MarketView for July 25

Stock prices were higher as were the major equity indexes on Friday as a drop in oil prices, and stronger-than-expected data on consumer sentiment and housing outweighed the ongoing concerns over the health of the banking industry.

 

The NASDAQ rose more than 1 percent, helped not only by lower oil prices, but also by Juniper Networks after the company raised its full-year outlook on strong demand for network equipment. The results, which sent Juniper shares up $4.00, or 17.72 percent, to close at $26.57showed strength among companies linked to the Internet. Juniper’s numbers helped show that companies were still investing in network equipment, particularly those items vital to handling increased Internet traffic.

 

Another drop in oil prices, adding to a sharp sell-off over the last two weeks on signs of weakening demand, was particularly welcomed by investors in airlines and industrials. However, financial stocks weighed on the Dow and S&P 500.

 

Wachovia fell $1.19, or 7.58 percent, to close at $14.50, leading bank stocks lower a day after the nation’s fourth-largest bank said its finance chief was quitting. In addition, a brokerage analyst downgraded the shares. Morgan Keegan cut its rating on the bank to "under perform."

 

Bank of America fell $1.06, or 3.46 percent, to close at $29.58. Citigroup was down $0.21, or 1.10 percent, to close at $18.85. Both stocks limited the gains of both the Dow and the S&P 500 indexes. Fannie Mae fell $0.47, or 3.91 percent, to $11.55, while Freddie Mac closed down $0.54, or 6.13 percent, at $8.27. Standard & Poor's said it may cut their subordinated debt and preferred stock ratings.

 

Home builders rose after the data on new homes gave a glimmer of hope for the beaten-down housing market. Big manufacturers, including United Technologies rose after a report that showed an unexpected jump in orders for long-lasting durable goods. United Technologies ended the day up $1.03, or 1.60 percent, to close at $65.23.

 

For the week, the Dow fell 1.1 percent, the NASDAQ rose 1.2 percent and the S&P 500 fell 0.2 percent, while oil futures settled down at $2.23 per barrel at $123.26.

 

Consumer sentiment rebounded unexpectedly after falling to levels last seen in the early 1980s, as tax rebate checks helped offset high gas prices, while new home sales in July were not as weak as expected.

 

Within the technology sector, Qualcomm helped lead gains on the NASDAQ, rising $2.02, or 3.85 percent, to close at $54.45, after several brokerages raised their price targets on the stock. Cisco was up $0.67, or 3.08 percent, to close at $22.43.

 

The Dow Jones home construction index rose 1.5 percent. Pulte Homes was up $0.28, or 2.54 percent, to close at $11.31, two days after reporting a smaller quarterly loss compared with a year ago.

 

Sounding a downbeat note was apparel retailer Abercrombie & Fitch. Its shares ended the day down $4.52, or 7.49 percent, to close at $55.86. The S&P retail index was down 1.1 percent.

 

Crude Down Again

 

The crude oil futures fell to their lowest point in weeks on Friday most likely as a reflection of a serious deterioration in demand. Light, sweet crude for September delivery settled down $1.60 per barrel at $123.89. Earlier the contract dropped as far as $122.50, its lowest point since June 5. In London, September Brent crude settled down $1.46 at $125 per barrel on the ICE Futures exchange.

 

In another sign that Americans continue to struggle with soaring energy prices, filling station operators hungry for business ratcheted down the average price for a gallon of regular by 2 cents, according to AAA. AAA spokesman Geoff Sundstrom said such a large decline indicates a deteriorating demand by the world's thirstiest oil consumer. Retail prices have fallen about a dime per gallon in just the past week.

 

"People say typically prices shoot up like a rocket, fall like a feather. But this time ... it looks like it's different," Sundstrom said. "The retail sector is interested in bringing these prices down as fast as they can to stimulate business in their convenience stores." A gallon of gas now sells for $4.006, the first time it has been that low in nearly seven weeks.

 

Sundstrom said prices at the pump should slip below the $4 mark over the weekend and could drop by at least another 25 cents a gallon by early September, if oil stays on its downward path.

"We're seeing a historic change in driving habits," he said, although he added that "we still have a long way to go before we get back to the comfort zone, if you will, for the consumer."

 

Crude has fallen in six of the past eight sessions, and is trading more than 15 percent below its peak above $147 a barrel earlier this month. By afternoon Friday, crude was down nearly 16 percent from its peak above $147 a barrel two weeks earlier. Still, prices remained about 65 percent higher than they were this time last year.

 

Although supply concerns have taken a back seat to demand over the past two weeks, analysts note that prices could rebound, on even a temporary cut to supply.

 

In other Nymex trading, heating oil futures fell 2.18 cents to $3.5453 a gallon while gasoline futures lost 2.54 cents to $3.034 a gallon. Natural gas prices sank 15.3 cents to $9.17 per 1,000 cubic feet.

 

New Home Sales Fall

 

The Commerce Department reported Friday that sales of new homes fell 0.6 percent in June to a seasonally adjusted annual rate of 530,000 units, following an even larger 1.7 percent decline in May. It was the seventh time in the past eight months that sales of new single-family homes declined. Nonetheless, the decline was slightly smaller than had been expected and sales were revised up a bit for May. Even with those changes, new home sales are down by a sharp 33.2 percent from a year ago. The report on new home sales showed that the median price of a new home sold in June fell by 2 percent compared to a year ago.

 

The nation is enduring a steep downturn in housing that has pushed the overall economy close to a recession. It has also triggered a severe credit crunch, forcing U.S. financial institutions to cope with billions of dollars of losses from bad mortgage loans.

 

Sales were down the most in the South, a drop of 2 percent, with sales falling 0.9 percent in the West. These declines were offset somewhat by sales increases of 5.3 percent in the Northeast and 2.5 percent in the Midwest.

 

Meanwhile, the number of households facing the foreclosure process more than doubled in the second quarter compared to a year ago. Nationwide, 739,714 homes received at least one foreclosure-related notice during the quarter, or one in every 171 U.S. households, according to Irvine, Calif.-based RealtyTrac.

 

Look for the sales of both new and existing homes will remain depressed for much of the rest of the year with prices continuing to fall into the spring of next year. The problem is that soaring mortgage defaults are dumping more homes on an already glutted market. That's causing banks to tighten up on lending standards, making it difficult for potential buyers to qualify for homes.

 

The House on Wednesday passed a sweeping rescue package designed to halt the slide in home prices by helping more homeowners avoid mortgage defaults. It also provides a new tax break for first-time homebuyers and throws a lifeline to mortgage giants Fannie Mae and Freddie Mac.

 

Durable Goods Orders Rise

 

Durable goods orders increased by 0.8 percent in June, the strongest gain in four months and a result that was much better than had been expected. However, excluding demand for defense equipment, total orders would have been up a much more modest 0.1 percent.

 

The June number was being propped up by sizable military spending for equipment, reflecting the ongoing wars in Iraq and Afghanistan, and this was offsetting widespread weakness in the rest of the economy. Orders for defense capital goods were up by 15.8 percent during June, a number that came on the heels of a 14.1 percent increase during May.

 

The report on factory orders showed that orders for motor vehicles and parts had a slight rebound in June, rising by 1.8 percent, the best showing in nearly a year. But the increase was only a fraction of the big declines in previous months and was not seen as signaling any kind of sustained rebound from U.S. automakers. Ford, General Motors and Chrysler are being battered by soaring energy prices that have caused buyers to turn away from formerly hot sellers such as trucks and sport utility vehicles.

 

Overall, demand for transportation goods fell by 2.6 percent as the slight increase in auto demand was offset by a big 25.1 percent plunge in orders for commercial aircraft. Demand for military aircraft was also down, falling by 8.6 percent.

 

Excluding the volatile transportation sector, orders for durable goods -- items expected to last at least three years -- shot up by 2 percent, the best showing since last December and much better than the 0.2 percent decline that had been expected.

 

The manufacturing sector has been hurt by the overall slowdown in the economy with industries related to housing and autos particularly hard hit. This has been offset to some extent by continued strong demand for U.S. exports, which have been helped this year by a falling U.S. dollar against many major currencies. A weaker dollar makes U.S. products cheaper on overseas markets.

 

Sharp Increase in Foreclosures

 

Foreclosures continue to soar, with 220,000 homes lost to bank repossessions in the second quarter of this year, according to the latest statistics from RealtyTrac, an online marketer of foreclosed homes. That's nearly triple the number from the same period in 2007.

 

There were a total of 739,714 foreclosure filings recorded during that three month period, up 14 percent from the first quarter, and up a whopping 121% from the same period in 2007. That means that out of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

 

"Most areas of the country are seeing at least some increase in foreclosure activity," said RealtyTrac CEO James Saccadic. "Forty-eight of 50 states and 95 out of the nation's 100 largest metro areas experienced year-over-year increases in foreclosure activity." Because foreclosure filings are growing so quickly, RealtyTrac will have to reevaluate its foreclosure forecast for the year.

 

Foreclosure filings were expected to total 1.9 million to 2 million this year. However, midway through the year, RealtyTrac has already counted at 1.4 million so they are going to raise their projections. In addition, bank repossessions are also up as a proportion of total filings, representing 30 percent of the notices issued during the quarter, up from 24 percent a year ago.

 

The ongoing problems in the housing market are compounded by a generally weaker economy. Foreclosures won't go down until we start to see employment move up again."

Sun Belt front and center California's Central Valley remains ground zero for foreclosure filings. Stockton, which is just east of San Francisco, had the highest rate of foreclosure filings of any metro area, one for every 25 homes. That's seven times the national average.

 

Riverside/San Bernardino, which is east of Los Angeles, had the second highest rate in the nation with one filing for every 32 households. Las Vegas, Bakersfield and Sacramento rounded out the top five.

 

Detroit continued to suffer more than any other non-Sun Belt area, with one filing for every 66 households. And several Ohio cities were also hard hit, led by Toledo (one in 92 households), Akron (one in 93) and Cleveland (one in 108).

 

On the other hand, there were a handful of metro areas that remained relatively unscathed. Honolulu, at one filing for every 1,331 households had the lowest rate of all, followed by Allentown, Penn. (one for every 972) and Syracuse, NY (one for every 880).

 

At the state level, Nevada had the highest rate with one filing for every 43 households, while California had the highest total number of filings - 202,599.

 

Meanwhile, Congress struggles to pass a housing rescue bill that will make FHA-insured loans available to many at-risk borrowers. However, even if that bill is signed this week, it will not take effect until October.