MarketView for June 30

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Monday, June 30, 2008

 

 

 

 

Summary

  

The Dow Jones industrial average and S&P 500 were little changed on Monday on the final trading day of the second quarter as record oil prices sent energy shares higher, offsetting weak financial stocks amid nagging concerns of further credit losses. As a result, Exxon Mobil ended the day up $1.58, or 1.83 percent, to close at $88.13, while Chevron moved up $1.33, or 1.36 percent, to end the day at $99.13.

 

However, even with the pause on Monday, the Dow and S&P posted their worst one-month drop since September 2002. The Dow also suffered its worst first half of the year since 1970. The NASDAQ ended the session lower; hurt by a drop in the shares of Yahoo as it battles with shareholders after takeover talks with Microsoft fell apart.

 

Oil rose to a record of $143.67 a barrel on rising Israeli-Iranian tensions but then pulled back to trade only slightly higher. Financial shares fell on more negative analyst comments. One Street analyst was given to write that Merrill Lynch will be forced to raise equity in the third quarter and may sell 20 percent of its holdings in Bloomberg for $1 billion. Merrill Lynch ended the day down $0.99, or 3.03 percent, to close at $31.71.

 

Trading was erratic, which was blamed on positioning by portfolio managers making final adjustments at the end of the quarter.

 

For the month, the Dow fell 10.2 percent, the NASDAQ ended the month down 9.1 percent and the S&P 500 fell 8.6 percent. For the quarter, the Dow fell 7.4 percent, the NASDAQ was up 0.6 percent and the S&P 500 lost 3.2 percent. The Dow ended 19.8 percent down from its October high, just short of a bear market, defined as a 20 percent drop.

 

The S&P financial index was down 1.5 percent, with American International Group and Citigroup among the heaviest drags on the S&P 500. Shares of AIG fell $1.29, or 4.65 percent, to close at $26.46, while Citigroup ended the day down $0.49, or 2.84 percent, to close at $16.76. Lehman Brothers fell $2.44, or 10.97 percent, to close at $19.81. Morgan Stanley's shares ended the day down $0.64, or 1.74 percent, closing at $36.07.

 

Wachovia fell $0.69, or 4.25 percent, closing at $15.53 after the New York Post said Prudential Financial could force the bank to buy its stake in their Wachovia Securities joint venture.

 

Yahoo fell $0.67, or 3.14 percent, to close at $20.66 as it sought to rally shareholder support for its board of directors and management, calling billionaire Carl Icahn's plan "ill-defined" for the future of the Internet company.

 

Price of Oil Slips on Lower Demand

 

The priced of crude oil fell from a record high that was above $143 per barrel on Monday as weak demand countered mounting tensions between Iran and Israel. As a result, domestic sweet crude settled down 21 cents at $140.00 per barrel, after hitting an all-time high of $143.67 earlier in the trading day. London Brent settled down 48 cents at $139.83.

 

The Energy Information Administration revised downward April demand for crude oil by 863,000 barrels per day to 19.77 million bpd, a 3.9 percent decline from year-ago levels, as continually rising fuel costs erode demand. The revision showed April demand was the lowest for the month since April 2002, and came even before gasoline prices hit new highs in June.

 

Earlier, crude prices moved to a new high on the weaker dollar and escalating tensions between Iran and Israel over Tehran's nuclear program. Iran's Revolutionary Guard said Saturday Tehran would impose controls on shipping in the Persian Gulf and Strait of Hormuz, if it were attacked. Roughly 40 percent of the world's traded oil flows though the narrow waterway separating Iran from the Arabian Peninsula.

 

The U.S. Navy's Fifth Fleet said on Monday the United States and its allies would not allow Iran to hamper shipping in the Gulf. Iran's foreign minister said Sunday he did not believe Israel was in a position to attack.

 

Tehran's dispute with the West over its nuclear development program has supported the 40 percent rise in oil prices this year, as has an influx of cash from investors seeking to hedge against inflation and the falling dollar. Oil prices have jumped nearly seven-fold since 2002 as part of a broader commodities rally sparked by surging demand from emerging economies like China and India.

 

At the same time, inflation in the euro zone rose to a record high of 4 percent in June, data showed Monday. High fuel prices have hit the economies of some consuming nations, prompting some countries including the United States to call on OPEC to increase output.

 

Saudi Oil Minister Ali al-Naimi reiterated his country's position that oil prices were being driven mostly by speculation and said the OPEC kingpin was prepared to supply all the oil its customers needed.

 

The heads of some of the biggest oil companies, gathered at an oil conference in Madrid, said fundamentals, not investor flows, were the main driver of prices.

 

Chicago NAPM Report Mediocre

 

The closely watched National Association of Purchasing Management-Chicago survey showed conditions in the Midwest region contracted for a fifth straight month, although at a less severe rate than Wall Street analysts had expected. The NAPM-Chicago business barometer rose to 49.6 from 49.1 in May, the strongest showing for that statistic since last January. A reading below 50 indicates contraction. The index has revived from February's reading of 44.5.

 

Still, sub-components of the Chicago index looked less promising than the headline, analysts noted. Production, at 45.1, was the lowest in 90 months, and new orders dropped to 52.0, the lowest since February. Many analysts consider the Chicago survey a factory report since the region is relatively industrialized, although service companies and nonprofits are polled too.

 

Conditions in the more blue-collar Milwaukee region, north of Chicago, slumped in June as forward-looking indicators such as the level of new orders plummeted. In both instances, the level of prices paid stayed very high, leaving companies with the decision of whether to pass their cost increases along to customers at a time the economy is struggling and demand, theoretically, is weak.

 

The Chicago survey also suggested that at least some firms are hiking prices, the kind of second-round inflation that the Federal Reserve is concerned about.

 

Also on Monday, new figures showed a downturn in New York City business resumed in June after a brief respite. NAPM-New York's index of local business activity fell to 417.5 in June from 419.8 in May and 419.6 in April. A year ago the index was at 430.1.

 

Meanwhile, the national Institute for Supply Management will issue its June report on manufacturing on Tuesday. The figure often reflects trends in the various regional reports. Wall Street forecasts the June ISM factory report at 48.6, down from 49.6 in May.

 

Wachovia Takes a Beating

 

Wachovia Corp saw its share price take a beating on Monday after the New York Post reported that Prudential Financial could force the bank to buy its stake in a brokerage joint venture. The report was a latest blow to Wachovia, which was the biggest decliner among large banks, and is trading at a 16-1/2-year low.

 

The bank has already been throttled by concern that it might have to again cut its dividend and potentially raise more capital after raising $8.05 billion in April. Roughly 34,000 puts, which give the right to sell the stock, compared to 23,000 calls traded in Wachovia in the morning session, according to option analytics firm Trade Alert.

 

The newspaper said that Prudential, starting on Tuesday, could force Wachovia to buy the insurer's 23 percent stake in the Wachovia Securities partnership, which it said some analysts value at around $5 billion.

 

Wachovia spokeswoman Christy Phillips-Brown said the bank was declining to comment "on what Prudential may or may not do," adding that the underlying brokerage business was strong. Phillips-Brown said that even if Prudential does exercise the option "it wouldn't take effect for another year."

 

Chrysler Cutting Production

 

Chrysler plans to cut production by closing a minivan plant and extending summer shutdowns at some of its other factories as the company tries to deal with falling vehicle sales amid record high gas prices.

 

Chrysler will "indefinitely idle" the St. Louis South minivan assembly plant, effective October 31, due to volume declines in the total minivan vehicle segment, Tom LaSorda, Chrysler's senior executive in charge of manufacturing said on Monday. Under Chrysler's contract with the United Auto Workers, it cannot unilaterally close plants, but lists them as idled indefinitely. Chrysler expects to fully close the minivan plant.

 

"We see no intent to re-run this plant," Lasorda said of the minivan plant referred to as St. Louis South by Chrysler.

 

Chrysler also plans to cut one of the two shifts at the nearby St. Louis North Assembly Plant where it builds pickup trucks. That plant will be on an extended shutdown over the summer. The shift cut is effective September 2.

 

Chrysler, acquired by private equity group Cerberus Capital Management last year, has seen its domestic sales fall 19 percent so far in 2008, the largest drop for any major automaker.

 

Chrysler said that it continues to meet or exceed financial targets, that it remains well-capitalized and that there is "absolutely no" plan to breakup the company.