MarketView for July 1

MarketView for Tuesday July 1
 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, July 1, 2008

 

 

Dow Jones Industrial Average

11,382.26

p

+32.25

+0.28%

Dow Jones Transportation Average

4,862.05

q

-85.51

-1.73%

Dow Jones Utilities Average

522.27

p

+1.42

+0.27%

NASDAQ Composite

2,304.97

p

+11.99

+0.52%

S&P 500

1,284.91

p

+4.91

+0.38%

 

 

Summary

  

Stock prices were a shade higher on Tuesday, the start of both a new quarter and the second half of the year. Acting as a major catalyst to the day’s upward momentum was some surprising news of stronger-than-expected June sales from General Motors. In addition, the bottom feeders were hard at work scouring for bargains among some oversold financial stocks, all of which overshadowed the ongoing concerns over record oil prices. The modestly positive start to the third quarter followed the Dow Jones industrial average's worst first six months since 1970.

 

General Motors saw its share price end the day up $0.25, or 2.17 percent, to close at $11.75, after the company posted better than expected sales that in turn eased some of Wall Street’s concerns regarding the impact of high fuel costs on the economy. However, GM's positive surprise was the exception, not the rule. Ford and Chrysler were among those feeling the deep pain of higher gasoline prices and as a result, posted poor June sales.

 

Financial shares, which had earlier led decliners in the S&P 500, turned higher in afternoon trading. UBS upgraded American Express, Capital One Financial and Discover Financial Services to "neutral" from "sell," writing to clients that the current valuations now reflect for the most part the difficult operating outlook those companies are facing. In other words, the bad news is now built into the share price.

 

American Express closed up $2.35, or 6.24 percent, at $40.02 and was the top contributor to the Dow on Tuesday. Capital closed out the day up $2.13, or 5.60 percent to close at $40.14, while Discover Financial gained $0.83, or 6.30 percent, to close at $14.00. An index of S&P financial stocks rose 1 percent.

 

Among financial shares, Lehman Brothers rose $, or 5.8 percent, to close at $20.96 after Morgan Stanley put out a buy recommendation on the investment bank's beaten-down shares.

 

Nonetheless, is spite of the day’s better than expected news, concerns over rising inflation continued to weigh on the market. Crude oil futures for August delivery closed at a record $140.97 per barrel on Mideast tensions and supply concerns raised by a report from the International Energy Agency.

 

In trading after the closing bell, Starbucks saw its share price rise sharply by more than 3 percent to $16.14 after the company stated that it is increasing planned store closures and will cut as many as 12,000 jobs.

 

A report by the Institute for Supply Management indicated that manufacturing activity expanded in June for the first time in five months, helped by a weak dollar which subsequently resulted in increased exports as our goods become cheaper on the world markets. Nonetheless, inflationary pressures were at their highest level since the stagflation-ravaged 1970s.

 

Apple saw its share price increase by $7.24, or 4.32 percent, to close at $174.68 and was among the top contributors to the NASDAQ after Sanford C. Bernstein raised its price target on Apple.

 

Shares of commercial lender CIT Group rose $2.02, or 29.66 percent, to close at $8.83 after the company agreed to sell its home lending business and other housing portfolio holdings.

 

The Commerce Department reported that construction spending fell 0.4 percent in May as home building continued to deteriorate. The data will add to concerns that the country has entered a period of weak growth accompanied by high inflation.

 

Manufacturing Increases but Inflation Also Rises

 

Although manufacturing expanded in June for the first time in five months, helped by a weak dollar, It was accompanied by increased inflationary pressures that soared to their highest level since the stagflation-ravaged 1970s. The Institute for Supply Management said its index of national factory activity rose in June to 50.2, topping the 50 level that marks expansion for the first time since January. The increase was attributed to a weak dollar, which helps exports, and some restocking of inventories.

 

While the index was just above forecasts and May's reading of 49.6, the report also showed manufacturers are slashing jobs while being pinched by soaring prices and weak demand. Federal Reserve officials will pay particular attention to the prices paid gauge of inflation, which jumped to the highest level since July 1979.

 

This year's manufacturing slump was the worst since 2003, when the ISM index spent five consecutive months below 50, from February to June that year. However, the index did not reach the low-40s depths hit during the recession of 2001.

 

The recent slide in factory activity has been mitigated by a sharp dollar decline, which has kept domestic goods more competitive abroad than they might have been otherwise. As evidence of this, the ISM's gauge of new export orders held near May's four-and-a-half-year high last month. Still, June's rebound was slight and economists cautioned that it by no means signaled an extended expansion.

 

The ISM index of prices paid jumped to 91.5 from 87.0 in May, and there were worrying signs that manufacturers were passing on their higher prices. "I'm seeing evidence in the market that the magnitude of the increases is so large that people can't help themselves," said Norbert Ore, head of the Institute for Supply Management's Business Survey Committee.

 

"Most of those companies are adamant that they have to have the price increase in order to stay in business," he said. "Generally they are very successful in trying to pass that on to customers. The thought of trying to offset that with productivity couldn't be done."

 

The ISM employment index fell to 43.7 in June from 45.5 in May, its lowest since May 2003, offering a hint at Thursday's national employment report. Although U.S. construction spending slid overall in May due to the dismal residential sector, outside of home building, private spending rose for the fifth consecutive month.

 

Gasoline Demand Falls

 

Retail gasoline demand remained is down as high prices at the pump trimmed demand for the fuel, MasterCard Advisors said Tuesday.

 

"The regional year-over-year view shows all regions but the Midwest are consuming less gasoline when compared to a similar week in 2007," said Michael McNamara, vice president of research and analysis at MasterCard Advisors.

 

U.S. consumers were pumping about 200,000 barrels per day less gasoline than they were at this time last year, McNamara said.

 

Gasoline consumption in the West Coast, Rocky Mountain and New England regions was down the most, with decreases greater than 5 percent when compared with 2007, MasterCard said in its weekly Spending Pulse report. The Midwest, with has some of the cheapest gasoline prices in the nation, was the only region with a demand increase.

 

The national average price of gasoline dipped 1 cent last week, but at $4.06 per gallon was more than 36 percent higher than this time last year.

 

Despite a year-on-year drop in demand of 1.99 percent, there was an uptick in gasoline consumption ahead of the Fourth of July holiday weekend, McNamara said. American motorists pumped an average of 9.545 million bpd last week, an increase of 1 percent from the previous week. However, weekly demand dropped 2.1 percent when compared with the same week last year.

 

Fourth of July weekend is traditionally the busiest holiday travel weekend of the year. But for the first time in 10 years, travel is expected to decline, according to AAA. The four-week moving average for gasoline demand was down 2.9 percent at 9.345 million bpd, dropping for the 12th week in a row.

 

Crude Prices Hit New Record

 

Oil prices rose on Tuesday on forecasts global supplies will struggle to keep pace with demand and concerns tensions between Israel and Iran could lead to a disruption of exports from the OPEC nation. Domestic sweet crude for August delivery settled up 97 cents per barrel at $140.97. London Brent crude settled up 84 cents at $140.67 per barrel.

 

The International Energy Agency on Tuesday cut its global oil supply capacity forecast by 2.7 million barrels per day to 95.33 million barrels per day by 2012. The cut offset downward revisions to expected demand as high prices bite into fuel use in some consumer nations, such as the United States.

 

The Energy Information Administration on Monday cut domestic oil demand figures for April, knocking oil from its record peaks. retail gasoline demand fell by 2.1 percent last week compared to a year ago, MasterCard Advisors said.

 

Concerns that tensions between Israel and Iran could disrupt supplies from the Organization of Petroleum Exporting Countries' second biggest oil producer also supported prices. Speculation has mounted that Israel plans to attack Iran's nuclear facilities, which Tehran says are for purely peaceful purposes, following an Israeli air force exercise last month.

 

The U.S. State Department on Tuesday criticized reported comments by an unidentified senior defense official who told ABC News there was an increasing likelihood Israel would attack Iran over its nuclear program.

 

Iran's Revolutionary Guards has said if Iran were attacked it would impose controls on shipping in the Strait of Hormuz. About 40 percent of all seaborne oil trade passes through the Strait of Hormuz, according to the EIA.

 

OPEC President Chakib Khelil said on Tuesday the cartel did not have enough spare capacity to replace Iranian oil, if Tehran were to cut exports due to an attack.

 

Oil prices have jumped nearly seven-fold since 2002 as supplies struggle to keep pace with demand from emerging markets like China. In addition, demand from investors seeking to hedge against the falling dollar and inflation has aided the 40 percent rise in prices this year alone.

 

Ali al-Naimi, oil minister for OPEC kingpin Saudi Arabia, said on Tuesday his country was willing to provide more oil to markets, if needed, but he added it would not discount crude prices to encourage buying. "We have said more than once we don't like these high prices ... We have nothing to do with where the price is today," Naimi said.

 

Saudi Arabia could help bring down the soaring crude market by cutting prices to a level that would encourage energy companies to build up inventories. However, OPEC insists markets are well supplied and blamed rising crude prices on speculation.

 

Weekly U.S. oil inventory data, due on Wednesday, is expected to show a 100,000-barrel fall in crude stocks, a 200,000-fall in gasoline stocks, and a 1.9-million-barrel build in distillates.

 

Auto Sales Hit 3-Year Low

 

Domestic auto sales for the month of June hit a 15-year low, but a month-end clearance sale helped General Motors retain its lead position and steer clear of the wipeout many had feared, with a resulting increase in its share price on Tuesday.

 

Record gas prices and declining trade-in values for big trucks and SUVs hit truck sales hard while major automakers, including Toyota, struggled to keep up with demand for some popular smaller cars and hybrids. GM was the industry's main surprise after a sale featuring zero percent financing for six years allowed the U.S. automaker to avoid losing sales leadership in the month to Toyota.

 

In a reversal of recent trends, Toyota trailed GM in June with a 21-percent sales decline, reflecting a 31-percent drop in sales of its trucks like the Tundra pickup. GM's sales were down 8 percent. Equally damaging, sales of Toyota's hybrids including the market-leading Prius hybrid dropped 27 percent as dealer inventory ran short of demand.

 

Ford sales were down 28 percent, while Chrysler saw its sales fall 36 percent, the weakest result in the industry. Now controlled by Cerberus Capital Management, the privately held automaker relies on light trucks for almost 70 percent of its sales. By contrast, Honda, which says it has the most fuel-efficient vehicle line-up among major automakers, bucked the downturn and posted a 1 percent sales gain.

 

The sales rate for vehicles dropped to 13.6 million units on an annualized and seasonally adjusted basis, down from 15.7 million a year earlier, according to tracking firm Autodata. It was the weakest month since August 1993.

 

The current expectation on the Street is that full-year auto sales will come in at about 15 million vehicles, down from 16.15 million in 2007. June had three fewer sales days than the same month a year earlier, leading to a difference of about 10 percentage points between adjusted and non adjusted figures.

 

GM shares, which touched a 54-year-low on Monday and have been trending lower for two months, rose as much as 15 percent on the June sales figures, pulling the broader U.S. equity market higher.

 

GM's more modest sales decline in June showed that its incentive program had succeeded. GM has avoided such a strategy in recent years because it cuts into profit margins and can rob sales from future months. GM sales chief, Mark LaNeve, said the month-end June promotion had cost the automaker an additional $400 on the average vehicle.

 

Now the question is whether the cash-strapped domestic auto industry is headed for even weaker sales in the second half of the year. Ford's marketing chief Jim Farley pointed out that consumer fundamentals and confidence had deteriorated in the first half of the year and added, "The economy enters the second half of the year with a notable absence of momentum and a high degree of uncertainty."