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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Tuesday, June 17, 2008
Summary Stock prices were lower again on Tuesday after
Goldman Sachs warned that the banking industry would have to raise as
much as $65 billion in capital to shore up balance sheets weakened by
the mortgage crisis. Raising capital could dilute the equity stakes of
current shareholders, and bank shares sold off across the board. Adding to the bearish tone of the market were
concerns about the impact of Midwestern floods, with railroad operators
including Union Pacific being among the worst-hit shares. Shares of Bank
of America, whose target price was among those cut by Goldman as it
warned on continued losses from the global credit crisis, fell 3.6
percent, resulting in it being a major drag on the S&P 500. Goldman Sachs warned the global credit crisis will
not peak until 2009 and lowered its price targets for 14 banking
companies. It also cut 2008 earnings-per-share forecasts for 11 banks.
The warning on the outlook for banks offset the market's upbeat reaction
to Goldman Sachs' release of its own quarterly earnings, which exceeded
Street expectations even though they were down 11 percent from a year
ago. Adding to the downbeat tone were worries about the
impact of Midwestern floods on companies ranging from food manufacturers
to retailers and railroad operators. The flooding in the region, the
worst in 15 years, has damaged unknown miles of railroad track and
bridges. Union Pacific, the largest domestic railroad, fell
$3.59 or 4.72 percent, to close at $72.47, while Burlington Northern
Santa Fe was down $3.01, or 2.86 percent, closing at $102.21. After the
close of regular trading, Union Pacific said that the Shares of American International Group, the world's
largest insurer, fell $1.73, or 5.09 percent, to close at $32.28 after
A.M. Best cut its rating on AIG, citing concern over its recent change
in top management. On Nasdaq, shares of Adobe Systems fell $1.45, or
3.38 percent, to close at $41.40, a day after the design software maker
offered revenue guidance that was a disappointment to the Street.. On the economic front, a government report showed a
higher-than-expected reading in overall producer prices in May, but the
data also showed that the core Producer Price Index, which excludes
volatile food and energy prices, moderated somewhat. Shares of home builders fell after the government
reported that housing starts in May fell to their lowest pace since
March 1991, and permits for future building also slipped. The thought
now is that home building could decline by another 15 percent in the
coming months.
Wholesale Prices Rise Sharply
Wholesale prices rose sharply in May resulting in the
fastest rate of increase in six months due mainly to higher food and
energy costs. According to a report by the Labor Department the index,
which measures the costs of goods before they reach store shelves, was
up 1.4 percent in May. That was up from a modest 0.2 percent rise in
April and marked the largest increase since November. However, if you remove food and energy, the "core"
rate of inflation rose 0.2 percent in May, an improvement from the 0.4
percent of the prior month. That suggested that other prices were fairly
well behaved. Nonetheless, the overall inflation rate of 1.4 percent was
higher than the 1 percent rise many of the Street’s economists were
forecasting although the increase in core prices matched their
expectations. Meanwhile, a report from the Federal Reserve showed
that industrial production dipped in May, underscoring the strain on
factories from the deep housing slump. Output at the nation's factories,
mines and utilities fell 0.2 percent in May, following a 0.7 percent
decline in April. Energy prices rose 4.9 percent in May, also the
largest rise since November. Diesel fuel prices jumped up 11.2 percent,
gasoline prices were up by 9.3 percent and home heating oil increased by
8 percent. Food prices also rose sharply. They increased by 0.8 percent
in May, after being flat in April. In May prices for pork went up 8 percent, the most
since September 1999. Prices for fruits and melons rose 5.9 percent, the
most since December. Prices for beef and veal, natural cheese and
certain confectionary goods also posted sizable increases. There are fears that eventually these energy and food
costs will force companies to boost prices for lots of other goods and
services, spreading inflation through the economy. Given those concerns,
many economists believe the Federal Reserve will hold interest rates
steady at 2 percent, a four-year low, when its meets next week. Fed Chairman Ben Bernanke and his colleagues have
signaled that the Fed's rate-cutting campaign, started last September to
shore up economic growth, was over because of growing concerns regarding
inflation. Look for the Fed to raise interest rates later this
year as a necessary measure to control the inflation flare-up. Soaring
energy and food prices are hurting consumers and businesses alike. Last
week, the government reported that consumer prices leaped by 0.6 percent
in May, the biggest increase in six months. Those higher prices also are
cutting into workers' paychecks - further straining budgets. Businesses, meanwhile, also are tightening the belt.
Employers have cut jobs every month so far this year. That's pushed the
nation's unemployment rate up to 5.5 percent in May, from 5 percent in
April - the biggest one-month rise in two decades. Wholesale prices are rising faster than consumer
prices because businesses - for competitive or other reasons - have been
limited in their ability to pass along all of their higher costs from
energy and other raw materials to customers. Elsewhere in the wholesale inflation report, prices
for light truck dipped 0.9 percent and prices for cars dropped 1
percent. Cigarette prices rose 2.5 percent and airplane prices increased
1.1 percent, the most since August 2004.
Goldman Says More Bank Write-Offs Coming Banks may need to raise $65 billion of additional
capital to cope with mounting losses from a global credit crisis that
will not peak until 2009, Goldman Sachs wrote to clients on Tuesday. The
new capital would be on top of $120 billion already raised by the
industry. "Banks will not turn until a peak in credit costs is
in sight," Goldman wrote. "Moreover, weaker banks are unlikely to
benefit from consolidation as bank deals always slow when credit is
deteriorating and larger banks are hamstrung by their own problem assets
as well as accounting requirements." Goldman said it lowered its price targets for 14
banking companies and cut its 2008 earnings-per-share forecasts for 11. Among the banks for which Goldman cut both are BB&T,
PNC Financial Services Group, Banks have already raised capital to help combat a
surge in problem loans. Among those to raise the most were Citigroup,
Wachovia, Washington Mutual and National City, which this year each
raised at least $7 billion. Problem loans were once concentrated in subprime
mortgages. They have, however, been spreading to other types of lending,
including prime mortgages, home equity loans, commercial real estate and
construction loans, auto loans and credit cards. Goldman estimates that domestic banks and thrifts
have set aside $86 billion for loan losses in the three quarters since
the credit crisis began. Goldman also wrote that the weak housing market
drove the deterioration and that home prices will likely keep falling
all year. It expects credit losses to peak in the first quarter of 2009,
when the rate of charge-offs may be 46 percent higher than a year
earlier. Worries about credit losses have driven down banks'
share prices. This has caused paper losses for many investors who
infused capital into the industry, including many private equity firms
and sovereign wealth funds. Much of this capital has come from offerings
of common stock or convertible preferred shares. Goldman said further
attempts to raise capital may prove even more costly for shareholders
because by Goldman’s estimates, only four out of the 42 deals it tracks
are currently in-the-money. This will make the next round of deals
harder and more expensive.
Pickens Says World Oil Production Has Peaked World crude oil production has topped out at 85
million barrels per day even as demand keeps climbing, helping to drive
a stunning surge in prices, billionaire oil investor T. Boone Pickens
said on Tuesday. "I do believe you have peaked out at 85 million
barrels a day globally," Pickens, who heads BP Capital hedge fund with
more than $4 billion under management, said during testimony to the
Senate Energy and Natural Resources Committee. The United States alone has been using "21 million
barrels of the 85 million and producing about 7 of the 21, so if I could
take just a minute on this point, the demand is about 86.4 million
barrels a day, and when the demand is greater than the supply, the price
has to go up until it kills demand," Pickens told lawmakers. Pickens, who announced a $2 billion investment in
wind energy earlier this year, told lawmakers during a hearing on
renewable electricity that he expected "the price of oil will go up
further." Without alternatives, the cost of foreign oil will drain the "In 10 years, we will have exported close to $10
trillion out of the country if we continue on the same basis we're going
now. It is the greatest transfer of wealth in the history of mankind,"
he said. Pickens downplayed the role that speculative trading
and institutional investors -- forces some see behind the high oil
prices -- have had in the price trend. Asked about the role of institutional investors,
Pickens told reporters he does not "agree that that has anything to do
with oil prices ... It's a global market. It doesn't have anything to do
with traders on Wall Street or any place else." He said increased
oversight of oil markets by the U.S. Commodity Futures Trading
Commission (CFTC) represents "a waste of time."
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MarketView for June 17
MarketView for Tuesday June 17
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