MarketView for July 22

The key equity indexes were up over 1 percent on Tuesday as oil prices slid over $3 a barrel, taking the edge off disappointing earnings from the likes of American Express and Apple. The price of crude, which last week had its largest weekly decline ever, was down 2.4 percent as the U.S. dollar rose, easing some worries about the impact of higher energy costs on consumers and businesses.

 

Stocks like Coca-Cola and Wal-Mart gained as oil prices tumbled. An index of airline stocks surged 22 percent. The drop in oil prices dominated the Street even as several large companies reported results that reflected the pain being felt by consumers. Even companies that rely on wealthier consumers, such as American Express, suffered. As always, there were some bright spots among the thunder clouds. Caterpillar saw its share price rise after the maker of heavy construction equipment posted a stronger-than-expected quarterly profit.

 

After the bell, Washington Mutual posted a $3.3 billion second-quarter loss. But its stock rose 3.1 percent after it said it didn't need to raise more capital. Also in extended trading, Yahoo posted a nearly 19 percent decline in net earnings, and net revenue that did not meet expectations.

 

Apple was a drag on the NASDAQ after the company indicated late on Monday that its current quarter earnings will be well below Wall Street's targets. Shares of General Electric Co rose on news that the conglomerate and Abu Dhabi investment agency Mubadala Development had entered into an $8 billion joint venture. Wachovia said it would slash its dividend, but shares rebounded when the company said it did not plan to sell new shares to raise capital.

 

Financial shares rose in part because of the emergency ruling by the Securities and Exchange Commission which limits short-selling in financial firms like Fannie Mae and Freddie Mac. The curbs took effect only on Monday.

 

Short sales declined 90 percent in shares of mortgage finance companies Fannie Mae and Freddie Mac after the emergency rule took effect. Short sells declined 70 percent in shares of the 17 other financial firms targeted by the rule.

 

Crude Oil Down Over $3

 

Oil prices fell as it became increasingly unlikely that Tropical Storm Dolly will threaten Gulf platforms, giving traders one less reason to buy as a strengthening dollar helped keep prices in check. The sell-off was a throwback to last week's sharp decline and dragged crude to its lowest level since early June. It was also the fifth decline for crude oil in the last sixth sessions.

 

Light, sweet crude for August delivery settled down $3.09 per barrel at $127.95 in its last trading day on the New York Mercantile Exchange. Earlier the contract, which will be replaced by the September crude contract on Wednesday, fell as low as $125.63. In London, September Brent settled down $2.27 per barrel at $129.55 on the ICE Futures exchange.

 

Apparently speculators are now pulling money out of the market quite rapidly in an effort to protect their profits. It was also a reminder that, with traders for the moment turning bearish, the absence of major news can push the market down, just as incremental supply concerns previously drove prices sharply higher.

 

Crude also came under pressure from a stronger dollar. The currency rose sharply against the euro after Charles Plosser, president of the Federal Reserve Bank of Philadelphia and a voting member of the Fed's Open Market Committee, said the central bank will probably need to boost interest rates "sooner rather than later."

 

The dollar's decline has been a major factor in oil's ascent, as investors bought dollar-denominated crude contracts as a hedge against inflation and a weakening dollar. When the dollar strengthens, such currency-related buying often unwinds. At the same time, there are new indications that the rising prices of refined products are substantially reducing demand.

 

In its weekly pump spending survey, MasterCard found U.S. gasoline demand dropped last week for the thirteenth week in a row. Demand fell 3.3 percent compared with the same week a year earlier, according to the survey. Since the start of 2008, gasoline demand is down 2.2 percent.

 

Natural gas fell below $10 per 1,000 cubic feet for the first time since April. Prices for the power generation and cooking fuel settled at $10.067 per 1,000 cubic feet, down 44.3 cents. Earlier, prices dipped as low as $9.889.

 

Natural gas has plummeted since early July, when it reached its highest point in more than two years following a sharp run-up fueled by expectations of strong summer demand.

 

In other Nymex trading, heating oil fell 6.97 cents to settle at $3.6782 per gallon, while gasoline futures tumbled 7.01 cents to settle at $3.147 per gallon.

 

12^th Largest Private Company Bites The Dust

 

Huge oil trading losses of $3.2 billion sent SemGroup into bankruptcy on Tuesday. The company chalked up the massive losses as oil prices ran up record gains, undercutting short crude futures positions SemGroup bought to hedge against its 500,000 barrel-per-day trading business. To meet obligations, SemGroup plans to sell off oil and natural gas gathering, transportation, and storage assets worth an estimated $6.14 billion that were purchased in a whirlwind of acquisitions since it was founded in 2000.

 

"We have determined that the best way to maximize value for our creditors is to undertake a sales process that will transition our valuable businesses to well-established companies," Terry Ronan, SemGroup's acting chief executive, said in a statement.

 

SemGroup took a $2.4 billion loss on July 16 after it transferred its New York Mercantile Exchange oil futures trading account to Barclays Plc, converting what they called "loss contingencies" into an actual loss. Included in the NYMEX loss was $290 million owed to SemGroup by a trading company owned by co-founder and former chief executive Thomas Kivisto.

 

SemGroup had engaged in regular hedging transactions with BOK Financial Corp, where Kivisto had been a board member since 2006 before resigning on July 16. As of the end of 2007, SemGroup had hedged 21 million barrels of crude oil with BOK, which had a fair value of negative $130 million.

 

As of the end of March, this position was worth negative $88 million, said BOK spokesman Jesse Boudiette, who declined to comment on BOK's current exposure to SemGroup saying the bank would not speak publicly about individual clients.

 

Since going public just over a year ago, SemGroup Energy's stock has lost 72 percent of its value, most of that in the past five trading days. The stock closed at $22.69 on July 16, the day before SemGroup Energy disclosed SemGroup LP was having liquidity issues, and ended Tuesday at $8.28.

 

SemGroup also took $850 million in losses on July 17 when its over-the-counter hedging program was marked to market. It listed liabilities of $7.53 billion in its bankruptcy filing, including $3.1 billion of total debt $2 billion of secured debt and $594 million in unsecured notes.

 

SemGroup's financial difficulties were disclosed by its publicly traded affiliate SemGroup Energy Partners LP last week, when it warned that a liquidity crisis at its parent could lead to bankruptcy.

 

SemGroup Energy Partners management said it was confident the partnership could survive despite SemGroup's bankruptcy and would seek new business from third parties. The company's board has also authorized management to consider a sale or merger.

 

SemGroup Energy Partners also warned it was not ready to say if it would make a cash distribution to unit holders in the second quarter, though its management believes parent SemGroup will continue to use its fee-based assets to maintain operations while in bankruptcy.

 

It Could Be Expensive

 

A Bush administration plan to support Fannie Mae and Freddie Mac could cost U.S. taxpayers $25 billion, congressional analysts said as Congress took steps to approve a housing market rescue package. The report sparked fresh declines in the value of the Fannie and Freddie shares that have already fallen over 80 percent as investors lost confidence in the government-sponsored financing giants during the housing crisis.

 

Treasury Secretary Henry Paulson pushed the plan as a way to restore financial stability to the markets, even as new data on Tuesday showed home prices falling again in May. Congress was pushing ahead on sweeping housing legislation that was expected to include Paulson's proposals to give Fannie and Freddie access to cheap, federal capital if needed.

 

The nonpartisan Congressional Budget Office put the tentative price-tag on taxpayers' exposure to the Paulson plan, though it said there was no certainty whether the credit line would ever be tapped.

 

CBO said there is a "probably better than 50 percent" chance that the proposed new Treasury authority would not be used before it expired at the end of December 2009. In that case, the proposed credit line and possible government equity investment would cost taxpayers nothing.

 

But the CBO said that a favorable "scenario is far from the only possible result." It said that any further worsening in the already steep housing market slump "would increase the probability that this new authority would have to be used."

 

Known as government-sponsored enterprises, or GSEs, Fannie and Freddie own or guarantee almost half of the nation's $12 trillion in outstanding residential mortgage debt and play a increasingly key role in the troubled American housing market.

 

Shares in Fannie were down 13.6 percent at $12.21, while Freddie shares were off 8.6 percent at $8, in mid-afternoon New York Stock Exchange trading, with senior Republicans in the Senate urging prompt action on a housing bill.

 

The plan to rescue the GSEs has faced criticism from some who say homeowners should be helped first, as well as critics of the GSEs' record, which has included multi-billion dollar accounting mishaps and earnings restatements in recent years.

 

Paulson has proposed giving the GSEs expanded access to government loans and has said the government should stand ready to buy equity in the companies -- if either step is needed.

 

Good News From Caterpillar

 

Caterpillar said on Tuesday that its quarterly earnings rose a surprising 34 percent as strong sales in the developing world offset continued weakness in North America and creeping softness in Western Europe and Japan.

 

The company also raised its full-year sales and profit outlook, even as it acknowledged that material costs would be significantly higher than forecast during the remainder of the year.

 

Although Caterpillar's latest quarterly results came in 20 cents a share better than expected, the company only lifted its full-year EPS guidance by 9 cents, suggesting a second half deceleration in sales and profits.

 

Caterpillar, a component of the Dow Jones industrial average and a bellwether for the economy, reported second-quarter earnings of $1.11 billion, or $1.74 per share, as compared to $823 million, or $1.24 per share a year ago. Sales rose 20 percent to $13.64 billion.

 

In North America, Caterpillar, the world's largest maker of earth-moving equipment, said economic conditions in construction and quarrying continued to deteriorate during the quarter, offsetting some improvements in commodity sectors. It characterized the downturn in U.S. housing as "the worst environment since the 1930s."

 

The softness spread to nonresidential construction during the quarter as "banks tightened lending standards for commercial and industrial loans, property prices softened and vacancy rates increased," Caterpillar said.

 

However, increased sales in Asia, where machinery sales surged 50 percent during the quarter, more than offset weakness domestically and in Western Europe. Nonetheless, Caterpillar warned that higher steel and commodity prices would increase its material costs by as much as 3 percent this year, double its estimate at the beginning of the year.

 

The company said it continues to work with suppliers to reduce those material costs. But it also announced separately that it was raising prices 5 percent to 7 percent worldwide, effective January 2009. That price increase comes on top of another increase of up to 5 percent that Caterpillar announced earlier this year.