MarketView for September 21

Summary  

It was another up day for the Nasdaq, but the same could not be said for the Dow Jones industrial average or the S&P 500 indexes, both of which found themselves at the mercy of factors such as the decline in oil and other commodity prices that in turn added downward pressure on energy and materials stocks. Meanwhile, the Nasdaq was lucky enough to be buoyed by a broker's upgrade in the biotechnology sector. Robert W. Baird upgraded Celgene, pushing the stock up 5 percent to $55.19.The Dow's leading laggard was American Express, down 2.9 percent at $33.76.

The dollar rose in strength after three weeks of declines and further hurt commodity prices, as investors scaled back short positions in anticipation of the Federal Reserve's decision on interest rates later this week.

Energy and materials ranked among the S&P 500's worst-performing sectors, with Halliburton down 2.5 percent at $27.45 and Sunoco off 2.3 percent at $27.79. Shares of Dow Chemical lost 2.8 percent to close at $26.00.

Adding to the overall negative tone in Monday's session, the Conference Board's index of leading indicators posted a slightly weaker-than-expected gain in August.

Among the top drags on the Dow was Caterpillar, down 1.8 percent at $52.46, after the company said dealer sales of its heavy machinery, engines and turbines fell 48 percent in August,al though many of the company’s markets showed signs of stabilization.

Dell announced a $3.9 billion proposal to take over Perot Systems. Perot rose 65.1 percent to $29.56, while Dell's shares were down 4.1 percent to $16.01.

Shares of American International Group (AIG) rose 21.3 percent to $48.40 after the Government Accountability Office, the watchdog agency of Congress, said the insurer's once desperate financial state has started to stabilize. Representative Congressman Edolphus Towns, a Democrat who chairs the Government Reform Committee, said he would look at easing the terms of the insurer's federal bailout once more.

Index of Leading Indicators Hit 2-Year High

The forward looking index of leading indicators hit a 1-1/2-year high in August but a record rise in home loan defaults cast doubts on the durability of the apparent recovery from recession. According to Monday’s report by the Conference Board, its index of leading economic indicators rose 0.6 percent to 102.5, the highest level since January 2008. It had advanced 0.9 percent in July.

It was the fifth straight month that the gauge, which is supposed to forecast economic trends six to nine months ahead, had increased. The gain was a touch below the 0.7 percent rise economists had forecast. The index has risen 4.4 percent during the past six months.

In August, the U.S. economy's prospects were lifted by rising supplier deliveries, stock market prices, building permits and consumer expectations, according to the Conference Board, a private sector research group.

Analysts said separate indexes in the report also offered some encouragement. The coincident economic index was unchanged at 99.8 in August, while the lagging index slipped 0.1 percent to 110.2 -- pushing up the so-called coincident-to-lagging ratio for a fifth straight month.

The coincident-to-lagging ratio, which tends to trough and turn up well before the official ending of recessions, has a good track record of foreshadowing an economic recovery, according to economists.

Real money supply, average weekly initial claims for unemployment insurance and manufacturers' new orders for nondefense capital goods were a drag on the main leading index in August. Weekly manufacturing hours and manufacturers' new orders for consumer goods and materials were steady.

Crude Oil Settles Down

 Crude oil futures settled down 3.2 percent at $69.71 per barrel as further signs of weak fuel demand raised expectations that prices may have raced ahead of the nascent economic recovery. London Brent crude settled down $2.63 per barrel at $68.69. Oil prices have more than doubled since hitting lows near $30 a barrel at the height of the global economic crisis, but the market has come under pressure since touching a year high of $75 a barrel almost a month ago.

"There will be little or no sustained upward pressure on oil prices until global economic recovery is firmly established and reviving oil demand begins to draw down bulging oil inventories," analysts at the Center for Global Energy Studies said in their monthly oil market report on Monday. "Even next year, prices are unlikely to rise much unless clear signals emerge that the world is pulling out of recession in a sustainable fashion."

Oil stockpiles have risen around the world as the global economic crisis has cut sharply into energy demand. The International Energy Agency said world electricity output was likely to drop this year for the first time since 1945, while Sinopec, Asia's top oil refiner, said demand for industrial fuels remains depressed in China, the world's second largest oil consumer.

Oil prices have followed moves in equity markets in recent months as traders try to gauge the timing of a pick-up in global energy demand expected to coincide with the world's emergence from the biggest economic slowdown since the 1930s.

Lower risk appetite also helped the dollar extend a rebound from a one-year low hit against the euro last week. A stronger dollar tends to pressure commodities priced in the U.S. currency as they become more expensive for holders of other currencies.

Former AIG CEO Hank Greenberg Trying to Ease AIG Bailout Terms

American International Group's dire financial situation has started to stabilize, a government agency said on Monday, as an influential lawmaker said he would look at easing the terms of the insurer's federal bailout once more, sending AIG's shares up more than 16 percent to $46.44.

AIG began to show signs of stabilizing in mid-2009, as financial markets improved, congressional investigators said in a report on the status of the government's assistance to the company. Now, Rep. Edolphus Towns, a Democrat who chairs the Government Reform Committee, told staff to take a look at a proposal from former AIG CEO Hank Greenberg that could make it easier for the insurer to repay federal obligations. Towns' spokeswoman said the congressman has not yet spoken with the Treasury Department or the Federal Reserve about Greenberg's proposal.

The proposal would cut the government stake in AIG from the current 80 percent and trim interest rates on AIG's government loan. It also would extend the term of the loan, giving the company more time to repay. However, it is still unclear whether U.S. taxpayers would ever be repaid fully, or whether AIG could pull off the restructuring of its business, according to the report compiled by the Government Accountability Office.

The GAO said the U.S. government remains exposed to risks, including credit risk and investment risk, which could result in the Federal Reserve and Treasury not being repaid in full.

AIG's total bailout package, already rewritten three times since September 2008, has swelled to as much as $182.5 billion. The rescue includes the government's purchase of toxic assets to relieve the insurer of billions of dollars in liabilities, and a funding facility that the insurer has yet to draw in full. AIG currently owes about $80 billion in federal loans.

To repay its debts, AIG has tried to sell off assets; but so far it has raised net proceeds of only $4 billion, hampered by tight credit markets and buyers looking for bargains. The possibility of a fourth revision to AIG's bailout appeared to spark the rally in AIG's stock.

AIG's shares have rallied strongly since the insurer installed Robert Benmosche to be its new CEO, rising from $28.37 on August 10, the day he took the helm, to as high as $55.90 in late August. Benmosche, AIG's fourth CEO since June 2008, has said he expects the company will be able to repay its federal debts, and hopes there will be something left over for shareholders.

Former CEO Greenberg, who ran AIG for 38 years, last month said he had agreed to help Benmosche, giving him advice on how to turn around what was once the world's largest insurer. AIG is open to constructive efforts by Mr. Greenberg or others that assist the company in restoring value to shareholders and repaying the taxpayer," AIG said in a statement on Monday.