MarketView for October 9

 

 

Summary

 

Stock prices moved sharply higher on Friday, with the Dow Jones industrial average reaching its highest point this year key earnings reports and bullish broker comments helped to send tech share prices skyward.

 

Breaking out of a two-week losing streak, week’s rally sent the Dow up 4 percent for the week, while the Standard & Poor's 500 chalked up a 4.5 percent gain and the Nasdaq rose 4.5 percent. Stocks briefly dipped at the open on Friday, pressured by a rebounding dollar after Fed Chairman Bernanke said the Fed will eventually have to start tightening its monetary policy as the economy heals.

 

For the day on Friday, IBM saw its share price chalk up a 3 percent gain to close at $125.93 after Barclays Capital raised its price target to $140 from $119, and upgraded the performance going forward of the company’s shares to a "positive" rating from "neutral" one. At the same time, Deutsche Bank predicted late Thursday that semiconductor companies would report upside surprises in their earnings for the past three months.

 

Two large merger deals attracted interest on Friday as Kimberly-Clark indicated that it plans to acquire I-Flow for $324 million, sending I-Flow shares up 7 percent to $12.58. Kimberly-Clark rose 0.3 percent to $59.26.

 

At the same time, Citigroup agreed to sell its Phibro commodities trading business to Occidental Petroleum. Citigroup’s shares fell 0.4 percent to $4.63, while Occidental's saw its share price fall 0.7 percent to $79.54.

 

According to the Commerce Department, our trade deficit fell unexpectedly in August, as trade in services pushed exports up slightly and imports fell by a fractionally larger amount.

 

Trade Deficit Falls

 

Our trade deficit contracted unexpectedly in August as oil imports fell and exports grew for the fourth consecutive month, a U.S. Commerce Department report showed on Friday.

 

The deficit was $30.7 billion, down 3.6 percent from July, surprising analysts who expected higher oil prices and business stock rebuilding to widen the gap in August.

 

Average oil import prices rose for the sixth consecutive month to $64.75 per barrel. But petroleum imports fell more than 10 percent in volume, cutting the oil import bill. As the United States climbs out of a recession that began in December 2007, analysts expect imports to grow faster than exports, which would make trade a drag on economic growth.

 

However, in August, the situation was the reverse as goods and services imports fell 0.6 percent to $158.9 billion and exports grew 0.2 percent to $128.2 billion. Nonetheless, for the most part, the markets mostly shrugged off the report, which showed trade hitting a plateau in August after partly recovering from a sharp plunge that began in mid-2008.

 

During the first half of 2009, trade was one of the few positive contributors to U.S. economic growth because imports fell more steeply than exports.

 

Despite the overall import drop, imports from China and Mexico were the highest since November and those from Canada were the highest since December. Imports of autos and auto parts also were the highest since late 2008, in a sign of demand generated by the federal government's "cash for clunkers" incentive program for autos.

 

Exports of services, led by an increase in travel and freight and port services, grew slightly in August, while goods exports fell. Capital goods exports were the lowest since October 2005, reflecting a large drop in civilian aircraft shipments. Some other categories such as industrial supplies and materials, autos and auto parts and petroleum products posted gains during the month.

 

Crude Oil Rises in Price

 

Oil rose slightly on Friday as a positive demand forecast from the International Energy Agency outweighed gains in the U.S. dollar. Domestic sweet crude for November delivery settled up 8 cents per barrel at $71.77. London Brent crude gained 23 cents to settle at $70.00 a barrel.

 

The IEA increased its global oil demand growth estimate for 2010, as well as for the rest of 2009.

 

The move came after the U.S. Energy Information Administration hiked its assumptions for 2010 demand earlier this week, and added to expectations a turnaround in the economy could lift flagging fuel consumption.

 

The economic crisis has weakened global fuel demand, and pushed crude oil prices off record highs over $147 a barrel in July 2008. Oil prices were also pressured by a stronger dollar that found support from comments from Fed Chairman Ben Bernanke, who indicated that  monetary policy might have to be tightened as an economic recovery takes hold.

 

A stronger dollar tends to weaken oil because dollar-priced commodities become more expensive for buyers using other currencies.

 

Hummer Deal Completed

 

General Motors signed a deal on Friday to sell its Hummer brand to an investment partnership headed by an obscure Chinese machinery maker in an agreement that underscores the fast rise and global ambition of the Chinese auto industry.

 

The deal with China's Sichuan Tengzhong Heavy Industrial Machinery caps a year-long struggle by GM to shed a military-derived SUV brand that had become synonymous with gas-guzzling excess.

 

It marks the first time that Chinese investors have stepped in as buyers into the distressed U.S. auto industry.

 

The sale also comes at a time when China has emerged as the world's largest auto market and GM remains majority-owned by the U.S. government after being driven into bankruptcy.

 

"The long-term game plan is to ride the China wave," said Jim Taylor, the GM executive who has helped steer the sale and will remain in Detroit as the new company's chief executive. The deal remains subject to regulatory review in the United States and China. Chinese officials have signaled that the deal would be treated favorably, Taylor said.

 

Financial terms were not announced. A person familiar with the deal said earlier on Friday that the Hummer business would be sold for about $150 million, far less than GM's early estimate that Hummer could fetch more than $500 million.

 

Under the deal, Lumena Resources Corp chairman and founder Suolang Duoji would hold 20 percent of the investment vehicle buying Hummer. Tengzhong would hold the remaining 80 percent.

 

The Hummer sale is part of a drastic restructuring plan by GM, which also involves the disposal of its Saab, Opel and Saturn operations as part of U.S. government-sponsored restructuring in bankruptcy.

 

Tengzhong, a little-known heavy machinery maker, has been in detailed negotiations with GM since it announced an initial plan in June to acquire the premium off-road Hummer brand. Tengzhong executives, including Chief Executive Yang Yi, have been in Detroit for more than a week for the final round of negotiations after GM missed an initial goal of completing the deal by the end of September.

 

Hummer's sales peaked in 2006 but have been hit hard since by a slumping U.S. economy, higher gasoline prices and a shift in U.S. consumer tastes away from Hummer's heavy-duty SUVs and its military-derived styling. Through September, Hummer's U.S. sales were down 64 percent this year.

 

The brand had its origins in a multipurpose vehicle known as the Humvee that was used by the U.S. military. Those were made by a company called AM General. GM bought the Hummer brand from AM General in 1999 and went on to sell the H1, H2 and H3 and H3T civilian models.

 

California Gov. Arnold Schwarzenegger, who won fame as bodybuilder-turned-Hollywood-action-hero before moving to politics, added to the profile of the brand as an early buyer.

 

"If I'm GM and I can sell it, I'm doing a jig," said Autoconomy.com analyst Erich Merkle. "There was a time when Hummer was quite popular, but that was earlier in this decade when people wanted McMansions and suburban assault vehicles."

 

GM's Taylor said it would take months for the new Hummer to set up for sales and distribution in China, a market where the brand has no established sales network.

 

In the meantime, he said, the image of the Hummer brand would have to become more "green" and deliver better fuel economy. "It's something we have to address," he said.

 

GM will continue to manufacture the existing Hummer models and provide engineering support for Tengzhong on a contract basis. That provision of the deal preserves about 3,000 U.S. manufacturing jobs until at least the middle of 2011.

 

GM's Shreveport, Louisiana, plant will continue to assemble the H3 and H3T. A plant in Indiana operated by AM General will continue to produce the older H2 model. Those contract manufacturing deals run until June 2011 and can be extended for a year, GM and Tengzhong said.