MarketView for July 30

Summary

The key equity indexes were higher on Wednesday, indicative of a positive day for share prices as a surprising increase in private-sector employment and central bank efforts to boost liquidity offset a surge in oil prices. Bank stocks gained some ground after the Federal Reserve and other central banks said they would add to current measures to stabilize financial companies struggling with credit losses.

The price of oil rose nearly 4 percent after weekly inventory data showed a decline in gasoline stockpiles. While higher oil prices crimp consumer and business spending, they also help send the shares of energy companies higher and that is what sent the Dow and S&P into positive territory. The share price of Exxon Mobil was up 4 percent and Chevron’s 5 percent.

A private-sector employment report said employers added 9,000 jobs in July. That helped to set a positive tone in the markets from the opening bell. The indicated the possibility for a stronger-than-expected government jobs report on Friday.

The rally accelerated in the last half hour of trading as traders reversed bets that stocks would fall, known as covering short positions. The late gains helped pull the Nasdaq out of negative territory.

Avon Products and SPX both posted better-than-expected earnings, providing bright spots among otherwise dismal second-quarter results. Financial shares advanced after U.S. securities regulators extended through August 12 an emergency rule aimed at curbing abusive short selling in the stocks of Fannie Mae, Freddie Mac and 17 other major financial firms. That, coupled with the Fed's move to extend liquidity to stressed banks, had the bulls out buying stocks.

Bank of America's shares rose 4.3 percent, while Citigroup climbed 2 percent. Merrill Lynch was up 2.5 percent as investors wondered whether Merrill has finished cleaning its balance sheet after stating that it will write down $5.7 billion in credit losses and raise $8.55 billion by selling new stock.

Shares of Fannie Mae rose 5.3 percent on the SEC emergency extension of its short-sale rule as well as on news that President George W. Bush had signed into law a housing rescue plan passed by Congress, which includes a government lifeline to both Fannie Mae and Freddie Mac.

Elan and Wyeth saw their shares take a beating after a drug trial showed the risk of a potentially serious side effect in a new Alzheimer's drug jointly developed by the companies.

Crude Reverses Course

The price of crude oil jumped in price settling up $4.58 per barrel at $126.77. London Brent settled up $4.39 per barrel at $127.10on Wednesday after government data showed an unexpected decline in gasoline stocks as suppliers facing weak consumer demand cut production and imports.

Gasoline stocks fell by 3.5 million barrels last week, according to the Energy Information Administration. The EIA report also showed domestic crude oil stocks dropped by 100,000 barrels, while distillate stocks rose 2.4 million barrels.

Additional support came from refinery problems, with BP cutting rates at its Texas City, Texas, plant due to mechanical problems. Valero plans to cut gasoline production by an average of 330,000 barrels per day (bpd) in the third quarter at its 16 plants.

While costly fuel and wider economic problems are curbing demand, especially in the United States, strong growth from emerging economies like China has stretched poor supply growth over the past six years, launching a rally that sent crude up sevenfold at its peak. Further strength has come from investors buying commodities as a hedge against inflation and the weak dollar, tensions between Iran and the West, and supply disruptions.

Iran's supreme leader, Ayatollah Ali Khamenei, said on Wednesday Tehran would pursue its nuclear path despite a deadline set by world powers in the dispute over Tehran's nuclear program. Western powers gave Iran two weeks from July 19 to respond to their offer to hold off on imposing more U.N. sanctions on Iran if the OPEC member would freeze any expansion of its nuclear work.

In Nigeria, Africa's top oil producer, Royal Dutch Shell, declared force majeure on Bonny Light exports after militants blew up parts of a key pipeline earlier this week. Militant attacks have disrupted supplies from the OPEC nation this year, pushing up oil prices.

Central Banks Pony Up Again

The U.S., European, and Swiss central banks on Wednesday extended emergency lending facilities for investment banks and expanded other liquidity programs to ease credit market strains that have weighed on the global economy for nearly a year. The joint measures helped lift share prices and were a factor in pushing up bond yields and the dollar.

The Federal Reserve said it was prolonging the emergency credit facility for primary dealers to January 30 which had been due to expire in mid-September. The Fed said it acted "in light of continued fragile circumstances in financial markets," and said it would close down the lending program once it determined credit market conditions were no longer "unusual and exigent."

The Primary Dealer Credit Facility was launched in March after the near bankruptcy of Bear Stearns and it marked the first time since the Great Depression that the Fed had opened its emergency lending to investment banks.

The Fed also said it would offer longer-term loans to banks under its Term Auction Facility, introducing 84-day offerings in addition to its current 28-day loans. The TAF was established in December to try to tamp down funding pressures.

The Fed plans alternate auctions of $75 billion in 28-day credit, with offerings of $25 billion in 84-day funds every two weeks. Credit outstanding at the Term Auction Facility would total no more than $150 billion, as is currently the case.

In parallel, the European Central Bank and Swiss National Bank said they would begin conducting dollar auctions with 84-day terms, in addition to their current 28-day offerings, alternating on a bi-weekly basis. Auction maximums would be $2 billion for the SNB and $10 billion for the ECB.

The Fed said it would temporarily expand its dollar swap line with the ECB to $55 billion from $50 billion. The Fed had put in place swap lines with both the ECB and SNB so that those central banks could provide dollars to European markets. The announcements followed record demand for dollar liquidity at the ECB's last 28-day auction, when banks bid for more than four times the $25 billion on offer. The actions indicate the seriousness of money market tensions a year after the initial credit-market shock.

The Fed's actions are the latest in a series of aggressive steps, in conjunction with the ECB and the Treasury, to calm financial market strains resulting partly from huge write downs by banks on mortgage related assets as U.S. house prices have tumbled in the past year.

The Fed said that in addition to extending the PDCF, it would also keep open through January 30 its Term Securities Lending Facility, which provides liquid Treasury securities for 28 days in return for harder-to-trade collateral.

It also gave the go-ahead to the New York Federal Reserve Bank to auction options to primary dealers to borrow Treasury securities to ease funding pressures that often build as financial quarters are drawing to a close.

When Times Get Tough the Tough Stop Drinking Lattes

Starbucks posted its first-ever quarterly loss as it took charges for stores closures, while at the same time laying out detailed plans for closing stores, all of which sent its shares up 4 percent. Starbucks had already announced it will close domestic stores and 61 in Australia. The company expects to make 200 of the U.S. store closures in the fourth quarter and the remainder in fiscal 2009, beginning in October.

The coffee chain reaffirmed its fiscal 2009 forecast for adjusted earnings of 90 cents to $1 per share and said it now expects to have a net decrease of 60 stores in the United States in that period.

Starbucks reported a fiscal third-quarter net loss of $6.7 million, or 1 cent per share, its first since the company went public in 1992. In the year-earlier quarter its net profit was $158.3 million, or 21 cents per share. If you exclude the 17 cents per share in charges primarily related to store closures and restructuring, Starbucks had a per-share profit of 16 cents.

Total revenue rose a slower-than-expected 9 percent to $2.6 billion from $2.4 billion, as the company’s domestic business deteriorated from the prior quarter and contributed to a mid-single-digit decline in sales at established stores. Citing factors such as weak traffic and increased costs, Starbucks now expects full-year fiscal 2008 earnings in the mid-70 cent range, excluding the charges related to store closures and restructuring.

The company lowered its U.S. store opening targets for fiscal 2008 to about 900 net new stores, evenly distributed between company-operated and licensed. Internationally, Starbucks now sees about 825 net new store openings during fiscal 2008, including the closures in Australia.

Capital expenditures for fiscal 2008 are now expected to be about $1.0 billion, below the $1.1 billion previously forecast. Internationally, Starbucks is planning to open about 900 net new stores in 2009. Two thirds of these stores are expected to be licensed.

For 2009, the company now sees capital expenditures of about $750 million, reflecting the reduced store targets for the U.S. and International segments.