MarketView for September 24

 

 

Summary  

  

Stock prices came under pressure on Thursday, with the result that all three major equity indexes ended the day in the red once again. The primary cause of the negative direction was a degree of weakness in housing market and concerns that the Fed is getting ready to curb some of its stimulus efforts and the Street is worried that it might be too soon.

 

World central banks said they would scale back infusions of dollars into their banking systems, adding to the unease triggered a day earlier when the Fed announced its decision to slow purchases of mortgage debt. That program has been one of the key pillars of the Fed's efforts to support mortgage lending.

 

Thursday's losses drove the S&P 500 index to its worst two-day drop in three weeks as investors pummeled stocks across the board. All 10 S&P 500 sectors closed out the day lower, with materials, energy, financials and industrials faring the worst.

 

In disappointing news for the economy, The National Association of Realtors said sales of existing homes fell 2.7 percent to an annual rate of 5.10 million units, a drop that dented optimism about housing after four months of gains in home sales.

 

That news sent the share of D.R. Horton down 4.2 percent to close at $11.93, while Toll Brothers fell 2.3 percent to $20.21 and Beazer Homes closed down 4 percent at $5.78.

 

After the closing bell, there was some additional news that was less than heartening. Research In Motion posted quarterly revenue numbers that came in below Street expectations, sending its shares down 9.7 percent to $75 in after-hours trading. The company’s outlook going forward was also a bit of a disappointment.

 

Shares of companies dealing with natural resources were weighed down by falling global commodity prices as the dollar rose. Front-month crude fell 4.5 percent, or $3.08, to settle at $65.89 per barrel. Spot gold prices fell below $1,000 an ounce.

 

Caterpillar was the top drag on the Dow, closing down 2.4 percent at $51.85, while Chevron Corp fell nearly 1 percent to close at $70.71. Among the financials, JPMorgan closed down1.5 percent at $44.37.

 

Unemployment Falls

 

A report from the Labor Department on Thursday showed new claims for unemployment benefits unexpectedly fell 21,000 to a seasonally adjusted 530,000 last week. Stubbornly high unemployment continues to cast a shadow over the strength of the economic recovery, which many economists agree is already under way.

 

While fewer workers submitted applications for unemployment benefits last week, initial claims have to fall below 500,000 to signal a recovery in the labor market.

 

The four-week moving average of new claims, considered a better gauge of labor market trends, was reported at 553,500 claims, the lowest since late January, the Labor Department said. The number of workers continuing to draw unemployment aid after an initial week of benefits fell 123,000 to 6.138 million in the week ending September 12.

 

Existing Home Sales Drop

 

The National Association of Realtors reported on Thursday that sales of existing homes fell 2.7 percent to an annual rate of 5.10 million units from 5.24 million units in July. That compared to Street projections of a rise to an annualized 5.35 million unit pace. Nonetheless, the report did not sway the majority of opinion on the Street that the economy is recovering from its worst recession in 70 years.

 

A government tax credit for first-time buyers and an improving economic picture, coupled with the lowest prices and mortgage rates in decades are helping the housing market to dig itself out of a three-year slump.

 

NAR Chief Economist Lawrence Yun described the decline as a "mild retreat" after a strong gain in July, adding that the August pace was the second-highest in 23 months. Compared to August last year, however, sales were up 3.4 percent.

 

"Some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and backlogs contributing to a longer closing process," Yun said.

 

Yun said the drop may reflect delays in completing sales due to tough lending standards and new rules for appraisals.

 

Nationwide sales are up nearly 14 percent from their bottom in January, but are still down nearly 30 percent from their peak nearly four years ago. For the housing market to stabilize, Yun said, sales would need to rise to a pace of around 5.5 million to 6 million per year.

 

If buyers see clear evidence of stable prices, the housing market recovery can be self-sustaining, Yun said, adding, "We are not there yet."

 

The median sales price was $177,700, down 12.5 percent from $203,200 in the same month last year. Foreclosures and other financially distressed sellers accounted for about 30 percent of the market. In the West, sales of homes under $100,000 were up 150 percent from a year ago. Sales of homes priced at over $250,000 were down nationally, with the biggest drop of nearly 40 percent coming among homes priced over $2 million.

 

The national median home price was $177,700 in August, down 12.5 percent from August last year. Distressed properties, which accounted for 31 percent of sales in August, continue to distort prices, the NAR said.

 

In one positive sign, the inventory of existing homes for sale in August fell 10.8 percent to 3.62 million units from July, the NAR said. The August sales pace left the supply of unsold homes on the market at 8.5 months, down from 9.3 months' worth in July and the lowest level in more than two years.

 

Crude Drops Sharply Again

 

Oil prices fell sharply Thursday for a second straight day as growing supplies of crude, gasoline and heating oil exposed how badly the recession has cut into energy demand. Sweet domestic crude for November delivery settled down $3.08 per barrel at $65.89 In London, Brent crude settled down $2.84 at $65.15. Prices for gasoline and heating oil also fell sharply.

 

A government report Wednesday showed a larger-than-expected buildup in crude supplies. Oil demand fell by 3 percent, the government said, and gasoline supplies surged by more than 5 million barrels even though refineries took in 316,000 fewer barrels of crude each day.

 

Still, the U.S currency continues to influence prices because a weak dollar effectively makes dollar-based crude cheaper. Meanwhile, gasoline fell 6.99 cents to $1.635 per gallon and heating oil for October delivery fell 7.14 cents to $1.688 a gallon. Natural gas rose 10.6 cents to $3.966 per 1,000 cubic feet.

 

The Energy Department's Energy Information Administration also reported on Thursday that natural gas inventories held in underground storage grew by 67 billion cubic feet, which was in line with expectations. Still, natural gas supplies are abundant. Levels are 16 percent above the five-year average, according to the government data.

 

Prices at the pump edged lower, falling 0.6 cents overnight to $2.534 a gallon, according the American Automobile Association.  Prices are now 8.9 cents below levels of a month ago and down $1.181 from year ago levels.

 

RIM Disappoints

 

For its current third quarter ending November 28, RIM expects revenue of between $3.6 billion and $3.85 billion, and a profit of between $1 and $1.08 per share. The company said that it expects to add between 4 million and 4.3 million new subscribers in the current quarter.

 

In a conference call with analysts, RIM co-CEO Jim Balsillie reaffirmed plans to launch new BlackBerry models in the coming months. "We're ... coming out with higher-end devices and you're going to see more of those launched in the quarter," he said, suggesting the company will continue to target the corporate market with new handsets.

 

RIM's shares fell to $75.10 in after-hours trading, down from their regular-session close of $83.06.