MarketView for July 24

Stock prices fell sharply on Thursday sending the major equity indexes down more than 2 percent after a report indicated another major decline in existing home sales, which in turn sent investors taking what profits they could from the rally of the past week and scurrying to the sidelines. As a result, the Dow Jones industrial average saw its largest decline in the past month. At the same time, an increase in the price of a barrel of crude oil had the Street worried that maybe the decline in oil prices had pretty much run its course. Particularly hard hit in the process were the shares of companies vulnerable to higher fuel costs, such as airlines and retailers.

Financial companies, which have been incurring huge losses from the housing slump, slid after the data from the National Association of Realtors reported that June sales of existing homes hit a 10-year low. The news sent an index of bank stocks down 6.7 percent. The index had been up about 40 percent over the past week.

Treasury bonds, which benefit from signs of economic weakness, gained a bit of ground. The dollar lost ground against the yen, but bounced against the euro after news in the euro zone cooled expectations of higher interest rates.

Trading has been very volatile in recent weeks due to a flood of serious setbacks stretching from bank failures to the cobbling together of a last-minute rescue plan for Fannie Mae and Freddie Mac. The plan was passed by the House on Wednesday night, and is expected to be approved by the Senate on Saturday.

Shares of mortgage finance companies Fannie Mae and Freddie Mac fell more than 18 percent, just a day after the House approved the housing rescue package that would include a government lifeline for the two companies.

Fannie Mae's stock ended the day down $2.98, or 19.87 percent, to close at $12.02, while Freddie Mac's shares closed down $1.99, or 18.43 percent, at $8.81. Other financial shares also fell with Citigroup closing down $2.06, or 9.75 percent, at $19.06 and Goldman Sachs Group falling $7.61, or 4.05 percent, to close at $180.26.

Ryland Group saw its share price tumble $5.97, or 19.13 percent, to close at $21.43 after reporting a wider-than-expected loss late on Wednesday. The Dow Jones home construction index fell 12.5 percent.

Ford was down $0.92, or 15.26 percent, to close at $5.11 after the company posted a wider-than-expected loss on declining sales of pickup trucks and sport utility vehicles. Dow Chemical said its profit missed Street expectations as it grappled with higher energy prices. Its stock fell $1.13, or 3.30 percent, to close at $33.11.

Adding to the negative tone were brokerage downgrades on three Dow components. Boeing's shares fell $4.19, or 6.28 percent, to close at $62.53 after Citigroup and Sanford Bernstein cut their price targets on Company and Cowen & Co lowered its rating on the stock. AT&T fell $1.36, or 4.11 percent, to close at $31.70 after JPMorgan cut its rating to "neutral" from "overweight." McDonald's ended the day down $1.29, or 2.16 percent, to close at $58.37 after Deutsche Bank downgraded the stock. In addition, Apple led the NASDAQ’s major decliners, falling $7.23 or 4.35 percent, at $159.03.

Finally, another economic report indicated a larger-than-expected rise in the number of claims for jobless benefits in the latest week, adding to concerns about a slowing labor market.

U.S. oil futures settled up $1.05 at $125.49 per barrel after a drop of more than 5 percent over the previous two sessions. Earlier during Thursday's NYMEX session, oil hit an intraday high above $126.

The Day’s Economic News Was Not Good

Jobless claims rose sharply, while the pace of existing home sales fell sharply as slowing growth hit hiring and a glut of unsold houses weighed on real estate, data released on Thursday indicated. A report from the real estate industry said that home sales dropped 2.6 percent in June, dragging the annual sales pace to the lowest since early 1998.

Housing is at the heart of the slowdown and officials hope conditions will start to slowly improve once it finds a bottom, although economists warn this may still be some way off. The pace of existing home sales in the United States fell in June to a 4.86 million-unit annual rate, according to the National Association of Realtors.

Sliding U.S. house prices and mounting losses from the subprime mortgage market sparked a credit crunch last year that has chilled growth and hiring, despite aggressive cuts in benchmark interest rates by the Federal Reserve. The June rate was the lowest since a 4.83 million rate in early 1998, the Realtors said.

The inventory of homes for sale held steady at 4.49 million homes or 11.1 months of supply at the current sales pace, down only slightly from the record level of supply in April. The median national home price declined 6.1 percent from a year ago to $215,100.

The number of workers filing new claims for jobless benefits increased by 34,000 claims last week, the Labor Department said, in part reflecting seasonal volatility typical at this time of year, but also indicating that jobs were hard to find. Initial claims for state unemployment insurance benefits rose to a seasonally adjusted 406,000 in the week ended July 19, from a revised 372,000 the prior week, the Labor Department said.

It was the highest reading since late March and above forecasts of 376,000 new claims. A Labor Department official noted that estimates were being affected by annual auto plant shutdowns, the end of the quarter, and the holiday-shortened July 4 reporting week. The four-week average of new jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, rose to 382,500 from 378,000.

Defense and Aerospace Continue To Be Wall Street’s Sweet Spot

Raytheon, L-3 Communications and Goodrich posted better than expected earnings and raised their full-year earnings forecasts on Thursday, as the long boom in defense and commercial aircraft spending shows no immediate signs of letting up.

Raytheon's profit from continuing operations rose a larger-than-expected 20 percent, helped by higher sales of its missiles and lower pension expenses.

Raytheon, the fifth largest defense contractor, which makes Patriot missile systems and a range of military electronics, reported an 11 percent increase in sales to $5.9 billion, helped by sales of Patriot systems to Kuwait and South Korea and more work on Britain's e-Borders security program.

Net income fell compared to a year ago, but only because the company booked a one-time gain of $980 million in the year-ago quarter from the sale of its Raytheon Aircraft business jet unit. Raytheon is now expecting earnings of $3.80 per share to $3.95 per share, in line with analysts' average forecast of $3.93.

L-3 Communications Holdings, the seventh largest supplier to the Pentagon, said earnings rose a better-than-expected 48 percent, helped by strong sales of its military electronics and a one-time gain. L-3, which also supplies intelligence services to federal agencies, raised its full-year forecast, based on strength across its operations.

It is now expecting earnings per share in the range of $6.71 to $6.75, in line with analysts' average forecast of $6.72.

Goodrich reported a bigger-than-expected 50 percent jump in profit, on strong sales of its landing gear and other aerospace components. The company also raised its 2008 earnings per share forecast to a range of $4.80 to $4.95 per share.

The defense budget has doubled since 2001 and commercial airplane orders have surged to record levels over the past three years, as the United States has increased investment in the large weapons projects, while airlines have responded to an unexpected resurgence in air travel.

The prospect of Pentagon spending cuts under the next administration and the risk that cash-strapped airlines will cancel airplane orders has not yet shown up on the balance sheets of companies feeding off the twin boom.

"We feel very positive about the long-term outlook for the company," said Raytheon Chief Financial Officer David Wajsgras said, adding that it was too early to predict what the next administration will do in the area of defense spending.

Goodrich, which makes wheels, brakes and landing systems for Boeing and Airbus, said struggling airlines grounding old planes had yet to make an impact on its replacement part business.

"Even though many airlines have announced that they will remove some of their older airplanes from their fleets, we do not expect these removals to have a significant impact on Goodrich results in 2008," said Goodrich Chief Executive Marshall Larsen.

Boeing and the EADS unit of Airbus, along with their suppliers, are hoping the civil aerospace market will survive relatively unscathed as high oil prices increase the attractiveness of their new, more fuel-efficient models.

Thursday's positive results emulate those of Lockheed Martin and General Dynamics, which both beat profit estimates and raised forecasts earlier this week.