MarketView for September 26

Summary

Stock prices were higher for the most part on Friday as bank shares staged a late rally on hopes lawmakers would hammer out an agreement on a $700 billion financial-sector rescue plan over the weekend. Unfortunately, the technology sector did not do as well as the Blue Chips, in large part because of a disappointing outlook from Research in Motion, a company that is considered to be a bellwether for the sector. Research In Motion warned that quarterly profit will fall short of Wall Street's forecasts. RIM shares fell 27.5 percent, or $26.77, to $70.76. It was the top-weighted drag on the Nasdaq 100.

Friday's market gains were in sharp contrast to the rest of the week, which was the worst for the benchmark S&P 500 since May.

Shares of JPMorgan Chase, up 11 percent and Bank of America, up nearly 7 percent, ranked among the top gainers in both the Dow and the S&P 500. The fate of the rescue plan pushed nearly everything else to the background on Friday, including bank regulators' move to close Washington Mutual late on Thursday, the largest bank failure in history. Bank regulators closed Washington Mutual, which had $307 billion of assets and $188 billion of deposits, and brokered a sale of the thrift's assets to JPMorgan Chase.

The government's bailout plan has run into stiff resistance on Capitol Hill, mostly from Republican lawmakers who have proposed an alternative that provides for no government money up front. It's been a tough sell on Main Street, too, where voters see it as a taxpayer-funded bailout of wealthy Wall Street.

Shares of JPMorgan Chase shot up 11 percent to $48.24, while Bank of America added 6.8 percent to $36.70. JPMorgan's larger-than-expected $10 billion stock sale to cap its purchase of Washington Mutual also helped to raise the confidence level investors have the shares of financial institutions. Meanwhile, Wachovia fell 27 percent to $10 but had been trading even lower before the New York Times reported the bank had started early deal talks with Citigroup.

Apple ended the day down 2.8 percent, or $3.69, to $128.24. Apple's decline also hurt the NASDAQ.

Economic Growth Slower Than Previously Estimated

The Commerce Department reported on Friday that second quarter economic growth was weaker than previously estimated as consumers increased spending less vigorously and businesses trimmed some investments, a sign confidence was sagging even before financial market turmoil deepened.

According to the Department, Gross Domestic Product, the measure of total goods and services output within our borders, expanded at a 2.8 percent rate in the April-June second quarter rather than the 3.3 percent rate it estimated a month ago.

The new evidence of fading economic activity came amid confusion in Washington about whether a plan to bail out U.S. financial firms by having the government use $700-billion of tax money to buy their bad debts can be revived.

The GDP data is backward-looking and was paid scant heed by markets amid the drama that gripped financial market participants in the U.S. and globally. The dollar's value was little changed against other major currencies and stock futures already were tumbling.

While GDP growth was ahead of the first quarter's 0.9 percent rate, economists surveyed by Reuters had forecast the second-quarter pace would be unchanged rather than revised down. There were signs that the turmoil that has engulfed Wall Street was already spreading to consumers and small businesses in the second quarter.

Personal spending that fuels two-thirds of national economic activity grew at a revised 1.2 percent rate instead of 1.7 percent previously estimated, partly because spending for costly durables like cars contracted more sharply. Analysts expect consumers to keep retrenching in coming months as job losses mount and doubts about the economy's ability to stay out of recession grow.

Central banks around the world were pumping more cash into the financial system overnight, trying to keep credit markets from seizing up as a financial crisis went from bad to worse as U.S. lawmakers argued over how to come to grips with it.

Businesses also appeared to be growing more wary about economic prospects in the second quarter. Spending on equipment and software, typically made when companies are planning production increases, shrank at a 5 percent rate rather than the 3.2 percent rate previously estimated.

It was the second straight quarter in which equipment and software spending contracted and was the steepest for any quarter since the beginning of 2002.

Companies cut their inventories at an annual rate of $50.6 billion in the second quarter. That was higher than the $49.4-billion rate previously estimated and was nearly five times the $10.2-billion rate at which inventories were trimmed in the first three months -- a potential sign that businesses are bracing for tougher times ahead.

Corporate profits after taxes shrank by 5.4 percent in the second quarter, the biggest decline since the third quarter of 2005 and another indicator that companies are likely to be reluctant to hire and invest in coming months.

Bailout Concern Sends Crude Lower

Crude oil futures were more than a $1 lower on Friday, with trading volatile due to uncertainty about a bailout package after talks in Congress stalled. The $700 billion deal to rescue the faltering domestic credit markets hit a wall on Thursday amid bickering between Democrats and Republicans. As a result, crude settled down $1.13 per barrel at $106.89. London Brent crude settled at $103.54, down $1.06.

Uncertainty over the details of the bailout package, and how quickly it would relieve the distressed banks in particular and the credit markets in general, led to some volatility. Further pressure has come from oil and other commodities being used as a hedge against inflation and a steadily declining dollar.

Oil has found some support from supply disruptions in the Gulf of Mexico, home to a quarter of domestic crude production, caused by Hurricane Ike. Recovery from those disruptions continues.

Shell Oil, the largest producer in the Gulf of Mexico, expects the bulk of its offshore fields to be back on line within two weeks. The International Energy Agency said Thursday it did not need to release emergency stocks to bolster supplies, even though nearly 60 percent of the region's output remained shut.