MarketView for June 16

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Monday, June 16, 2008

 

 

 

 

Summary

  

Technology stocks carried the day on Monday for the third straight session, due in no small part to the bubbling over of optimism over the sales of Research in Motion’s BlackBerry and Apple's new iPhone. At the same time, blue-chip stocks slipped, weighed by down broker downgrades of Verizon and AT&T, both components of the Dow Jones industrial average. UBS cut its rating on the stocks to "neutral" from "buy," citing pressure from mobile competitors and the weak economy. Verizon ended the day down $1.09, or 2.92 percent, close at $36.24, while AT&T fell $0.51, or 1.39 percent, to close at $36.17.

 

However, the decline in the broad market was limited by a rebound of more than 5 percent in the shares of Lehman Brothers. Lehman’s CEO, Richard Fuld, took full responsibility for the company's first-ever quarterly loss of $2.8 billion. That helped to relieve the Street’s fears over the bank's stability and the shares ended the day up $1.39, or 5.39 percent, to close at $27.20.

 

The NASDAQ ended almost 1 percent higher, helped by the shares of Research in Motion, up $8.02, or 6.03 percent, to $140.98 after investors said that Nokia's new phone models would not pose a threat to RIM's dominance of the business market. It was among the top-weighted gainers in the Nasdaq 100.

 

Apple saw its shares move up $4.47, or 2.59 percent, to close at $176.84 after a bullish forecast from RBC Capital markets, which forecast sales of the company's iPhone would reach 14 million this year. Apple ranked number one among the companies making up the Nasdaq 100.

 

Technology stocks showed strength in response to a weaker dollar. Investors deem weakness in the dollar as positive for tech as it makes tech exports more competitive overseas. The dollar fell versus the euro Monday, snapping a three-session winning streak, as record euro-zone inflation fanned expectations of an interest-rate hike by the European Central Bank.

 

Fears that floods in the Midwest could drive up the prices of corn syrup hit Coca-Cola hard. Corn prices have risen for eight straight days as floods cut back anticipated corn harvests in the Midwest. Corn futures for July 2009 delivery rose above $8 per bushel for the first time.

The soft drink company’s shares ended the day down $1.04, or 2.24 percent, to close at $54.18, its lowest point since last September.

 

PepsiCo ended the day down $1.50, or 2.22 percent, to close at $66.04. Coca-Cola was the top-weighted drag within the Dow. PepsiCo was among the largest drags on the S&P 500.

 

A slight decline in the price of oil after its earlier run to a record high also helped the broad market. Crude oil for July delivery settled down 25 cents per barrel at $134.61, off a record high of $139.89 set early in the day’s trading session.

 

Crude Oil Prices Are Volatile on Monday

 

Crude oil futures were all over the waterfront on Monday, rising to a record and then dropping as speculators tried to ascertain whether Saudi Arabia's promise to boost production had any real substance to it. Meanwhile, the price of gasoline at the retail level rose to a record $4.08 per gallon.

 

Light, sweet crude for July delivery settled down 25 cents per barrel at $134.61 after hitting a trading record of $139.89 early in the trading day and then dropping to as low as $132.84 per barrel. In London, August Brent crude futures fell 40 cents to settle at $134.71 on the ICE Futures exchange.

 

With little in the way of news to explain oil's fluctuating prices, the Street was left with only Saudi Arabia's weekend decision to boost production and to Tuesday's expiration of crude options on oil futures. Trading is often volatile in the days immediately preceding options expiration.

 

Saudi Arabia, the world's largest oil producer, told U.N. chief Ban Ki-moon over the weekend that it would boost oil output by 200,000 barrels a day, or by 2 percent, from June to July. In May, the kingdom raised production by 300,000 barrels a day.

 

There is some credence being given to the idea that the Saudis may actually start becoming serious with regard to increasing crude shipments. Yet, while the thought is in the right place, the additional Saudi output is actually too little to make much of a difference.

 

According to the International Energy Agency, OPEC spare capacity fell below 2 million barrels a day in May for the first time since 2006. The majority of that, about 1.45 million barrels per day, is in Saudi Arabia.

 

Early in the trading day, prices rose as the dollar fell against the euro. Commodities, such as oil, are often purchased as a hedge against inflation when the dollar falls. Also, a weaker dollar makes oil less expensive to those dealing in other currencies. Therefore, it is a reasonable conclusion to draw that the dollar's protracted decline is a major factor behind oil's doubling in price over the past year.

 

There was also the issue of the effects of an overnight fire at a StatoilHydro ASA drilling rig in the North Sea, which could affect as much as 150,000 barrels of daily oil output. At the pump, meanwhile, the national average price of a gallon of gas rose 0.3 cent overnight to its latest milestone, according to AAA and the Oil Price Information Service. Gas prices are following crude prices higher, and likely have several more cents to rise before catching up with oil's latest advance. If oil prices pass $140 and continue to head upward, the pain consumers are feeling at the pump will intensify.

 

Diesel fuel prices held steady Monday at a record $4.797 a gallon. High prices for diesel, used to transport most of the world's food, are pushing food prices higher, putting even more pressure on consumers.

 

In other Nymex trading, July gasoline futures fell 2.47 cents to settle at $3.4379 a gallon, while July heating oil futures fell 0.94 cent to settle at $3.8274 a gallon. July natural gas futures rose 30.8 cents to settle at $12.933 per 1,000 cubic feet.

 

Anadarko Petroleum Corp. said Monday that natural gas production from a project in the deep waters of the Gulf of Mexico has been restored, hitting a gross rate of about 900 million cubic feet per day. Output from the Independence Hub was halted April 8 after a pipeline leak was found.

 

Report on Manufacturing in New York State is Not Good

 

There was more bad news on Monday in the manufacturing sector with a gauge of manufacturing in New York state contracting in June for the fourth time in five months.

 

The New York Fed's "Empire State" report on factories showed inflation pressures remained high in June. At the same time, it highlighted the weak state of the state's factory sector, boding ill for other regional reports to follow. The Empire State’s general business conditions index fell to minus 8.68 from minus 3.23 in May. The report reflects a national factory sector that had already contracted in May for the fourth consecutive month while inflation pressures surged to their highest in four years, as reported earlier this month by the Institute for Supply Management.

 

The factory sector has been hit by the wider economic slowdown, led by the bursting of the housing bubble last year and the Empire State survey is one of the earliest monthly guideposts to factory conditions overall. It will be followed on Thursday by the Philadelphia Federal Reserve Bank's report on factory activity in the Mid-Atlantic region.

 

The New York Fed's prices paid measure of June inflation eased to 66.28, its first drop since December, from 69.57 in May. The May prices paid reading was the highest since the start of the data series in July 2001. However, the gauge of prices received jumped to 26.74, the highest reading for that index since January 2006, up from 15.22 in May. The rise in prices received could be worrying for inflation vigilantes since it suggests manufacturers are having success in passing their higher costs down the chain of buyers.

 

Inflation Is Of Top Concern

 

Policy-makers around the globe declared soaring inflation a top threat on Monday, with pressure rising for central banks to raise interest rates amid protests against higher costs of living. The European Commission, the European Union's executive arm, said inflation was its main economic concern after data showed prices in the 15 countries using the euro rose a record 3.7 percent year-on-year in May from 3.3 percent in April.

 

The comments boosted the euro against the dollar because they fueled speculation the European Central Bank may raise interest rates at its July 3 meeting by more than the 25 basis point hike already expected. Inflation in the euro zone, as elsewhere, is fueled by food and energy costs, which are surging on steadily rising demand from fast-growing economies like China and India and some supply disruptions. EU finance ministers also are of the belief that the dollar’s weaknesses, in combination with speculative selling, are factors to be contended with.

 

Finance ministers from the United States, Canada, Japan, France, Germany, Italy, Britain and Russia, meeting in Japan over the weekend, warned that soaring commodities prices could damage economic growth. However, they did not come up with any plans to calm financial markets or quell public protests over the rising cost of living.

 

Protests by truckers, fishermen and other groups particularly vulnerable to rising energy costs have swept across countries from Spain to India and South Korea in recent weeks. On Monday, French truckers began blocking roads in the latest protest to pressure the government to help them cope with oil prices that have more than doubled in a year. Colombian truck drivers staged strikes on Monday to protest high fuel costs and road tolls and demanded higher transport payments after failing to reach a deal with the government.

 

Floods across America's Midwest, the country's prime cropland, exacerbated supply concerns and boosted the price of corn above $8 a bushel for the first time. before closing down at $7.87. Competing forces of higher human and animal consumption of grains, plus bio-fuel production, are keeping prices elevated.

 

Rising prices are helping fuel the economic renaissance in emerging markets. But they are also strengthening inflation pressures, and central banks in these markets have already started to raise interest rates to keep them in check.

 

Politicians worry inflation will undermine economic growth. Brazilian President Luiz Inacio Lula da Silva on Monday told investors in Sao Paulo that the fight remains a top priority.

 

In the United States, the president of the Richmond Federal Reserve Bank, Jeffrey Lacker, told business and community leaders the U.S. central bank can keep interest rates on hold for the moment but should not leave them too low for too long.

 

Britain's leading employers' group said on Monday that rising oil and food prices and feeble consumer demand would slow the country's economy to its weakest growth rate in almost two decades next year. Recent comments from U.S. Federal Reserve and ECB officials have raised market expectations the world's central banks would start to raise interest rates to try to calm price pressures.

 

Home Builder Sentiment Falls

 

Home builder sentiment sank in June to match the record low set in December, with the outlook soured by the highest mortgage rates in eight months, the National Association of Home Builders said on Monday. A massive supply of unsold homes had already darkened prospects for the building business, where a two-year housing slump has slashed profits, before inflation concerns starting pushing mortgage interest rates higher.

 

The NAHB said its preliminary NAHB/Wells Fargo Housing Market Index fell to 18 from 19, the same level reached in December and the lowest since the index began in January 1985. Readings below 50 indicate more builders view market conditions as poor than favorable.

 

"I'm now worried about a reversal on the fundamental mortgage rate front that I really wasn't worried about before," David Seiders, NAHB chief economist, said on a conference call. "It's another threat to the housing market moving ahead."

 

Average 30-year mortgage rates jumped to 6.32 percent in the week ended last Thursday from 6.09 percent the prior week, according to Freddie Mac, the second largest U.S. home funding source. The rate was the highest since October. The rise of nearly a quarter-percentage point would boost the cost of a $250,000 home loan by about $450 a year.

 

Seiders also expects home sales volume to erode further in coming months because "consumer sentiment took another nose-dive" in early June. The NAHB said its index of current single-family home sales was unchanged at an all-time low of 17 in June. Its gauge of home sales over the next six months was unchanged at 28, hovering four points above its record low set in November. The trade group's index of prospective buyers declined 1 point to 17, also holding four points above its record low reached in December.

 

"None of it is encouraging," David Seiders, NAHB chief economist, said on a conference call.

 

Lenders burnt by record foreclosures are becoming stricter in approving mortgages, making it difficult for consumers who do want to move to sell their existing homes. Meanwhile, the builders association is eager for Congress to approve a bill to revive one of the worst U.S. housing markets since the 1930s.

 

In a twist, NAHB is reversing its call for a specific builders tax break as necessary part of any housing bill. The Senate version of the bill would give a $6 billion tax break to home builders by temporarily extending a rule that lets businesses count current losses against taxes from prior profitable years.

 

Earnings Up At Adobe

 

Adobe Systems reported on Monday that its quarterly earnings number rose 41 percent, due to the growth in sales of programs for photo editing, Web creation and graphics design. Adobe also forecast earnings per share before items, and revenue for the current quarter, that was above, or in line with, analyst expectations.

 

Net income for the second quarter ended May 30 rose to $214.9 million, or 40 cents per share, from $152.5 million, or 26 cents a share, a year earlier. Revenue rose 19 percent to $887 million.

 

The company also reported per-share earnings, excluding items, of 50 cents. For its current, third quarter, Adobe said it expects a per-share profit before items of 45 cents to 47 cents and revenue in a range of $855 million to $885 million.

 

Adobe ended the day up 14 cents, or 0.33 percent, to close at $42.85. In extended or after hours trading, the shares slipped to $42.38.