MarketView for June 13

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Friday, June 13, 2008

 

 

 

 

Summary

  

It was a rough week on Wall Street but one that ended with a substantial gain on Friday after government readings on inflation and a drop in oil prices eased worries about the effect of rising prices on consumers. The advance lifted the Dow Jones industrial average more than 165 points, and the three major indexes turned in a mixed performance for the week. At the same time, short-term Treasury prices rose after being pounded earlier this week on fears that the Federal Reserve would be forced to raise interest rates to combat inflation.

 

The economic reports released on Friday along with gains in the dollar supported a notion that the Fed will be able to walk a middle line as it seeks to balance the well-being of the economy with pressures from rising prices. Recent drops in the dollar had contributed to higher oil prices because a weaker greenback makes each barrel more expensive.

 

The government's report that prices are rising came as no surprise. The Labor Department's Consumer Price Index grew 0.6 percent last month, which was just above the 0.5 percent economists had expected. The core inflation reading, which excludes often volatile food and energy prices, edged up a more moderate 0.2 percent, as expected.

 

While overall prices showed their biggest one-month gain since November, the fact that the run-up seems largely contained to food and energy appeared to give the Street some solace. Price spikes in all areas could make it harder for some consumers to reach into their wallets for anything more than the basics. And a pullback in consumer spending, which accounts for more than two-thirds of economic activity, could derail investors' hopes of seeing an economic recovery later in the year.

 

Still, the rise in energy costs is having a negative effect on consumer confidence. The Reuters/University of Michigan preliminary reading on consumer confidence for June fell to a near 30-year-low of 56.7 from 59.8 last month.

 

However, the easing of some inflation concerns Friday appeared to bolster the case for the Fed to keep rates unchanged when it meets June 24-25 and to perhaps hold off on boosting rates for several meetings. Comments this week from Fed officials, however, make clear that policymakers are mindful of rising prices and the taxing effect they can have on the economy.

 

For the week, the Dow was up 0.80 percent gain, and the NASDAQ composite index fell 0.81 percent and the S&P 500 fell 0.05 percent.

 

The inflation findings appeared to lend some calm to the bond markets. Bond investors fear inflation because it lowers the value of fixed-income securities, so short-term Treasuries, the most vulnerable to the effects of rising prices, moved higher.

 

The 2-year yield, which moves opposite its price, fell to 3.03 percent from 3.05 percent late Thursday. The yield on the benchmark 10-year Treasury note, however, rose to 4.26 percent from 4.22 percent. The yield on the 30-year long bond rose to 4.80 percent from 4.76 percent.

 

The dollar rose against other major currencies, while gold prices fell. Oil prices fell, following a sharp rebound in the previous session. A barrel of light, sweet crude settled down $1.88 at $134.86 per barrel.

 

A reading due Tuesday on inflation at the wholesale level should provide some indication as to whether some businesses will be able to continue to refrain from passing some rising costs to consumers.

 

In corporate news, Anheuser-Busch is holding preliminary talks with rival Grupo Modelo SAB, according to a report in The Wall Street Journal. Anheuser-Busch has received an unsolicited $46 billion bid from Belgian brewer InBev SA.

 

Lehman Brothers saw its share price rise $3.11, or 13.7 percent, to $25.81 following reports that Chief Executive Richard Fuld is looking for outside capital, possibly from a sovereign wealth fund or a U.S. investor. The investment bank's shares fell sharply during the week after the company reported a nearly $3 billion second-quarter loss. The company also ousted its chief financial officer and chief operating officer.

 

Yahoo is now turning to rival Google to help squelch a rebellion among its shareholders who believe it should have accepted Microsoft's $47.5 billion buyout offer while it was still available last month. Late Thursday, Yahoo announced talks with Microsoft had ended with no deal. Yahoo fell 5 cents to $23.47, Google rose $18.56, or 3.4 percent, to $571.51 and Microsoft rose 83 cents, or 2.9 percent, to $29.07.

 

Inflation Rises Sharply

 

The inflation rate shot up in May at the fastest pace in six months, pushed higher by soaring costs for gasoline and other types of energy. The Labor Department reported Friday that consumer prices rose by 0.6 percent last month, the biggest one-month increase since last November, as gasoline costs surged by 5.7 percent. Food prices, which have also been rising sharply, were up 0.3 percent as the cost of beef and bakery products showed big gains.

 

Core inflation, however, which excludes energy and food, edged up a more moderate 0.2 percent in May. That increase was right in line with expectations and should help relieve worries that the big increases in food and energy could be breaking through to more widespread inflation. In fact, the Fed is now indicating that its biggest concern has changed from the threat of a recession to worries about inflation.

 

In a speech Monday, Fed Chairman Ben Bernanke said that the Fed will "strongly resist an erosion of longer-term inflation expectations." Those comments have raised expectations that the Fed's next move later this year will be to start raising interest rates.

 

The 0.6 percent rise in overall prices was slightly higher than the 0.5 percent gain that economists had been expecting while the 0.2 percent rise in core prices matched expectations. So far this year, consumer prices are rising at an annual rate of 4 percent, compared with a 4.1 percent increase for all of 2007.

 

Energy prices are rising at a 16.5 percent annual rate, compared with a gain of 17.4 percent for all of 2007, while food prices are rising at a 6.3 percent annual rate, up from a 4.9 percent increase for all of last year.

 

Furthermore, the pressure in both the energy and food areas is likely to continue as global food shortages and rising demand push food prices up and energy costs continue to soar, reflecting a relentless surge in crude oil prices. The energy increases have pushed the nationwide average for gasoline up to a record of $4.06 and private economists believe that price will keep climbing through the summer driving season.

 

The combination of rising inflation and weak wage gains contributed to another drop in weekly earnings. After adjusting for inflation, weekly earnings for nonsupervisory workers were down 1.2 percent in May, compared to a year ago, the Labor Department said in a separate report.

 

Energy prices were up 4.4 percent in May after being unchanged in April. The increase was led by a 5.7 percent jump in gasoline, the biggest one-month increase since last November, and gains of 0.9 percent for electricity, 10.4 percent for home heating oil and 5.6 percent for natural gas.

 

The 0.3 percent rise in food costs reflected a 1.5 percent jump in beef costs, the biggest rise in 13 months, and another steep increase in cereal and bakery products, which were up 1.6 percent.

 

Outside of food and energy, clothing costs fell by 0.3 percent and the cost of prescription drugs dropped by 0.7 percent, but airline tickets jumped 3.2 percent, the biggest gain in more than six years, reflecting the surge in fuel costs.

 

Foreclosures Up 48% In May

 

The number of U.S. homeowners swept up in the housing crisis rose further last month, with foreclosure filings up nearly 50 percent compared with a year earlier, a foreclosure listing company said Friday. Nationwide, 261,255 homes received at least one foreclosure-related filing in May, up 48 percent from 176,137 in the same month last year and up 7 percent from April, RealtyTrac Inc. said.

 

One in every 483 U.S. households received a foreclosure filing in May, the highest number since RealtyTrac started the report in 2005 and the second-straight monthly record. Foreclosure filings increased from a year earlier in all but 10 states. Nevada, California, Arizona, Florida and Michigan had the highest statewide foreclosure rates.

 

Metropolitan areas in California and Florida accounted for nine of the top 10 areas with the highest rate of foreclosure. That list was led by Stockton, Calif. and the Cape Coral-Fort Myers area in Florida.

 

RealtyTrac monitors default notices, auction sale notices and bank repossessions. Nearly 74,000 properties were repossessed by lenders nationwide in May, while more than 58,000 received default notices, the company said.

 

In Nevada, one in every 118 households received a foreclosure-related notice last month, more than four times the national rate. In California, one in every 183 households faced foreclosure.

 

The combination of weak housing sales, falling home values, tighter mortgage lending criteria and a slowing U.S. economy has left financially strapped homeowners with few options to avoid foreclosure. Many can't find buyers or owe more than their home is worth and can't get refinanced into an affordable loan.

 

Making matters worse, mortgage rates have been rising, reflecting increased concerns about what the Federal Reserve might do to battle inflation. Freddie Mac reported Thursday that 30-year fixed-rate mortgages averaged 6.32 percent this week, the highest level in nearly eight months and up sharply from 6.09 percent last week.

 

Efforts by government and the mortgage industry to stem the tide of foreclosures aren't keeping up with the rising number of troubled homeowners, and critics say a Bush administration-backed mortgage industry coalition, dubbed Hope Now, is falling far short.

 

Rick Sharga, RealtyTrac's vice president of marketing, said foreclosures are unlikely to peak until sometime this fall, as more loans made to borrowers with poor credit records reset at higher levels. "I don't think we've seen the high point," he said. About 50 to 60 percent of borrowers who receive foreclosure filings are likely to lose their homes, Sharga said. The rest are likely to be able to sell or refinance.

 

A government report released Wednesday found that among mortgages held by Bank of America, Citigroup  and seven other large banks, foreclosures climbed to 1.23 percent of all loans in March from 0.9 percent in October.

 

As foreclosed properties pile up, they add to the inventory of homes on the market and drag down home prices. The trend is most dramatic in many parts of California, Florida, Nevada and Arizona, where prices skyrocketed during the housing boom and are now falling precipitously.

 

Sales of foreclosures, vacant new homes and other distressed properties now dominate some markets, causing grief for individual homeowners who need to sell for other reasons, like a job in a new city. Nationwide, one out of every four sales between January and March was a distressed sale, and that figure jumps to more than 50 percent in the hardest-hit areas like Las Vegas, Detroit and distant suburbs of Los Angeles, according to Moody’s Economy.com.

In some neighborhoods, lenders are slashing prices dramatically to rid themselves of an unprecedented number of foreclosed properties, sparking bidding wars and multiple offers. While that's a positive for the real estate market, buyers in other parts of the country are still holding back.

 

Oil Falls Due To Report Saudis Mulling Rise In Output

 

Oil prices fell on Friday on a report that Saudi Arabia may increase production to stem crude's record rally to peaks near $140 a barrel. Domestic crude oil settled down $1.88 per barrel at $134.86, while Brent crude settled down $1.84 per barrel at $134.25.

 

Saudi Arabia is considering bringing output to near record levels of around 10 million barrels per day ahead of a meeting of producer and consumer nations in Jeddah on June 22, the Middle East Economic Survey reported on Friday. The world's top oil exporter is expected to pump 9.45 million bpd this month, after announcing in May plans to increase output by 300,000 bpd to make up for production shortfalls by other members of OPEC.

 

Separately, Saudi Oil Minister Ali al-Naimi, speaking to the state news agency SPA, reiterated that market fundamentals did not justify current prices and that producers and consumers would seek a solution in Jeddah. "The kingdom called this meeting based on its positive role in international relations ... and its commitment to the world economy and a balanced global oil market," Naimi said.

 

Oil prices have jumped 40 percent this year to a record above $139 a barrel, causing protests around the world. Prices have jumped more than six-fold since 2002 as supply struggles to keep pace with demand in emerging markets, especially China and India. Further pricing support and pressure has come from a wave of cash from investors seeking a hedge against rising inflation and the falling dollar.

 

At the same time the demand for crude oil has shown signs of faltering under high prices. OPEC on Friday became the latest group to cut its forecast for global growth in oil demand in 2008, adding that it is pumping more than the forecast demand for its oil.

 

The International Energy Agency this week cut its demand growth forecast for 2008 to 800,000 bpd.

 

Wachovia Shares Lowest Since 1992

 

Wachovia saw its share price fall as much as 10.2 percent to the lowest level since 1992 on concern that the fourth-largest bank might cut its dividend a second time, and after another mortgage lender with heavy exposure to California reported a jump in nonperforming assets. Nonperforming assets may be defined as those no longer collecting interest or principal payments. They often include loans more than 90 days overdue.

 

Friday's decline came after Lehman Brothers analyst Jason Goldberg wrote to clients that Wachovia was among large banks "relatively poorly positioned" to maintain its dividend, based on dividend yields and payouts, as well as capital levels. Wachovia in April raised $8.05 billion of capital and cut its dividend 41 percent after a surge in losses tied to its portfolio of option adjustable-rate mortgages. The bank took on many of these when it paid $24.2 billion in 2006 for the Oakland, California, lender Golden West Financial Corp.

 

Dollar, Oil Speculators Feed G8 Inflation Fears

 

The weak dollar and oil speculators took centre stage as Group of Eight finance ministers gathered in Japan on Friday to grapple with surging inflation and a slowing global economy. The G8 consists of the United States, Japan, Britain, France, Italy, Germany, Canada and Russia As soaring energy costs stirred protests from Malaysia to Spain, the world's most powerful governments talked up a link between a dollar slide and a doubling of oil prices in 12 months.

 

The G8 countries, mostly importers of crude, wield little influence over oil markets that are driven by demand from India and China and concerns about supplies. But they can try to arrest a slide in the U.S. currency that has prompted investors to buy oil futures and other commodities to hedge dollar risks.

 

"On top of the (oil) barrel there is a magnum of speculative champagne," Italian Economy Minister Giulio Tremonti said, floating a plan to make speculation in oil futures more costly. "There are more contracts than barrels," he told reporters. The G8 will ask the International Monetary Fund to study the rise in commodity prices, Tremonti said.

 

Italy will propose increasing the size of the deposit required to trade oil futures to make speculation more difficult, Tremonti said, warning that failure to act would have political consequences.

 

"The impoverishment of the middle classes in Europe can have only one outcome: fascism," he said.

 

A Japanese official called for a defense of the dollar to contain commodity prices. France welcomed the dollar's rebound of the past week, after Washington signaled it was worried enough about the dollar's long decline to raise the prospect of intervening in markets.

 

Japanese Finance Minister Fukushiro Nukaga said he had discussed currencies with U.S. Treasury Secretary Henry Paulson, who refused last week to take intervention off the table. Nukaga declined to say if they had talked about the dollar.

 

With central bankers absent, currencies had not been top of the agenda for the two-day meeting of G8 financial leaders in the Japanese city of Osaka. Officials had said the talks would focus on commodities and inflation.

 

"Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide...may increase global inlationary pressures," the G8 draft says, according to the source.

 

But French Economy Minister Christine Lagarde said commodity prices and inflation were inextricably tied to the dollar.

 

"The strengthening of the dollar I find satisfying," Lagarde said in Osaka, Dow Jones Newswires and other media reported.

 

The dollar edged higher after her comments, as it closed in on its biggest one week rally against the euro in three years. Oil prices have rallied in tandem with a slide that has seen the dollar nearly halve in value against the euro in six years.

 

"Defense of the dollar has become an urgent issue," Kyodo news agency quoted Japan's Financial Services Minister Yoshimi Watanabe as saying on Friday.

 

The Dallas Federal Reserve said in a paper last month the U.S. currency's slide had contributed about one-third of a $60 increase in oil prices between 2003 and 2007.

 

Anger over oil prices near a record $140 per barrel has spilled on to streets around the world. Trucker strikes turned violent in Spain, Malaysians marched against the government and authorities from Thailand to the Netherlands face protests over rising pump prices.

 

Those prices are also percolating through the global economy, crimping growth, stoking inflation and dampening consumption. Data released on Friday showed U.S. inflation and euro wage growth accelerating.

 

The Bank of France cut its second-quarter economic growth forecast by a third to 0.2 percent. The Bank of Japan downgraded its view on exports and corporate profits. Markets have long interpreted U.S. dollar policy as one of "benign neglect," speaking of the virtues of a strong currency while profiting through export growth from its weakness.