MarketView for June 24

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Tuesday, June 24, 2008

 

 

 

 

Summary

  

Stock prices were lower again on Tuesday as concerns regarding the economy again took hold after a report showed consumer confidence hit a 16-year low and Monday’s profit warning from United Parcel Service stoked fears regarding corporate profits going forward..

 

In addition, trading volume was thin with Wall Street unwilling to undertake any serious trading ahead the announcement from the Fed as to their position going forward, to be posted at the conclusion of their two day meeting tomorrow, despite the almost indisputable outcome of interest rates remaining on hold at least through the summer. However,  worries over Inflation were also an impediment to the day’s trading activity as the price of oil rose and concerns over inflation continued to rise..

 

Shares of big manufacturers, seen as economic bellwethers, fell, with Caterpillar ending the day down $3.36, or 4.20 percent, to close at $76.64, while UPS closed out the day down $4.00, or 6.04 percent, to close at $62.26, a five-year low, after the package delivery company cut its second-quarter earnings outlook late on Monday, citing slow economic growth and high fuel costs. Boeing ended the day down $0.80, or 1.06 percent, to close at $74.79.

 

The overall corporate profit outlook is deteriorating rapidly with S&P 500 earnings for the second quarter now seen falling at a double-digit pace from a year earlier. Besides grappling with a slowing economy, companies also face pressure from soaring fuel costs, which prompted Dow Chemical, the largest domestic chemicals manufacturer, to announce price increases of as much as 25 percent on its products.

 

A gain in financial shares helped keep losses in check. The S&P financial index, down nearly 12 percent this month, ended the day up 1.5 percent. The parade was led by Wells Fargo and JPMorgan Chase. The largest percentage gains were among regional banks, such as SunTrust as investors looked for bargains in the beaten-down sector.

 

Yahoo was active, rising as much as 11 percent before giving up most of those gains to end the day up $0.59, or 2.75 percent, to close at $22.04 on rumors that Yahoo is continuing to talk with Microsoft. However, CNBC, also citing unnamed sources, said there was no deal "whatsoever" on the table.

 

Housing Prices and Consumer Confidence Fall Sharply

 

Consumer sentiment slid to a 16-year low in June while house prices suffered record annual drops in April, according to data released on Tuesday. The conclusion therefore would have to be that the continued retrenchment in spending will keep economic growth at a minimum.

 

The Conference Board's monthly survey of consumers showed the overall index of consumers' mood fell to 50.4 in June, the lowest since 47.3 in February 1992. The index has now dropped by more than half since 111.90 last July, before the housing market troubles triggered the most severe credit crisis in at least a decade. In addition, the survey showed an index measuring consumer expectations for the future sank to a record low as inflation forecasts matched an all-time high this month.

 

The inflation threat has been highlighted by massive price increases announced by some of the world's largest basic materials conglomerates. First, mining titan Rio Tinto secured an agreement with China's largest steel maker to nearly double the price Rio gets for iron ore, and rival producer BHP Billiton is expected to follow through with similar price hikes. At the same time, Dow Chemical said it would raise prices up to 25 percent, just weeks after the country’s largest chemical manufacturer implemented a 20 percent across-the-board price increase.

 

Meanwhile, home prices in April extended their record annual slump in April although the pace of decline subsided a bit in the month, according to Standard & Poor's/Case-Shiller data. S&P's 20-city index for April posted a smaller-than-expected 1.4 percent drop from March, but it also slumped by a record 15.3 percent annually and by 17.8 percent since hitting its peak in July 2006.

 

By another measure, the Office of Federal Housing Enterprise Oversight, which gauges prices based on relatively low risk loans purchased by Fannie Mae and Freddie Mac, said its home price index fell 0.8 percent in April from March for a 4.6 percent annual downturn. Both housing reports suggest consumers will be less in the mood to ramp up spending any time soon.

 

Retail Demand For Gasoline Falls

 

Retail gasoline demand declined nearly 2 percent year-to-date from the same time last year as gasoline prices set another record over $4 per gallon, MasterCard Advisors said Tuesday.

 

"High gasoline prices are depressing the normal peak driving season that occurs this time of year," said Michael McNamara, vice president of research and analysis at MasterCard Advisors.

 

With average retail prices for gasoline rising 3 cents to a record $4.07 during the week ended June 20, motorists may be altering their driving habits by car-pooling, working at home, and taking mass transit, McNamara said.

 

Year-to-date, gasoline demand was down 1.99 percent, while gasoline demand last week was 2.7 percent below the same week a year ago. Despite year-over-year comparisons that suggest declining gasoline demand, American drivers pumped an average of 9.447 million barrels per day last week, 1.5 percent more than the previous week.

 

"Gasoline consumption increased due to typical seasonal cycles while gasoline prices keep rising," McNamara said.

 

The four-week moving average for gasoline demand, however, dropped 3.6 percent to 9.22 million bpd from a year ago, falling for the 19th consecutive week.

 

MasterCard Advisors estimates retail gasoline demand based on aggregate sales activity in the MasterCard payments system coupled with estimates for all other payment forms. MasterCard Advisors is a unit of MasterCard Inc.

 

BlackRock Says Things Are Going To Get Worse

 

BlackRock president Robert Kapito said on Tuesday the money management firm is bracing for a "much bigger" global economic slowdown, but said financial market declines have created some of the best buying opportunities ever for fixed-income money managers.

 

He also said that all options are open in a possible sale by Merrill Lynch of its large stake in BlackRock. Merrill had mentioned such a possibility last month. Kapito, citing slowing growth in emerging markets and tightening pressures on the consumer, said BlackRock expects a much bigger slowdown in 2009.

 

"We think there's going to be a global slowdown," he said at a lunch sponsored by the Securities Industry and Financial Markets Association in New York. BlackRock is the largest publicly traded asset manager with about $1.4 trillion in assets under management.

 

Using a baseball reference, Kapito said the credit crisis is in the fourth inning, indicating he believes the crisis is nearly halfway over. "Inflation is up, housing is down," he said. "The consumer is hurt. I can't think of one positive thing for the consumer here." But amid the poor economic outlook, Kapito said there are bright spots for investors.

 

Declines in residential and commercial mortgage-backed securities since last year have created some of the best buying opportunities for fixed-income money managers in history, he said. "If you take a look in the marketplace, and step back from what's going on, this is the best time that we've ever been in to add value to a portfolio," he said.

 

Challenges remain, however, since homeowners are still defaulting on loans and house prices are falling. But money managers who have the ability to do the proper credit research can "ferret out" good opportunities, he said.

 

Kapito said securities backed by loans on properties such as office buildings, retail stores and hotels were especially attractive, in addition to residential mortgage bonds that do not carry the guarantees of Fannie Mae and Freddie Mac, the two government-sponsored enterprises.

 

"I am a big believer in backing up the truck and buying CMBS," he said, referring to commercial mortgage-backed securities.

 

BlackRock has emerged as one of the winners from the subprime mortgage and credit crisis that has gripped global markets since last year. The firm is managing $30 billion of illiquid assets acquired by the Federal Reserve from Bear Stearns as part of bailout efforts for the collapsed bank, which was acquired by JPMorgan Chase.

 

Is Circuit City In Play

 

Circuit City has received buyout interest from several strategic and financial bidders, including movie-rental company Blockbuster and a sales agreement could be announced over the next month.

 

Circuit City opened its financial books to Blockbuster last month and said it was exploring strategic options. Blockbuster disclosed in April it had offered as much as $1.3 billion, or $6 to $8 a share, to acquire Circuit City. But since Circuit City reported a quarterly loss and cut its dividend last week, analysts have raised the possibility that Blockbuster might lower its offer or walk away from a potential deal.

 

However, Blockbuster may be just one of the players interested in bidding for the electronics retailer. A Blockbuster spokesman said his company was still conducting due diligence and would proceed with a transaction "if it makes sense financially and strategically and also creates significant value for our shareholders." Circuit City ended the day down $0.02, or 0.59 percent, to close at $3.35.