MarketView for September 10

Summary

  

Stocks rose on Wednesday as OPEC's move to shore up oil prices boosted energy shares and Texas Instruments' latest outlook soothed over concerns about technology spending, even as worries persisted regarding the health of the banking sector. The broader market's gains came a day after the S&P 500 posted its largest decline in a year and a half.

 

Energy shares were highly sought after on the view that they now look more attractive after having fallen sharply in recent months, combined with the fact that OPEC said it would cut production, which was seen as an attempt to halt a recent sharp slide in the price of oil. Exxon Mobil rose 2.7 percent to $75.25 and was the leader for the S&P. Conoco Phillips rose 5.2 percent to close at $71.87.

 

Technology shares also rose on relief that chip maker Texas Instruments did not cut its earnings outlook after a spate of recent warnings on consumers' cell phone spending. IBM climbed 2.6 percent to $118.04 and led gains on the Dow Jones industrial average.

 

Financial shares, however, were broadly lower after Lehman Brothers posted an unexpectedly large quarterly loss on huge mortgage-related write-downs and failed to announce any firm deals to raise desperately needed capital.

 

Meanwhile, shares of Washington Mutual sank to a 17-year low on fears that the savings and loan, which is under special regulatory supervision, won't find a buyer or raise enough capital to offset soaring mortgage losses.

 

Shares of Wachovia were down 2.5 percent at $15.84 while Merrill Lynch fell 3.8 percent to $23.81. American International Group, the world's biggest insurer, which also has substantial exposure to the mortgage market, lost 4.7 percent to end at $17.50.

 

Oil Inventory Down

 

Oil prices fell a little in jittery trading Wednesday, as the strengthening dollar and signs of a slowing economy outweighed a decline in inventory and OPEC's cutback of excess production. The Energy Department's Energy Information Administration (EIA) said that crude inventories fell by 5.9 million barrels last week compared to the previous week, and that gasoline inventories fell by 6.5 million barrels.

 

The EIA also reported, however, that inventories of distillates, which include heating oil and diesel fuel, fell by a lower-than-anticipated 1.2 million barrels. Refineries were running at a low 78.3 percent of their capacity last week, the report said.

 

The supply readings came after OPEC said it would reduce output by 520,000 barrels a day. However, OPEC decided not to take the more dramatic step of slashing its production target. The move was viewed as a compromise meant to avoid a backlash from the biggest petroleum consuming nations and stop the rapid decline in oil prices. OPEC's output decision did not spark any kind of a sustained rally in oil prices

 

The EIA report showed that demand for gasoline, distillate fuel and jet fuel over the past four weeks was below year-ago levels.

 

Light, sweet crude for October delivery fell $0.68 to $102.58 per barrel on Wednesday, after initially moving higher as a result of the EIA's report. The contract fell by more than $3 a barrel in the previous session to the lowest close since April 1.

 

The U.S. dollar rose against the euro, pound and yen, encouraging investors who used commodities to hedge against a weakening dollar to unwind those bets.

 

The Department of the Interior's Minerals Management Service said that as of Tuesday, about 77.5 percent of oil production and about 64.8 percent of natural gas production in the Gulf remained shuttered as Hurricane Ike approaches Texas. Oil and gas operators have been working to restore production since they prepared for Hurricane Gustav nearly two weeks ago.

 

In other Nymex trading, heating oil futures fell 1.23 cents to $2.8888 a gallon, while gasoline prices gained 01 cents to $2.6424 a gallon. Natural gas for October delivery fell 8.5 cents to $7.450 per 1,000 cubic feet.

 

In London, October Brent crude fell $1.41 to $98.93 a barrel on the ICE Futures exchange.

The average U.S. retail price for a gallon of gasoline was $3.668 on Wednesday, up from $3.652 on Tuesday but well below the record $4.114 reached July 17, according to the auto club AAA, the Oil Price Information Service and Wright Express.

 

OPEC Reduces Output

 

As was discussed here Tuesday evening, OPEC has officially announced that it plans to trim overall output by more than 500,000 barrels of oil a day by adhering closer to production quotas, a compromise meant to prevent a backlash from key petroleum consuming nations and stop the rapid decline in oil prices.

 

OPEC's decision to effectively cut output comes after prices spiked close to $150 a barrel in July, only to shed nearly 30 percent in subsequent months.

 

Oil prices had lost more ground Tuesday ahead of the decision, falling $3.08 to settle at $103.26 on the New York Mercantile Exchange, the lowest settlement price since April 1.

 

Light, sweet crude for October delivery rose 59 cents to $103.85 a barrel on Nymex Wednesday.

A statement issued by the Organization of Petroleum Exporting Countries issued after oil ministers ended their meeting early Wednesday said the organization agreed to produce 28.8 million barrels a day. OPEC President Chakib Khelil said that quota in effect meant that member countries had agreed to cut back 520,000 barrels a day in production over the established quota.

 

Saudi Arabia alone exceeds that amount of production in excess of its official quota. All members of the 13-nation OPEC have such formal production limits allotted to them except violence-torn Iraq. However, Khelil said that the cutbacks in overproduction would apply proportionally to all OPEC members bound by quotas.

 

OPEC overall regularly churns out oil above the organization's overall quota, last set in November at 27.3 million barrels a day, and it remained unclear whether group members would abide by the decision to keep to their limits.

 

Still, the decision could have the psychological effect of steadying eroding prices at or above the $100 mark — the red line for many OPEC nations concerned about their rapid loss of revenue in recent months.

 

While the new production limit of 28.8 million barrels a day is above that set in November, the statement said it reflected adjustments to include new members Angola and Ecuador and exclude Iraq, as well as Indonesia, which used the Vienna meeting to announce it was suspending its full membership.

 

Saudi Arabia was widely believed to be leaning toward maintaining the status quo heading into this week's meeting — a view shared by its Arab Gulf neighbors. Wednesday's compromise, while promising to tighten up global supplies, does not amount to an official cutback by the cartel.

 

Saudi Arabia and others opposed to a major pullback are concerned that high oil prices will kill demand, a trend that has already begun in the U.S. and other big oil-consuming nations. But at the same time, OPEC countries' economies are being buoyed considerably by crude's historically high price and members are not eager for the flow of money to ease.

 

Saudi Arabia and other U.S. allies in the Middle East also do not want OPEC to become more of a target for American consumers fuming over historically high fuel prices in a highly charged presidential election season.

 

The impact of Wednesday's compromise remains to be seen. The half a million barrels OPEC said it will shave from the market is similar to the amount of additional crude Saudi Arabia unilaterally promised to pour onto the market over the summer when prices were setting new weekly, if not daily, highs.

 

Oil demand from China's and India's booming economies have helped fuel oil demand and drive up prices. At the next OPEC meeting Dec. 17, in Oran, Algeria, the organization would "reassess the market situation," he added.

 

Since crude surged to a record $147.27 a barrel on July 11, it declined in price by over $40, or more than 27 percent. Still, prices remain close to 14 percent higher this year than in 2007, and a barrel of benchmark crude still fetches four times what it did five years ago.

 

Also coming out of the meeting in Vienna was a new agreement between Russia and OPEC intended to improve bilateral cooperation in energy issues. Russia produces around 11 percent of the world's oil and OPEC 40 percent. OPEC Secretary General Abdalla Salem El-Badri, who spoke of the memorandum of understanding after meeting with Russian Vice Premier Igor Sechin, said Russia and OPEC were in early talks.

 

"I don't think our cooperation will affect the consumer at all," El Badri said, adding that OPEC had similar arrangements with China and the EU.

 

Lehman On The Ropes

 

Lehman Brothers, desperate for capital and fighting for its survival, unveiled a plan to shed weak assets and sell a stake in its funds business, but Wall Street was skeptical and its shares hit new lows. Dick Fuld, Lehman CEO, said it would consider offers to buy the entire company.

 

The Wall Street firm, founded in 1850 by three German immigrants who traded cotton from local farmers as currency the traded it for cash or merchandise, posted a record quarterly loss of $3.9 billion on Wednesday and said it will slash its dividend by more than 90 percent.

 

Lehman is the latest victim of the global credit crunch and is, "…experiencing a crisis of confidence," ratings agency Moody's Investors Service wrote. The company has struggled for months with billions of dollars in write-downs, rumors of defecting clients and talk of a takeover at a fire sale price. Short sellers have argued that Lehman is badly undercapitalized and have pummeled the stock.

 

The government's decision to rescue mortgage finance companies Fannie Mae and Freddie Mac last weekend, and its earlier brokering of a sale of Bear Stearns have led to a growing debate over whether Washington will do something similar at Lehman.

 

At issue for Lehman were more than $60 billion in mortgage-related assets on its balance sheet as of the second quarter -- more than double the company's net worth as measured by shareholders' equity.

 

Lehman said it plans to sell $4 billion in British mortgages to BlackRock Inc, and has sold other assets too. The bank also plans to spin off $25 billion to $30 billion in commercial real estate assets in the first quarter into a separate company known as Real Estate Investments Global. Lehman will pump $5 billion to $7.5 billion into REI Global, and lend funds to it as well.

 

Lehman will also sell about 55 percent stake in some of its investment management businesses, including Lehman's crown jewel, Neuberger Berman, and its private equity arm. Lehman hopes to announce that sale in October. With that transaction, Lehman will have most of the money it will need to pump into REI Global. Lehman said it was in "advanced discussions with a number of potential partners" on a sale. Final bids are due Friday.

 

According to analysts, the asset management business could be worth $8 billion in a sale -- more than Lehman's entire market value of less than $5 billion.

 

Lehman had explored options including selling a stake to state-run Korea Development Bank. According to reports, the talks fizzled, then reignited, then fizzled again this week.

 

The planned deals announced Wednesday may also be a prelude to Lehman selling itself. Fuld had said the bank "can go it alone and be very strong," but added that he would take reasonable offers to the board of directors. On Wednesday, his stance appeared to change, saying only that he would show the board reasonable offers.

 

Moody's said if Lehman finds a "stronger financial partner," its credit rating could be upgraded, but a failure to do a deal would likely result in a downgrade. Ratings cuts would make it tough for Lehman to stay in some businesses.

 

Lehman's management put a brave face on their predicament, saying on a conference call they do not believe they need to raise further capital after the planned asset sales.

 

Lehman posted a loss of $5.92 per share for the third quarter ended August 31, while net revenue was negative $2.9 billion, reflecting the write-downs. The cost of protecting Lehman's debt for five years climbed 1 percentage point to 5.75 percentage points on Wednesday, or $575,000 a year to protect $10 million of debt, according to Phoenix Partners Group.

 

Lehman will cut the dividend to 5 cents per share from 68 cents, saving $450 million a year. The company also said it has eliminated 1,500 jobs since May 31. Employees are worried about more cuts.