MarketView for September 16

Summary

  

Wall Street managed to recoup some of the ground lost on Monday when stock prices saw their largest decline in seven years, the result of growing optimism that the government may finance a rescue of insurer American International Group. A Bloomberg report after the closing bell indicated that the government was considering conservatorship as an option for the troubled insurer. The report, citing two people briefed on the talks, caused a 48 percent drop in AIG shares after the bell.

 

Financial shares, rebounded from their worst day ever on Monday, primarily because of  rumors that the Fed would likely be forced to step and resolve the crisis surrounding AIG. The insurer's credit ratings were downgraded late Monday, thereby adding to concerns over AIG's ability to raise the capital necessary to weather its rapidly increasing credit losses. Financials continued to rally after the closing bell with Morgan Stanley shares up more than 7 percent after the bank released its earnings ahead of schedule, reporting stronger-than-expected quarterly results.

 

Adding to day’s optimism was the day's continual stream of rumors that Barclays was close to cementing a deal to purchase the broker-dealer business of Lehman Brothers.

 

The Federal Reserve held its key benchmark U.S. interest rate steady on Tuesday, opting for the time being to soothe rattled financial markets with central bank lending facilities rather than rate cuts.

 

Shares of Goldman Sachs Group Inc fell 1.8 percent to $133.01 after the investment bank said quarterly profit plunged 70 percent as the worst market slump in decades led to weaker-than-expected revenues.

 

Hewlett-Packard saw its share price post a 6.8 percent gain to $48.41 and ranked among the stocks giving the biggest boost to the Dow Jones industrial average. The company’s chief financial officer indicated on Tuesday that he is "very confident" Hewlett-Packard will reach its current quarter profit target, despite currency headwinds and ongoing weakness in its printer business.

 

Also helping the markets was a substantial decline in the price of crude oil. Crude futures settled down $4.56 per barrel at $91.15. Lower oil prices helped fuel-cost sensitive airlines and retailers.

 

Dell saw its share price fall 11.2 percent to $15.98, and was a top drag on the NASDAQ. The company said it was seeing softer global demand for technology.

 

Consumer electronics retailer Best Buy Co posted a steeper-than-expected drop in quarterly profit as it spent more than planned to bolster its stores, sending its shares down 2.8 percent to $42.46.

 

And Inflation Is….

 

By official government statements, inflation decreased last month, unless of course you are looking at the core rate. The funny thing is that the emphasis is always on the declining number, whether it be the overall rate or the core rate.

 

On Tuesday, everyone was all excited because the overall inflation rate fell 0.1 percent, obviously a significant improvement from a 1.1 percent price spike in June and a 0.8 percent rise in July. It was also the first monthly decline since prices fell by 0.5 percent in October 2006, another time where energy prices took a big decline.  The cost of gasoline and other fuels have plunged, reflecting big drops in crude oil prices.

 

Lost in the shuffle was the core rate, which excludes energy and food and rose 0.2 percent, after two months of increases of 0.3 percent. Core inflation is up 3.4 percent over the past 12 months.

 

However, even with the dip in overall prices, paychecks continued to be under pressure. Weekly wages of non-supervisory workers dropped by 2.5 percent in August compared to a year ago, the 11th straight month in which wages have been down on a year-over-year basis.

 

Over the past 12 months, overall inflation is up by 5.4 percent. That's a slight improvement from the 5.6 percent rise for the 12 months ending in July, which had been the largest year-over-year increase in 17 years. Gasoline prices fell by 4.2 percent, natural gas slid 5.8 percent and home heating oil prices dropped by 9.6 percent.

 

Food costs continued to surge upward in August, rising by 0.6 percent after a 0.9 percent increase in July. Prices for fruits and vegetables showed large price gains. Prices for clothing rose 0.5 percent, while the price of airline tickets, reflecting previously monthly gains in jet fuel, jumped 1.6 percent.

 

Fed Keeps Rates Unchanged

 

The Federal Reserve voted on Tuesday to keep interest rates unchanged, but also sent a signal to the markets that the economy is not in dire straits. In a statement accompanying its decision, the Fed noted the growing strains in the financial markets a day after the Dow Jones industrials fell 504 points in reaction to continuing turmoil in the financial sector.

 

The Fed also noted the ongoing weakening of the labor market. But it also sought to give some reassurance by saying it expected its policy moves to foster moderate economic growth over time.

 

Many on Wall Street expected the Fed to keep its rates steady but there was some hope that the central bank would try to calm uneasy financial markets with a rate cut. Still, the fact that the Fed didn't lower rates was a sign that it doesn't believe the economy doesn't need that type of stimulus. It reiterated that it believed its moves to inject more liquidity into the banking system to help struggling financial institutions would help them, and in turn the economy overall.

 

With the Fed's decision out of the way, Wall Street was still focused on troubled insurer American International Group Inc., the latest in a string of companies investors are worried could be undone by a shortage of cash.

 

Barclays To Acquire Part of Lehman Bros

 

Barclays agreed late Tuesday to acquire bankrupt Lehman Brothers’ main investment banking assets for about $2 billion.

 

The deal, which is expected to be announced late Tuesday or early Wednesday, would unite two big debt trading houses and could stanch the flow of customers fleeing Lehman in the wake of the largest bankruptcy in history. The deal would include Lehman's core broker-dealer business, including equity, fixed income, M&A advisory and other assets.

 

Barclays won't be buying any of Lehman's real estate, real-estate-backed securities, derivatives positions or over-the-counter trades, The Wall Street Journal reported. As many as 9,000 Lehman employees would find jobs with Barclays, the newspaper reported on its website.

 

Earlier on Tuesday, Barclays had confirmed it was in talks to buy some of Lehman's assets on terms that would need to be attractive to its shareholders. Barclays was involved in frantic talks over the weekend to rescue Lehman, but quit after authorities would not guarantee the investment bank's trading obligations.

 

That prompted Lehman's New York-based holding company to file for Chapter 11 bankruptcy protection, sending shockwaves throughout world financial markets as a year-long credit crunch claimed another, bigger victim.

 

One of Barclays’ top 15 investors questioned the merit of pursuing Lehman in the current climate, however. "Does Barclays not have better things to do with its capital? I don't think it's an environment for banking people to be brave," he said.

 

Crude Falls Again

 

The price of crude oil continued its retreat on Tuesday, shedding $10 per barrel in a violent, two-day slide as hopes for a swift economic recovery dwindled and a subsequent continuing drop in the demand for energy. Crude, which shot up near $150 a barrel only two months ago, is now down 8 percent for the year.

 

Meanwhile, gas prices edged higher at the pump, topping $3.85 a gallon amid the aftermath of Hurricane Ike. However, given crude's continuing slide, retail gas was expected to turn lower within a few weeks.

 

As uncertainty grips Wall Street, evidence mounted that we are in for a protracted economic downturn that will likely guarantee continuing conservation measures that have been prevalent during the past 12 months. Consumers will refine and reduce the need to drive, airlines will keep fewer planes in the air and manufacturers will be shipping fewer products. That in turn is expected to keep crude prices down.

 

Light, sweet crude for October delivery settled down $4.56 per barrel at $91.15 on the New York Mercantile Exchange, after earlier dipping to $90.51, its lowest level since Feb. 8. Crude has fallen about $55, or 37 percent, since rising above $147 on July 11. In London, November Brent crude settled down $5.02 per barrel at $89.22 on the ICE Futures exchange.

 

Oil's steep correction comes as traders were riveted by rapidly unfolding events on Wall Street with the possibility that another large round of commodities liquidation may be in the offing if Lehman, a major player in commodities, moves to unwind its positions to raise capital. Others big banks, institutional investors and hedge funds may follow suit on worries that the downward momentum on oil and other commodities may have reached a tipping point where prices will not rebound.

 

Also pressuring crude prices was the decision Tuesday by the Fed to hold interest rates steady. The move was viewed by some as another drag on oil. Lower interest rates would likely have depressed the dollar, potentially sending the price of oil and other commodities higher if investors had shifted money into hard assets to hedge against inflation.

 

However, the largest weight on oil prices is the slumping economy and continuing demand destruction. On Tuesday, Dell said it sees "further softening" in demand for information technology products around the world. That means the company will likely be shipping less products around the globe, further reducing demand for fuel.

 

Meanwhile, pump prices edged higher Tuesday due to Gulf Coast refinery shutdowns after Hurricane Ike slammed into Texas over the weekend. A gallon of regular jumped more than a penny overnight to a new national average of $3.854, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices topped $4 a gallon in parts of Alabama, Illinois, Kentucky and Tennessee.

 

Virtually all oil production in the Gulf and about 84 percent of natural gas output remained shut down after the passage of Ike and Hurricane Gustav last month, according to the U.S. Minerals Management Service.

 

Crude's decline has come despite ongoing tensions with Russia, militant attacks in Nigeria, saber-rattling by Iran and the loss of 25 percent of U.S. refining capacity due to Ike, bullish events that likely would have sent prices skyrocketing only months ago.

 

In other Nymex trading, heating oil futures fell 7.15 cents to settle at $2.7197 a gallon, while gasoline prices dropped 16.06 cents to settle at $2.4008 a gallon. Natural gas for October delivery fell 9.5 cents to settle at $7.279 per 1,000 cubic feet.