MarketView for June 5

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Thursday, June 5, 2008

 

 

 

 

Summary

  

Stock prices moved sharply higher on Thursday after Wal-Mart and other retailers posted stronger-than-expected May sales and data showed a surprising fall in weekly jobless claims, spurring optimism about the economy's health. Energy stocks added the greatest amount of momentum to the Dow Jones industrial average and the S&P 500. The price of oil roared back from a three-week low as a significant decline in the dollar forced traders to backtrack from bets that crude had further to fall.

 

A rare mega-deal in the telecommunications sector added to the positive tone. Verizon Wireless said it will buy rural mobile phone provider Alltel Corp for $28.1 billion, including debt.

 

Wal-Mart saw its share price hit a four-year high after the world's largest retailer reported a stronger-than-expected increase in domestic same store sales. It said some of the gains resulted from rebates that consumers began receiving in late April under the government's $152 billion economic stimulus package.

 

Stocks heavily influenced by economic cycles, such as Hewlett-Packard and Alcoa, responded strongly to data showing the number of workers filing new jobless benefit claims last week fell unexpectedly.

 

Crude Oil Prices Hit Record High

 

The price of crude oil gained more than $6 per barrel to over $128 per barrel on Thursday in the largest price rise on record on word that the European Central Bank may raise interest rates this year. That rumor sent the dollar toward the basement once again. Crude traded up $6.08 to $128.38 per barrel after settling up $5.49 earlier at 127.79, thereby erasing two days of sharp losses that had been triggered by worries high prices were starting to eat into global demand. London Brent crude futures settled $5.44 higher at $127.54 a barrel, before trading up to $127.83 in post-settlement activity.

 

Oil prices have doubled in a year on growing Asian demand and as investors rushed into commodities as a hedge against the weak dollar and inflation, helping drive crude to a record $135 a barrel in May.

 

Thursday's price rise came as the dollar fell sharply against the euro after European Central Bank President Jean-Claude Trichet signaled possible rate hikes later this year. The comments offset a rare warning this week from the U.S. Federal Reserve on the inflationary risk of a weak dollar, suggesting more interest rate cuts this year are not likely.

 

Oil's losses this week came from concerns that Asian demand growth, which has helped underpin the six-year rally, could falter as some countries ease fuel subsidies. This week, India raised retail petrol and diesel fuel prices by about 10 percent and Malaysia hiked petrol prices by 41 percent, after Taiwan, Sri Lanka and Indonesia reviewed their subsidies last month.

 

Rising fuel prices in Asia and weaker consumption in the United States, the world's top consumer, are expected to lead to further reductions in estimates for global oil demand growth in 2008.

 

The International Energy Agency, adviser to 27 industrialized countries, issues its latest forecasts next week and has said it may lower its 2008 demand projection further. Meanwhile, the Energy Information Administration on Wednesday reported gasoline inventories rose 2.9 million barrels last week while gasoline demand over the past four weeks slumped 1.4 percent versus last year. Distillate stocks were up by 2.3 million barrels, while crude stocks fell 4.8 million barrels.

 

Jobless Claims Decline

 

The number of claims for unemployment benefits declined last week although a key indicator of unemployment hit a four-year high. According to a report by the Labor Department, applications for unemployment benefits totaled 357,000 last week, some 18,000 fewer than the previous week. That pushed applications for benefits to their lowest level since mid-April.

 

However, the four-week average edged up to 3.086 million claims, the highest level since March 6, 2004, when the country was trying to recover from a prolonged period of rising unemployment. The increase in so-called continuing claims underscored the problems people are facing with rising layoffs and the difficulty in finding new jobs in a weak economy.

 

The drop of 18,000 drop in claims applications was better than the unchanged performance that economists had been expecting. For the week ending May 24, a total of 31 states and territories reported that claims had declined, while 22 reported increases. Keep in mind that the better-than-expected weekly claims number was likely an aberration that reflected problems the government has in adjusting the claims figures around holidays. Last week covered the Memorial Day holiday when state claims offices were closed.

 

The states with the biggest increases were Ohio, up 2,390, because of higher layoffs in the auto, transportation and service industries, and Mississippi, with a rise of 2,028, reflecting higher layoffs in the auto industry.

 

The states with the biggest declines were Michigan, with a drop of 1,880, reflecting fewer layoffs in the auto industry in that state, and Pennsylvania, with a drop of 1,120, reflecting fewer layoffs in petroleum, primary metals and the furniture industry.

 

Foreclosures Hit Record High

 

More than one million homes are currently in foreclosure, the highest rate ever recorded, and the crisis is expected to only grow worse. According to the Mortgage Bankers Association's first quarter report, a record 2.5 percent of all home loans being serviced by its members are now in foreclosure. That number works out to about 1.1 million homes, up from the 2 percent of loans, or about 938,000 homes, that were in foreclosure at the end of 2007.

 

The report also showed that 448,000 homes, or about 1 percent of loans being serviced, began the foreclosure process during the first quarter. That's up from about 382,000 homes, or 0.83 percent, that entered foreclosure in the last three months of 2007.

 

This marks the sixth straight quarter in which a record percentage of loans went into foreclosure. The trend has led to a widespread decline in home prices, as well as huge losses for banks and other financial firms that issued or invested in the loans.

 

Nearly half of the homes in foreclosure are concentrated in six states. But those states are undergoing two very different types of housing meltdowns.

 

California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade, which was fueled by rising home prices and investors snatching up real estate using risky mortgages. Those four states have about 368,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.7 percent of all of the loans in these states are now in foreclosure.

 

The other two states that are ground zero for the crisis, Michigan and Ohio, have been hit by the more traditional economic woes stemming from rising job losses, particularly in the automotive sector. Ohio has about 61,000 homes in foreclosure, while Michigan has about 54,000. The foreclosure rate in those two states is 3.9 percent.

 

Retail Sales Rise

 

Consumers stepped up their shopping in May after tax rebate checks began hitting mailboxes, giving many of the nation's retailers stronger than expected sales for the month. Still, there were signs that many people are still focusing on necessities such as food and gas.

 

Discount and lower-priced stores such as Costco and Wal-Mart were again among the strongest performers, benefiting from a blip up in sales as consumers spent some of their rebate money.

 

According to a preliminary report from Thomson Financial, of the 31 retailers reporting their May sales so far on Thursday, 18 exceeded expectations, three met expectations and 10 missed. The tally is based on same store sales, considered a key indicator of a retailer's strength.

 

Retail sales have been largely disappointing since the holiday season, with lower-priced stores like Wal-Mart and Costco among the few standouts. Consumers have had to contend with ever-rising food and gasoline bills, forcing them to pay more for the basics and stopping them from buying clothing and other non-discretionary items. Worries about the ongoing housing slump and struggling economy have taken a further toll, making consumers think twice before even mildly splurging.

 

Wal-Mart said same store sales rose 3.9 percent, while analysts surveyed by Thomson Financial predicted a 1.6 percent rise. Including fuel sales, same store sales rose 4.4 percent. Tom Schoewe, Wal-Mart's chief financial officer, told reporters Thursday that $350 million worth of tax rebate checks had been cashed in the stores so far, although he didn't know what percentage of that money was actually spent at Wal-Mart. He said the checks, along with an improvement in Wal-Mart's merchandise, helped May sales results surpass expectations.

 

"Our customer is clearly under pressure when it comes to higher gas prices, higher food prices for that matter," Schoewe said. Schoewe said he believes more customers are staying at home to save money, helping to boost sales in its home merchandise business, which had its first increase in same stores sales in more than two years.

 

Target, which has a somewhat more upscale clientele, said same store sales fell 0.7 percent. Health care, electronics and perishables were the company's strongest sales categories in May, while men's apparel, jewelry, and lawn and patio sales were weakest.

 

Costco said same store sales rose 9 percent, ahead of the 6.9 percent analysts were expecting. Results were boosted by food and gas sales, along with the benefit of the weaker dollar, mainly in Canada.

 

TJX, which operates discount apparel and home furnishing stores, including T.J. Maxx and Marshalls, said same store sales rose 2 percent, edging higher than the 1.8 percent analysts expected.

 

Department stores reported weaker results, but many still beat analyst expectations and the luxury sector was strong. J.C. Penney said same store sales fell 4.4 percent, better than the 5.8 percent analysts expected. Footwear and women's accessories were strong performers, while jewelry and home categories were softer.

 

According to Saks, its same store sales fell 8.7 percent, while analysts predicted a 7.5 percent drop, but that was mainly due to the shift of a clearance event into April. Store sales for April and Many combined rose 8.6 percent. Nordstrom reported a 10.9 percent increase in same store sales.

 

Mall-based apparel stores continued to struggle. Limited Brands said same store sales fell 6 percent, missing the 5.5 percent drop analysts expected. The company's stores include Victoria's Secret and Bath & Body Works.

 

Gap's same-store sales fell 14 percent, hurt by results from its Old Navy Stores. The result was worse than the 9.5 percent decline analysts expected. Teen retailers, who tend to be a little more recession-proof than other apparel merchants, had mixed results.

 

American Eagle Outfitters said its same store sales fell 9 percent, while Aeropostale was the best performer in the teen segment, with a 6 percent increase, due in part to a positive reaction to its summer merchandise.