MarketView for July 10

Stock prices were somewhat higher on Thursday; the result of optimism from a major deal in the chemicals sector combined with the comments by Federal Reserve Chairman Ben Bernanke who said the central bank and the government are focused on stabilizing the financial system. Specifically, Dow Chemical's $15.3 billion bid for Rohm and Haas set in place some confidence that there was value in the sector. The deal size rises to $18.8 billion if you include debt. Meanwhile, Rohm and Haas closed out the day as one of the top advancers in the S&P 500.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told Congress they were doing everything possible to restore calm to financial markets, but stressed to lawmakers that a longer-term regulatory overhaul was vital to avert future crises.

Alcoa helped send the Dow Jones industrial average higher after aluminum prices hit an all-time high on output cuts by a large Chinese firm. Apple's stock is still benefiting from the upcoming launch the latest version of its popular iPhone. Apple's new iPhone is expected to attract hordes of buyers when it goes on sale on Friday in more than 20 countries, helping Apple handily beat its target to sell 10 million of them by the end of 2008.

However, a $5.60 per barrel increase in the price of oil amid threats to production in Nigeria and Brazil and an additional missile test by Iran kept the stock market's momentum well in check. The higher oil prices raised concerns about consumer spending and corporate profits, hurting sectors from retailers to automakers.

Financial stocks remained under pressure as a result of concerns that the sector may need additional capital to withstand the ongoing credit crisis. Shares Freddie Mac and Fannie Mae were among the hardest hit.

Lehman Brothers saw its share price hit the skids on word that Pimco, the world's largest bond fund, had pulled business away from the investment bank. However, Pimco said it continued to trade normally with Lehman Brothers. Nonetheless, the rumors torpedoed Lehman's shares.

In the latest snapshot of the economy, June retail sales figures sounded a positive note. Summer weather, aggressive promotions and tax rebates sent consumers shopping in June, giving retailers struggling with a weak economy their strongest month in more than a year. However, it is no secret that the gains are likely to be fleeting in nature. The jump in oil prices further weighed on the retail sector.

Did Jobless Claims Really Fall

The Labor Department reported Thursday that new applications filed for unemployment insurance fell by a seasonally adjusted 58,000 to 346,000 for the week ending July 5. A year ago, the figure was lower, at 304,000, showing an ongoing deterioration in employment conditions.

A government analyst cautioned that last week's drop did not suggest a sudden improvement in the country's overall economic health. The decline was exaggerated because of adjustment problems related to temporary shutdowns at auto plants for retooling new assembly lines. The unadjusted, or actual raw figures, showed an increase of 30,000 claims for last week.

The number of people continuing to draw unemployment benefits jumped by 91,000 to 3.2 million for the week ending June 28, the most recent period for which that information is available. That increase left such filings at the highest level since late December 2003. A year ago, the figure stood at 2.5 million.

Employers have been faced with rising energy prices combined with continuing fallout from the housing and credit crises. As they try to cope with those problems and squeezed profits, they have cut back on hiring and other types of investments.

Cautious employers have cut jobs for six months straight, bringing total losses to 438,000 so far this year, the government reported last week. The economy needs to generate more than 100,000 new jobs a month for employment to remain stable.

The jobless rate in June held steady at 5.5 percent after jumping in May by the most in two decades. However, the unemployment rate is expected to climb to 6 percent or higher by early next year or possibly even sooner.

Hard Times for Fannie Mae and Freddie Mac

Mortgage giants Fannie Mae and Freddie Mac watched helplessly as hoards of investors abandoned their securities for a second consecutive day on Thursday as fears mounted over their ability to raise capital needed to survive. The maelstrom raised concern in Washington and the White House pressed for regulatory reforms, which it said would buoy confidence in the two companies that own or guarantee nearly half of all domestic home mortgages. The congressionally chartered companies are considered the last bastions of support for the housing market, which is suffering its worst downturn since the Great Depression.

Shares in both companies have plunged throughout the week and on Thursday they hit their lowest point since 1991, severely limiting their ability to raise the capital they will need to purchase home loans and hold down mortgage rates. The relative values of their bonds fell to the lowest levels since the days before the Federal Reserve's orchestrated bailout of Bear Stearns Cos. in March.

Attempts by the companies, government and some Wall Street players to shore up confidence by underscoring their capital adequacy had little effect. But the regulator, the Office of Federal Housing Enterprise Oversight, said after the market close that the companies also have access to credit and large portfolios of easily traded assets.

Anxiety has been high all week, but a report in the Wall Street Journal on Thursday intensified the stocks sell-off. It said Bush administration officials were meeting with regulators to discuss contingency plans should the companies be unable to raise funds. Further stoking concerns, former St. Louis Federal Reserve President William Poole said the two mortgage finance companies were "insolvent" and may need a government bailout, according to Bloomberg News. The companies have lost more than $11 billion in the current housing market downturn.

They are expected to need billions of dollars in capital to support their balance sheets to try to stabilize the mortgage market. The two have attracted strong demand, raising some $20 billion since late last year, but their falling share prices since then raise doubts about support from Wall Street.

Freddie Mac has disappointed investors by not raising the $5.5 billion in capital it announced in May. The company "absolutely" has enough capital, and will raise more depending on market conditions, a spokeswoman said.

Lawmakers have been pushing hard on Fannie Mae and Freddie Mac to expand their might in the housing market, underscoring the companies' importance while steering clear of direct reference to investor confidence. "They play an important role in our housing markets today and need to continue to play an important role in the future," Treasury Secretary Henry Paulson told Congress on Thursday.

Yields on the 10-year "agency" bonds issued by Fannie Mae and Freddie Mac ballooned as much as 12 basis points to more than 1 percentage point above government debt. They closed the session just 3 to 5 basis points wider. Their mortgage-backed securities were more insulated since payments on the issues flow directly from homeowners to investors.

Retail Sales Not Up For Everyone

Department stores posted disappointing June same-store sales results on Thursday, hurt by slow mall traffic and consumers looking to cut discretionary purchases. In fact, department stores were the worst-performing sub-sector of retail in June, down 3.8 percent versus a year ago. The numbers were not lost on Wall Street.

JC Penney’s shares led the slide downward, falling about 10 percent after the company posted a weaker-than-expected 2.4 percent decrease in June sales at stores open at least a year. Nordstrom saw its share price fall despite meeting Wall Street expectations with its 18.6 percent decline. Department store chains, mainly located in malls, are facing slowing sales and lower foot traffic as cash-strapped consumers turn to discounters such as Wal-Mart for bargains.

Looking ahead to July, department stores will face difficult comparisons with the year-ago period, when same-store sales rose 3.5 percent. Department stores that target middle-income consumers, such as JC Penney and Kohl's, face a bleaker picture in the long run than their high-end peers such as Nordstrom and Saks because of a perceived lack of value by middle income consumers

Fewer shoppers in malls have also hurt sales at specialty apparel retailers such as American Eagle Outfitters and Limited Brands, which operates Victoria's Secret and Bath & Body Works stores. Eight of the 10 companies whose sales performed the worst in June compared to expectations were either department stores or mall-based apparel stores, according to tracking firm Retail Metrics.

"The mall-based apparel retailers are the ones who are being hit the most by consumers right now who are more cost-conscious," said Britt Beemer, chairman of America's Research Group, which tracks consumer behavior. "When you talk to parents they'll say we go to Target and Wal-Mart to save money and we go to the mall to spend money."

JC Penney said on Thursday that June same-store sales at its off-mall locations were stronger and more consistent than its mall locations. Lagging mall traffic is largely a function of rising gas prices, Needham & Co analyst Christine Chen said in a research note, adding that most retailers have controlled inventory levels well, sustaining profit margins, and earnings estimates likely will not be lowered.