MarketView for October 24

Summary 

 

Wall Street ended a week that would rather be forgotten on a down note Friday, as stock prices fell in Stocks a worldwide sell-off as signs mounted that the global economic slowdown could be deeper than feared and the corporate profit outlook darkened. As a result, stocks ended at 5-1/2-year lows. In the overnight hours, selling was so fierce that index futures were halted until after Wall Street's opening bell. Part of the problem is the forced liquidations being undertaken by  hedge funds and mutual funds to raise cash to meet large-scale redemptions.

 

Energy companies such as Chevron were also lower as the price of oil settled down $3.69 to at $64.15 per barrel on the premise that the global economic slowdown will cut into demand for fuel, despite OPEC's decision to cut output. Chevron lost 4.3 percent to $63.91, while Exxon Mobil gave up 1.9 percent to $69.04.

 

Estimates for S&P 500 third-quarter earnings growth continued to decline with the consensus now being an 11 percent decline, sharply below the 2.9 percent decline seen at the beginning of October.

 

It was a painful week for all three major equity indexes as Friday's session marked their lowest closing levels since the spring of 2003. The Dow ended the week down about 5.4 percent, the NASDAQ down 9.3 percent and the S&P 500 down 6.8 percent.

 

Technology shares, including Apple, fell on concern about the outlook for profits and consumer spending, while Microsoft lost.6 percent to $21.96, after cutting its profit outlook. News that Sony had reduced its profit forecast by half and that Korea's Samsung posted a 44 percent decline in quarterly earnings certainly did not help matters. At the same time, IBM was among the largest drags on the Dow, falling 2.7 percent to $82.07, while Apple weighed on the NASDAQ, sliding 1.9 percent to $96.38.

 

Bank shares were lower on fears that losses from bad loans will soar due to a deep global recession, and news that National City a large, ailing U.S. bank, agreed to be acquired at a below-market price. Shares of National City ended the day down 24.7 percent to close at $2.07 after PNC Financial Services said it would buy the Cleveland-based bank for $5.6 billion. PNC closed up 3.5 percent at $58.88.

 

Data showing the British economy shrank 0.5 percent in the third quarter, the first contraction in 16 years and a decline that far exceeded expectations added greatly to the day’s global economic concerns.

 

Crude Prices Continue To Drop Despite Supply Cut

 

The price of crude oil continued to decline on Friday, with the price for domestic sweet for December delivery settling down $3.69 at $64.15 per barrel as concerns about a global recession and slowing fuel demand took the steam out of an OPEC agreement to cut output. London Brent crude settled down $3.87 at $62.05.

 

The Organization of the Petroleum Exporting Countries agreed at an emergency meeting in Vienna to remove 1.5 million barrels a day of crude, or about 5 percent of its supply, off the world market. Saudia Arabia's Oil Minister Ali al-Naimi said the reduction would take effect from November1. The question then is will OPEC's action be enough to arrest oil's slide of more than 56 percent from a record $147 a barrel in July. Drops in motor fuel demand amid the economic downturn have been dramatic.

 

The Energy Information Administration said this week that oil products demand in the United States during the previous four weeks was 18.7 million barrels per day, down 8.5 percent from a year ago. Meanwhile, the Transportation Department said motorists drove 15 billion miles (24 billion km) less in August than they did a year earlier for the biggest decline in any month ever recorded.

 

Oil has dropped sharply as the credit crisis hit economic growth and fuel demand in the United States and other industrial countries. The International Energy Agency, which advises industrialized consumer countries, was critical of OPEC's cut.

 

It Does Not Look Good For The World

 

Poor economic data globally, another international barrage of corporate profit warnings and job cut announcements intensified fears of deep global recession on Friday. Seventy-nine years to the day after the 1929 crash that led into the Great Depression, currencies experienced almost unprecedented volatility, oil and other commodities tumbled on fears of plummeting demand that would accompany a slowdown, and stock markets dropped from Tokyo to New York.

 

Reports of the euro zone's private economy shrinking this month at the fastest pace since monetary union and a much deeper-than-expected contraction in Britain's economy in the third quarter can really only mean one thing, recession.

 

Meanwhile, the government will allow banks to be the first to announce Treasury Department capital infusions, backtracking from a plan to announce a list of some 20 banks as early as Friday. At the same time, the Treasury Department is closely studying how it can give relief to bond and mortgage insurance companies under the $700 billion rescue package.

 

Washington may also decide to bail out the auto industry. General Motors has intensified negotiations to buy Chrysler's auto operations, but intends to seek government support for any deal.

 

Foreign exchange markets were rocked by extreme volatility, with the yen soaring to multiyear highs against the dollar and euro. The euro fell 10 percent against the yen at one point, kindling speculation over how central banks might respond.

 

Canada's finance minister said the country is headed for tough times, although it is better able to withstand them than most other countries in the West. "These are difficult times. Canadians should not underestimate what we're facing. We're not an island. We're a trading nation," Finance Minister Jim Flaherty told a news conference.

 

China warned the outlook for the world economy was grim. "The global financial crisis has been constantly spreading and worsening, creating a severe shock to global economic growth," Chinese Premier Wen Jiabao said.

 

Contributing to the financial unrest, stock markets fell around the world with the Nikkei closing down 9.6 percent as European shares fell 5.4 percent to close at their lowest level in over five years. Russia suspended trading on its stock market until at least Tuesday after the market lost more than 13 percent of its value, hitting its lowest levels since late 2004.

 

Furthermore, a recent global money markets thaw appeared to be halting as recession concerns brought focus back to counterparty risk and raised expectations of sharp interest rate cuts. The cost of borrowing overnight dollars rose and sterling overnight rates increased.

 

Are Insurance Companies Next

 

The Treasury Department is studying how it could give relief to insurance companies under a $700 billion financial services rescue package. The Troubled Asset Relief Program established by Congress earlier this month has been viewed primarily as a means to recapitalize banks and take bad assets off their books to help support creaking credit markets.

 

Last week, the Treasury tried to squash rumors the government was preparing to give bond and mortgage insurance companies a capital injection. But senior officials are considering how the Treasury might be able to aid state-regulated insurance companies, the sources said.

 

The Treasury so far has used capital powers to aid only federally regulated institutions. But the program, known as TARP, could be used to buy sour assets from other financial companies and help them scrub their balance sheets.

 

While there is no federal regulator for the insurance industry, which is regulated by states, some companies may qualify for aid because their parent holding companies operate under a federal charter. The Treasury Department has assigned a team to examine how it might deliver aid to the industry.

 

American International Group Inc, which has said it expects it may be able to benefit from access to TARP, ended down 19 percent. AIG was bailed out by the federal government last month and said on Friday that it has so far tapped the Federal Reserve for $90 billion. The insurer veered toward bankruptcy after mortgage-linked investments cost it $25 billion over three quarters.

 

MBIA, the largest U.S. bond insurer, and its rival, Ambac Financial met with regulators earlier this week to push for a way to tap into the government's bailout plan. New York Insurance Superintendent Eric Dinallo, the main regulator for MBIA, and Wisconsin Insurance Commissioner Sean Dilweg, Ambac's primary regulator, convened in New York to discuss the matter with the firms.

 

Both companies have seen business grind to a near halt after large losses on mortgage debt guarantees and subsequent rating cuts. A leading financial trade group on Friday sent a letter to the Treasury asking that the government interpret its new TARP powers broadly and leave the door open to aid for insurers, automakers and subsidiaries of foreign banks or companies.

 

"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," the Financial Services Roundtable wrote in a letter to TARP administrator Neel Kashkari. "The Roundtable would strongly urge that you permit such institutions to participate in the program."

 

Home Sales Rise

 

The National Association of Realtors reported on Friday that sales of previously owned homes rose 5.5 percent last month, the largest gain since July 2003. At the same time, the inventory of unsold homes fell, a hopeful sign for a housing market mired in a long slump.

 

According to the NAR, sales of existing homes rose to a 5.18 million-unit annual rate from the 4.91 million unit pace set in August. It was the first time the sales pace had risen above its year ago level in nearly three years, a sign the market could be stabilizing. The surprisingly large jump in sales pushed the inventory of unsold homes down by 1.6 percent to 4.27 million, or a 9.9 months' supply at the current pace, the lowest since February.

 

However, home prices gave no sign of escaping their long, deep slide. The median national home price declined 9 percent from a year ago to $191,600, the lowest level since April 2004. In order for prices to recover, the glut of unsold homes needs to be whittled down further, analysts said.

 

Lawrence Yun, the chief economist for the Realtors' trade group, also pointed to a rise in foreclosure and other 'distress' sales in regions hard-hit by the housing downturn.

 

"In some regions, the lower prices are seeing buyers return to the marketplace," he said. "This was a nice jump and hopefully this trend can continue because the first step to stabilizing the market is an increase in home sales."

 

Sales rose 16.8 percent in the West, 4.4 percent in the Midwest and 2.2 percent in the South. In the Northeast, sales fell 1.2 percent. Sales of single-family homes, which represent the lion's share of the market, rose 6.2 percent. Sales of condominiums held steady.