|
|
|
MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Wednesday, June 4, 2008
Summary Blue-chip stocks fell on Wednesday, sending the Dow
Jones industrial average to its lowest point since mid-April after
Federal Reserve Chairman Ben Bernanke stoked inflation worries.
Compounding the problem were concerns over whether the major financial
institutions will continue to post losses as the credit market debacle
remains unabated. At the same time, technology shares recovered after
two down days due in part to some positive brokerage comments on chip
makers Xilinx XLNX and Altera. Xilinx ended the day up $0.94, or 3.49
percent, to close at $27.86, while Altera ended up $0.65, or 2.84
percent, to close at $23.54. Qualcomm was the top gainer on the Nasdaq
100, ending the day up $1.46, or 3.11 percent, to close at $48.45. Cisco
Systems was up $0.42, or 1.59 percent, to close at $26.76, while Intel
added $0.54, or 2.35 percent, to close at $23.48. Wall Street, which had spent much of the day on an
upbeat note, took a turn for the worse late in the session after
Bernanke said policy-makers were concerned by signs of rising long-term
inflation expectations. His remarks renewed worry that the Fed's next
step will be to raise interest rates. The day’s decline in stock prices
could have been much worse had it not been for a $2.00 per barrel
decline in the price of crude oil. Financials fell for the third day in a row on
concerns over newly announced credit losses, even as the chief focus of
that worry for the past two days, Lehman Brothers, regained some of the
ground given up since last Thursday, a week’s decline that amounted to
18 percent of its share price. Lehman saw its share pickup a gain of $0.79, or 2.58
percent, to close at $31.40. A major bond fund manager, Dan Fuss at
Loomis Sayles, said he had been buying Lehman's debt and Merrill Lynch
upgraded Lehman's stock to a "buy." Lehman had been a drag on the
markets earlier in the week over concerns it was looking to raise new
capital. Moody's Investors Service said it is likely to cut
the top credit ratings of both MBIA and Ambac Financial Group over
mortgage-related losses and limited new business prospects. Bank of
America saw its share price end the day down $0.68, or 2.08 percent, to
close at $31.99 after Merrill Lynch cut its earnings outlook. Not all the blue chip financials ended the day in the
red. Shares of American Express provided the largest boost to the Dow
after its chief executive said full-year profit could increase up to 6
percent. American Express rose $1.33, or 3.00 percent, to close at
$45.64. Verizon Communications shares were one of the top
drags on the Dow, on news that Verizon Wireless, in which the company
has a 55 percent stake, is in talks to buy Alltel for about $27 billion
in debt and cash. Verizon ended the day down $0.38, or 1.02 percent, to
close at $36.98. A report from the Institute for Supply Management
showed the Economically sensitive stocks, such as communications
equipment makers, drew strength from that report, as well as from ADP
data that showed an unexpected gain in private- sector employment last
month. The ADP report is closely watched as a prelude to Friday's
government report on non-farm payrolls.
Could It Be The Fed Is Finally Catching On Federal Reserve Chairman Ben Bernanke said rising
long-term inflation expectations were a "significant concern" for
policy-makers but dismissed worry a wage-price inflation spiral was
developing. "Some indicators of longer-term inflation
expectations have risen in recent months, which is a significant concern
for the Federal Reserve," Bernanke said. "We will need to monitor that
situation closely." He described overall inflation as "significantly
higher than we would like," the second straight day in which he sounded
a warning on inflation, which financial markets took as a firm signal
that interest rates are likely on hold for some time. Nonetheless, Bernanke said he saw no sign a
"1970s-style wage-price spiral, in which wages and prices chased each
other ever upward," might be starting. While inflation has averaged
3-1/2 percent over the past four quarters, that number was still
considerably less than rates reached in the 1970s and again in 1980. Bernanke said soaring oil prices have had a
"relatively muted" impact so far because the amount of energy used to
produce a given amount of output, a gauge known as energy intensity, has
fallen markedly since the 1970s. However, he also remarked that
policy-makers learned a lesson in the 1970s, in particular that they
must keep long-term inflation expectations anchored to achieve low and
stable inflation. "If people expect an increase in inflation to be
temporary and do not build it into their long-term plans for setting
wages and prices, then the inflation created by a shock to oil prices
will tend to fade relatively quickly," he said. He said the
But he said that should also encourage conservation
and boost investment in energy-saving technologies, which will help the
economy over the longer term.
Economic News Was Positive The economy showed signs of resilience on Wednesday
as the service sector and private employment posted surprising gains for
May, despite the rising inflationary pressures. Nonetheless, the reports
support inflation worries expressed by Bernanke and suggest the Fed may
have to turn its focus to reining in price growth from warding off
recession. The service sector grew in May for a second straight
month, according to a report by the Institute for Supply Management
(ISM) that exceeded Wall Street expectations but showed inflation in the
sector hit its highest since September 2005. The ISM reading came after
a separate report showed the private sector added workers in May,
defying expectations of a fall. The ISM said its non-manufacturing index came in at
51.7 in May versus 52.0 in April. That was above the level of 50 that is
the dividing line between growth and contraction. The data suggested
economy may be coping surprisingly well with the current housing-led
downturn, though it is not growing impressively by any means. Underpinning concerns with inflation, the ISM prices
paid index rose to 77.0 in May, the second-highest reading in the
report's 11-year history. It was up from 72.1 in April and the rise also
contributed to bond-market losses. ISM's reading on service sector jobs
also showed a less favorable picture, with the employment component of
its index falling to 48.7 in May from 50.8 in April. A report by ADP Employer Services showed
private-sector employers added 40,000 jobs in May. However, economists
may reserve judgment until the government's monthly jobs report on
Friday, which they see as more reliable. The robust ADP report conflicted with another measure
of the jobs market, which showed companies' planned layoffs rose 15
percent in May from April to the highest monthly total since December
2005. Planned job cuts in A separate report by the government showed
productivity grew at a slightly faster-than-expected rate of 2.6 percent
during the first quarter, which may calm some of the Fed’s worries over
elevated inflation. Compared with the first quarter of 2007, non-farm
productivity was up 3.3 percent, the quickest pace in nearly four years.
Verizon Wireless May Acquire Alltel
Verizon Wireless is in talks to Alltel for about $27
billion in debt and cash to create a company that would overtake AT&T as
the largest domestic mobile service. While the details of the deal were
still being worked out, the $27 billion valuation will likely be made up
of mostly debt and a smaller amount of cash. Alltel had $23.35 billion
in long-term debt on its balance sheet at the end of the first quarter. The deal is currently valuing Alltel at eight times
its earnings before interest, tax, depreciation and amortization,
compared with its November sale to private equity firms for about 9.2
times EBITDA. Alltel was sold to private equity firms TPG Capital
and GS Capital Partners, the buyout arm of Goldman Sachs for about $25
billion on November 16. Including debt, the price was about $27.5
billion. The ownership structure of Verizon Wireless, 55 percent owned
by Verizon Communications and 45 percent owned by Vodafone, would not
change under the deal. Verizon Wireless and Alltel, which had more than 13
million customers at the end of the first quarter, together would have
more than 80 million customers. AT&T, currently the largest domestic
wireless service, said it ended the first quarter with about 71 million
subscribers.
Lehman Out Of The Woods
Lehman Brothers, which has been besieged by reports
that it may need to raise capital to shore up its balance sheet, won a
key vote of confidence from a top bond manager on Wednesday, who said he
was buying Lehman's securities and was not at all hesitant to trade with
the bank, The comments helped staunch three days of losses that
had chopped $4 billion off Lehman's value, as other Wall Street players
voiced confidence in Lehman and said they do not expect it to go the way
of former rival Bear Stearns. The Street also took to heart news that
Lehman had significantly reduced its borrowing from the first quarter.
Lehman, which has been dogged by speculation since late last week that
it could become the next victim of the global credit crisis, on Tuesday
denied rumors that it borrowed capital directly from the Federal
Reserve. On Wednesday, Lehman began the day again under heavy
pressure about its financial condition after The Wall Street Journal
reported the smallest remaining major Wall Street investment bank was
looking to raise capital overseas. However, concerns eased about a
repeat of the run on the bank witnessed in Bear Stearns' demise after
Dan Fuss, the vice chairman of fund manager Loomis Sayles, said he'd
been buying Lehman bonds in recent days. Lehman is expected to report second-quarter net
leverage ratio of about 12.5 times versus 15.4 times in the first
quarter. Lehman's gross leverage is expected to be about 24.5 times
versus 31.7 times in the first quarter. Gross leverage ratio is total
assets divided by total stockholders' equity, while net leverage ratio
is net assets divided by tangible equity capital. Lehman shares, which fell to their lowest level on
Tuesday since the meltdown of Bear Stearns in mid-March, snapped a
painful three-day decline on Wednesday, rising 2.58 percent to $31.40.
Lehman's market cap had fallen to just short of $17 billion at the close
of trade on Tuesday, after sliding 18 percent over three days. The
company is now worth roughly a third of its peak value just north of $45
billion back in February 2007. Merrill Lynch upgraded Lehman to a "buy" with a price
objective of $37 on Wednesday. Lehman shares have "meaningfully
undershot fair value in the last few days on speculation and concerns
that are not justified, in our opinion, given access to the Federal
Reserve primary dealer facility and ample liquidity," Merrill wrote to
clients. "Also, we believe concerns of a 'Bear-like' event at Lehman are
unfounded as Lehman is not subject to the same funding risk at Bear
Stearns," Merrill wrote.
|
|
|
MarketView for June 4
MarketView for Wednesday June 4
 |
 |
 |
