MarketView for April 21, 2008

MarketView

Events defining the day's trading activity on Wall Street

Lauren Rudd

Tuesday, April 22, 2008

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Summary

The bears had their claws in Wall Street once again on Tuesday as stock prices tumbled in response to another sharp rise in oil prices. Needless to say energy prices affect virtually every thing we do, with the result that worries over inflation and consumer spending, or the lack of it, was the forefront of the day’s thinking among traders and investors alike. A series of disappointing earnings reports did not make life on the Street any easier.

In economic news, the National Association of Realtors said the pace of existing home sales in the United States fell 2 percent in March, in a report that showed the U.S. housing market continues to struggle.

Airline stocks were particularly hard hit, as the seemingly never ending increase in the price of oil has pushed jet fuel costs to record levels. At the same time, retailers are glum on concerns that consumers will curtail shopping to pay for ever necessary gasoline.

Texas Instruments recent release of lowered expectations also tempered the outlook for the economy, primarily because of its warning of tepid demand for cell phones. Texas Instruments shares ended the regular trading day down $177, or 5.79 percent, to close at $28.82.

Inconsistent earnings during the quarterly reporting period have kept concerns about the economy close to the surface. While big multinationals with significant overseas sales have fared well, companies with a more domestic focus have sputtered.

Oil hit a record $119.90 a barrel intraday, fueled by weakness in the dollar, which encouraged buying of commodities, and developments in Nigeria and the U.K. that increased concerns about oil supply.

Yahoo closed out everyone’s day with a surprise. After the close of regular trading, Yahoo reported earnings, excluding one-time items, at the high end of Wall Street's estimates. Nonetheless, its share price slipped 0.5 percent in after-hours trading to $28.39. At the close of regular trading, Yahoo was down 1 cent, or 0.04 percent, to close at $28.54.

Shares of Yum Brands chalked up a gain of 3 percent, to $39.95 in after hours trading on higher than expected earnings. After the close of regular trading, Yum, the operator of KFC, Taco Bell and Pizza Hut fast-food chains, posted quarterly profit that topped Wall Street's estimates. Yum had closed down 58 cents, or 1.48 percent, at $38.49 before the results were released.

Shares of UAL, the parent of United Airlines, ended the day down $7.88, or 36.77 percent, to close at $13.55 after the company reported a quarterly loss that was more than triple that of a year ago. Once again much, but not all of the blame can be placed

AirTran also reported a loss as did JetBlue. Shares of AirTran closed out the day down 95 cents, or 20.83 percent, to close at $3.61, while JetBlue's shares were down 28 cents, or 5.7 percent, to $4.65 on the NASDAQ.

Shares of Apple were down $7.96, or 4.73 percent, to close at $160.20 on the NASDAQ. Apple ranked as the top drag on both the S&P 500 and the NASDAQ 100 after American Technology Research downgraded Apple's stock to "neutral" from "buy," writing that it is no longer inexpensive and the company's near-term results might not meet expectations.

DuPont was down $2.09, or 4.00 percent, to close at $50.16 and led the major decliners in the Dow Jones industrial average. The chemicals maker said first-quarter profit rose, but gave a cautious outlook.

Other companies disappointing investors included UnitedHealth Group. It posted a lower-than-expected first-quarter profit, hurt by weakness in its business serving employers and slashed its full-year earnings forecast. Its shares fell 9.66, or 3.68 percent, to close at $34.15.

Existing Home Sales Down

Existing home sales fell in March while inventories swelled and prices slid, the National Association of Realtors (NAR) said on Tuesday. According to the NAR, the housing market continues to struggle. Existing home sales fell 2.0 percent to a 4.93 million-unit annual rate.

The inventory of homes for sale swelled by 40,000 to 4.06 million homes, or a 9.9 months' supply at the current sales pace from 9.6 months in February. Meanwhile, the median national home price declined 7.7 percent from a year ago to $200,700.

A separate government report on national home prices showed home values up about 0.6 percent in February from the prior month but down 2.4 percent from last February.

Three regions across the nation saw a median home price decline, according to NAR data, while the Northeast saw a gain of 4.6 percent. The West saw a 14.7 percent drop in home prices from a year ago, NAR said. The drop in home values nationwide has pushed many borrowers toward foreclosure and upset lending standards in many markets.

Of the homes for sale, 18 percent have negative equity and so are either in foreclosure proceedings or headed for a 'short sale' that will see the lender write off some of the original loan amount.

"This has been a frustration of our members," said NAR chief economist Lawrence Yun. "Lenders have been dragging their feet in approving short sales."

Up Up Up for Crude

Oil prices rose sharply higher on Tuesday to records near $120 a barrel on the weaker dollar, export disruptions from Nigerian rebel attacks and concerns a Scottish refinery strike could hit North Sea production.

Further price support came from data showing demand in China, the world's second largest consumer of crude oil, increased 8 percent in March from a year ago, the fastest rate in 19 months.

Domestic sweet crude settled up $1.89 at $119.37 per barrel after hitting an all-time peak of $119.90 earlier. London Brent crude settled up $1.52 at $115.95 per barrel, after rising to a record peak of $116.75.

Oil's fresh highs extended a rally that has seen prices climb more than five-fold since 2002, as booming demand from emerging markets such as China has coincided with long-term supply constraints.

The falling dollar, which has hit new lows against the euro on Tuesday, has also helped to increase dollar-denominated commodities like oil and attracted speculative inflows from hedge funds.

Pipeline attacks in OPEC member Nigeria last week shut 169,000 barrels per day (bpd) of Bonny Light production, forcing Royal Dutch Shell Plc to declare force majeure on crude oil exports. Nigerian rebels also attacked two Shell oil pipelines in the Niger Delta on Monday.

Management and union officials are in talks to avoid a planned two-day strike at Scotland's Grangemouth refinery, which could force the shut-in of some oil and natural gas production from the North Sea.

Oil producers gathered in Rome for the International Energy Forum said they can do nothing to halt oil's rally and the world might have to live with even higher prices if it wants supplies for the future.

Ali al-Naimi, oil minister to OPEC kingpin Saudi Arabia, said a lack of investment in crude and refining capacity, not a lack of reserves, was driving prices higher.

"Recently, I have observed an unprecedented level of uncertainty, doubt and even fear in discussions about the future of energy and its impact on global economic prospects," Naimi said.

"I can assure you unequivocally that the world is not running out of oil."

Rising energy costs and the U.S. economic crisis have forced analysts to revise downward oil demand growth forecasts for the world's largest consumer, which has lobbied OPEC to increase output to help lower prices.

Yahoo Overshadows Upcoming Microsoft Earnings Report

Microsoft is expected to provide a first glimpse at its projections for its coming year, but news of any progress on a possible deal with Yahoo will likely overshadow even an upbeat outlook.

Microsoft is slated to report its fiscal third-quarter results on Thursday with a fall in earnings from a year earlier being a distinct possibility. The company booked $1.6 billion in revenue deferred from a quarter earlier because of delays to its Windows and Office upgrades.

Microsoft will also provide an outlook for its coming fiscal year starting in July, offering the Street at least a small taste on how concerned the world's largest software maker is about an economic downturn sapping technology spending. The caveat to any projections made by Microsoft is that an acquisition of Yahoo would make previous forecasts obsolete.

The Microsoft and Yahoo are in a stand-off over Microsoft's unsolicited $43 billion offer to buy Yahoo. Microsoft has refused to lift its stock-and-cash price, even as Yahoo's board of directors has said the offer undervalues the Web pioneer. So Microsoft's results should play second fiddle to the takeover battle.

"There isn't going to be a lot of things that pop out of the blue so the focus is going to be on Yahoo and the online business especially given the magnitude of the deal," said Parakh, who has a "buy" rating on Microsoft with a 12-month price target of $40.

This week could bring some progress in breaking the deadlock between the two companies. Microsoft Chief Executive Steve Ballmer, speaking on Tuesday in Morocco, said Yahoo's results will not affect the company's view that its offer remains "full and fair."

Fundamentals surrounding Microsoft's core businesses remain strong. Worldwide shipments of personal computers in the March quarter rose between 12 percent and 15 percent, according to research firms IDC and Gartner, boosted by strong growth in emerging markets.

Its Windows operating system, which runs on more than 90 percent of the world's PCs, has been helped by strong sales in emerging markets like Brazil, Russia and China. Since 60 percent of sales come from overseas, Microsoft has said it is partially shielded from a weak economy is North America.

Robust computer sales should also lift revenue at Microsoft's Office business. However, sales growth at the Windows and Office division could look less impressive when compared with last year's inflated figures, which factored in coupons issued to consumers affected by development delays.

Aside from its two main businesses, Microsoft is expected to post a profit gain in its server and tools division as well as its entertainment and devices division, which is home to its Xbox 360 game console business.