MarketView for June 18

MarketView for Wednesday June 18
 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Wednesday, June 18, 2008

 

 

Dow Jones Industrial Average

12,029.06

q

-131.24

-1.08%

Dow Jones Transportation Average

5,120.36

p

+16.75

+0.33%

Dow Jones Utilities Average

521.88

q

-2.30

-0.44%

NASDAQ Composite

2,429.71

q

-28.02

-1.14%

S&P 500

1,337.81

q

-13.12

-0.97%

 

 

Summary

  

The Dow Jones industrial average hit a three month low on Wednesday after slipping below 12,000 for the first time since mid-March, as worries about a weak economy compounded credit sector concerns and drove shares of banks, autos and transportation companies sharply lower. Only four of the Dow's 30 components finished higher, with Boeing leading that list. At one point in the afternoon, the Dow fell to an intraday low at 11,993, its lowest level since the Federal Reserve's mid-March rescue of Bear Stearns rattled investors who were already worried about the health of the banking sector.

 

Triggered by fears of a slowing economy and the forecast of dismal profits as rising fuel costs sap demand, FedEx saw its share price, closely watched by Wall Street as a proxy for business activity, fall $1.73, or 2.05 percent, to close at $82.60.

 

Adding to the bleak outlook for bank stocks, Fifth Third Bancorp sank $3.47, or 27.26 percent to close at $9.26 and ranked among the NASDAQ’s biggest percentage losers. The Midwestern bank said it would cut its dividend and raise $2 billion in capital, stirring fears that the credit crisis was tightening its grip on commercial banks.

 

A 2 percent rise in oil prices above $136 a barrel compounded concerns about rising raw material costs. Crude oil for July delivery settled up $2.67 at $136.68 per barrel.

 

Shares of General Motors fell $0.93, or 5.88 percent, to close at $14.89, ranking as the Dow's largest percentage loser. GM touched $14.75, its lowest level since the recession of 1982. Ford ended the day down $0.38, or 5.76 percent, to close at $6.22.

 

Bank of America ended the day down $0.87, or 2.98 percent, to close at $28.37, while SunTrust, a regional bank sank $3.66, or  9.01 percent, to close at $36.95.

 

A rare bright spot was provided by Boeing, whose shares rose $, or 0.4 percent, closing at $74.65 after the U.S. Government Accountability Office recommended the Air Force reopen a competition to award a refueling tanker program, potentially worth $35 billion. Last February, the Air Force awarded the contract to rival Northrop Grumman and its European partner EADS.

 

Dog Days In The Auto World

 

The shares of General Motors and Ford, auto parts suppliers and auto retailers were under pressure on Wednesday as Wall Street reacted negatively to signs of a further slowdown in auto sales for the month of June and uncertainty about when the battered industry will hit bottom.

 

The sector-wide decline was accompanied by cautious notes from analysts on GM's liquidity and by a warning from CarMax of the fallout from an unprecedented collapse in demand for larger trucks and SUVs. Tom Folliard, CarMax president and chief executive, told analysts during a conference call that demand had fallen steadily over the past several months for pickup trucks and SUVs, a once-lucrative segment dominated by the Detroit automakers.

 

"This has been going on for really since the beginning of the year and has really steepened in the last couple of months. And as of right now, I couldn't tell you when it's going to turn," Folliard said.

 

Chrysler, while now a private company, was not spared the pain. Chrysler Chief Executive Bob Nardelli told employees of the privately held automaker that overall sales had fallen below forecasts in early June. Nardelli's memo to Chrysler employees, first reported by the Detroit Free Press, said outside data showed a deep slump in early June sales for the industry.

 

"This is the lowest sales level in 16 years and indicates a significant and continued softening of the U.S. automotive market," Nardelli said in the memo.

 

GM's shares hit their lowest level since the recession of 1982, while Ford’s shares were down nearly 6 percent, erasing gains for the week. CarMax shares fell nearly 11 percent as the largest domestic. used-car dealer suspended its financial forecast and said traffic at its stores had weakened since late May.

 

Analysts at JP Morgan and Deutsche Bank warned that GM could be forced to borrow heavily as industry-wide U.S. vehicle sales head toward their lowest level in more than a decade. "GM is burning cash fast, but it still has many unencumbered assets that can be borrowed against," JP Morgan analyst Himanshu Patel wrote in a note for clients.

 

"The bank debt market is expensive but open, and we believe GM, most likely before year-end and perhaps as early as the third quarter, may announce a secured bank deal," he said. Patel said he expected GM could borrow up to $10 billion, secured by assets such as its overseas operations, trademarks for brands and inventories.

 

Deutsche Bank analyst Rod Lache expects GM would be forced to come up with a more "aggressive" restructuring that would allow the automaker to borrow funds to ride out a projected cash burn of $19 billion through 2009. Lache also cut his industry-wide U.S. auto sales outlook for 2008 and the following two years saying leading indicators pointed toward continued "recessionary levels" of demand.

 

Lache said he now expects 2009 industry-wide sales of about 15 million vehicles, and sales of 16 million vehicles in 2010. More immediately, he said, there was evidence that June sales were falling to "surprisingly low levels."

 

A survey of dealers, he said, suggested the seasonally adjusted, annualized rate of sales was running near 13 million vehicles in the first half of the month, down from 15.2 million in the first quarter and near 14.4 million in April and May.

 

Adding to the gloom, Toyota said on Wednesday it was cutting production at truck plants in Texas and Indiana in reaction to slumping demand.

 

Auto suppliers' shares were also hit. American Axle & Manufacturing, which supplies axles and related components for trucks and SUVs, saw its share price fall almost 9 percent. Magna International said it would lay off about 400 workers from a St. Thomas, Ontario, parts plant, where it makes truck frames, due to what it called a "considerable downturn" in demand for full-sized trucks.

 

GM, a major customer for Magna and American Axle, recently said it would shut four North American truck plants, reducing its pickup truck and SUV capacity by more than 700,000 units.

 

Red Ink At FedEx

 

FedEx posted a quarterly loss on Wednesday due to high fuel prices, a weak economy and a previously announced write-down. To make matters worse, it also issued a weak forecast for fiscal 2009. The news weighed heavily on the stock market because FedEx is considered a strong gauge of business activity. The company blamed its weak fiscal 2009 forecast on the impact of high fuel prices on demand for its services.

 

FedEx reported a fiscal 2008 fourth-quarter loss of $241 million, or 78 cents a share, compared with a profit of $610 million, or $1.96 a share, a year earlier. Excluding a one-time charge of $891 million, FedEx reported earnings of $1.45 a share. The charge was related to a name change for FedEx Kinko's. Earlier this month FedEx said it was changing the name of FedEx Kinko's, which has struggled in recent quarters as its core copy print business has underperformed, to FedEx Office. FedEx bought Kinko's in 2004.

 

"Record-high fuel prices and the weak U.S. economy dampened volume growth and substantially affected our bottom line," Chief Executive Fred Smith said. "We will continue to reduce expenses to match volume and revenue expectations."

 

Revenue in the fourth quarter rose 8 percent to $9.87 billion. FedEx said it expects fiscal first-quarter earnings of 80 cents to $1.00 per share. The company said it expects full-year fiscal 2009 earnings of $4.75 to $5.25 per share.

 

Boeing Gets Another Chance

 

Government auditors urged the Air Force Wednesday to rerun its competition for a $35 billion refueling-aircraft order, upholding a protest by losing bidder Boeing. The Government Accountability Office found the Air Force made "a number of significant errors that could have affected the outcome of what was a close competition." The contract was awarded on February 29 to a team made up of Northrop Grumman Corp and Europe's EADS, corporate parent of Boeing's passenger-jet maker rival Airbus.

 

GAO, a nonpartisan arm of Congress that reviews federal contract bidding disputes, faulted the Air Force for seven specific reasons, including "misleading and unequal discussions with Boeing." The GAO's ruling is a recommendation to the Air Force, which has 60 days to respond. It was an uncommonly harsh rebuke to the service, which lists the tanker as its top acquisition priority.

 

Sue Payton, the Air Force's top weapons buyer, said the service was reviewing the decision and would spell out its response as soon as possible.

 

"The Air Force will do everything we can to rapidly move forward so America receives this urgently needed capability," she said in a statement. "The Air Force will select the best value tanker for our nation's defense, while being good stewards of the taxpayer dollar."

 

The GAO criticism may give Boeing another chance at what is likely to be one of the biggest contracts in Pentagon history, potentially swelling to $100 billion with follow-on orders. The $35 billion deal was to build 179 midair refuelers over the next 15 years to replace its current fleet of Boeing KC-135 tankers, which average 47 years old.

 

The issue could become a hot potato for Sen. John McCain, the presumptive Republican presidential nominee who helped shape the competition. As a member of the Senate Armed Services Committee, McCain led an effort to kill what turned out to have been a corrupt Air Force plan to lease and then buy 100 modified Boeing 767s as tankers without the benefit of competition.

 

Democratic presidential candidate Barack Obama of Illinois, where Boeing is based, hailed the GAO recommendation, saying the contract had "enormous implications for our national security and economy" and should be re-opened.

 

The ruling also may cause shockwaves in Europe, where political leaders had cheered the Northrop-EADS victory as a breakthrough into the world's richest market for arms makers. Boeing and Airbus are already embroiled in World Trade Organization cases, accusing each other of unfairly using government subsidies as they vie for commercial sales worldwide.

 

Senate Armed Services Committee Chairman Carl Levin, a Michigan Democrat, jumped on the Air Force to stage a new competition in light of the GAO's ruling.

 

Mark McGraw, the head of Boeing's tanker program, said, "We look forward to working with the Air Force on next steps in this critical procurement for our war fighters." Randy Belote, a Northrop spokesman, said, "We continue to believe that Northrop Grumman offered the most modern and capable tanker."

 

EADS Chief Executive Louis Gallois told Reuters in Paris that if bids were reopened, EADS would be a "quality competitor."

 

The GAO said its decision should not be read as reflecting any view of the 767 offered by Boeing versus the Northrop offer, a modified Airbus A330. The GAO faulted the Air Force for, among other things, failing to assess the relative merits of the competing offers in line with its stated criteria.

 

The Air Force also failed to take into account that Boeing offered to satisfy more technical "requirements" than Northrop even though the bidding rules explicitly asked the rivals to meet as many as possible, GAO said.

 

Lawmakers from Washington State, where Boeing has manufacturing plants, and Kansas, where it planned to complete assembly of its tanker, urged Gates to overturn the Northrop contract.

 

Political support for both Boeing, the Pentagon's No. 2 supplier after Lockheed Martin, and Northrop, No. 3, is entrenched. Look for the possibility that the DOD buys both Airbus and Boeing tankers.

 

The abortive, post-September 11, Air Force plan to lease Boeing 767s as tankers led to prison terms for two Boeing employees. They were convicted of holding illegal job talks while one of them, Darleen Druyan, was still the Air Force's No. 2 arms buyer, overseeing billions in Boeing contracts.