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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Friday, June 27, 2008
Summary It was another down day for the financial markets as
Wall Street found itself on the cusp of a bear market as a result of
concerns that concerns that record oil prices and the seemingly endless
credit crisis will further damage the economy. Friday's decline in
combination with the drop in share prices on Thursday has resulted in
the worst week on Wall Street since Feb. 10. While the blue-chip Dow average briefly dipped into
bear market territory, it managed to close above that level, thus
narrowly avoiding the official onset of a bear market, or a 20 percent
drop from its all-time high. As the price of oil crossed $142 for the first time,
shares of companies that sell everything from fast food to soap slid on
fears that consumers will need to cut back. Procter & Gamble saw its
share price lose $1.76, or 2.83 percent, to close at $60.49. However, financial stocks were the top drag on the
S&P 500. Merrill Lynch saw its shares fall after Lehman Brothers
forecast Merrill would write down another $5.4 billion in the second
quarter. In addition, Moody's indicated that it may cut Morgan Stanley's
credit ratings. Merrill ended the day down $0.35, or 1.06 percent, to
close at $32.70, while Morgan was down $0.12, or 0.33 percent, to close
at $36.71. For the week, the Dow Jones industrial average was
down 4.2 percent, the NASDAQ was down 3.8 percent, its largest weekly
decline since Feb. 10, while the S&P 500 fell 3 percent for its worst
weekly decline since June 6. Merck saw its share price increase $0.78, or 2.15
percent, to close at $36.98, after a positive study on its experimental
migraine treatment. Merck said a late-stage study showed its treatment
provided similar pain relief to AstraZeneca's Zomig treatment but was
better tolerated. In addition, a gain in oil companies' shares helped
keep the day’s losses in check. The price of domestic sweet crude climbed to a record
high for a second straight day, climbing as high as $142.99 per barrel
during the trading day as a weak dollar and slumping equities made oil
and other commodities an attractive investment alternative. Exxon Mobil
was one of the best gainers on the S&P 500, even though the shares were
up a mere $0.14, or 0.16 percent, to close at $86.55. Companies whose fortunes are closely tied to the cost
of fuel also fell. Boeing's shares fell 1.29, or 1.89 percent, to close
at $66.92. United Technologies saw its share price fall $1.64, or 2.61
percent, to close at $61.15 weighing heavily on the Dow. JPMorgan Chase
fell $1.27, or 3.50 percent, to close at $35.05, while Citigroup was
down $0.42, or 2.38 percent, to close at $17.25. Citigroup's decline
also weighed on the S&P. American International fell $0.34, or 1.21 percent,
to close at $27.75. AIG said it planned to absorb up to $5 billion in
losses on sales of investments from a dozen insurance units hit by the
subprime meltdown. Research In Motion fell $2.48, or 2.01 percent, to
close at $120.98, adding to the previous day's steep losses sparked by
the disappointing profit outlook the company gave late Wednesday.
Research In Motion was the top drag on the NASDAQ. The share prices of home builders hit the skids after
KB Home said it expected to post a quarterly loss. The stock ended the
day down $0.41, or 2.26 percent, to close at $17.72. Early in the session, Commerce Department data showed These concerns were reinforced a short while later by
the Reuters/University of Michigan Surveys of Consumers, which hit
another 28-year low in June of 56.4 from May's 59.8 reading. It also
showed elevated household expectations for inflation.
Oil Continues to Gush Higher and Higher
Oil futures climbed to a new record near $143 a
barrel Friday as the dollar weakened against the euro, confirming
expectations that the falling greenback, a major factor in crude's
stratospheric rise, will extend its decline and add to oil's appeal. Light, sweet crude for August delivery rose as high
as $142.99 a barrel on the New York Mercantile Exchange before pulling
back sharply in a spate of late-day profit-taking to settle up 57 cents
at a record $140.21. On Thursday, the contract shot past $140 and rose
more than $5 to a new settlement record. The latest record came as the dollar fell against the
euro in afternoon trading, having traded roughly unchanged for much of
the day. The market now believes the Federal Reserve is
unlikely to raise interest rates in the near future; since higher rates
tend to strengthen the dollar, traders are anticipating that it will
continue to fall and, consequently, that investors will keep turning to
commodities including oil as a hedge against inflation. With oil over $140 a barrel, traders are now
expecting to see $145 and even $150. Oil has more than doubled in the
past year due to the dollar's decline, but also because of rising global
demand, particularly in fast-growing economies such as The sharp increase in oil prices has driven a similar
rise in fuel prices. Gas prices are $1.09 per gallon higher than a year
ago, and diesel prices were up $1.85 over the past year at a national
average of $4.763 a gallon on Friday. Diesel is used to fuel most
industrial vehicles, trucks, trains and ships, and its increase is a
large part of the reason food and consumer goods prices are rising. In other trading Friday, July gasoline futures fell
1.01 cents to settle at $3.5012 a gallon after earlier rising to a
trading record of $3.585. July heating oil futures rose 2.32 cents to
settle at $3.9066 a gallon. August natural gas futures fell 5 cents to
settle at $13.198 per 1,000 cubic feet.
Fed Moved To Prevent a Financial Disaster from
Spreading
The Federal Reserve was scrambling to prevent a
"contagion" from infecting the nation's financial system when it took
unprecedented actions to back a Bear Stearns rescue package and provide
emergency loans to big Wall Street firms. Minutes released by the Fed on
Friday that provided some insights into its private deliberations during
March that led to those controversial decisions. According to the Fed,
credit and financial problems were intensifying to the point where they
threatened to paralyze the entire financial system and plunge the
economy into a recession. Given the financial markets' fragile condition at
that time, the Fed said it felt compelled to intervene because an
"immediate failure" of Bear Stearns would bring about an "expected
contagion." The Fed moved on March 14 to provide temporary
emergency financing to investment bank Bear Stearns Cos. through an
arrangement with JPMorgan. Two days later, as the nation's
then-fifth-largest investment bank teetered on the brink of bankruptcy,
the Fed agreed to provide backing for up to $30 billion for a deal in
which JPMorgan would take
over the troubled company. That same day - March 16 - the Fed said it would let
big Wall Street firms go directly to the Fed for emergency loans, a
privilege only commercial banks had previously enjoyed. It was the
broadest use of the Fed's lending powers since the 1930s. The Fed's decision to take this action was "based on
recent, rapidly changing developments," the documents said. "These
developments demonstrated that there had been impairment of a broad
range of financial markets" that Wall Street firms rely on for
financing. There was fear that other Wall Street firms could
fall into jeopardy, sending problems cascading through the financial
system. Democrats in Congress and other critics contend the Fed's
actions are akin to a government bailout and are putting billions of
taxpayer dollars at risk. However, Bernanke has defended the actions,
and in appearances on Capitol Hill has said he doesn't believe taxpayers
will suffer any losses. The Fed's financial lifeline in JPMorgan's
takeover of Bear Stearns was subsequently changed to $29 billion and -
most recently - to $28.82 billion. The documents said the Fed, in discussions on March
16, believed the takeover was "necessary to avoid serious disruptions to
financial markets." The Fed said "many potential investors" had been
invited to back Bear Stearns but the investment firm determined that
JPMorgan was "the most suitable bidder." Bear Stearns began to unravel last year when two
hedge funds it managed collapsed because of heavy bets on subprime
mortgage securities, which soured when the housing market fell into a
deep slump. Along with other big investment banks, it was forced to take
multibillion-dollar write downs on the bad investments. Then rumors in
mid-March about the company's cash position triggered a run on the
investment bank that left it close to bankruptcy. Earlier this month, JPMorgan
closed its acquisition of Bear Stearns, bringing to an end an
85-year-old institution.
Consumer Confidence Hits 28-Year Low
Consumer confidence fell more than expected in June,
hitting another 28-year low as surging prices and mounting job losses
contributed to a bleak outlook, according to a survey released on
Friday. The Reuters/University of Michigan Surveys of Consumers said
five-year inflation expectations remained steady at the peak of 3.4
percent reached in May, which was the highest in 13 years. Federal Reserve officials have focused on long-term
inflation expectations and the persistence of such pressures heightens
their dilemma -- whether to fight price growth or support a weak economy
in the grips of the worst housing slump since the Depression of the
1930s. The Surveys of Consumers said the final June reading
for its index of confidence fell to 56.4 from May's 59.8. The report
said the pace of consumer spending is likely to sink at least through
the start of 2009. "Moreover, gas prices have risen to an all-time peak,
food prices posted the largest increases in decades, home prices have
fallen faster than any time since the Great Depression, and there has
been widespread distress associated with foreclosures," the report said. Also weighing on consumers, data earlier this month
showed U.S. employers shed jobs for a fifth straight month in May and
the unemployment rate jumped to 5.5 percent, its highest point in more
than 3-1/2 years. The final June result is slightly below the
preliminary figure of 56.7 released on June 13. The June reading is the lowest since 51.7 in May
1980, which was also the lowest reading ever. The index dates back to
1952, though the survey has been conducted since 1946. One-year
inflation expectations declined to a still-elevated 5.1 percent from
May's 5.2 percent. May's one-year inflation expectations reading was the
highest since 5.2 percent in February 1982. The index of consumer expectations fell to 49.2 in
June -- its lowest since May 1980. This was down from May's 51.1.
Meanwhile, the index of current personal finances fell to 69 in June,
the lowest on record, from a reading of 80 in May.
Lehman Says Merrill May Have To Write Off $5.4
billion In Q2
Merrill Lynch will likely write down $5.4 billion of
securities in the second quarter, mainly due to its exposure to bond
insurers, an analyst at Lehman Brothers wrote on Friday. The quarterly write-down estimate, one of the highest
yet for Merrill Lynch, helped sink the company's shares as much as 2.8
percent and highlighted concerns the broker may need to raise capital. Lehman analyst Roger Freeman raised his write-down
view by $3 billion for Merrill, making his estimate the highest among
Wall Street analysts. Analysts to date have expected write-downs to
range from $3.5 billion to $4.2 billion. Freeman looked at how recent rating agency downgrades
of bond insurers would affect Merrill Lynch, which offloaded some of its
risk on bond insurers. With the bond insurers seen as weaker, their
protection is not worth as much to Merrill. Merrill is likely to have to raise capital if it does
write down this exposure, because the charges will leave Merrill Lynch
with low capital levels relative to the industry, wrote Brad Hintz, an
analyst at Sanford C. Bernstein. Raising capital may also be necessary
to maintain credit ratings, Hintz said. Standard & Poor's cut Merrill's
debt rating one notch earlier this month. "Merrill does not want to see their rating go down
again," Hintz wrote. But Merrill Lynch Chief Executive John Thain may
find raising capital difficult, Hintz said. Merrill cannot easily issue
more common equity, because investors who gave money to Merrill in
December and January must receive substantial extra compensation if
Merrill raises additional capital at too low a price.
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MarketView for June 27
MarketView for Friday June 27
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