast, where construction of single-family units fell to the lowest level on record.

 

Construction slipped by 16.8 percent in the West with single-family building hitting a record low there, too. The Midwest saw a gain of 5.6 percent, although that reflected strength in apartment construction as single-family building also hit a record low in that region. Construction activity in the South was up a slight 0.5 percent.

 

The housing industry, which enjoyed a five-year boom, is suffering its worst downturn in decades.

The weakness in housing, where prices have been falling sharply in many parts of the country, has triggered severe economic problems. The government has been forced to rush through a $700 billion rescue package for banks which have been hit with billions of dollars in losses from soaring defaults on mortgages.

 

Builder sentiment dropped to a record low in October, according to the latest survey from the National Association of Home Builders which said builder confidence had been shaken by the recent financial market troubles. Builders have been facing tighter lending standards as they try to get financing for new projects.

 

Record Drop in Consumer Confidence

 

Consumer confidence suffered its steepest monthly drop on record in October; as the worst financial crisis since the Great Depression sent shocks waves through the economy. The Reuters/University of Michigan Surveys of Consumers said its index of confidence plummeted to 57.5 in October from 70.3 in September.

 

"Consumer confidence in early October registered its largest monthly decline in the history of the surveys," the report said. The index is now at its lowest since June this year. The report said there have only been four surveys that posted monthly declines of 10 index points or more.

 

"All of the prior double-digit declines were based on severe economic dislocations with the losses accelerated by fear and panic," the report said.

 

The University of Michigan confidence index dates back to 1952. Its record low was 51.7, which it hit in May 1980. Consumers rated current economic conditions the worst on record, with this gauge falling to 58.9 from September's 75.0.

 

Worryingly, short-term inflation expectations actually rose, even as consumers struggled with worsening job prospects and deteriorating personal finances. The gauge of one-year inflation expectations rose to 4.5 percent from September's 4.3 percent.

 

However, five-year inflation expectations fell to 2.8 percent, its lowest since October 2007, from 3.0 percent in September.  Furthermore, the outlook for the future is bleak, with the index of consumer expectations falling to its lowest since July this year, when record-high oil prices were still pummeling sentiment.

 

Be Greedy

 

Warren Buffett wants the world to know that it's time to get greedy right now, as fear sends stock prices plunging across the globe. Using the widely-read opinion pages of The New York Times, Buffett writes that he's been buying U.S. stocks for his personal account, picking up a "slice of America's future at a marked-down price."

 

Besides his Berkshire Hathaway shares, Buffett reveals that he used to own nothing but U.S. bonds. Now, he writes, "If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent" in American stocks. (Remember, he's talking about his own holdings, not the billions of dollars of stock owned by Berkshire Hathaway itself.)

 

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."

 

While he acknowledges that the financial world is a "mess" and the economy will only get worse in the near term, he argues that over the long term, "the stock market news will be good," just as it has been throughout the 20th century. All the bad news right now creates opportunities for investors willing to look five, ten, or twenty years into the future.

 

Buffett admits that he doesn't have the "faintest idea" whether the stock market will be higher or lower in a month or a year, he argues that it's likely the market will move higher well before we see improvements in investor sentiment or the economy. "So if you wait for the robins, spring will be over."

 

In the piece, Buffett doesn't name any specific stock or stocks that he's been buying. Earlier this month, however, Buffett did reveal in a live interview on CNBC that he couldn't resist buying some shares of Wells Fargo for his personal account when they dipped into the low 20s during the summer. In that conversation, however, he made it sound like buying Wells was more of an exception to the rule than the start of a stock-buying trend.

 

It's no secret that Buffett remains optimistic about America's long-term financial future and thinks "people who own a piece of it will do well."

 

It is, however, unusual for Buffett to make such an emphatic public declaration that the time to buy is now. He never likes to "opine" on the stock market.

 

These must indeed be extraordinary times for him to say to the world that he's putting his own money where his mouth is right now, by purchasing his own pieces of America's future prosperity.

 

Crude Rises on Possible OPEC Cut

 

The price of crude oil rose $2 to near $72 a barrel on Friday, due to a broader rise across financial markets and expectations OPEC could cut output at an emergency meeting next week.

 

Domestic sweet crude for October delivery settled up $2.00 per barrel at $71.85, while December Brent crude settled up $1.76 per barrel at $69.60. Oil traders are betting that OPEC will reduce supply to support prices after the cartel called for an emergency meeting to October 24 from November 18 to discuss the impact of global recession on oil markets.

 

Worried about the financial fallout of the oil price drop, OPEC, which controls 40 percent of the world's oil supply, called a special meeting to address the slide. The consensus seems to be that OPEC could decide to trim output by as much as 1 million barrels a day in a bid to halt the slide, in addition to a 500,000 barrel per day cut announced last month.

 

Qatar's Oil Minister Abdullah al-Attiyah appeared to agree with that number, while Nigerian Oil Minister Odein Ajumogobia said the meeting was an opportunity to consider options regarding the world oil price but that no course of action had been proposed yet.

 

Oil prices have fallen more than 50 percent from their peak above $147 a barrel hit just three months ago, depressed partly by lower demand in the United States and other industrial countries as the credit crisis has hit the wider economy.

 

At the same time, the bearish sentiment around oil has grown more feverish in recent days, lopping more than $11 off prices in the previous three trading sessions alone. A barrel of crude hasn't been this cheap in almost 14 months.

 

The pullback comes as a widening economic slowdown forces a wholesale contraction in energy demand: Americans are driving less, airlines are keeping more planes on the ground and businesses are ramping down operations. Highlighting the weak appetite for energy, filling stations cut prices for a gallon of regular by 4.4 cents overnight to a new national average of $3.04, according to AAA, the Oil Price Information Service and Wright Express.

 

Nonetheless, there are those who hold to the theory that crude's decline has been overdone amid the panicked selling in world equity markets.

 

In other Nymex trading, heating oil futures rose 4.61 cents to settle at $2.1569 a gallon, while gasoline futures rose 4.41 cents to settle at $1.661 a gallon. Natural gas for January delivery rose 9.1 cents to settle at $7.306 per 1,000 cubic feet.