MarketView for September 3

Summary

  

In an exact reverse of what happened on Tuesday, the markets were sharply in negative territory for most of the day on Wednesday before a meager rally sent the Dow Jones industrial average back into positive territory, where it remained until the closing bell. However, the S&P 500 and the NASDAQ were not as fortunate as signs of increasingly sluggish growth worldwide rattled Wall Street, which was already nervous over the outlook for consumer spending and corporate profits.

 

Home Depot, a component of the Dow, saw its share price move a bit higher after its CEO Frank Blake said the battered housing market's decline may be nearing an end. According to Blake, housing market was nearing the bottom of its decline, but the home-improvement sector would remain under pressure at least through early 2009.

 

General Motors, another Dow component, said it thinks it has seen the bottom of the downturn in the auto industry. Technology companies were particularly hard-hit amid fears that a global economic slump would crimp tech spending worldwide.

 

Shares of wireless companies fell, weighing on the NASDAQ, after comments from mobile chipmaker Qualcomm's CEO and JPMorgan analysts fueled concerns that the demand for cell phones is slowing. Qualcomm, a maker of chips for wireless technology, fell 3.7 percent to $49.26 and were the top drag on the Nasdaq 100.

 

The company's CEO told CNBC that consumer cell phone upgrades were slowing, and a JPMorgan analyst cut his forecast for mobile phone sales for the rest of the year, citing economic weakness.

 

Adding to the pain, Texas Instruments’ CFO cited a subdued mobile market, sending its shares down 3.9 percent to $23.49. Research In Motion fell 3 percent to $114.78 on worries that cell phone demand would fall short of expectations for the holiday shopping season.

 

A continued decline in the price of oil failed to spark optimism, as many are calling it yet another symptom of slowing global demand.

 

The Federal Reserve said in its Beige Book report that economic activity has been slow across most of the United States in recent weeks, though there has been some relief from high commodity and energy prices.

 

European data showed that falling investment and private consumption led to the first-ever quarterly contraction in the euro zone economy, fueling fears of a recession in the region. A weakening global economy would compound the outlook for corporate America since demand from abroad has served as a lifeline for the U.S. economy as it grapples with the housing slump.

 

Shares of Corning, the world's largest maker of glass for liquid crystal display televisions and computers, slid 12.6 percent to $17.05 after the company slashed its third-quarter profit outlook.

 

Among the day's economic data, there was some positive news: a government report showed factory orders increased more than expected in July, helped by a rise in orders for transportation oriented products.

 

Beige Book Reports Slow Economic Activity

 

Economic activity was slow in August amid slack consumer spending, the Federal Reserve said on Wednesday, while one official warned the credit crunch had offset low Fed interest rates.

 

"Many described business conditions as 'weak,' 'soft,' or 'subdued,'" the Fed said in its regular Beige Book, an anecdotal economic assessment compiled from reports by the 12 regional Federal Reserve banks.

 

"Consumer spending was reported to be slow in most Districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending," the Fed said.

 

Rising unemployment, falling house prices and painful jumps in gasoline costs have pinched households and are expected to slow economic growth sharply in the second half of the year.

 

Second-quarter economic growth came in at an annual rate of 3.3 percent, due in no small part to the emergency government fiscal stimulus package and buoyant export earnings, but the Fed expects this pace of activity to fade in the months ahead.

 

Some Fed officials are concerned by inflation, which has been pushed above 5 percent by soaring energy and food prices during a time of historically low Fed rates. They fear such conditions could embed expectations for higher inflation.

 

Documents on Tuesday showed that directors of three regional Feds, Kansas City, Dallas and Chicago sought a quarter point hike in the discount rate before the Fed's last policy meeting, on August 5. The discount rate is the rate charged banks for direct loans from the Fed.

 

The Beige Book noted that price pressures continued to be felt across the nation, but recent sharp falls in oil and other commodity prices were beginning to show through.

 

"Almost all Districts continued to report price pressures from elevated costs of energy, food, and other commodities, although some noted that there have been declines," it said.

 

Factory Orders Up

 

The Commerce Department reported on Wednesday that factories orders rose 1.3 percent after an upwardly revised 2.1 percent gain in June, but domestic. automakers reported dismal sales in August, raising fears of renewed economic weakness.

 

In its report, the Commerce Department said transportation orders jumped 3.2 percent in July after a 1.8 percent drop in June. When transportation orders were stripped out, factory orders still rose 1 percent, reflecting gains in orders for metals, machinery and nondurable goods.

 

Inventories rose for the 10th time in 11 months but the inventory-to-shipments ratio dipped to 1.20 months' supply from 1.22, the lowest since July 2007, the report said.

 

Crude Down On Weak Demand

 

Oil prices fell below $109 a barrel on Wednesday, weighed down by slowing demand in and signs the domestic. oil sector will recover quickly from Hurricane Gustav. Light, sweet crude for October delivery settled down 36 cents at $109.35 per barrel, after earlier falling as low as $107.22. In London, October Brent crude settled down 28 cents per barrel at $108.06.

 

The pump price of a gallon of regular gasoline fell to a new national average of $3.681. That's less than half a penny lower than Tuesday's average and more than 10 percent off the all-time record of $4.114 set July 17.

 

Wall Street is anxiously waiting for a Thursday report from the U.S. Energy Department's Energy Information Administration on domestic oil, gasoline and distillate stocks for the week ended Aug. 29. The EIA said last week that crude stockpiles fell slightly by 100,000 barrels to 305.8 million barrels for the week ended Aug. 22, while gasoline stocks dropped 1.2 million barrels.

 

In other Nymex trading, heating oil futures inched up half a penny to settle at $3.0788 a gallon, while gasoline futures rose 3.31 cents to settle at $2.7668 a gallon. Natural gas futures rose less than half a penny to settle at $7.264 per 1,000 cubic feet.

 

Crude prices have fallen by more than $6 per barrel after Hurricane Gustav proved to be less devastating than feared. Initial checks on U.S. energy installations in the Gulf of Mexico showed little damage, and the Louisiana Offshore Oil Port, our only deepwater port, was expected to resume operations within the next couple of days.

 

Companies closed 14 refineries and shut in all of the 1.3 million barrels per day of oil production in the Gulf at the peak of the storm's impact Monday. However, by Wednesday two refineries had restarted and some offshore production was trickling back online.

 

More storms were brewing in the Atlantic, but so far were not threatening the U.S. Gulf of Mexico. Tropical Storm Hanna could strike the East Coast, while Hurricane Ike continued westward across the Atlantic and was projected to be in the vicinity of the Bahamas by Sunday.

 

Any disruption caused by Gustav will not be fully reflected in U.S. inventory data until next week. The latest set of data will be released Thursday, a day later than usual because the Labor Day holiday.

 

Ospraie Management To Close Flagship Fund

 

Ospraie Management plans to close its flagship fund after taking a  27 percent loss in the fund during August as its investments in energy, mining and natural resources tumbled. It is one of the largest ever closures of a commodities-focused hedge fund.

 

The closure could be more bad news for Lehman Brothers, which took a 20 percent stake in the hedge fund manager in 2005. The closure could have also have played a role in bringing down the markets on Tuesday. Shares of Lehman Bros were down more than 3 percent in after-hours trading.

 

As of the beginning of August, the flagship fund, Ospraie Fund Ltd, had $2.8 billion invested. Ospraie Management still manages $4 billion in other investment funds, including a special opportunities fund, the source said. That fund bought the commodity trading and merchandising operations of ConAgra Foods Inc earlier this year.

 

Ospraie Management said it planned to distribute 40 percent of Ospraie Fund's assets to investors by September 30 and an additional 40 percent by the year-end. The remaining 20 percent of the fund's assets are mostly illiquid and could take up to three years to give back to investors.

 

Based on a Securities and Exchange Commission filing, Ospraie Management held shares in companies including Alcoa Inc and Arch Coal. It was not immediately clear which fund held what stocks.

 

Ospraie owns major stakes in several Australian resources companies, mostly held through Ospraie Portfolio Ltd, in which Ospraie Fund is a main shareholder. Ospraie Portfolio owns about 16 percent of Australian plantations group Great Southern Ltd and 19.5 percent of Consolidated Rutile Ltd.

 

Ospraie Fund had an 11.8 percent stake in Iluka Resources Ltd but that was sold to below 5 percent last week, according to a substantial shareholder notice to the Australian securities exchange. "They've reduced, if not exited, their holdings," said Iluka spokesman Robert Porter.

 

Ospraie also owns at least 5 percent in Australian resources and mining services companies Emeco Holdings Ltd and Mineral Deposits Ltd.

 

This marks the second time in two years that Ospraie Management, which has been a major player in commodities markets, has run into problems. In early 2006 soured bets on copper left the fund down roughly 20 percent before it pared most of those losses by year's end.

 

Ospraie Management is the latest in a number of hedge funds to have run into trouble in the $2 trillion hedge fund industry this year. Last month, Dan Benton said he will shut down his $2 billion Andor Capital.