MarketView for October 30

Summary 

 

Stock prices turned in a reasonable rally on Thursday as bottom feeders continued to aggressive rate cuts by global central banks, including the Federal Reserve, will help cushion a worldwide economic downturn. There are signs that efforts to loosen up clogged credit markets were taking hold as the rate that banks charge to lend dollars to each other fell, freeing up cash needed to avert a sharp slowdown.

 

Nonetheless, with just a day left in October, stocks are on course to post their biggest one-month loss since the 1987 crash. Although data showed the U.S. economy experienced its sharpest contraction in seven years in the third quarter, the reading on gross domestic product was slightly better than expected.

 

In the latest batch of earnings results, Colgate-Palmolive rose 7.1 percent to $64.23 after the consumer products maker posted quarterly profit that beat estimates. Technology is among the sectors that analysts see poised to be the biggest beneficiaries of an economic revival. Office Depot rose 48.6 percent to $3.12 and ranked near the top of the NYSE's biggest percentage gainers on the day after it said it would delay opening new stores in a weak economy. Rival Staples saw its share price turn in a 15.6 percent gain, rising to $18.42 after stating that its third-quarter adjusted profit would beat estimates.

 

The market's gains came a day after the Fed cut its benchmark fed funds rate for overnight bank loans by 50 basis points, or a half-percentage point, to 1 percent. The move was followed by rate cuts in Taiwan, Hong Kong and China. Japan is expected to cut rates on Friday, while the European Central Bank, the central bank of Australia and the Bank of England are expected to cut rates next week.

 

The price of oil fell more that 2 percent to settle under $66 a barrel as the U.S. economic data prompted worries that demand could be further dampened. Airlines' shares were higher on the sharp drop in crude futures.

 

Exxon Mobil reversed course in afternoon trading and edged up 0.5 percent to $75.05 after the major oil company's profit exceeded expectations. Exxon, however, said its quarterly oil output fell.

 

Shares of Hartford Financial Services Group were down 51.6 percent to $9.62 after the property and life insurer reported a surprisingly large quarterly loss, raising concern that it may need to raise more capital. The insurer's stock was the biggest percentage loser on the Big Board. Prudential Financial Inc shed 18.1 percent to $28.87 the day after it swung to a quarterly loss that marginally missed the Street's expectations.

 

GDP Falls

 

The Commerce Department reported on Thursday that the country’s gross domestic product or GDP went into negative territory during the third quarter as consumers cut back on their spending by the largest amount in 28 years, the strongest signal yet the country has hurtled into recession.

 

The broadest barometer of the nation's economic health shrank at a 0.3 percent annual rate in during the third quarter, marking the worst showing since the economy contracted at a 1.4 percent pace in the third quarter of 2001, when the nation was suffering through its last recession.

 

The latest GDP reading indicated a rapid loss of traction for the economy, which logged growth of 2.8 percent in the second quarter, and is sure to buttress the belief of many economists that the nation is in the throes of a painful downturn.

 

The deterioration reflected a sharp retrenchment by consumers, whose spending accounts for the largest chunk of national economic activity. Consumers ratcheted back their spending at a 3.1 percent pace in the third quarter, the most since the second quarter of 1980, when the country was in the grip of recession.

 

GDP measures the value of all goods and services produced within the United States and is the broadest barometer of the country's economic health.

 

While the third-quarter's contraction wasn't as deep as the 0.5 percent annualized decline the Street had expected, the poor showing underscored the terrible toll of the housing, credit and financial crises.

 

The grim report comes just days before the nation picks the next president on Nov. 4. Regardless of who wins the White House, the incoming president will inherit a deeply troubled economy and a record-high budget deficit that could cramp his domestic agenda.

 

Crude Down in Price

 

The price of crude oil fell more than 2 percent on Thursday as weak economic data stirred concerns demand could plummet further. Domestic sweet crude for December delivery settled down $1.54 per barrel at $65.96, after trading up to $70.60 earlier. London Brent crude settled down $1.76 per barrel at $63.71.

 

Oil has more than halved its record high of $147.27 from July and is down 30 percent in October alone, on track for its biggest-ever monthly drop as the economic crisis continues to batter demand in the United States and other major consumers.

 

The demand for crude in August was revised down by 4.8 percent from the EIA's early estimate of 20.242 million bpd to the agency's final demand number of 19.267 million bpd, and was 8.4 percent less than demand of 21.035 million bpd a year earlier.

 

Oil drew some support from OPEC's decision last week to cut output by 1.5 million barrels per day, or about 5 percent, to prop up prices and hints that it might further reduce supply. Nigeria's state oil company said in a statement it would reduce crude oil export volumes by 5 percent in November and December because of the OPEC cutback. Members of the cartel have said they could cut output again to support prices.

 

Venezuelan Oil Minister Rafael Ramirez said on Thursday OPEC should cut oil output by 1 million barrels per day -- possibly before its next scheduled meeting in December, and should set a minimum price target of $70 or $80 a barrel.

 

Exxon Mobil Shatters Its Own Profit Record

 

Exxon Mobil managed to exceed its own record for the highest ever domestic quarterly operating profit and Royal Dutch Shell Plc earnings beat market as a result of high oil prices and fatter refinery margins. However, both Exxon and Shell indicated that their oil production declined in the quarter, in part from damage caused by Hurricanes Gustav and Ike which swept through the Gulf of Mexico during the quarter. Furthermore, the price has fallen by nearly 60 percent in recent months. Nonetheless, prices averaged about $118 barrel during the quarter, more than $40 higher than a year-ago period.

 

Exxon and Shell posted strong performances from their refining arms, which benefited as the declining crude oil price trimmed costs, even as demand for gasoline shrank.

 

The global economic slump has prompted a drop in the forecast of oil demand in recent months, and the sharp declines in oil prices have forced many companies, such as Hess and Suncor Energy, to rein in spending on new projects. However, Exxon said it planned to stick to its plans for spending of $25 billion this year, and added it had maintained its strong financial position despite the economic turmoil.

 

Marathon Oil said rising production and improved refinery margins helped it more than double its profit in the quarter, but said it would cut 2009 spending by more than 15 percent from 2008 levels because of the current business environment.

 

Exxon's earnings increased 58 percent from a year ago to $14.8 billion, and its operating profit climbed 42 percent to $13.4 billion, easily exceeding second quarter’s $11.7 billion.

 

Things Are Not Looking Good Yellen Says

 

Janet Yellen, president of the San Francisco Fed, indicated on Thursday that the economic trend is  "deeply worrisome" at a time when damage from the credit crunch has outpaced the Federal Reserve's huge interest rate cuts. According to Yellen, the central bank's benchmark lending rate, which has already been cut in response to an economy plunging toward recession, could "potentially ... go a little lower" than the current 1.0 percent.

 

Yellen was the first Fed official to speak after Thursday's news that the U.S. economy had shrunk by 0.3 percent in the third quarter, and she suggested the worst was yet to come. "For the fourth quarter, it appears likely that the economy is contracting significantly," she said. "The mortgage meltdown is far from over (and) the economy and financial markets are still reeling from it."

 

Most private-sector borrowing rates are higher now than at the start of the financial crisis in August 2007, despite "some of the most momentous steps in decades" from the Fed, she noted.

 

"I don't mean to imply that the rate cuts did no good; borrowing rates in my view would be substantially higher absent the reduction in our base lending rate," said Yellen, who will vote on the Federal Open Market Committee in 2008 in 2009.

 

The FOMC on Wednesday voted to cut the benchmark federal funds rate by a half percentage point to 1.00 percent, the lowest since June 2004. The Fed has cut rates by 4.25 percentage points since September 2007.

 

Financial markets point to another cut at the December FOMC meeting, to 0.75 percent or even lower. Yellen said the Fed would not need to push rates to zero given the dramatic pace at which it is expanding its balance sheet.

 

The central bank appears to have kicked off a process known as "quantitative easing," flooding the market with liquidity and allowing the federal funds rate to trade in the interbank market below the announced target rate.

 

The Fed's asset base could hit close to $3 trillion by year end against about $800 billion a year ago, Yellen said.

 

Yellen has warned for months about a vicious cycle between reduced credit availability, weakened financial institutions, and the broader economy, and said the "adverse feedback loop" is now in full swing.

 

"A greatly reduced flow of credit in the economy ... is the major factor responsible for the economic downturn that now is under way," she said.

 

The Fed's steps to support credit markets are "extremely constructive," and will thaw credit flows over time, she said, citing "very tentative signs of an easing of stress in money markets." However, with a long way to go before the credit crunch is totally alleviated, other types of policies, including programs that give direct assistance to homeowners to stem the flow of foreclosures, are worth pursuing, Yellen said.

 

"The bottom is not yet in sight" for falling house prices or housing starts, she said, stating that although prices need to correct to bring buyers back into the market, "we are in danger of over-correction."

 

"By mitigating foreclosure sales at fire-sale prices, these programs may also support housing prices more generally and serve to limit the credit losses that have done so much damage to the financial system," she said.

 

Yellen said it also "certainly makes sense" for Congress to act on broader fiscal policy measures at this point to shore up the economy.