MarketView for October 22

Summary 

Stock prices took it on the chin again on Wednesday hitting a 5 year low as an increasingly dire outlook for the global economy took hold following a raft of disappointing earnings announcements and subsequent dire outlooks from major corporations. In addition, a substantial drop in commodity prices sent energy and materials shares sharply lower. Exxon Mobil was the top drag on the Dow Jones industrial average. Exxon ended the day down 9.7 percent to $64.57, while ConocoPhillips, which sharply reduced its 2008 exploration and production outlook, fell 9.1 percent to $49.06.

Boeing's shares were down 7.5 after the aircraft maker reported a steep drop in quarterly earnings and warned it might need to provide financing to some of its customers in 2009, while AT&T's shares fell 7.6 percent after the company posted a quarterly profit well below Wall Street's forecasts as it grappled with pressure on wireless margins. Boeing shares ended the day at $42.91, while AT&T, another Dow component, closed at $23.78.

Merck & Co shares fell 6.5 percent to $28.01 after it said it would slash 12 percent of its workforce and tempered its long-range earnings outlook. Wachovia, which is being acquired by Wells Fargo, posted a third-quarter loss of $23.9 billion, a record quarterly loss for a bank during the credit crisis. Shares of Wachovia dropped 6.2 percent to $5.71, while Wells Fargo shares lost 4.1 percent to $31.30.

SanDisk fell 31.6 percent to $10.09 after Samsung Electronics dropped its $5.9 billion unsolicited bid for flash memory maker, citing SanDisk's deepening losses and uncertain outlook. At the same time, Apple saw its shares chalk up a gain of 5.9 percent to $96.87, a day after the company reported a stronger-than-expected quarterly profit.

With emerging market assets on the decline and widespread deleveraging taking place on the world markets, it is becoming increasingly evident that the credit crisis that has plagued the United States and Europe has begun to hit developing countries.

Argentina's government proposed to seize almost $30 billion of private pension funds, while Hungary hiked interest rates to defend its currency. Interbank borrowing costs fell again, but recession worries held sway as investors fretted about the extent to which the credit crisis has damaged the global economy.

Crude Prices Down Again

The price of crude oil fell again on Wednesday, down more than 7 percent and hitting a new 16-month low as rising inventories pointed to the fact that the ongoing global economic slowdown has been a major contributor to a reduction in the demand for refined products.

Sweet domestic crude for Nov. delivery settled down $5.43 per barrel at $66.75, after falling as low as $66.20 per barrel, its lowest since June 14, 2007. London Brent settled down $5.20 per barrel at $64.52.

The price of crude is down more than 50 percent from its record high above $147 in July as the financial crisis cuts energy demand in top energy consumer the United States and other industrial countries. Data from the Energy Information Administration indicates that product demand is down 8.5 percent for the four week period ending October 17, when compared to the year-ago period, while inventory levels continued to increase.

Inventories of crude oil reached 3.2 million barrels during the week of October 17, while distillate inventories increased by 2.2 million barrels. Gasoline inventories rose by 2.7 million barrels.

Meanwhile, the global economic outlook could limit the impact of any oil supply cuts OPEC might agree at an emergency meeting on Friday, and the group's president said output policy would prove a difficult balancing act. The cartel is under pressure to reduce output at the Vienna meeting, with many OPEC ministers calling for a supply cut to help balance the oil market.

OPEC President Chakib Khelil said oil stocks are high and some member countries are finding it hard to sell their oil.

"There is excess of crude not able to be absorbed by the market," Khelil told reporters. "If Friday's decision goes too far, it will affect countries who are already affected by economic crisis. If it doesn't go too far, then it will affect the producers who might end up in the category of people affected by the financial crisis," he said.

Pharmaceuticals Post Dismal Numbers

Merck, Wyeth and GlaxoSmithKline all posted lower earnings for the third quarter on Wednesday, partly because of the intensifying generic competition weighing on the entire pharmaceutical industry. In what it characterized as an advance strike to counteract that and other problems, Merck said it will reduce its workforce by about 7,200 jobs, or nearly 13 percent of its employees, in its second major restructuring in less than three years.

The companies managed to meet or slightly beat Street expectations, in part because of benefits from currency exchange rates. However, Wall Street was having no part of it. Merck's fell $1.96, or 6.5 percent, to $28.01; Glaxo's fell $1.21, or 3.2 percent, to $36.63, and Wyeth's share price was down $3.72, or 10.7 percent, to $31.06. Part of the decline in the price of Wyeth was due to news that a promising Alzheimer's drug could be delayed.

Merck's third-quarter profit plunged 28 percent, mainly due to a $612 million after-tax restructuring charge. That lowered net income to $1.09 billion, or 51 cents per share, from $1.53 billion, or 70 cents per share, a year earlier. The after-tax charge includes a $720 million pretax charge for the new restructuring program, much of it for severance costs, plus $127 million for the prior restructuring. Excluding the $612 million charge, equal to 29 cents per share, earnings per share would have been at 80 cents per share.

The restructuring is "not a reaction to our performance in 2008 or the economy," Chief Executive Richard Clark said. "I think it's a competitive advantage" to make the company leaner and more flexible. Clark said 60 percent of the job cuts will come overseas, and they'll affect workers in sales and marketing, manufacturing, administration and even basic research, where more spending will be shifted to outside collaborations. Three basic research centers will be closed — in Seattle, Japan and Italy — and the company is evaluating which factories will be closed in a few years as it outsources more "non-core manufacturing."

Despite a 4 percent boost from the favorable exchange rates, Merck's revenue was down 2 percent at $5.9 billion; analysts were expecting $6.1 billion. Sales were hurt by the continuing decline of Merck's cholesterol drugs Vytorin and Zetia, lower sales for nearly all its vaccines, partly related to manufacturing problems, and generic competition for former blockbuster osteoporosis drug Fosamax, which saw sales cut in half this quarter to $354 million.

Wyeth reported a slight drop in its third-quarter profit as it continues with a restructuring program meant to brace for generic competition. Earnings fell to $1.14 billion, or 84 cents per share, from $1.15 billion, or 84 cents per share. Revenue rose 4 percent to $5.83 billion. Excluding charges, the company earned 90 cents per share. Still, the company tightened its full-year profit guidance, excluding charges, to between $3.49 and $3.55 per share, from a prior range of $3.47 to $3.55 per share.

Earlier this year, blockbuster heartburn drug Protonix lost patent protection, and top-selling antidepressant Effexor will soon face generic competitors as well. So like others in its industry,  

Wyeth has been focusing on international expansion and diversifying to increase revenue.

Wyeth pharmaceutical sales rose 5 percent to $4.89 billion, despite a 45 percent decline in Protonix sales. As a result, Wyeth has already begun a cost-cutting program that could reduce its employee count by up to 10 percent of its 50,000 employees by 2011. Effexor sales rose 3 percent to $982 million. Sales of Prevnar, a children's pneumococcal vaccine, rose 13 percent to $717 million, but sales of consumer health products fell 5 percent to $679 million as the U.S. economy soured. Animal health care product sales rose 11 percent to $261 million.

GlaxoSmithKline, the world's second-largest drug manufacturer, posted better-than-expected results as the weak British pound boosted revenue and helped outweigh the impact of increased generic competition in the United States. Earnings fell 1.8 percent to $2.1 billion in the third quarter of 2007. However, revenues increased 7 percent to $9.6 billion. Earnings per share rose 6 percent to 41 cents.

Glaxo CEO Andrew Witty said Glaxo will lose a total of around $5 billion of sales as demand falls for treatments like its diabetes drug Avandia, its antidepressant Wellbutrin and heart medication Coreg. Witty also said that controversy surrounding Avandia meant that the outlook for sales of the drug "remains negative."