MarketView for June 10

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, June 10, 2008

 

 

 

 

Summary

  

Although the Dow Jones industrial average managed a small gain on Tuesday, share prices were in negative territory for the most part as concern that interest rates are destined to move higher took precedence over everything else with technology shares being among the hardest hit. Saving the Dow was an upgrade of Coca-Cola.

 

Coca-Cola saw its share price rise $2.15, or 3.85 percent to $58.01 after a brokerage house upgraded the stock, saying the company will benefit from international sales even as the domestic market weakens. Shares of rival PepsiCo gained $2.21, or 3.38 percent, to close at $67.58 after it said it will affirm its 2008 profit outlook.

 

At the same time, energy stocks hurt the S&P 500 despite a drop in crude oil futures amounting to about $3 per barrel. The S&P index of energy shares was down 2.2 percent. Among energy stocks, Exxon Mobil was the top-weighed drag on the S&P, falling $1.18, or 1.32 percent, to close at $87.89, while Chevron fell $2.42, or 2.39 percent, to close at $98.78. Occidental Petroleum was down $3.69, or 3.94 percent, to close at $89.87.

 

Growth-sensitive sectors such as chip makers and software developers were trading lower after Federal Reserve Chairman Ben Bernanke said on Monday evening that he would strongly resist rising inflation expectations, which the Street took to mean policy makers would lift rates. Higher borrowing costs are seen as negative for stocks since they impede business investments.

 

The Philadelphia Stock Exchange index of semiconductors fell 1.7 percent as all but two of its 18 components traded lower. Marvell Technology MRVL was the sharpest decliner, falling $0.88, or 5.18 percent, to close at $16.10. Adobe Systems fell $0.73, or 1.72 percent, to close at $41.74.

 

Apple helped to stem the hemorrhaging tech heavy NASDAQ. Apple’s shares gained $4.03, or 2.22 percent, to close at $185.64 a day after the introduction of a faster iPhone. In addition, Lehman Brothers and Citigroup both raised their price targets on the stock.

 

Shares of investment bank Lehman Brothers continued their sharp descent on Tuesday, falling $1.98, or 6.72 percent, to close at $27.50. The shares are down 20 percent from Thursday. On Monday, the investment bank raised dilutive capital and warned of a $2.8 billion quarterly loss.

 

Trade Deficit Continues to Expand

 

According to a report by the Commerce Department, the country’s trade deficit widened more than expected in April as the price of imported oil hit a record high, pushing the overall imports number to an all-time high. The monthly trade gap number increased 7.8 percent to $60.9 billion, its largest one-month gain since September 2005, despite a healthy rise in exports to a record $155.5 billion.

 

The wider deficit was due mostly to higher average prices for imported oil, which gainrd $6.96 per barrel in April to a record $96.81. Imports from Saudi Arabia, Venezuela and other members of the Organization of Petroleum Exporting Countries hit a record $20.9 billion.

 

Oil prices hit a record high near $140 per barrel on Friday, suggesting imported oil costs will continue to climb. Even so, trade is expected to remain a source of strength for the economy, which has been buffeted by a severe housing downturn and a credit crisis.

 

Overall U.S. imports of goods and services reached a record $216.4 billion in April as they showed their biggest one-month gain since November 2002. Although oil accounted for much of the increase, imports of autos and capital goods bounced back after dropping in March.

 

Even with the run-up in oil prices, our trade deficit is $4 billion lower than it was in the first four months of 2007, U.S. Commerce Secretary Carlos Gutierrez noted in an interview.

 

"Without the impact of petroleum, the year-to-date deficit would have improved by over $50 billion. We're talking about one of the best eras we've ever had in our history for exports," Gutierrez said.

 

"Our net exports are actually adding more to our economy in the second quarter than in the first quarter," he said.

 

U.S. exports rebounded to a record $155.5 billion in April after retreating slightly in March. The month-to-month rise was the biggest in more than four years. Exports of civilian aircraft, farm machinery and other capital goods "performed particularly well, up 15 percent from the comparable period of 2007," said Frank Vargo, vice president at the National Association of Manufacturers.

 

A weak dollar has helped push U.S. exports higher over the last several years, and has played a big role in keeping the U.S. economy afloat in recent months. This week, China's ambassador to the World Trade Organization said the weak U.S. dollar was hurting developing countries by fueling increases in oil and food prices and he called on Washington to take quick action to stabilize its currency.

 

That criticism follows years of U.S. complaints that China maintains an artificially low currency exchange rate, giving Chinese companies a big price advantage in international trade. The U.S. trade gap with China increased nearly 26 percent in April to $20.2 billion, as imports from that country surged and U.S. exports to China slumped.

 

Growth of Crude Oil Supplies Falls

 

Two of the world's most closely watched energy forecasters on Tuesday slashed predictions for output from oil fields outside the OPEC cartel in 2008, indicating more bad news for a global economy struggling with record high oil prices and tight supply. The dimming outlook for world production will keep the market on edge even as high prices hit consumers and cut into the pace of global demand growth.

 

The International Energy Agency reduced its expectations for supply growth from countries outside OPEC to 460,000 barrels per day above 2007 levels, down from 680,000 bpd a month ago. At the same time, the Energy Information Administration, the statistical arm of the Energy Department, cut its forecast for non-OPEC output growth nearly in half to 310,000 bpd from 600,000 bpd.

 

Both groups have consistently over-shot on non-OPEC supply growth in recent years, as soaring field costs and geopolitical constraints have wreaked havoc on official timelines.

 

Partly due to the dearth of supplies outside the Organization of Petroleum Exporting Countries, the EIA raised its projections for 2008 oil prices by nearly 12 percent. Benchmark West Texas Intermediate oil prices will average $122.15 a barrel, up from its previous forecast of $109.53 a barrel, the EIA predicted.

 

The EIA said it was still accounting for a planned non-OPEC supply increase of 820,000 bpd later this year as big fields in Brazil and Azerbaijan come online. But, given recent delays, the EIA hedged its bets on the probability of such supplies materializing as planned.

 

"Given recent history, EIA believes that the pace and timing of non-OPEC supply growth will continue to be subject to possible delays in key projects and accelerating production declines in some older fields," the agency said.

 

The EIA has sifted through new data that paints a less rosy picture for supplies from three key producers, Russia, Mexico and Brazil, said Matt Cline, an economist at the agency.

 

In Russia, the world's No. 2 oil exporter behind Saudi Arabia, a venture with LUKOIL and ConocoPhillips to produce 160,000 bpd in Russia's north has been repeatedly delayed, while in Mexico, production from the huge Cantarell offshore field plummeted by more than 30 percent in the first four months of 2008, versus a year ago, Cline said.

 

"Like everyone else, we had been expecting Cantarell to decline this year," Cline said. "But no one had been expecting it to decline by that much."

 

In Brazil, the EIA has dramatically increased its baseline for decline rates in some larger, more mature fields, especially in its offshore areas.

 

Cline said, "based on some new data and some new analysis, we reevaluated what we saw as the underlying decline rate and we increased it" to about 13 percent for some fields, versus about 10 percent previously.

 

EIA head Guy Caruso said the downward revisions would put more pressure on OPEC suppliers like Saudi Arabia to fill the gap, and will lead to tighter global spare capacity.

 

The slower growth in supply from non-OPEC countries will keep supplies tight, despite weakening growth in demand, as high prices hit consumers, the EIA said.

 

The IEA said global oil demand will rise by 800,000 bpd this year, 230,000 bpd less than its previous forecast, in part because developing Asian economies are moving to roll back fuel subsidies that sheltered consumers. The EIA, meanwhile, cut its forecasts for U.S. demand by 100,000 bpd and global oil demand by 210,000 bpd in 2008.

 

Yahoo Shareholders Ask For Speedy Trial

 

Shareholders suing Yahoo's board of directors demanded a trial ahead of the company's August 1 annual meeting to fight an employee severance plan they contend is a barrier to a merger with Microsoft. Lawyers for two Detroit pension funds suing Yahoo over its rebuff of a $47.5 billion buyout offer from software company Microsoft contend in court papers that their litigation "is the only vehicle" for challenging the severance plan.

 

The plaintiffs contend that the severance arrangement is nothing more than a maneuver to make any takeover of Yahoo prohibitively expensive. If billionaire Carl Icahn, who is waging a battle for control of the Yahoo board, prevails in his proxy fight, Yahoo could be faced with up to $2.4 billion in potential severance payouts to workers, they argue.

 

Yahoo responded on Tuesday in a U.S. regulatory filing denying assertions made in the lawsuit and which activist investor Icahn has relied upon in his campaign to dislodge Yahoo's existing board.

 

In particular, the company said the $2.4 billion figure vastly overstates any conceivable lay-off that might occur and that the likely cost of the program, if as many as 15-30 percent of employees were laid off, was $514 million and $845 million.

 

Yahoo's severance plan offers enhanced benefits, cash and accelerated vesting of stock options to any employees who are fired or leave because their roles are diminished after a merger or change in control of the company, the plaintiffs say.

 

Yahoo has defended the plan as a way of ensuring that its pool of talented employees, a key asset to any deal, isn't drained by rivals ahead of an agreement.

 

"A July trial on the validity of the severance plans is imperative for Yahoo shareholders," lawyers for the funds said in a filing on Monday with the Delaware Court of Chancery.

 

"The court should decide plaintiffs' challenges to the severance plans before the next director election takes place, and before further harm becomes irreparable," wrote the attorneys from law firms Bernstein Litowitz Berger & Grossmann LLP and Bouchard Margules & Friedlander.

 

The Delaware Court of Chancery holds trials without juries. Many corporate disputes and merger battles are fought there. The court's chief judge, Chancellor William Chandler III, is presiding over the Yahoo litigation.

 

The plaintiffs contend that the company's sitting board is free to reorganize Yahoo's work force as it sees fit without fear of triggering the severance benefits. But if Icahn's board slate prevails, the plaintiffs say, Yahoo shareholders will be forced to fund the costly severance payouts to departing workers.

 

The Sunnyvale, California-based company has said previously that it believes the lawsuit is without merit.

 

In its filing on Tuesday, Yahoo said many companies have severance plans that cover some or all of their employees, while others have no such protections: "Regardless of what other companies do, our senior leaders felt it is important to adopt a plan that is appropriate for all levels of Yahoos."

 

The lawsuit, filed by the City of Detroit's Police and Fire Retirement System and General Retirement System, was originally filed in February. It contends that Yahoo CEO Jerry Yang conspired with co-founder David Filo on how to maintain Yahoo's independence in the face of Microsoft's buyout bid because they had a personal interest in keeping Yahoo a stand-alone company.

 

Yahoo ended the day down $0.18, or 0.68 percent, to close at $26.40.